Many firms are
the low-price trend
and have seen success
in converting the
acquired customers to
Developing Pricing Strategies
By Philip, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha
Traditionally, price has been the major determinant of a buyers’ choice. And this is still the
case with large segments of markets across the world. Although non-price factors have
recently risen in importance, pricing remains an important factor in determining sales and
profitability. Also, price is the only component in the marketing mix that provides revenue and
Buyers can :
• Get instant price comparisons from thousands of vendors: Websites like
pricescan.com offer data about products like prices and reviews from hundreds of
• Name their prices: The consumer can state his desired price for a product and find the
seller willing to meet this price on sites like priceline.com. Also, volume-aggregating
sites collate orders from many customers and press the supplier for a deeper discount.
• Get products free: The open source software movement has eroded margins for
almost any major software player. Also, the recent emergence of low-cost airlines
providing tickets only for the amount of taxes levied on a ticket is an example how
firms have been successful with free offerings.
Sellers can :
• Monitor customer behaviour and customize offers: Firms use software to analyse
pricing requests with pricing factors such as past sales data, discounts, etc. to reduce
processing time of these requests greatly.
• Offer certain customers special prices: Certain customers are offered lower prices by
firms in order to capture a certain market segment on ensure the loyalty of existing
Setting the price
Firms set a price when they introduce a new product, or venture into a new market with an
existing product. This is usually achieved by following a six-step process as follows
Chapter 14 - Developing Pricing Strategies and Programs
Step 1: Selecting the Pricing Objective – The firm first decides where it wants to position
its market offering. The five major pricing objectives are
• Survival: Companies pursue survival if they are plagued with over-capacity, intense
competition, or changing consumer wants.
• Maximum current profit: Many firms try to set a price that maximises their current
profits and delivers a high return on investment.
• Maximum market share: Here, firms believe that a higher sales volume will lead to
lower unit costs and higher long-run profits and thereby maximise their market
• Maximum market skimming: Companies offering new technologies often set high
prices initially in order to gain high profits from various segments of the market
• Product-Quality Leadership: Many firms aspire to be the product-quality leader in
Step 2: Determining Demand – Each price leads to a different level of demand and
therefore has a different impact on a company’s marketing objectives. The factors
entailing this are
• Price Sensitivity: The relation between price and demand, i.e. the demand curve can
be analysed to determine the market’s probable purchase quantity at various prices.
This helps a firm to maximise its profits.
• Estimating Demand Curves: Most companies use the following methods to estimate
demand curves: Market Surveys, Price Experiments, Statistical Analysis, etc.
• Price Elasticity: Marketers need to know how responsive, or elastic, the demand
would be, to a change in price. If the price elasticity is high, increasing prices would
lead to a great reduction in demand, while decreasing prices would lead to increase
in demand. Hence, marketers prefer inelastic markets where price changes do not
elicit great shifts in demand.
Step 3: Estimating Costs – While demand sets a ceiling on the range of price a firm can
charge for its product, costs determine the floor.
• Types of Costs and Levels of Production: Costs are classified as Fixed costs and
Variable costs. Fixed costs include salaries, electricity bills, etc. which do not depend
upon quantity produced. Variable costs include processing costs, packaging costs,
shipping costs, etc. which depend upon quantity produced. Hence, companies must
decide on a level of production which will more or less guarantee no losses on the
cost of production.
• Accumulated Production: As firms gain experience in production of a good, the
costs involved begin to decline. This is due to various factors such as workers finding
shortcuts, smoother flow of materials, etc. This decline in cost with production
experience is called experience curve.
• Target Costing: Other than production scale and experience, costs also change a
result of concentrated efforts by designers, engineers, purchase agents etc. They
examine each cost component and try to find ways to reduce the costs involved in
each of these.
• Reference prices:
Consumers often employ
comparing an observed
price to an internal
reference price or a posted
‘regular retail price’.
Sellers manipulate this by
suggesting that the actual
price of the product is
much higher or by
pointing to a competitor’s
• Price-Quality inferences:
Many consumers use price
as an indicator of quality.
High-price cars are
perceived to be of higher
quality and vice versa.
• Price cues: Consumer
perceptions of prices are
also affected by the
manner in which prices are
displayed. Many sellers
believe setting a price of
Rs.2999 puts a product
into the 2000 range
instead of the 3000 range
as perceived by the
consumer. Putting ‘Sale’
signs near the price
display have also been
known to be effective.
Step 4: Analyzing Competitors – The introduction of any change in price, cost, offers given by
any seller can elicit a response in the market.
A firm must analyse the value offered by a competitor to a customer in terms of prices, add-
ons, post-sale services, etc. and thereby modify its own price in order to be competitive in the
Step 5: Selecting Pricing Methods – There are six major pricing methods:
• Mark-up Pricing: The most elementary pricing method is to add a standard mark-up to
the producer’s cost.
• Target-return Pricing: In target-return pricing, the firm determines the price that would
yield its target return on investment.
• Perceived-value Pricing: Perceived-value pricing is made up of several factors like the
buyer’s image of the product, the channel deliverables, warranty quality, customer
support, supplier’s reputation, etc.
• Value Pricing: Here, high quality products are assigned a fairly low price. The basic aim
here is to attract a value-conscious customer base by reengineering the company to
become a low-cost producer without sacrificing quality.
• Going-rate Pricing: Here, firms base their prices largely on competitors’ prices, charging
nearly the same as major competitors in the market do.
• Auction-type Pricing: There are three types in this pricing method –
English Auctions (Ascending bids): Here, the seller puts up an item and the bidders raise
the price until the top price is reached.
Dutch Auctions (Descending bids): Here, the seller announces a high price and then goes
on lowering the price until a bidder accepts it. Or, a buyer announces his desire for a
product and sellers compete to offer him the lowest price.
Sealed-bid Auctions: Here, potential suppliers submit their bids without knowledge of
other bids made and the best bid is selected.
Step 6: Selecting the Final Price – After the pricing methods have narrowed the range of the
price, the company selects the final price by taking into account factors as listed below:
• Impact of other marketing activities: The final price must take into account the brand’s
quality and advertising relative to the competition.
• Company Pricing Policies: The final price must be compliant with the company’s pricing
• Gain-and-Risk-sharing Pricing: Buyers may resist accepting a supplier’s proposal because
of a high perceived level of risk. Hence, the seller has the option of offering to absorb part
or all of the risk if the promised value is not delivered.
• Impact of price on other parties: The final price’s effect on other parties such as
distributors, dealers, competitors, government should also be taken into account by the
Adapting the Price
• Geographical Pricing
• Price Discounts and Allowances
• Promotional Pricing
• Differentiated Pricing
Chapter 14 - Developing Pricing Strategies and Programs
• Initiating price
price cuts in order to
dominate the market
through lower prices.
• Initiating price
initiate price increase
to increase their profits
by taking into account
the feasibility of the
price rise. A major
factor leading to these
price increases is over
demand, where the
supply all its customers
and hence raises its
• Responding to
changes: Firms respond
to price cuts/raises by
factors like the
product’s stage in the
life cycle, its
importance in the
company portfolio, etc.