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Unit 4 Pricing Methods

Pricing is an important element of the marketing mix that expresses the value of a product to customers. There are several factors that affect pricing decisions, including costs, competition, company objectives, and customer willingness to pay. Companies use various pricing strategies and methods to determine prices, such as cost-plus pricing, penetration pricing, price skimming, competitive pricing, and bundle pricing. Setting an effective pricing policy involves selecting objectives, estimating demand and costs, analyzing competitors, choosing a pricing method, and determining the final price.

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101 views37 pages

Unit 4 Pricing Methods

Pricing is an important element of the marketing mix that expresses the value of a product to customers. There are several factors that affect pricing decisions, including costs, competition, company objectives, and customer willingness to pay. Companies use various pricing strategies and methods to determine prices, such as cost-plus pricing, penetration pricing, price skimming, competitive pricing, and bundle pricing. Setting an effective pricing policy involves selecting objectives, estimating demand and costs, analyzing competitors, choosing a pricing method, and determining the final price.

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vishal chaurasia
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Meaning of Pricing

• Pricing is one of the most important elements of


the marketing mix
• Price is the marketing variable that can be
changed most quickly
• The price of a product may be seen as a financial
expression of the value of that product
• The concept of value can therefore be expressed
as:
(Perceived) VALUE = (perceived) BENEFITS -(perceived) COSTS
List Price – For What customer pays?

Includes:
Physical good/service
Assurance of quality
Repair facilities
Packaging
Credit Warranty
Delivery
Pricing objectives
• Survival
• Maximum current profit
• Maximum market share
• Maximum market skimming
• Product-quality leadership
Factor affecting pricing

• Fixed and variable costs.


• Competition
• Company objectives
• Proposed positioning strategies.
• Target group and willingness to pay
Pricing policy
The policy of a company or business that guides
the price setting of its goods and services that
are offered for sale.
Pricing Strategy
• Pricing strategy refers to method companies
use to price their products or services.
• The price of the products and services are set
on the basis their expenses
• They add on a certain percentage so they can
make a profit.
• There are several different pricing strategies to
fulfil their objectives
Pricing Methods
Cost Based
• Full Cost or Cost Plus Pricing
• Incremental Cost Pricing
• Marginal Cost Pricing
• Target Pricing
Competition Based
• Going Rate Pricing
• Sealed Bid Pricing
Pricing Methods
Demand Base
• Dual Pricing
• Price Lining & Discrimination
• Cyclical Pricing
Strategy Based
• Price Penetration
• Price Skimming
1. FULL COST OR COST PLUS PRICING

Full cost plus pricing is a price-setting method under which you add
together the direct material cost, direct labor cost, selling and
administrative costs, and overhead costs for a product, and add to it a
markup percentage (to create a profit margin) in order to derive the
price of the product. The pricing formula is:
(Total production costs + Selling and administration costs + Markup) ÷
Number of units expected to sell
= Full cost plus price
2. Incremental Cost Pricing
It is the method of pricing a product based on incremental
cost. In this type of pricing, the selling price of a product is
determined by the variable cost, and not kept according to
the overall cost of creating the product. Incremental cost is
the cost of creating additional products from the same setup
(i.e. R&D, factory, machinery being same as used for other
products), i.e. the fixed cost remains same, and the selling
price of the product thus generated is based mainly on the
variable cost. This method is used only when the fixed
overhead is being absorbed by existing product sales. The
advantage of incremental cost pricing is that it can be used
to launch a new product with low cost so that it is readily
accepted in the market, and also to open up a new
customer base by reducing the price of an existing product.
3. Marginal Cost Pricing
Marginal-cost pricing, in economics, the practice of setting
the price of a product to equal the extra cost of producing an
extra unit of output. By this policy, a producer charges, for
each product unit sold, only the addition to total
cost resulting from materials and direct labour. Businesses
often set prices close to marginal cost during periods of poor
sales. If, for example, an item has a marginal cost of Rs.1.00
and a normal selling price is Rs.2.00, the firm selling the item
might wish to lower the price to Rs.1.10 if demand has
decreased. The business would choose this approach
because the incremental profit of 10 paise from the
transaction is better than no sale at all. During low
occupancy season, a guest paying a ridiculously low amount
of Rs 1000/- per night to the Taj Hotels
4.Target Pricing
It is a refined variant of cost-plus pricing. The only
difference between these two method is about
setting the mark-up. The target pricing considers the
derived reasonable rate of return on initial
investment made by the firm in setting the mark-up.
The rate of return is a relationship between the
profits and suitably defined measure of invested
capital. The profit target may be different for different
firms and in different phases of business cycle.
Main examples of target pricing are Toyota and
Nissan
5.Going Rate Pricing
Going rate pricing is when a business sets the price of
their product or service based on the market price. This
pricing strategy is often used to price similar products, like
commodities or generic items, that have little variation in
design and function. A going rate pricing strategy is most
often used to price products or services that are
homogenous and don't vary in design. Businesses that
choose a going rate pricing strategy often set their prices
based on the leader of the market.
Since competitor prices tend to be similar, it's challenging
to differentiate your product or service from the
competition.
6. Sealed Bid Pricing
Sealed bid pricing is the process of offering to buy or
sell products at prices designated in sealed bids.
Companies must submit their bids by a certain time.
The bids are later reviewed all at once, and the most
desirable one is chosen. Sealed bids can occur on
either the supplier or the buyer side. Via sealed bids, oil
companies bid on tracts of land for potential drilling
purposes, and the highest bidder is awarded the right to
drill on the land. Similarly, consumers sometimes bid on
lots to build houses. The highest bidder gets the lot. On
the supplier side, contractors often bid on different jobs
and the lowest bidder is awarded the job. The
government often makes purchases based on sealed
bids.
7.Dual Pricing

Dual pricing is the practice of setting different prices in


different markets for the same product or service. This
tactic may be used by a business for a variety of
reasons, but it is most often an aggressive move to take
market share away from competitors. Dual pricing may
be demand-based. For example, an airline may offer
one price to an early customer and another, higher price
to someone booking at the last minute. Additionally,
businesses in many developing nations that rely on
tourism employ dual pricing strategies. Local
residents get lower prices for goods and services while
tourists pay more.
8. PRICE LINING OR PRODUCT LINE PRICING
Price lining (also product line pricing) is a marketing strategy where a business prices its
offerings according to the quality, features, or attributes to differentiate it from other similar
offerings.
In simple terms, price lining is a process of grouping similar offerings under different price
brackets – each varying slightly by the quality features, or attributes on offer. These
brackets usually tend to start low and go higher in price.
9. DISCRIMINATORY PRICING
DISCRIMINATORY PRICING
DISCRIMINATORY PRICING
10. CYCLICAL PRICING

Cyclical Pricing refers to appropriate pricing


strategy at different stages of Business Cycle . Every
Business Cycle consists of four phases: Recession,
Depression, Recovery and Prosperity. Contraction
comprises of the first two phases and the last two
phases constitute expansion. If there is recession in
the economy, the pricing policy may include heavy
price discount, trade discount, gift coupons’ etc.
Likewise during prosperity, high price is charged.
11. PENETRATION PRICING
12. SKIMMING PRICING
13. MARKET PRICING
14. ECONOMY PRICING
15.BUNDLE PRICING
16. PSYCHOLOGICAL PRICING
17.PREMIUM PRICING
18. ONE PRICE POLICY
19. DISCOUNTING PRICING
20. PROMOTIONAL PRICING
21. LOSS LEADER
Loss leader pricing is a marketing strategy that involves
selecting one or more retail products to be sold below cost –
at a loss to the retailer – in order to get customers in the
door. The loss leaders are the products being sold at such
low prices as an enticement to buyers to step foot in the
store.
22. COMPETITIVE PRICING
23. PRICE LEADERSHIP PRICING
Price leadership is a situation in which one company,
usually the dominant one in its industry, sets prices
which are closely followed by its competitors. This firm is
usually the one having the lowest production costs, and
so is in a position to undercut the prices charged by any
competitor who attempts to set its prices lower than the
price point of the price leader. Competitors could charge
higher prices than the price leader, but this would likely
result in reduced market share, unless competitors could
sufficiently differentiate their products.
24. OPTIONAL PRODUCT PRICING
25.TRANSFER PRICING

Transfer pricing is the setting of the price for goods and


services sold between controlled (or related) legal entities
within an enterprise. For example, if a subsidiary
company sells goods to a parent company, the cost of
those goods paid by the parent to the subsidiary is
the transfer price.
Setting Pricing Policy
1. Selecting the pricing objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’ costs, prices, and offers
5. Selecting a pricing method
6. Selecting final price

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