FUNDAMENTALS OF MARKETING IN NEPAL

CHAPTER SEVEN: PRICING DECISIONS

CHAPTER SEVEN: PRICING DECISIONS

MEANING OF PRICE and PRICING ................................................................................................................. 2
OBJECTIVES OF PRICING............................................................................................................................ 2
PROCEDURE OF PRICING........................................................................................................................... 4
IMPORTANCE OF PRICING......................................................................................................................... 5
FACTORS AFFECTING PRICE DETERMINATION.......................................................................................... 6
METHOD OF PRICE DETERMINATION ....................................................................................................... 8
INITIATING PRICE CHANGE...................................................................................................................... 11
PRICING POLICIES .................................................................................................................................... 12
PRICING STRATEGIES [PRICE ADJUSTMENT STRATEGIES]....................................................................... 14
DISCOUNTS AND ALLOWANCES .............................................................................................................. 17

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 FUNDAMENTALS OF MARKETING IN NEPAL
CHAPTER SEVEN: PRICING DECISIONS

CHAPTER SEVEN: PRICING DECISIONS

MEANING OF PRICE and PRICING

Price is the one element of the marketing mix that produces revenue; the other elements product
costs. Price is the easiest marketing mix element to adjust; product features, channels and even
promotion take more time.

Philip Kotler: “The amount of money charged for a product or service, or the sum of the values that
consumers exchange for the benefits of having or using the product or service is Price”.

Price is all around us. You pay rent for your apartment, tuition for your education and fee to your
physician or dentist. The airline, railway, taxi and bus companies charge you fare; the local utilities
call their price a rate; and the local bank charges you interest for the money you borrow, the guest
lecturer charges an honorarium, government official who took a bribe to help a shady character
steal dues collected by a trade association. Clubs or societies to which you belong may make a
special assessment to pay unusual expenses. Your regular lawyer may ask for a retainer to cover
her services. The 'price' of an executive is a salary, the price of a salesperson may be a commission
and the price of a worker is a wage. Finally, although economists would disagree, many of us feel
that income taxes are the price we pay for the privilege of making money.

Pricing is a method adopted by a firm to set its selling price. It usually depends on the
firm's average costs, and on the customer's perceived value of the product in comparison to his or
her perceived value of the competing products. Different pricing methods place varying degree of
emphasis on selection, estimation, and evaluation of costs, comparative analysis,
and market situation. Pricing is the process of determining what a company will receive in exchange
for its products. It is the manual or automatic process of applying prices to purchase and sales
orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign,
specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple
orders or lines, and many others. Automated systems require more setup and maintenance but may
prevent pricing errors. The needs of the consumer can be converted into demand only if the
consumer has the willingness and capacity to buy the product. Thus pricing is very important in
marketing.

OBJECTIVES OF PRICING
Pricing objectives or goals give direction to the whole pricing process. Determining what your
objectives are is the first step in pricing. When deciding on pricing objectives you must consider:
1. The overall financial, marketing, and strategic objectives of the company;
2. The objectives of your product or brand;
3. Consumer price elasticity and price points; and
4. The resources you have available.

a. PROFIT ORIENTED:
Target Return:
Rate of return is normally measured in relation to investment and sales. The producers
enjoying some protection may prefer to earn a target rate on investment. This would be
possible where the entrepreneur enjoys a franchise or a monopolistic situation. But in
the long run, every businessman attempts to secure an adequate return on investment
through price setting. Mostly, middleman like wholesalers, retailers will price their
merchandise to earn a particular rate of return on sales.

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CHAPTER SEVEN: PRICING DECISIONS

Profit Maximization:
Profit maximization does not mean profiteering. There is nothing wrong in this policy if
practiced over the long run. As a matter of fact, many of the enterprises strive to
maximize their profits. Maximization of profits should be on the total output and not on
a single item. In such case, consumers do not get dissatisfied since a particular group is
not called for paying a high price. While adopting this pricing objective, the marketers
should attempt to project their image in the market through sales promotion techniques.
The marketers should watch the reactions of the consumers. Profit maximization
through price hikes should be sparingly used.

b. SALES ORIENTED:
Sales Volume:
In a highly price sensitive market, the businessman may continue to sell his products
even without profit. He is interested in growth rather than in making a profit. In the
market penetration objective, the unit cost of production and distribution will decrease
when the volume of sales attain a particular target. In brief, market penetration
objective is an attempt to secure a large share of the market by deliberately setting the
low prices.

Market Share:
A company may either have the objective of maintaining the present market share or
increase its share depending upon its stature. Particularly, big business houses adopt
such pricing that it enables them to retain their market share. If they raise their market
share, they may draw the attention of the government and if they shed their share, they
may lose revenues. Contrary to this, small business houses are found interested in
raising their share in the market so as to reap the benefit of large-scale production. In
few cases, firms may sell the products even at a lower cost to capture the market.
However, such practice may lead to financial crisis. As a matter of fact, this is an
objective to be adopted by new firms cautiously.

c. STATUS QUO ORIENTED:

Price Stability:
Frequent changes in the prices of product will harm the long-term interests of the
companies. Hence, they aim at stabilization of prices. They do not exploit a short supply
position to earn the maximum. During the periods of good business, they try to keep
prices from rising and during the periods of depression, they keep prices from falling too
low. Thus, they take a long-term view in achieving price stability.

Meet Competition:
Pricing is often done to meet or even prevent competition. If a company is a price leader,
it is better to follow it to ward off the possibility of competition. Market followers use
this method. The prevailing market price is used to avoid price competition.

Survival:
Perpetual existence of the business over a period is the indication of the sound financial
position of the enterprise. All organizations will have to meet expected and unexpected,
initial and external economic losses. These enterprises have to pool up the resources to
meet all the contingencies through appropriate pricing strategies. Price is use to
increase sale volume to level up the ups and downs that come to the organization.

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CHAPTER SEVEN: PRICING DECISIONS

d. QUALITY ORIENTED:
Quality Leadership:
Sometime premium pricing is charged to indicate high quality in an attempt to position
the product as the quality leader. It is adopted for the prestige products like Land Rover
Car, RADO watch, Rolex watch etc. However, to charge premium pricing the image of the
organization should also be high and noteworthy.

Quality Imitation:
Some of the producers imitate the product and charge the lower price to attract the
customers. Almost this type of product provides similar benefits to the customers.
Chinese mobiles can be the good example for this.

PROCEDURE OF PRICING

The firm has to consider many factors in setting the pricing policy. There are six steps procedure:

Selecting the Seleting a

pricing Estimating pricing
objective costs method

Determining Analyzing Selecting the

Demand competitors final price
cost, prices
and offers

1. Selecting the pricing objective:

The company first decides where it wants to position its market offering. The clearer a firm’s
objectives the easier it is to set price. A company can pursue any of the objectives discussed
above like gaining market share, achieve target return, increase sales volume etc. Whatever the
specific objective, businesses that use price as strategic tool will profit more than those who
simply let costs or the market determine their pricing.

2. Determining Demand:
Each price will lead to a different level of demand and therefore have a different impact on a
company’s marketing objectives. The relation between alternative prices and the resulting
current demand is captured in a demand curve. In normal case, demand and price are inversely
related: the higher the price, the lower the demand. In the case of prestige goods, the demand
curve sometimes slopes upward. A perfume company raised its price and sold more perfume
rather than less: some consumers take the higher price to signify a better product. However, if
the price is too high, the level of demand may fall.

3. Estimating Costs:
Demand sets a ceiling on the price the company can charge for its product. Costs set the floor.
The company wants to charge a price that covers its cost of producing, distributing, and selling
the product, including a fair return for its effort and risk. To price intelligently, management
needs to know how its costs vary with different levels of production as well.

4. Analyzing Competitors’ costs, prices and offers:

Within the range of possible prices determined by market demand and company costs, the firm
must take the competitors’ costs, prices, and possible price reactions into account. If the firms’
offer contains positive differentiation features not offered by the nearest competitor, their

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CHAPTER SEVEN: PRICING DECISIONS

worth to the customers should be evaluated and added to the competitor’s price. If the
competitor’s offers contain some features not offered by the firm, their worth to the customer
should be evaluated and subtracted from the firm’s price. The firm must be aware, however,
that competitors can change their prices in reaction to the price set by the firm.

5. Selecting a pricing method:

After estimating customer’s demand schedule, cost function and competitor’s prices, the
company is now ready to select a price. Costs set a floor to the price; Competitors’ price and the
price of substitutes provide an orienting point. Customer’s assessment of unique product
features establishes the ceiling price. Companies select a pricing method that includes one or
more of these three considerations.

6. Selecting the final price:

Pricing methods narrow the range from which the company must select its final price. In
selecting that price, the company must consider additional factors, including psychological
pricing, gain and risk sharing pricing, the influence of other marketing mix elements on price,
company pricing policies and the impact of price on other parties. In the last case, marketers
need to know the laws regulating pricing. Price-fixing is illegal.

IMPORTANCE OF PRICING

1. IMPORTANCE TO THE ECONOMY:

a. Factors of Production:
Each factors of production receives price in different forms. Pricing helps to regulate the
allocation of the factors of production. It directly influences the supply of factors of
production. Higher the price higher will be the supply and vice versa.

b. Supply and Demand:

We are well acquaintance with the theory of demand and supply. It has clearly explains
the relationship of price with demand, supply and their elasticity. Demand and supply
situation can be controlled by price in most of the case.

c. Saving and Investment:

High prices discourage saving and investment. Higher interest on loan discourages
investor to invest which affect the profit earn and eventually saving. Hence, price is
important to encourage saving and investment.

d. Economic management:
Pricing helps to regulate the economy as a whole. Government may levied higher tax
rate to discourage import of luxury goods, alcoholic goods etc. Pricing of public utilities
like water, electricity, communication is administered by the government and regulates
it as well.

2. IMPORTANCE TO THE ORGANIZATION:

a. Profitability:
The only marketing mix which generates revenue is Price. The price for your product or
service affects your profits. Price too high and you may not earn enough to keep your
doors open because customers go elsewhere. Price too low and you may keep customers
but will merely break even or lose money.

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CHAPTER SEVEN: PRICING DECISIONS

b. Market Share:
Price also helps to gain market share. If we want to gain higher market share, low
pricing strategy can be our tool. Even large market shares enable a firm to operate cost
effectively and allow firms to dictate the prices which weaker competitors have to
follow. If not, we can charge premium price to pursue a small specialist market segment.

c. Non price competition:

Even non-price competition is influenced by the pricing decisions. Product
differentiation and product positioning can be based on price. People may regards,
product with low price as low quality and high price as high quality.

3. IMPORTANCE TO CUSTOMER:

a. Product choice:
Most of the customers are price sensitive. They prefer quality product but in lower price.
Their choice of product mostly depends on price.

b. Quality of the product:

Most of customer thinks that high quality product is expensive and priced high. Hence, it
is the task of marketers to address this psychology while pricing.

c. Customer Value:
Value is the ratio between benefit and price. Hence, if the customer gets more in the
price they are paying, it will increase customer’s value. So, price plays important role to
determine the value of the product. This is the reason why marketers provide discount
and cut prices time and again.

FACTORS AFFECTING PRICE DETERMINATION

1. INTERNAL FACTORS:

a. Pricing Objectives:
Corporate objectives can be wide-ranging and include different objectives for different
functional areas (e.g., objectives for production, human resources, etc). While pricing
decisions are influenced by many types of objectives set up for the marketing functional
area, there are four key objectives (profit, status quo, sales and quality) in which price
plays a central role. In most situations only one of these objectives will be followed,
though the marketer may have different objectives for different products.

b. Costs:
For many for-profit companies, the starting point for setting a product’s price is to first
determine how much it will cost to get the product to their customers. Obviously,
whatever price customer pay must exceed the cost of producing a good or delivering a
service otherwise the company will lose money. When analyzing cost, the marketer will
consider all costs needed to get the product to market including those associated with
production, marketing, distribution and company administration (e.g., office expense).

c. Organization structure:
Management must decide who within the organization should set prices. Companies
handle pricing in a variety of ways. In small companies, prices are often set by top

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CHAPTER SEVEN: PRICING DECISIONS

management rather than by the marketing or sales departments. In large companies,

pricing is typically handled by divisional or product line managers. In industrial
markets, salespeople may be allowed to negotiate with customers within certain price
ranges. Even so, top management sets the pricing objectives and policies, and it often
approves the prices proposed by lower-level management or salespeople. In industries
in which pricing is a key factor (aerospace, railways, oil companies), companies will
often have a pricing department to set the best prices or help others in setting them.
This department reports to the marketing department or top management. Others who
have an influence on pricing include sales managers, production managers, finance
managers and accountants. In brief, the decision of who will set the price in organization
structure affects the pricing decisions. For example: finance department is concerned
about realizing costs and making profit. Marketing department uses price to promote
brand image and consumer satisfaction.

d. Other elements of marketing mix:

Price is only one of the marketing-mix tools that a company uses to achieve its
marketing objectives. Price decisions must be co-ordinate with product design,
distribution and promotion decisions to form a consistent and effective marketing
program. Decisions made for other marketing-mix variables may affect pricing
decisions. For example, producers using many resellers that are expected to support and
promote their products may have to build larger reseller margins into their prices. The
decision to position the product on high performance quality will mean that the seller
must charge a higher price to cover higher costs. The perfume houses argue that their
high margins, expensive advertising and exclusive distribution are essential to the
brands and in the public interest. The final price must take into account the brand’s
quality (Product) and advertising (promotion) relative to competition. It is found that
brands with average quality but high relative advertising budgets were able to charge
premium prices. Consumers apparently were willing to pay higher prices for known
products than for unknown products.

2. EXTERNAL FACTORS:

a. Market Demand:
Marketers should never rest on their marketing decisions. They must continually use
market research and their own judgment to determine whether marketing decisions
need to be adjusted. When it comes to adjusting price, the marketer must understand
what effect a change in price is likely to have on target market demand for a product.
Understanding how price changes impact the market requires the marketer have a firm
understanding of the concept economists call elasticity of demand, which relates to how
purchase quantity changes as prices change. Elasticity is evaluated under the
assumption that no other changes are being made (i.e., “all things being equal”) and only
price is adjusted. The logic is to see how price by itself will affect overall demand.
Obviously, the chance of nothing else changing in the market but the price of one
product is often unrealistic. For example, competitors may react to the marketer’s price
change by changing the price on their product. Despite this, elasticity analysis does
serve as a useful tool for estimating market reaction.

b. Competition:
Another external factor affecting the company's pricing decisions is competitors' costs
and prices, and possible competitor reactions to the company's own pricing moves. A
consumer who is considering the purchase of a Canon camera will evaluate Canon's
price and value against the prices and values of comparable products made by Nikon,
Minolta, Samsung and others. In addition, the company's pricing strategy may affect the
nature of the competition it faces. If Canon follows a high price, high-margin strategy, it

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CHAPTER SEVEN: PRICING DECISIONS

may attract competition. A low-price, low-margin strategy, however, may stop

competitors or drive them out of the market. Hence, marketers will undoubtedly look to
market competitors for indications of how price should be set. For many marketers of
consumer products researching competitive pricing is relatively easy, particularly when
Internet search tools are used.

c. Market Intermediaries:
Number of market intermediaries between producer and final consumer also affect the
pricing since each market intermediaries has price to be paid. Hence, distribution
decisions shall be taken into consideration while setting price.

d. Pressure Groups:
Some of the goods that are of basic necessity cannot price as per the organizations’
decision. Lots of pressure groups come into action if they are set higher. For example,
whenever price of petrol, kerosene rise, lots of pressure groups come into protest and
voice to decrease the price no matter what is the circumstances for rise in price.

e. Government:
Marketers must be aware of regulations that impact how price is set in the markets in
which their products are sold. These regulations are primarily government enacted
meaning that there may be legal ramifications if the rules are not followed. Price
regulations can come from any level of government and vary widely in their
requirements. For instance, in some industries, government regulation may set price
ceilings (how high price may be set) while in other industries there may be price floors
(how low price may be set). Additional areas of potential regulation include: deceptive
pricing, price discrimination, predatory pricing and price fixing.
Finally, when selling beyond their home market, marketers must recognize that local
regulations may make pricing decisions different for each market. This is particularly a
concern when selling to international markets where failure to consider regulations can
lead to severe penalties. Consequently marketers must have a clear understanding of
regulations in each market they serve.

METHOD OF PRICE DETERMINATION

1. COST ORIENTED PRICING METHODS

a. Cost Plus Pricing [Mark Up Pricing]:

It is the process of setting the price at your production cost, including both cost of goods and
fixed costs at your current volume, plus a certain profit margin. For example, your widgets cost
Rs.20 in raw materials and production costs, and at current sales volume (or anticipated initial
sales volume), your fixed costs come to Rs.30 per unit. Your total cost is Rs.50 per unit. You
decide that you want to operate at a 20% markup, so you add Rs.10 (20% x Rs.50) to the cost
and come up with a price of Rs.60 per unit. So long as you have your costs calculated correctly
and have accurately predicted your sales volume, you will always be operating at a profit.
Mark-up pricing remains popular for a number of reasons. First, sellers are more certain about
costs than about demand. By tying the price to cost, sellers simplify pricing - they do not have to
make frequent adjustments as demand changes. Second, when all firms in the industry use this
pricing method, prices tend to be similar and price competition is thus minimized. Third, many
people feel that cost-plus pricing is fairer to both buyers and sellers. Sellers earn a fair return on
their investment, but do not take advantage of buyers when buyers' demand becomes great.

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b. Target Return Pricing:

The process of setting an item's price by using an equation to compute the price that
will result in a certain level of planned profit given the sale of a specified amount of items is
target return pricing. By using a target return pricing method, a business is able to set
its products' prices at such levels that its corporate profit objectives are likely to be met
if sales continue to run at or above the amount specified.
It is setting your price to achieve a target return-on-investment (ROI). For example, let's use the
same situation as above, and assume that you have Rs. 10,000 invested in the company. Your
expected sales volume is 1,000 units in the first year. You want to recoup all your investment in
the first year, so you need to make Rs. 10,000 profit on 1,000 units, or Rs.10 profit per unit,
giving you again a price of Rs.60 per unit.

c. Break Even Pricing:

Break Even Price is the amount of money for which a product or service must be sold to cover
the costs of manufacturing or providing it. Breakeven prices can be translated to almost any
transaction. For example, the breakeven price of a house would be the sale price the owner
would need to get to cover the home's purchase price, interest paid on the mortgage, hazard
insurance, property taxes, maintenance, improvements, closing costs and real estate sales
commission. At this price, the homeowner would not see any profit, but also would not lose any
money.
Break-even pricing is a strategy that yields zero profit on a transaction. At break-even pricing
the sales revenue equals expenses and is calculated by totaling the fixed and variable costs.
Break-even pricing may be used as an aggressive marketing tool for market expansion or
penetration. Understanding break-even price points gives management the tools to work
toward generating profits or whether or not to even enter a particular market.

2. COMPETITION ORIENTED PRICING METHODS

It is a pricing method in which a seller uses prices of competing products as a benchmark
instead of considering own costs or the customer demand. Where costs are difficult to measure
or competitive response is uncertain, firms feel that the going price is a good solution because it
is thought to reflect the industry’s collective wisdom.

a. Meet Competition Method:

This method is mostly used in perfect competition or oligopoly where there is more
number of sellers for the similar products. In this situation, price is determined by the
market itself. It is also called going rate pricing because here marketer set the price at
the prevailing rate. They try to reduce the cost to increase their profit instead. The
smaller firms ‘follow the leader’, changing their prices when the market leader’s prices
change rather than when their own demand or costs change.

b. Below Competition Method:

This method is used when the company wants to penetrate the market. Here, the
company quotes the price slightly lower than that of competitors in order to gain the
market share. Providing discounts for the product can be the example. However, there is
always risk of perceiving the company’s product as lower quality product due to low
price.

c. Above Competition Method:

In this method, marketer sets the price slightly higher than the competitors or charges
the premium price. That company whose products has high brand equity and is
categories under prestige brands uses this method. Better positioned products also use
this method for pricing.

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CHAPTER SEVEN: PRICING DECISIONS

d. Sealed Bid Pricing Method:

Another way of competition based pricing is sealed bid pricing. In a large number of
projects, industrial marketing, and marketing to the government, the suppliers are
asked to submit their quotation as part of tender. The price quoted reflects the firm’s
cost and its understanding of competition. If the firm was to its offer only at its cost
level, it may be the lowest bidder and may even get the contract but may not make any
profit out of the deal. So, it is important that the firm uses the expected profit at different
price levels to arrive at the most profitable price. This method obviously assumes that
the firm has complete knowledge or information about the competition and consumer.

3. VALUE ORIENTED PRICING METHODS

a. Customer Value Pricing:

Price your product based on the value it creates for the customer. This is usually the most
profitable form of pricing, if you can achieve it. The most extreme variation on this is "pay for
performance" pricing for services, in which you charge on a variable scale according to the
results you achieve. Let's say that your widget above saves the typical customer Rs. 1,000 a year
in, say, energy costs. In that case, Rs.60 seems like a bargain - maybe even too cheap. If your
product reliably produced that kind of cost savings, you could easily charge Rs.200, Rs.300 or
more for it, and customers would gladly pay it, since they would get their money back in a
matter of months.

b. Perceived Value Pricing:

It is an open line pricing technique where respondents estimate the price of a new product
compared to those who are already in the market. This method can be used with concepts or
real products. The technique is used with face to face interviews. It is a preferred approach if the
client has little idea about the price level of the new product.
For new products you can identify price expectations
Identify the willingness to pay
Make rough assessments of price elasticity
For line extensions you can
Assess expected relativities within the product range
For re-launches you can
See if price perceptions in relation to competitors change as new features or additional
information is added to product description
For existing products you can
Explore perceived differences in relative values

Perceived Value Pricing is the valuation of good or service according to how much consumers are
willing to pay for it, rather than upon its production and delivery costs. Using a perceived
value pricing technique might be somewhat arbitrary, but it can greatly assist in
the effective marketing of a product since it sets product pricing in line with its perceived value by
potential buyers.

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CHAPTER SEVEN: PRICING DECISIONS

INITIATING PRICE CHANGE

1. INITIATING PRICE CUTS

Several circumstances might lead a firm to cut prices.

a. Excess Capacity: When the firms needs additional business and cannot generate it
through increased sales effort, product improvement, or other measures; when
additional revenue is not possible without price reduction, the company initiates price
cuts.

b. Declining Market Share: Another situation leading to price changes is falling market
share in the face of strong price competition. Either the company starts with lower costs
than its competitors or it cuts prices in the hope of gaining market share that will
further cut costs through larger volume.

c. Price Wars: When one’s close competitor reduce its product price, as a competitor
response they also reduce price, which eventually leads to price wars. This will benefit
the customers because they can get same quantity in lower price however reduce the
profit margin of all the producers.

d. Recession: Companies may have to cut their prices in a period of economic recession as
well. During hard times, consumers reduce their spending. Since the purchasing power
of the customer gets reduced in this period, most of the producers are compelled to
reduce price.

This strategy also involves high risks:

i. Low quality trap: Consumers will assume that the quality is below that of the higher
priced competitors.
ii. Fragile-market-share trap: A low price buys market share but not market loyalty.
Customers will shift to another lower-price firm that comes along.
iii. Shallow-pockets trap: High priced competitors may also cut their price and may have
longer staying power because of deeper cash reserves.

2. INITIATING PRICE INCREASES

a. Unbundling: If product is demanded by unbundling then the seller charge higher price
and a bundled one. They charge separate installation costs, delivery etc.

b. Inflation: Rising costs unmatched by productive gains squeeze the profit margins and
lead companies to regular round to increase price. Companies often raise prices by more
than the cost increases in anticipation of further inflation or government price controls.

c. Over-demand: When company cannot supply to all its customers it can raise its prices
or ration supplies to customers or may do both.

d. Quality: The quality improvement needs more research and engineering which will cost
higher than normal, hence opt for price increase.

e. New Taxes: Government keeps on increasing or introducing new types of taxes, which
will eventually increases prices of the product.

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CHAPTER SEVEN: PRICING DECISIONS

PRICING POLICIES

1. SINGLE PRICING POLICY [ONE PRICE POLICY]

A pricing strategy in which the same price is offered to every customer who purchases the
product under the same conditions is called Single Pricing Policy. A one price policy may
also mean that prices are set and cannot be negotiated by customers. Fixed priced shop can
be good example for it. This pricing policy will help reduce time of unnecessary bargaining.
Even seller feel motivated to stock such products. It saves time as well. However this pricing
policy may ignore demand, costs and competition.

2. FLEXIBLE PRICE POLIY [PRICE FLEXIBILITY POLICY]

a. Price Discrimination:
When a firm charges a different price to different groups of consumers for an identical
good or service, for reasons not associated with costs is price discrimination. This price
differentiation can be occurring due to locations, time, products or customers themselves.
For example: QFX cinema charge different price for the same hall for the same movie under
different category as Gold, Silver, Platinum and Premium. Similarly, telecom service
provider charges less between 10pm to 6am and more between 6am to 10pm. Similarly,
kids are charged differently as compared to their parents in parks and entertainment
centers.

b. Discounts:
Most companies adjust their basic price to reward customers for certain responses, such as
early payment of bills, volume purchases and off-season buying. These price adjustments -
called discounts - can take many forms. Some are discussed below:
A cash discount is a price reduction to buyers who pay their bills promptly; such discounts
are customary in many industries and help to improve the sellers' cash situation and reduce
bad debts and credit-collection costs.
A quantity discount is a price reduction to buyers who buy large volumes. Such discounts
provide an incentive to the customer to buy more from one given seller, rather than from
many different sources.
A seasonal discount is a price discount to buyers who buy merchandise or services out of
season. Hotels, motels and airlines will offer seasonal discounts in their slower selling
periods. Seasonal discounts allow the seller to keep production steady during the entire
year.

c. Allowances:
Allowances are another type of reduction from the list price. For example, trade-in
allowances are price reductions given for turning in an old item when buying a new one.
Trade-in allowances are most common in the car industry, but are also given for other
durable goods. Promotional allowances are payments or price reductions to reward dealers
for participating in advertising and sales-support programs.

3. GEOGRAPHICAL PRICE POLICY

a. Free on Board (FOB) Price:

FOB means that the goods are placed free on board a carrier. At that point the title and
responsibility pass to the customer, which pays the freight from the factory to the
destination. In another words, FOB means that the charges become yours at the origination.
The seller will load it on the truck, ship, plane or train and then it's yours.

BINAYA RATNA SHAKYA

CASPIAN VALLEY COLLEGE
 FUNDAMENTALS OF MARKETING IN NEPAL
CHAPTER SEVEN: PRICING DECISIONS

b. Zone Price:
Zone pricing falls between FOB-origin pricing and uniform delivered pricing, the company
sets up two or more zones. All customers within a given zone pay a single total price; the
more distant the zone, the higher the price.

c. Base Point Price:

Using basing-point pricing, the seller selects a given city as a 'basing point' and charges all
customers the freight cost from that city to the customer location, regardless of the city from
which the goods actually are shipped. Using a basing-point location other than the factory
raises the total price for customers near the factory and lowers the total price for customers
far from the factory.

d. Uniform Delivered Price:

Uniform delivered pricing is the exact opposite of FOB pricing. Here, the company charges
the same price plus freight to all customers, regardless of their location. The freight charge
is set at the average freight cost. It is fairly easy to administer and it lets the firm advertise
its price nationally.

e. Freight Absorption Price:

Using this strategy, the seller absorbs all or part of the actual freight charges in order to get
the desired business. The seller might reason that it can get more business; its average costs
will fall and more than compensate for its extra freight cost. Freight-absorption pricing is
used for market penetration and to hold on to increasingly competitive markets.

4. PRODUCT MIX PRICE POLICY

a. Product Line Price:

Companies usually develop product lines rather than single products. Each of these
products is available in a variety of sizes and performance. In product line pricing,
management must decide on the price steps to set between the various products in a line.
The price steps should take into account cost differences between the products in the line,
customer evaluations of their different features and competitors' prices. If the price
difference between two successive products is small, buyers will usually buy the more
advanced product. This will increase company profits if the cost difference is smaller than
the price difference. If the price difference is large, however, customers will generally buy
the less advanced products.

b. Optional Feature Price:

Many companies use optional-pro duet pricing - offering to sell optional or accessory
products along with their main product. For example, a car buyer may choose to order
power windows, cruise control and a radio with a CD player. Pricing these options is a sticky
problem. Car companies have to decide which items to include in the base price and which
to offer as options. The basic model is stripped of so many comforts and conveniences that
most buyers reject it. They pay for extras or buy a better-equipped version.

c. Product Bundling Price:

Using, product-bundle pricing, sellers often combine several of their products and offer the
bundle at a reduced price. Thus hotels sell specially priced packages that include room,
meals and entertainment; computer makers include attractive software packages with their
personal computers. Price bundling can promote the sales of products that consumers might
not otherwise buy, but the combined price must be low enough to get them to buy the
bundle

BINAYA RATNA SHAKYA

CASPIAN VALLEY COLLEGE
 FUNDAMENTALS OF MARKETING IN NEPAL
CHAPTER SEVEN: PRICING DECISIONS

d. Two-part Price:
A fixed fee is charged (often with the justification of it contributing to the fixed costs of
supply) and then a supplementary “variable” charge based on the number of units
consumed. There are plenty of examples of this including taxi fares, amusement park
entrance charges and the fixed charges set by the utilities (gas, water and electricity). For
example: NTC is charging minimum service charge for landline and if that limit exceed it will
charge price per call.

e. Ancillary Product Price / Captive Product Price:

Companies that make products that must be used along with a main product are using
captive-product pricing. Examples of captive products are razors, camera film and computer
software. Producers of the main products (razors, cameras and computers) often price them
low and set high mark-ups on the supplies. Thus Polaroid prices its cameras low because it
makes its money on the film it sells. And Gillette sells low-priced razors, but makes money
on the replacement blades. Camera makers that do not sell film have to price their main
products higher in order to make the same overall profit.

f. By product price:
In producing processed meats, petroleum products, chemicals and other products, there are
often by-products. If the by-products have no value and if getting rid of them is costly, this
will affect the pricing of the main product. Using byproduct pricing, the manufacturer will
seek a market for these by-products and should accept any price that covers more than the
cost of storing and delivering; them. This practice allows the seller to reduce the main
product's price to make it more competitive. By-products can even turn out to be profitable.
For example, many lumber mills have begun to sell bark chips and sawdust profitably as
decorative mulch for home and commercial landscaping.

PRICING STRATEGIES [PRICE ADJUSTMENT STRATEGIES]

1. PRODUCT LIFE CYCLE STRATEGY:

a. Introduction Stage:
In this stage, buyers are price insensitive because they lack knowledge of the product’s
benefits. Both production and promotional costs are high. Competitors are either
nonexistent or few, and are not a threat since the potential gains from market development
exceed those from competitive rivalry. Pricing strategy signals the product’s value to
potential buyers, but buyer education remains the key to sales growth. In this stage,
generally price are set high, assuming a skim pricing strategy for a high profit margin as the
early adopters buy the product and the firm seeks to recoup development costs quickly. In
some cases a penetration pricing strategy is used and introductory prices are set low to gain
market share rapidly.

b. Growth Stage:
During the market growth phase, buyers’ concerns about a product’s utility give way to
concerns about the costs and benefits of the product. As buyers become more informed
about product attributes, they are more responsive to lower prices. At this time, competition
emerges, and both the original innovator and later entrants begin to assume competitive
positions. High rates of market growth enable industry-wide expansion, generally limiting
price competition. The innovator and its competitors must decide whether their marketing
strategies will be geared more toward a differentiated product strategy or a cost leadership
strategy. In this stage, price are maintained at a high level if demand is high, or reduced to
capture additional customers.

BINAYA RATNA SHAKYA

CASPIAN VALLEY COLLEGE
 FUNDAMENTALS OF MARKETING IN NEPAL
CHAPTER SEVEN: PRICING DECISIONS

c. Maturity Stage:
During this phase, most buyers are repeat purchasers who are familiar with the product.
Increasing homogeneity enables them to better compare competing brands, so price
sensitivity reaches its maximum in this phase. Competition begins to put downward
pressure on prices since any firm can grow simply by taking sales from its competitors.
Despite such competition, profitability depends on having achieved a defensible,
competitive position through cost leadership or differentiation, and exploiting it effectively.
Margins can be maintained by increasing pricing effectiveness through unbundling related
products, improved demand estimation, improved control and utilization of costs,
expansion of the product line and re-evaluation of distribution channels. In this stage, there
are possibilities of price reductions in response to competition while avoiding a price war.

a. Decline Stage:
Reduced buyer demand and excess capacity characterize this phase. If costs are largely
variable or if capital can be easily reallocated to more promising markets, prices need fall
only slightly to induce some firms to cut capacity. If costs are largely fixed and sunk, average
costs ascend due to reduced capacity utilization, while price competition increases as firms
attempt to increase their capacity utilization by capturing a larger share of a declining
market. Three options are available to deal with this challenge: economize to one’s strongest
product lines and price to defend one’s share in them, harvest one’s entire business by
pricing for maximum cash flow, or consolidate one’s position by price-cutting to drive out
weak competitors and capture their markets. Further, Prices may be lowered to liquidate
inventory of discontinued products or prices may be maintained for continued products
serving a niche market.

2. PRICE CHANGE STRATEGY:

a. Price Increase Strategy:

Sometimes due to change in factors other than cost, the company should opt for price
increase. If company is on process of improving the quality of product, it will obviously
increase the price. Similarly, introduction of new taxes, shortage of products or inflation
may also lead to price increase strategy. A company needs to decide whether to raise its
price sharply on a one time basis or to raise it by small amounts several times. Generally,
consumer prefers small price increases on a regular basis to sudden, sharp increases.
But in passing price increases on to customers, the company must avoid looking like a
price gouger.

b. Price Decrease Strategy:

When the supply increases than the market demand, generally price is decreased to
adjust the market condition. Hence, extra production capacity, recession and need of
higher market share leads to price decrease.

c. Price Maintain Strategy:

The leader might maintain its price and profit margin, believing that either it would lose
too much profit if it reduced its price or it would not lose much market share or it could
regain market share when necessary. However, the argument against price maintenance
is that the attacker gets more confident, the leader’s sales force gets demoralized and
the leader loses more share than expected. The leader panic and lowers price to regain
share, and finds that regaining its market position is more difficult and costly than
expected.

BINAYA RATNA SHAKYA

CASPIAN VALLEY COLLEGE
 FUNDAMENTALS OF MARKETING IN NEPAL
CHAPTER SEVEN: PRICING DECISIONS

3. PRICE RESPONSE STRATEGY:

a. Competitive Price Strategy:

If the company adapts to the price of close competitors, it is called competitive price
strategy. When there are homogenous product in the market and little difference in
price change may impact the market share, this strategy is adopted by the company.

b. Do Nothing Strategy:
If competitors’ price change is for short run (for example stock clearance, seasonal sales
etc), do nothing strategy should be followed as it will not affect the market share in long
run.

c. Non Price Competition Strategy:

Competing with price as a tool may be unbeneficial for both the competitors. Hence,
non-price competition like aggressive promotion, effective distribution and product
differentiation should be adopted to counter price competition.

4. PHYCHOLOGICAL PRICING STRATEGY:

a. Prestige Pricing Strategy:

Create perception of quality exclusively in customer minds by setting high price is called
prestige pricing strategy. Many customers use price as an indicator of quality and
prestige. Reasonable price connotes acceptable quality; exorbitant price adds an aura of
excellence and exclusivity. Image pricing is especially effective with ego-sensitive
products such as perfumes and expensive cars. Price and quality perceptions of cars
interact. Higher priced cars are perceived to possess high quality. Higher quality cars are
likewise perceived to be higher priced than they actually are.

b. Odd Even Pricing Strategy:

Many sellers believe that prices should end in an odd number. Many customers see a
product priced at Rs.299 instead of Rs.300 as a price in the Rs.200 range rather than
Rs.300 range. Another explanation is that odd endings convey the notion of a discount
or bargain.

c. Psychological Discounting Strategy:

The advertising of a product at a heavily reduced price, as in "was Rs.1500, now only
Rs.500.00" is called psychological discounting strategy. In true sense, there may not be
any discount as such. The practice may be illegal under many jurisdictions trade
practices legislation unless the reduction is a genuine one

d. Customary Pricing Strategy:

Customary Pricing is the strategy of setting a price because that’s what the price has
always been. If everyone in your town charges the same fee for a product, it may be
difficult to break out of that customary pricing policy trap.

e. Promotional Pricing Strategy:

Promotional pricing is very popular with retailers, and can be a very successful strategy
when the aim is attracting new customers. There are many appropriate times and
reasons for promotional pricing, such as new product launches, competitive factors and
protecting current market share. Promotional pricing can be divided into several types
of programs, and each one has its own benefits.

BINAYA RATNA SHAKYA

CASPIAN VALLEY COLLEGE
 FUNDAMENTALS OF MARKETING IN NEPAL
CHAPTER SEVEN: PRICING DECISIONS

 The current purchase discount typically offers customers money off the purchase
price. This is a commonly-used technique that is easy to implement, because
prospective customers understand and respond to it.
 The future purchase discount is a promotional-pricing technique similar to the
current purchase discount, but offers the discount at the customer's next purchase.
 Cash back promotional pricing requires the customer to pay full price at the time of
purchase, but gives them cash or check rebates.
 Volume promotions usually offer more products at the same price. An example of
this promotion is ‘Buy One Get One Free’.

DISCOUNTS AND ALLOWANCES

Most companies will adjust their list price and give discounts and allowances for early payment,
volume purchases and off season buying. Companies must do this carefully or find that their profits
are much less than planned. Salespeople, in particular, are quick to give discounts in order to close a
sale, but the word gets around fast that the company’s list price is ‘soft’, and discounting becomes
the norm.

1. DISCOUNTS
a. Cash Discounts:
It is a price reduction to buyers who pay bills promptly.

b. Quantity Discounts:
It is a price reduction to those who buy large volumes.

c. Trade Discounts:
It is offered by manufacturer to trade-channel members if they will perform certain
functions, such as selling, storing, and recordkeeping. Manufacturers must offer the
same functional discounts within each channel.

d. Seasonal Discounts:
It is a price reduction to those who buy merchandise or service out of season. Hotels,
motels and airlines offer seasonal discounts in slow selling periods.

2. ALLOWANCES
a. Trade-in allowance:
It is granted for turning in an old item when buying a new one.

b. Promotional allowance:
It is reward provided to dealers for participating in advertising and sales support
programs.

BINAYA RATNA SHAKYA

CASPIAN VALLEY COLLEGE