Price is an important element of the marketing mix.
It can be used as a strategic marketing variable to meet
It is also a direct source of revenue for the firm. It must not
only cover the costs but leave some margin to generate
profit for the firm.
Price should not be so high as to frighten the customers.
Price is also an element which is highly perceptible to
customers and significantly affects their decisions to buy a
Price directly determines the quality to be sold.
That is why electric fans are sold at lower prices and hotels
reduce their tariffs during off season periods to attract
Various Factors Affecting Pricing
Pricing decisions are usually determined by
demand, competition and cost.
1. Demand: The popular ‘Law of Demand’ states that “higher
the price, lower the demand, and vice versa, other things
remaining the same”.
In season, due to plentiful supplies of certain, agricultural
products, the prices are low and because f low prices, the
demand for them increases substantially.
Of course, the law of demand assumes that there should be no
change in the other factors influencing demand except
price. If any one or more of the factors, for
instance, income, the price of the substitutes, tastes and
preferences of the
consumers, advertising, expenditures, etc. vary, the demand
may rise in spite of a rise in price, or alternatively,
the demand may fall in spite of a fall in price.
The degree of control over prices which the seller may
exercise varies widely with the competitive situation in
which they operate.
Sellers operating under conditions of pure competition
do not have any control over the prices they receive.
A monopolist, on the other hand, may fix prices
according to his discretion.
Sellers operating under imperfect competition may
have some pricing discretion.
The marketers, therefore, needs to know the degree of
pricing discretion enjoyed by him.
Who determines the price?
Price takers (Pure Competition)- All that the individual seller
can do is to accept the price prevailing in the market, i.e., he is in
a position of a Price Taker. If he wants to change a higher
price, buyers will purchase from other sellers. And he need not
charge less since he can sell his small supply at the going market
Price makers (Monopoly)- A single producer has complete
control of the entire supply of a certain product. Railways and
Telephones are examples of monopoly.
Main features of monopoly are:
There is only one seller of a particular good or service and
rivalry from the producers of substitutes is so remote that it is
As a result, the monopolist is in a position to set the price
himself. Thus, he is in the position of a Price Setter.
Oligopoly: is a market situation characterised by a few
sellers, each having an appreciable share in the total output
of the commodity.
Ex. Automobiles, cement, tyre, infant food, dry
batteries, tractors, cigarettes, aluminium and razor blades
In each of these industries, each seller knows his competitors
individually in each market.
Monopolistic competition: is a market situation, in which
there are many sellers of a particular product, but the
product of each seller is in some way differentiated in the
minds of consumers from the product of every other seller.
Ex. You can find it out yourself by going to the market, as a
large number of consumer goods like
toothpastes, soaps, cigarettes etc. are subject to a large
degree of product differentiation as a means of attracting
Influences on Price
Regulatory environment – legal, political and image
1. Cost-Plus or Full-cost pricing
2. Pricing for a rate of return, also called target pricing
3. Marginal cost pricing
4. Going rate pricing, and
5. Customary prices
Cost-plus or Full-cost Pricing
This is most common methods used in pricing. Under
this method, the price is set to cover costs
(materials, labour and overhead) and a predetermined
percentage for profit.
The percentage differs strikingly among
industries, among members- firms and even among
products of the same firm.
This may reflect differences in competitive
intensity, differences in cost base and differences in the
rate of turnover and risk.
Pricing for a rate of return (Target
Rate of return pricing is practiced by businesses that
set specific goals for the capital that they spend and
the revenue they wish to generate.
A business can set prices to ensure that these goals will
Marginal Cost Pricing
Both under above mentioned methods, prices are
based on total costs comprising fixed and variable
Under marginal cost pricing, fixed costs are ignored
and prices are determined on the basis of marginal
The firm uses only those costs that are directly
attributable to the output of a specific product.
Instead of the cost the emphasis here is on the market.
The firm adjust its own price policy to the general
pricing structure in the industry.
Where costs are particularly difficult to measure, this
may seem to be the logical first step in a rational
Taker of this pricing strategy will show that the firm
has some power to set its own price and could be a
price maker if it chooses to face all the consequences.
Ex. Banks, Petrol, Supermarkets, Electrical goods.
Prices of certain goods become more or less fixed, not
by deliberate action on the seller’s part but as a result
of their having prevailed for a considerable period of
time. For such goods, changes in costs are usually
reflected in changes in quality or quantity. Only when
the costs change significantly the customary prices of
these goods are changed.
Ex. Candy bars of a certain weight all cost a predictable
amount -- unless you purchase them in an airport
Price skimming (Creaming) is a pricing strategy in
which a marketer sets a relatively high price for
a product or service at first, then lowers the price over
Penetration pricing is a pricing strategy where the
price of a product is initially set at a price lower than
the eventual market price, to attract new customers.