Chapter 5


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Chapter 5

  1. 1. Chapter 5 PRICING <ul><li>Price may be defined as the value of product attributes expressed in monetary terms which a consumer pays or is expected to pay in exchange & anticipation of the expected or offered utility </li></ul><ul><li>Pricing is the function of determine product value in monetary terms by the marketing management of a company before it is offered to the target consumer for sale </li></ul>
  2. 2. <ul><li>Objectives/ or Advantages of Pricing decisions </li></ul><ul><li>1. To maximize the profits </li></ul><ul><li>2. Price stability </li></ul><ul><li>3. Competitive situation </li></ul><ul><li>4. Achieving a Target-return </li></ul><ul><li>5. Capturing the market </li></ul><ul><li>6. Ability to pay </li></ul><ul><li>7. Long-run welfare of the firm </li></ul><ul><li>8. Margin of profit to middlemen </li></ul>
  3. 3. <ul><li>Factors influencing of price decision </li></ul><ul><li>INTERNAL & EXTERNAL FORCES </li></ul><ul><li>1. Objectives of the business </li></ul><ul><li>2. Cost of the product </li></ul><ul><li>3. Market position </li></ul><ul><li>4. Competitors prices </li></ul><ul><li>5. Distribution channels policy </li></ul><ul><li>6. Price elasticity & Demand elasticity </li></ul><ul><li>7. Products stage in the Life cycle of the product </li></ul><ul><li>8. Product Differentiation </li></ul><ul><li>9. Buying patterns of the consumers </li></ul><ul><li>10. Economic environment </li></ul><ul><li>11. Government policy </li></ul><ul><li>12. Social & ethical consideration </li></ul><ul><li>13. Fear of labor leaders </li></ul><ul><li>14. Consumers reactions towards rising prices </li></ul>
  4. 4. <ul><li>Methods of pricing polices/ Basic pricing polices </li></ul><ul><li>1. Cost-oriented pricing </li></ul><ul><li>2. Demand-oriented pricing </li></ul><ul><li>3. Competition-oriented pricing </li></ul>
  5. 5. <ul><li>1. Cost-oriented pricing </li></ul><ul><li>Following are some of the methods based on cost </li></ul><ul><li>Cost-plus pricing </li></ul><ul><li>Rate of return or target pricing methods </li></ul><ul><li>Break-even pricing </li></ul><ul><li>Marginal cost or Incremental pricing </li></ul><ul><li>Cost-plus pricing </li></ul><ul><li>In this method assumes that no product is sold at a loss since the price covers the full cost incurred </li></ul><ul><li>Fixing tentative pricing is easier in this method </li></ul><ul><li>The price under this method is determined by adding a desired percentage profit on the cost to the total cost of the product taking into account, the margins for middlemen </li></ul>
  6. 6. <ul><li>The de-merits is that it ignores completely the influence of competition & market demand </li></ul><ul><li>Merits </li></ul><ul><li>1. Where it is difficult to forecast the future demand this method is appropriate </li></ul><ul><li>2. If there are only few buyers for the product, then pricing can be justified </li></ul><ul><li>3. Public utility services like railways, post offices, electricity are priced through this method </li></ul><ul><li>De-merits </li></ul><ul><li>1. The two important factors i.e. demand & supply are ignored </li></ul><ul><li>2. Method totally based on cost concept but in reality cost don’t influence the prices where as price influence the cost </li></ul><ul><li>3. Correct cost can’t be calculated </li></ul>
  7. 7. <ul><li>Rate of return or target pricing methods </li></ul><ul><li>Price per unit=Total cost of production + </li></ul><ul><li>Total desired profit at </li></ul><ul><li>desired rate on investment </li></ul><ul><li>_______________________ </li></ul><ul><li>Total no. of units produced </li></ul><ul><li>This method is good only when there is no competition in the market </li></ul>
  8. 8. <ul><li>Break-even pricing </li></ul><ul><li>--This helps firm to determine at what level of output the revenues will equal the costs considering certain selling price </li></ul><ul><li>--For this purpose two cost are taken i.e., FIXED cost & VARIABLE cost, foxed cost decrease per unit when production increases, variable cost on the other hand change as production varies i.e. , no production no variable cost, more production more variable cost </li></ul><ul><li>--Therefore break even point is a point where there is neither loss nor profit </li></ul><ul><li>BEP= Total fixed cost </li></ul><ul><li>Margin of contribution per unit </li></ul>
  9. 9. <ul><li>Marginal cost or Incremental pricing </li></ul><ul><li>--- In this method the price fixed on the basis of additional variable cost associated with an additional unit of output </li></ul>
  10. 10. <ul><li>2. Demand-oriented pricing </li></ul><ul><li>--- In this method of pricing DEMAND is considered as pivotal factor </li></ul><ul><li>--- PRICE is fixed by simply adjusting it to the market conditions </li></ul><ul><li>--- A high price is charged when or where the demand is intense & low price is charged when the demand is low </li></ul>
  11. 11. <ul><li>3. Competition-oriented pricing </li></ul><ul><li>1. Parity pricing or going rate pricing </li></ul><ul><li>2. Pricing above competitive level or Discount pricing </li></ul><ul><li>3. Pricing above competitive level or Premium pricing </li></ul><ul><li>1. Parity pricing or going rate pricing </li></ul><ul><li>Price is fixed on the basis of competitors price, this method is used when the firm is new in the market or existing firm introduces a new product in the market or when there is tough competition in the market </li></ul>
  12. 12. <ul><li>2. Pricing above competitive level or Discount pricing </li></ul><ul><li>Means when the price is fixed below the competitive level i.e., below the competitors product. This method is used only by new firms entering the market </li></ul><ul><li>3. Pricing above competitive level or Premium pricing </li></ul><ul><li>Where the firm determines the price of its product above the price of the same products of the competitors </li></ul>
  13. 13. <ul><li>PRICING STRTERGY </li></ul><ul><li>1. SKIM THE CREAM PRICING </li></ul><ul><li>2. MARKET- PENETRATION </li></ul><ul><li>PRICING </li></ul><ul><li>3. FOLLOW THE LEADER PRICING </li></ul>
  14. 14. <ul><li>1. Skim the cream pricing strategy or A high Initial pricing strategy </li></ul><ul><li>--This strategy uses a very high introductory price to skim the cream of demand at a very outset </li></ul><ul><li>--It is used when thee is no competition in the market or the new product has some exclusive characteristics </li></ul><ul><li>--It continues to be high till the competitors begin to enter the market, as soon the competitors enter the market the producer reduces the price </li></ul>
  15. 15. <ul><li>2. Market Penetration pricing </li></ul><ul><li>--This is just opposite of skimming pricing; it offers a very low introductory price to speed up its sales & therefore widening the market base </li></ul><ul><li>--Basically low price is used as a major tool for rapid penetration of a mass market & is based on a long-term view point, also aims at capturing the market share </li></ul>
  16. 16. <ul><li>3. Follow the leader Pricing </li></ul><ul><li>-- It fixes the prices near about their prices which are generally lower than those of their leader’s means they follow the company leader policy </li></ul><ul><li>-- Has no scientific & rational basis for fixing the prices </li></ul>
  17. 17. <ul><li>Kinds of pricing </li></ul><ul><li>1. ODD pricing </li></ul><ul><li>Ending in odd number e.g. Bata shoe company pricing like 399.95 </li></ul><ul><li>2. PSYCHOLOGICAL pricing </li></ul><ul><li>Prices are fixed at a full number </li></ul><ul><li>Positively inclined </li></ul><ul><li>3. CUSTOMARY pricing </li></ul><ul><li>Prices are fixed by the custom. Soft drinks are priced by their customary basis </li></ul>
  18. 18. <ul><li>4. Pricing at PREVAILING prices </li></ul><ul><li>Undertaken to meet the competition </li></ul><ul><li>5. PRESTIGE pricing </li></ul><ul><li>Luxury goods are priced in this type </li></ul><ul><li>6. Price LINING </li></ul><ul><li>This type usually found among retailers, it is related to both psychological & customary pricing </li></ul><ul><li>7. GEOGRPHIC pricing </li></ul><ul><li>Petrol is priced depending upon the distance from the storage area to the retail outlet </li></ul><ul><li>8. F.O.B (Free on Board) </li></ul><ul><li>First the buyer will incur the cost of transit & in the latter the quoted is inclusive of transit chargers </li></ul>
  19. 19. <ul><li>9. DUAL pricing </li></ul><ul><li>When the manufacturer sells the product at two or more different prices in the same market. E.g. In railways where the passengers are charged differently for the same journey & traveling in different classes </li></ul><ul><li>10. ADMINSTERED pricing </li></ul><ul><li>Pricing is fixed on the basis of policy decisions of sellers </li></ul>