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PRICING DECISIONS

Objectives
In this lesson, we will introduce you to the 2nd P of marketing – Price.
While the other 3Ps represent costs, this element in the marketing mix
produces revenue. After you work out this lesson, you should be able to:
 Appreciate the importance of pricing decision
 Identify the considerations that come to bear on pricing decisions
 Understand why customers may be price sensitive In this lesson, we
will discuss the following:
 Product costs
 Customer value
 Elements in the pricing decision

Introduction
A price is an expression of value. The value rests in the usefulness and
quality of the product itself, in the image that is conveyed through
advertising and promotion, in the availability of the product through
wholesale and retail distribution systems, and in the service that goes with
it. A price is the seller’s estimate of what all of this is worth to potential
buyers, recognizing the other options buyers will have for filling the need
the product is intended to satisfy. To the extent that the product or service
finds markets and is profitable at given price levels, it provides a viable
economic base for building and maintaining a business.

In the competitive marketplace, pricing is a game. The struggle for market

share focuses critically on price. Pricing strategies of competing firms,
therefore, are highly interdependent. The price one competitor sets is a
function not only of what the market will pay but also of what other firms
charge. Prices set by individual firms respond to those of competitors; they
also are intended often to influence competitors’ pricing behaviour. All of
marketing comes to focus in the pricing decision.
Pricing
Pricing is a process to determine what manufactures receive in exchange of
the product. Pricing depends on various factors like manufacturing cost, raw
material cost, profit margin etc.

Objectives of Pricing

The main objectives of pricing can be learnt from the following points −
 Maximization of profit in short run
 Optimization of profit in the long run
 Maximum return on investment
 Decreasing sales turnover
 Fulfill sales target value
 Obtain target market share
 Penetration in market
 Introduction in new markets
 Obtain profit in whole product line irrespective of individual product
profit targets
  Tackle competition
 Recover investments faster
 Stable product price
 Affordable pricing to target larger consumer group
 Pricing product or services that simulate economic development
Pricing objective is to price the product such that maximum profit can be
extracted from it.

Factors Influencing Pricing

Pricing of a product is influenced by various factors as price involves many

variables. Factors can be categorized into two, depending on the variables
influencing the price.

Internal Factors

The following are the factors that influence the increase and decrease in the
price of a product internally −
 Marketing objectives of company
 Consumer’s expectation from company by past pricing
 Product features
 Position of product in product cycle
 Rate of product using pattern of demand
 Production and advertisement cost
 Uniqueness of the product
 Production line composition of the company
 Price elasticity as per sales of product
Internal factors that influence pricing depend on the cost of manufacturing
of the product, which includes fixed cost like labor charges, rent price, etc.,
and variable costs like overhead, electric charges, etc.

External Factors

The following are the external factors that have an impact on the increase
and decrease in the price of a product −
  Open or closed market
 Consumer behavior for given product
 Major customer negotiation
 Variation in the price of supplies
 Market opponent product pricing
 Consideration of social condition
 Price restricted as per any governing authority
External factors that influence price depend on elements like competition in
market, consumer flexibility to purchase, government rules and regulation,
etc.

Pricing Methods

Let us now discuss the various pricing methods −

Cost plus Pricing

Cost plus pricing can be defined as the cost of production per unit of
product plus profit margin decided by the management.
Step 1 − (Calculation of average variable cost)
Step 2 − (Calculation of average fixed cost), i.e.,
$$AFC=\frac{Total Fixed Cost}{Units Of Output Products}$$
or,
$$AFC=\frac{Total Fixed Cost}{Expected Unit Sales}$$
Step 3 − (Determination of the desired profit margin)
Selling Price = Unit total cost + Desired unit profit
i.e., Selling Price = AVC + AFC + Mark up
i.e.,
$$Selling Price=\frac{Unit Total Cos}{1-(Desired Profit Margin}$$
These are the steps one needs to follow to calculate cost plus pricing.

Break Even Analysis

It is a point when the investment and revenue of an enterprise is equal;

after this point an enterprise gains profit.
Prices Based on Marginal analysis

In this method, additional cost of that activity is compared to additional

profit and the price is calculated according to margin cost. Thus, the cost
and price is evaluated and as per the result, the price is decided so as to
maximize the profit.

Pricing Strategies

Let us now understand the various pricing strategies −

Skimming Pricing

In this method, a new product is introduced in the market with high price,
concentrating on upper segment of the market who are not price sensitive,
and the result is skimmed.

Penetration Pricing

In penetration pricing, a product is introduced in the market with a low

initial price. The price is kept low to increase target consumer. Using this
strategy, more consumers can be penetrated or reached.

Discounts and Allowances

Discounts are provided in order to increase the demand of product in the

market. The main points to be considered to offer discounts are as follows
−

 Discount in quantity
 Discount in trade
 Discount in cash
 Other discounts like seasonal, promotional, etc.

Geographic Pricing Strategies

Geographic pricing strategy is used to price product as per its geographical

location. As the distance increases from the point of production, the cost of
the product increases.
The main points to be considered under this are as follows −

 Point of production pricing strategy

  Uniform delivery pricing strategy
 Zone delivery pricing strategy
 Freight absorption pricing strategy

Special Pricing Strategies

Special pricing strategy is mostly used for the promotion of the product. In
this strategy, pricing is changed for a short interval of time. These
strategies can be lined up as follows −

 One price strategy

 Flexible price strategy
 Flat rate pricing strategy
 Single price strategy
 Odd pricing
 Leader pricing
 High low pricing
 Resale price maintenance
 Everyday low pricing
 Price lining
Name: ____________________ Year & Section______________

ASSESSMENT TASK

Direction: Please answer the following:

1.The CEO of a large company selling seeds and garden supplies
to consumers and businesses through catalogs and the Internet
is unhappy with its overall profitability. He feels that part of the
solution is to be more professional in price setting, and he asks
the director of marketing to hire an experienced person for a
new position of pricing manager. While interviewing one
candidate, the marketing director explains that the company
has been advised to listen more to customers and respond to
their needs and asks the candidate how he would implement
this advice in the area of pricing. The candidate responds as
follows:
“It’s great to listen to the customer when you are designing
your product, but it’s just not practical in pricing. All the
customers have to say is that they want lower prices. If you
want me to increase profits, I can’t very well listen to that!”

a.What should the marketing director make of this response?

b.If you were the candidate, how would you have responded to
this question?
2. The marketing manager of a large truck manufacturer was
surprised to learn that the price lists generated by his
department had little relation to the prices that were actually
charged to customers. The company’s finance department
often changed the prices to conform to profit goals before the
prices reached the company’s sales force. The salespeople
often gave custom- ers discounts to increase their sales
volume. The operations manager made price adjustments to
accommodate delays in promised shipping times.
a.Why is this situation undesirable for the company?
b.What can be done about this situation?
3. An entrepreneur is starting a business selling decorative
items, such as vases, wall hangings, and prints (framed or
unframed) over the Internet. She is aware that she needs to
make a number of pricing decisions.
a.Describe a decision that the entrepreneur must make that
would be an example of price setting. Describe a decision
that she would have to make that would be an example of
pricing policy.
b.Describe a decision that she would need to make regarding
price format, and describe one regarding price structure.