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BACHELORS OF BUSINESS
ADMINISTRATION (BBA)
Marketing Management
Topic: Pricing
Pricing the product or service is one of the most important business
decisions you will make.
Pricing is not an end in itself but a means to achieve marketing objectives of the firm.
“Pricing is a managerial task that involves establishing pricing objectives, identifying

the factors governing the price, ascertaining their relevance and significance,
determining the product value in monetary terms and formulation of price policies
and the strategies, implementing them and controlling them for the best results”.
In fact, price means different things to different participants
in an exchange:
1. Buyers’ View:
For those making a purchase, such as final customers, price refers
to what must be given up to obtain benefits. In most cases what is
given up is financial consideration (e.g., money) in exchange for
acquiring access to a good or service. But financial consideration is
not always what the buyer gives up. Sometimes in a barter situation a buyer
may acquire a product by giving up their own product. For instance – two farmers may
exchange cattle for crops.
2. Sellers’ View:
To sellers in a transaction, price reflects the revenue generated for each product sold
and, thus, is an important factor in determining profit. For marketing organizations
price also serves as a marketing tool and is a key element in marketing promotions. For
example – most retailers highlight product pricing in their advertising campaigns.
The main objectives of pricing followed by different firms are
as follows:
Objective # 1. Target Rate of Return:
Firms following this objective design their pricing strategy in such a way that will yield
desired return on total investment (ROI). Rate of return refers to the amount of net
profits divided by investment or capital employed. This goal often leads to cost plus
pricing. The price of a product or service is determined by adding the expected margin
of profit to the cost of production and distribution.
Objective # 2. Price Stabilization:

This goal is adopted in industries having a few firms. In an oligopolistic situation where
one firm is very big and all others are small, the big firm acts as the price leader and
other firms follow it. All the firms try to avoid price wars. No firm is willing to cut its
prices for fear of retaliation by other firms.
Objective # 3. Target Share of the Market:

In an expanding market, market share is a better indicator of a firm’s success than the
target rate of return. When the market has a potential for growth, a firm earning the
target rate of return may, in fact, be decaying if its share of the market is decreasing.
Therefore, maintenance or improvement in the market share is a more worthwhile
objective in growing markets. Market share measures a firm’s sales vis-a-vis the sales of
its competitors.
Objective # 4. Facing Competition:

Under conditions of intense competition, a firm may seek to meet or prevent
competition. It may fix prices at a very low level (even below cost) to eliminate its
competitors or to prevent the entry of new firms in the market. Some firms follow this
practice while introducing a new product. This goal is not very popular and cannot be
adopted on a regular basis. In the long run, a firm cannot survive if it continues to
charge less than the cost of the product or service.
Objective # 5. Profit Maximization:

Traditionally, profit maximization is considered to be the objective of pricing. The
classical economic theory suggests the fixation of prices in such a way that the marginal
cost is equal to marginal revenue where profits are maximized. Even today some firms
are not very conscious of social responsibilities and try to maximize profits. But in
recent years there has been a change in the philosophy of business and profit
maximization is not considered rational business behaviour. In practice, no firm states
explicitly that profit maximization is its pricing objective due to the fear of public
criticism and government regulation.
Objective # 6. Improving Public Image:
Another objective of pricing may be to enhance the firm’s public
image. The firm may launch a premium product at a high price for
this purpose. Alternatively, it may offer the new product at a low
price to appeal to the common buyer. The pricing policy should be
consistent with the established reputation of the firm.
Cost-Oriented Methods
These are the traditional methods of product pricing. The major
factors which influence the product price are the fixed cost, variable
cost other overheads incurred in manufacturing the products.
Let us now go through the different cost-oriented pricing models
below:
1. Cost Plus Pricing

Cost-plus pricing is one of the simplest ways of price determination. A
certain percentage of cost is added as a profit margin to the value of
the product to acquire the selling price.
2. Mark-up Pricing
It is a form of cost-plus pricing, but here the profit margin is presented
as a percentage of expected return on sales. The formula for mark-
up pricing is:
3. Marginal Cost Pricing
The primary aim of the company adopting this pricing method is to
meet its marginal cost and overheads. The marginal costing method
is suitable for entering the industries which are dominated by giant
players, posing a fierce competition for the organization to sustain in
the business.
4. Target Return Pricing

The pricing objective in target return method is to attain a certain
level of ROI (Return on Investment). The formula for determining the
target return price is:
5. Break-Even Pricing
This method is similar to break-even analysis, here the company
needs to price the products such that it generates profit after
recovering the fixed and variable costs. The selling price should be
equal to or more than the break-even price (the point at which the
sales revenue matches the cost of goods sold).
6. Early Cash Recovery Pricing
When it comes to rapidly growing technological products or the ones
with a short life cycle, the cost needs to recover as early as possible.
This method is very similar to target return pricing; the only
difference is that it considers a high value of return on investment
owing to a short recovery period.
Market-Oriented Methods
In a highly competitive market, the company cannot survive with cost-oriented pricing.
Hence, it needs to price its products according to the market demand and
competitor’s pricing strategy.
To understand the three primary market-oriented models of pricing, read below:
1. Going Rate Method

‘Follow the crowd’ method is based on market competition, where the company price
its product similar to the competitor’s product price. If the market leader reduces the
price of its product, the organization also needs to decrease its product price, even if
the latter’s cost of production is high.
2. Sealed Bid Pricing Method
When it comes to industrial marketing or government projects, the
supplier needs to bid specific product price, which he/she assumes to
be the lowest, in a sealed quotation.
In other words, the organization needs to fill a tender, which indicates
its costing and competitiveness. The pricing should be done smartly
by estimating the profit margin at different price levels and enclosing
the most competitive price.
Customer-Oriented Method
This method is also called perceived value pricing. It is demand-based pricing where the
company determines the product price on value perception in terms of consumer
demand for the particular goods or service. This perceived value is based on the
following constituents:
•Direct Price Rating Method: The customers need to determine the

price of products displayed to them, where each product belong to a
different brand.
•Direct Perceived Value Rating: The buyers rate the different

brand products on a scale of 0-100 according to their preference. The
highest-rated product has the maximum perceived value.
•Economic Value to the Customer: To determine the target market

segment, the companies correlate its total product cost to the
consumer benefits of the current product.
•Diagnostic Method: The customers evaluate products of multiple

brands on various parameters or attributes. Each attribute has an
importance weight, and on multiplying it with the given ratings, the
perceived value of each brand can be determined.

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BACHELORS OF BUSINESS

“Pricing is a managerial task that involves establishing pricing objectives, identifying

Objective # 2. Price Stabilization:

Objective # 3. Target Share of the Market:

Objective # 4. Facing Competition:

Objective # 5. Profit Maximization:

1. Cost Plus Pricing

4. Target Return Pricing

1. Going Rate Method

•Direct Price Rating Method: The customers need to determine the

•Direct Perceived Value Rating: The buyers rate the different

•Economic Value to the Customer: To determine the target market

•Diagnostic Method: The customers evaluate products of multiple

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