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What is Price ?
• It is a market value expressed in terms of money.
• Price is the amount of money to be paid to buy
something.
• As the consideration given
in exchange for transfer of ownership, price
forms the essential basis of commercial
transactions.
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• Price is determined by what a buyer is willing
to pay, a seller is willing to accept, and
the competition is allowing to be charged.
• Price = Prime cost + factory cost + Office and
administrative cost + Marketing cost + Profit +
Brand Value
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What is Pricing ?
• Pricing is the process whereby a business
sets the price.
• Method adopted by a firm to set its product
price.
• Pricing is the method of determining the
value a producer will get in the exchange of
goods and services.
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Important point of pricing
• Nature of the product/service.
• The price of similar product/service in the
market.
• Target audience i.e. for whom the product is
manufactured (high, medium or lower class)
• The cost of production viz. Labor cost, raw
material cost, machinery cost, inventory cost,
transit cost, etc.
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Pricing Objective
• Return on Investment.
– To achieve the expected profit
• Target share of the market.
– Increase the market share
• Meeting or keeping out competition.
– To eliminate competition
• Profit maximisation.
– Basic Goal of marketers
• Stabilisation of price.
– Stability in price that can maintain reputation.
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Pricing Policies or Methods or Decision
A major factor in determining the
profitability of any product is establishing a base
price :
Cost oriented pricing
Demand oriented pricing
Competition oriented pricing
Leader pricing
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1. Cost oriented pricing
• Also Known as cost-plus pricing method.
• The cost estimate(cost-plus) of the product is
made and a margin(Mark-up) of profit is added
to determine the price.
• This policy is completely overlooks the influence
of competition and market demand.
• Selling Price = Total Cost + Desired Profit
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• Pricing attempt to determine what consumers
are willing to pay for goods and services.
– High price is fixed when the demand increase.
– Low price is charged when the demand low.
2. Demand oriented pricing
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• Marketer decides the prices of his product after
careful study of competitors prices.
• Three actions after learning their competitors’
prices:
– Price above the competition
– Price below the competition
– Price in line with the competition (going-rate pricing)
3. Competition oriented pricing
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• Marketer tries to capture the market by setting
up low price.
– Also known as “Loss Leader Price”.
• High price may be fixed for a prestigious product
to improve the image.
– This known as “Profit Leader Pricing”.
4. Leader oriented pricing
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• High premium price in charged when a product is
launched in the market.
– High profit margins in the early stages .
Types :-
• Rapid Skimming Pricing - High price with high
promotional activity expenditure.
• Slow Skimming Pricing - High price with low
promotional activity expenditure.
Skimming Pricing Strategy
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• Low price in charged when a product is launched
in the market.
– Capture the large share of the market in the early
stages .
Types :-
• Rapid Penetration pricing - High price with high
promotional activity expenditure.
• Slow Penetration Pricing - High price with low
promotional activity expenditure.
Penetration Pricing Strategy
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Steps in Setting price for a product
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 the Final Price
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• 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.
– Survival
– Maximum current profit
– Maximum market share
– Maximum market skimming
– Product-quality leadership
Step 1: Selecting the Pricing Objective
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• Each price will lead to a different level of
demand and have a different impact on a
company’s marketing objectives.
• Most companies attempt to measure their
demand curves using several different methods.
– Surveys
– Price experiments
– Statistical analysis
Step 2: Determining Demand
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• Variable and Fixed Cost :
– Price must cover variable & fixed costs and as
production increases costs may decrease.
– The firm gains experience, obtains raw materials at
lower prices, etc., so costs should be estimated at
different production levels.
Step 3: Estimating Costs
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Tankertanker Design• Target Costing :
– firm may attempt Target Costing (TG).
– TG is when a firm estimates a new product’s desired
functions & determines the price that it could be sold
at.
– From this price the desired profit margin is
calculated.
– Now the firm knows how much it can spend on
production whether it be engineering, design, or
sales but the costs now have a target range.
– The goal is to get the costs into the target range.
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• The firm should benchmark its price against
competitors.
• Learn about the quality of competitors offering,
• Learn about competitor’s costs.
Step 4: Analyzing Competitors’ Costs,
Prices, and Offers
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• Pricing methods narrow the range from which
the company must select its final price.
• In selecting that price, the company must
consider additional factors.
– Impact of other marketing activities
– Company pricing policies
– Gain-and-risk-sharing pricing
– Impact of price on other parties
Step 6: Selecting the Final Price
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1. Cost:
• While fixing the prices of a product, the firm
should consider the cost involved in producing
the product.
• This cost includes both the variable and fixed
costs.
• Thus, while fixing the prices, the firm must be
able to recover both the variable and fixed costs.
Internal Factors
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2. The predetermined objectives:
• While fixing the prices of the product, the
marketer should consider the objectives of
the firm.
• if the objective of a firm is to increase return
on investment, then it may charge a higher
price.
• if the objective is to capture a large market
share, then it may charge a lower price.
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3. Image of the firm:
• The price of the product may also be
determined on the basis of the image of the
firm in the market.
• For Example, HUL and Procter & Gamble can
demand a higher price for their brands, as
they enjoy goodwill in the market.
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4. Product life cycle:
• The stage at which the product is in its
product life cycle also affects its price.
• During the introductory stage the firm may
charge lower price to attract the customers.
• During the growth stage, a firm may increase
the price.
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5. Credit period offered:
• The pricing of the product is also affected by
the credit period offered by the company.
– Longer the credit period, Higher may be the price
of the product.
– shorter the credit period, lower may be the price
of the product.
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6. Promotional activity:
• The promotional activity undertaken by the
firm also determines the price.
• If the firm incurs heavy advertising and sales
promotion costs, then the pricing of the
product shall be kept high in order to recover
the cost.
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External Factors:
1. Competition:
• While fixing the price of the product, the firm
needs to study the degree of competition in
the market.
• If there is high competition, the prices may be
kept low to effectively face the competition.
• if competition is low, the prices may be kept
high.
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2. Consumers:
• The marketer should consider various
consumer factors while fixing the prices.
• The consumer factors that must be
considered includes the price sensitivity of the
buyer, purchasing power, and so on.
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3. Government control:
• Government rules and regulation must be
considered while fixing the prices.
• In certain products, government may
announce administered prices, and therefore
the marketer has to consider such regulation
while fixing the prices.
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4. Economic conditions:
• The marketer may also have to consider the
economic condition prevailing in the market
while fixing the prices.
• At the time of recession, the consumer may
have less money to spend, so the marketer
may reduce the prices in order to influence
the buying decision of the consumers.
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5. Channel intermediaries:
• The marketer must consider a number of
channel intermediaries and their
expectations.
• The longer the chain of intermediaries, the
higher would be the prices of the goods.
