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Chapter III
Price

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Learning outcomes
➢Analyse the financial services pricing process
➢Analyse the importance of price as an element of the marketing mix
➢Analyse the difficulties of price setting for financial services
➢Compare the range of different pricing approaches for financial services
➢Examine ways of pricing savings products, brokerage and investment products, credit
products and insurance products
➢Analyse the relationship between demand and price
➢Analyse the relationship between price and other elements of the marketing mix
Learning objectives

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One of the most complex decisions involved in the marketing mix
is deciding on the price of the product or service. Buyers have
only limited resources and have to make decisions about what they
will and will not buy.
Introduction
In a market, the suppliers wish to set price at the highest level
that they can, whilst still obtaining adequate sales – by doing
so, they maximise their profit.
On the other hand, customers will want to see prices at as low a
level as possible to reduce their outgoings.

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The importance of price
Pricing is vital for the following reasons:
➢Price brings together three of the other elements of the marketing mix and affects
each one of them.
➢Price determines the firm's income and profits for each product and each market. A
relatively small increase in price can lead to a very large increase in profits, unless of
course the higher price means customers buy competing products instead.
➢Price contributes to the firm's business and financial objectives. Pitching a low price
will probably increase unit sales (at the cost of losing profit), so price can be used to
control demand, perhaps in order to maintain efficient use of production capacity.

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➢Price operates as a competitive tool, if done with care. Competing by reducing
prices can lead to retaliation by competitors, and a price war will always favour the
firm with the most cash resources. Because price has an immediate effect on the
value proposition, it can be used to boost sales temporarily (for example, a sales
promotion which offers a discount).
➢Price acts as an important surrogate for judging quality. People tend to assume that
the higher priced product is better quality, and if the price/quality ratio is right,
higher priced products actually represent better value for money since they offer
more benefits: people often think that paying extra is worthwhile in order to obtain a
better product. Of course, the product has to meet the customers' expectations, or no
repeat purchases will result.

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The difficulties of price setting in financial services
❑ Economic factors
❑ Comparison issues
❑ Quality
❑ Pricing for profit
❑ Funding cost
❑ Long-term products
❑ Uncertainty
❑ Ethical issues and regulations

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How to set prices
The first stage of setting a price is to select a pricing objective. This pricing
objective must be consistent with:
➢Overall objectives of the organization
➢Marketing objectives
Objectives serve a number of purposes including
➢ Sense of direction
➢ Focus for decision making
➢ Motivate employees
➢ Controlling mechanism
➢ Profitability
➢ Growth
➢ Shareholder value
➢ Customer satisfaction

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Determining demand
The next stage is to determine the demand for the product by considering its relationship
with price.
For most products, the quantity demanded falls as the price increases, as illustrated by the
classic demand curve. A demand curve for a product is shown as D1 below.

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Examples of factors which will cause the demand curve
to shift include:
➢Changes in the quality of the product (product)
➢Advertising campaigns (promotion)
➢Online availability (place)
➢Restructuring of the branch network (place)
➢Competence of staff (people)

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Price elasticity of demand measures the relationship between price and
demand. If a price change has a relatively significant impact on demand,
demand is said to be elastic. Demand for basic financial services might be
relatively inelastic. This means that changes in the price only have a slight
effect on the demand for these products.

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The break-even point is the point at which the costs of producing a product
equal the revenue made from selling it. It is important to know how many
units are required to break even when determining the price.
total fixed costs
Break-even point =
Sale price per unit - variable costs per unit

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Determining a basis for pricing
➢ Cost-based pricing In a cost-based approach, a monetary amount or percentage is added to the
product cost. There are two main types of cost-based pricing: cost plus, and mark-up.
➢ Market-based pricing (also known as perceived value pricing)
❖ This kind of pricing takes account of a wide range of factors:
1) Marketing strategy
2) Competition
3) Costs
4) Product line pricing
5) Value to the customer
6) Negotiating margins
7) Price-quality relationships
8) Political factors
9) Explicability
10) Effect of distributors/retailers
❖ The price set must reflect the product's marketing strategy and be in line with the rest of the
marketing mix.

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➢Regulation-based pricing: Financial services are heavily
regulated and in some cases, the pricing of services may be
dictated by the regulations. For example, for some types of
lending a maximum interest rate may be specified. The
important point to note is that prices must be set in accordance
with the relevant laws and
➢Promotional pricing : Other special events, break holiday,
seasonal, …ect.

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Credit product pricing
1).Collateralised and non-collateralised credit
2).Time frame
3).Credit rating
4).Fixed or variable rates

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➢Savings product pricing
➢Brokerage and investment service pricing
1) Mutual funds
2) Ethics