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PRICING

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7 views3 pages

PRICING

Uploaded by

hith
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PRICING

The term 'price' denotes the money value of a product or service. It is the amount of
money a seller is asking for the product or service he offers for sale or the amount which
buyers are to pay for it. According to Clark, "The price of an article or service is its market
value expressed in terms of money".

Price is an important element in the marketing mix of a firm and affects other
components of the marketing mix.The quality of a product, the services supplied along
with it, the channel of distribution and the promotional effort depend greatly upon the
price. Price is fundamental to all marketing efforts.

Price structure affects the competitive position and market share of the firm. A firm
cannot succeed if its prices are too low or too high.

Consumers take their buying decisions and allocate their income with the help of the
prices of alternative goods and services. Without pricing, there can be no marketing as a
sale takes place only when the buyer and the seller agree on price.

In a free enterprise economy, prices determine the volume of economic activity. Price
regulates production, distribution and consumption in the economy.

Price of goods and services determine largely the prices paid to various factors of
production in the form of wages, interest, rent and profit.

Prices depend not only upon the market forces of demand and supply but are also
regulated by management and the government.

Pragmatic pricing decisions require upto date knowledge of trends in sales and demand.

The main objectives of pricing followed by different firms are as follows:

TARGET RATE OF RETURN

An adequate return on investment or net sales is an important pricing objective. The idea
is to secure a sufficient return on capital employed after covering costs of production and
distribution.

Prices are so set that the total sales revenue exceeds the total costs by the estimated
profit amount. In other words, this objective leads to cost plus pricing.

Let us take an illustration. Suppose, a company has total investment of ₹50 lakh and seeks
to earn 30% (before tax) return on investment . it expects to sell 20,000 units and the total
cost per unit is ₹ 50. The price per unit can be calculated as under:
Target return on investment is a long term objective.It ensures a reasonable return to the
investors.

However, target return pricing may not be feasible in all conditions. This goal can be
achieved by firms which are industry leaders or which sell in protected markets.

The target rate of return differs from firm to firm depending upon the cost of capital and
the actual market conditions in the industry.

PRICE STABILITY

In this objective, a firm seeks to cut or eliminate cyclical price fluctuations and to avoid
price wars. The aim is to live and let live.

All the firms try to avoid price wars. No firm is willing to cut its prices for fear of retaliation
by other firms.

Price stability helps in planned and regular production in the long run. However, it may
create rigidity in pricing.

MARKET SHARE

This Market share (sales of a firm in relation to those of competitors) is a very meaningful
mark for measuring the market position or success.

Therefore, maintaining or improving the market share is a


more worthwhile objective in growing markets. For example,
firms manufacturing refrigerators, washing machines, etc.
reduce prices to capture a larger share of the growing demand
in India.

MEET OR PREVENT COMPETITION


In a market characterised by cut-throat competition, firms often take pricing decision to
meet or prevent competition. An established firm may cut prices drastically to prevent
competitors from entering a market. Some firms match competitors prices to maintain
the status quo within an industry.

But in the long run firm cannot survive by charging less than the total cost of product.

PROFIT MAXIMISATION

Firms pursuing this objective try to earn as much money as possible. Small and little
known firms may try to charge as much price as the customer can bear.

Due to high profits, new entrepreneurs will be attracted into the industry and prices will
come down in the long run.

Traditionally, profit maximisation is considered to be the objective of pricing. But today in


customer oriented stage, where customer is the king, his satisfaction as social obligations
cannot be overlooked

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