Pricing strategy in Decision Making

PROF.Dr.R.SARVAMANGALA
DEPTARMENT OF COMMERCE
BANGLORE UNIVERSITY
 Pricing strategies:
• Pricing strategy is a science that requires you
to consider many factors if you want to
maximize your profits.
 following things or factors should be
considered to set proper pricing strategy :

• Cost
• Perceived Value
• Competition
• Spoilage Risk
• Loss Leaders
• Economies of Scale
• Psychological Pricing
• Goal
 Cost
• Obviously, cost needs to be one of your first
considerations when making pricing decisions. No
business can sustain itself when costs exceed sales.
• The simplest pricing models use a "cost plus"
approach, in which you add a standard percentage
to your costs to determine your price. This will
guarantee profitability as long as you maintain
sales, but it may not maximize your profitability
 Perceived Value
• Customers are willing to pay what they think something is worth and don't
really care about your costs. If your costs push prices above their perceived
value, they simply won't buy. If the perceived value is much higher than
your costs, they'll happily pay a price that gives you a huge margin.
• One of the best examples of this is in retail clothing. Average markups start
at about 100% of cost, and high-end shoes can be sold for as much as five
times what the retailer paid for them.
• While perceived value is mostly in the customer's mind, you can influence
the perception by increasing your levels of service or positioning yourself
as a higher-end brand. If you're looking to sell more volume at a lower
margin, you might position yourself as a fair-price alternative who is
accessible to everyone.
 Competition

• Competition is another key factor in pricing. Open and free

markets are very price-sensitive, while monopolies have
virtually unlimited power to raise their prices. Ask two
questions about your competitors:
• Do they offer the same level of quality and service?
• How much does it cost the consumer to switch to a
competitor in terms of time, gas, or shipping costs?
• The more you can differentiate yourself, the more power
you'll have to set monopoly-like prices. Even with
commodities, such as gas and groceries, you can still find
differentiators such as being on the right side of the road
during the evening commute. If you fail to differentiate
yourself and are seen as an equivalent to your
competitors, you'll always have to compete on price.
 Spoilage Risk

• You also need to consider real and effective

spoilage risks. A real risk is when perishable or
dated items, such as milk or calendars, go bad
or are no longer useful. An effective risk is
when unsold seasonal items, such as holiday
decorations, could be sold next year but the
costs of storage lead you to scrap unsold items.
• When there is spoilage risk, you either need to
be more conservative when setting initial
prices or faster to give discounts to prevent
waste from unsold merchandise.
 Loss Leaders
• You don't need to earn a profit on every item.
Some items can be listed at a loss to drive
customers to your store in the hope that you more
than make up the loss when they purchase
additional, higher-margin items.
• Costco is one of the industry front-runners when it
comes to loss leaders. The company sells about 70
million cooked rotisserie chickens at a loss each
year. Executives believe that customers who come
to the store knowing they can pick up a quick meal
will purchase additional items, grow more loyal to
the store, and spur the sale of more memberships.
 Economies of Scale
• Early-stage companies have the problem of
needing to cover their fixed costs with
fewer sales and not having the purchasing
power to reduce their variable costs by
negotiating for volume discounts from their
suppliers. You have two options in this situation.
The first is to keep prices above costs knowing
that your higher prices may make it harder to
pick up market share and then reduce prices as
you scale production. The second is to set your
price based on your projected break-even point
and take a loss on early sales in a more
aggressive push to gain market share.
Economies of scale in microeconomics refers to the
cost advantages that companies obtain when they
increase production – their costs per unit decreases the
more they produce.
Diseconomies of scale – the opposite of economies of
scale – can also occur when a company expands.
If you produce more, your fixed costs are spread out
over more units of output. If you are buying in larger
quantities from suppliers you are probably able to get
better unit prices.
Economists say that with increased production and
sales, greater operational efficiency is generally
achieved too, which leads to cheaper variable costs as
well.
 Psychological Pricing

• Sometimes, the price isn't about the actual cost but

how consumers view it. This is why car dealerships like
to negotiate based on monthly payments rather than
the full sale price.
• Customers might feel better about paying only $100
per month than $1,000 per year, and $99 sounds a lot
less expensive than paying the three-figure sum of
$100. At the same time, customers looking for a higher-
end product or service may feel better paying a higher
price than a lower one.
• The key is that pricing is just as much in the
presentation as it is in the actual numbers
 Goal
• The biggest question to answer is what
end goal do you want to achieve? Are
you trying to build market share, put
competitors out of business, maximize
profits, raise quick cash to survive
another month or position yourself as the
low-cost alternative?
• Your end goal will guide what pricing
strategy you pursue and how
aggressively you follow it.
 Pricing Policy
• Through systematic pricing policies
and strategies, companies can reap
greater profits and increase or
defend their market shares. Setting
prices is one of the principal tasks of
marketing and finance managers in
that the price of a product or service
often plays a significant role in that
product's or service's success, not to
mention in a company's profitability.
• Generally, pricing policy refers to how a
company sets the prices of its products and
services based on costs, value, demand, and
competition. Pricing strategy, on the other hand,
refers to how a company uses pricing to achieve
its strategic goals, such as offering lower prices
to increase sales volume or higher prices to
decrease backlog. Despite some degree of
difference, pricing policy and strategy tend to
overlap, and the different policies and strategies
are not necessarily mutually exclusive.
• After establishing the bases for their
prices, managers can begin
developing pricing strategies by
determining company pricing goals,
such as increasing short-term and
long-term profits, stabilizing prices,
increasing cash flow, and warding off
competition. Managers also must take
into account current market
conditions when developing pricing
strategies to ensure that the prices
they choose fit market conditions. In
addition, effective pricing strategy
involves considering customers,
costs, competition, and different
 Pricing Process
• 8 major steps involved in price
determination process are as follows:
• (i) Market Segmentation
• (ii) Estimate Demand
• (iii) The Market Share
• (iv) The Marketing Mix
• (v) Estimate of Costs
• (vi) Pricing Policies
• (vii) Pricing Strategies
• (viii) The Price Structure.
• Decisions on pricing are taken in
the light of marketing
opportunities, competition and
many other valuables influencing
pricing
• The Price decision must take into
account all factors affecting both
demand price and supply price.
 (i) Market Segmentation:

• In market segments, marketers will have

firm decisions on:
• (a) The type of products to be produced or
sold.
• (b) The kind of service to be rendered.
• (c) The costs of operations to be estimated.
• (d) The types of customers or market segments
sought.
 (ii) Estimate Demand:

• Marketers will estimate total

demand for the product based on
sales forecast, channel opinions
and degree of competition in the
market. Prices of comparable rival
products can guide us in pricing
our products. We can determine
market potential by trying different
prices in different markets.
 (iii) The Market Share:
• Marketers will choose a brand image and the desired
market share on the basis of competitive reaction. Market
planners must know exactly what his rivals are charging.
Level of competitive pricing enables the firm to price above,
below or at par and such a decision is easier in many cases.
• Higher initial price may be preferred, in case of smaller
market share is anticipated, whereas, in the expectation of
a much larger market share for the brand, marketer will
have to prefer relatively lower price. Proper pricing strategy
is evolved to reach the expected market share either
through skimming price or through penetration price or
through a compromise, i.e., fair trading or fair price- to
cover cost of goods, operating expenses and normal profit
margin.
 (iv) The Marketing Mix:
• The overall marketing strategy is based on an integrated
approach to all the elements of marketing mix.
It covers:
• (a) Product-market strategy
• (b) Promotion strategy
• (c) Pricing Strategy
• (d) Distribution Strategy
• Marketers will have to assign an appropriate role to price as
an element of marketing- mix. Promotional strategy will
affect pricing decisions.
• The design of marketing mix can indicate the role to be
played by pricing in relation to promotion and distribution
policies. Price is critical strategic element of the marketing
mix as it influences the quality perception and enables
product or brand positioning. Price is also a good tactical
variable. Changes in price can be made much faster than in
any other variable of marketing mix. Hence, price has a good
 (v) Estimate of Costs:

• Straight, cost-plus pricing is

not desirable always as it is
not sensitive to demand.
Marketing must take into
account all relevant costs as
well as price elasticity of
demand.
 (vi) Pricing Policies:

• Pricing policies are guidelines to

carry out pricing strategy. Pricing
policy may be fixed or flexible.
Pricing policies must change and
adopt themselves with the changing
objectives and changing
environment.
 (vii) Pricing Strategies:
• Strategy is a plan of action to adjust with
changing condition of the– market place.
New and unanticipated developments
such as price cut by rivals, government
regulations, economic recession,
changes in consumer demand etc. may
take place, and then changes all for
special attention and relevant
adjustments in the pricing policies and
producers.
 (viii) The Price Structure:

• Developing the price structure on the

basis of pricing policies and
strategies is the final step in price
determination prices. The price
structure will now define the selling
prices for all products and
permissible discounts and allowances
to be given to distributor’s co-dealers
as well as various types of buyers.
 Role of Pricing

• Price is important to marketers

because it represents marketers'
assessment of the value the customers
see in the product or service and are
willing to pay for a product or service.
While product, place and promotion
affect costs, price is the only element
that affects revenues, and thus, a
business's profits.
 Pricing Methods:

• cost plus pricing,

• Marginal cost pricing,
• pricing for target rate of return,
• added value method of pricing,
• differential cost pricing going rate
pricing,
• opportunity cost pricing, standard cost
pricing,
• customary pricing,
 cost plus pricing

• Cost-plus pricing is a pricing

strategy in which the selling price, of
goods and services, is determined by
adding a specific
fixed markup percentage to a single
product or service.
 Marginal cost pricing

• Marginal-cost pricing, is 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
$1.00 and a normal selling price is $2.00, the firm selling
the item might wish to lower the price to $1.10 if demand
has waned. The business would choose this approach
because the incremental profit of 10 cents from the
transaction is better than no sale at all.
 Pricing for target rate of return

• Target return pricing is a pricing strategy used by e-

commerce experts that helps them set the price of a
product based on the expected rate of return of their
business.
• An example: A company ABC Ltd has an objective of
achieving a required rate of return of say 20% on goods
that they sell.

The company manufactures pencils and have already

invested Rs 10,00,000 in the business. The cost of each
pencil is Rs 16. Here, we are assuming that sales can hit
50,000 units in a year.

The target return price would be = 16 (cost) +

(20%*10,00,000 (investment))/50,000 (sales) = Rs 20. So,
to achieve the required rate of return, the company should
sell the pencil at Rs 20 each.
 Added value method of pricing

• Value-added is the difference between the price of a

product or service and the cost of producing it.
The price is determined by what customers are willing
to pay based on their perceived value.
perceived Value is added or created in different ways.
• example of perceived value is car manufacturing,
especially automobile doors. ... Others meet the results
of a better-perceived value by merely increasing
the prices. Higher prices often show premium products
and many customers would happily pay extra for what
they feel is a superior option.
• Company A, charges twice as much for a cup of coffee
than their competitor, Company B. Although their prices
are double what others charge for similar products, people
are willing to pay more for coffee from Company A.
Because,
• Company A has brand-loyal customers and superb peer-to-
peer marketing. Because of this, they have a strong
connection with their customers. They also market quality
and value to consumers and make them feel they are
buying the best of the best. Therefore, the customers are
willing to pay the extra money for the perceived value and
quality of the coffee.
 Differential cost pricing going rate
pricing
• Going rate pricing is when a business sets
the price of their product or service based on
the market price. Since competitor prices tend
to be similar, it's challenging to differentiate
your product or service from the competition.
• . 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.
 opportunity cost pricing, standard cost pricing

• Opportunity cost is the profit lost when one

alternative is selected over another. The concept is
useful simply as a reminder to examine all reasonable
alternatives before making a decision. For example,
you have $1,000,000 and choose to invest it in a
product line that will generate a return of 5%. If you
could have spent the money on a different investment
that would have generated a return of 7%, then the
2% difference between the two alternatives is the
foregone opportunity cost of this decision.
• Opportunity cost does not necessarily involve money.
It can also refer to alternative uses of time. For
example, do you spend 20 hours learning a new skill,
or 20 hours reading a book?
 customary pricing

• Is a technique used to determine

the price for a product and/or
service based. The price is based
on the value placed on the
product and/or service by the
buyer. Historically, customary
pricing is used for  products
with a relatively long market
history of being sold for a
particular amount.