This document discusses various pricing methods and strategies. It begins by defining price and listing factors that affect price decisions, both internal like costs and marketing objectives, and external like competitors' prices and market conditions. It then outlines the pricing process, which involves determining objectives, estimating demand and costs, analyzing competitors, selecting a pricing method, and adapting prices based on factors like location. The document provides details on various pricing methods like markup pricing, target return pricing, and perceived value pricing. It emphasizes that effective pricing requires considering multiple internal and external factors.

1. Pricing
Methods & Strategies
G ururajPhatak
B.Sc MBA (PhD)

2. What is Price?
Price Has Many Names
 Rent Tuition Bribe
 Fee Fare Salary
 Rate Toll Wage
 Commission Premium Interest
 Assessment Retainer Tax
10- 2

3. Definition
 Price
 The amount of money charged for a
product or service, or the sum of the
values that consumers exchange for the
benefits of having or using the
product or service.
10- 3

4. What is Price?
 Price and the Marketing Mix:
 Only element to produce revenues
 Most flexible element
 Can be changed quickly
 Price Competition
 Common Pricing
Mistakes
10- 4

5. Factors Affecting Price Decisions
10- 5

6. Factors to Consider When Setting Price
 Market positioning influences
Internal Factors strategy
 Other pricing objectives:
 Marketing  Survival
objectives  Current profit maximization
 Marketing mix  Market share leadership
 Product quality leadership
strategies  Not-for-profit objectives:
 Costs  Partial or full cost recovery
 Organizational  Social pricing
considerations
10- 6

7. Factors to Consider When Setting Price
 Pricing must be carefully
Internal Factors coordinated with the other
marketing mix elements
 Marketing  Target costing is often used
objectives to support product
 Marketing mix positioning strategies based
strategies on price
 Nonprice positioning can
 Costs
also be used
 Organizational
considerations
10- 7

8. Factors to Consider When Setting Price
 Types of costs:
Internal Factors  Variable
 Marketing
 Fixed
 Total costs
objectives
 How costs vary at different
 Marketing mix
production levels will
strategies influence price-setting
 Costs  Experience (learning) curve
 Organizational effects on price
considerations
10- 8

9. Factors to Consider When Setting Price
 Who sets the price?
Internal Factors  Small companies: CEO or top
management
 Marketing
 Large companies: Divisional or
objectives product line managers
 Marketing mix  Price negotiation is
strategies common in industrial
 Costs settings
 Organizational
 Some industries have
pricing departments
considerations
10- 9

10. Factors to Consider When Setting Price
 Types of markets
External Factors  Pure competition
 Nature
 Monopolistic competition
of market  Oligopolistic competition
and demand  Pure monopoly
 Competitors’
 Consumer perceptions of
costs, prices, price and value
and offers  Price-demand relationship
 Other  Demand curve
environmental  Price elasticity of demand
elements 10- 10

11. Factors to Consider When Setting Price
 Consider competitors’ costs,
External Factors prices, and possible reactions when
developing a pricing strategy
 Nature of market  Pricing strategy influences the
nature of competition
and demand  Low-price low-margin strategies
 Competitors’ inhibit competition
 High-price high-margin strategies
costs, prices, attract competition
and offers  Benchmarking costs against the
competition is recommended
 Other
environmental
elements 10- 11

12. Factors to Consider When Setting Price
 Economic conditions
External Factors  Affect production costs
 Affect buyer perceptions of price
 Nature of market and value
and demand  Reseller reactions to prices
 Competitors’ must be considered
costs, prices,  Government may limit or
restrict pricing options
and offers
 Social considerations may be
 Other
taken into account
environmental
elements 10- 12

13. Major Considerations in Setting Price
10- 13

14. Setting the Price-Pricing Process
1. Defining the Pricing Objective.
2. Determining the Demand .
3. Estimating the Cost.
4. Analyzing Competitors’ Cost, Prices and Offers.
5. Selecting a Pricing Method.
6. Selecting the Final Price.
7. Adapting the Price.

15. 1. Defining the Pricing Objective
 Pricing will be straight forward if a company has selected its target market
and market positioning carefully.
 Pricing Strategy largely determined by decision on ‘Market Positioning’.
 Each price will have a different impact on: Profits, Sales Revenues and
Market Share.
 5 Main Pricing objectives :
 Survival
 Maximum Current Profit
 Maximum Sales Growth
 Maximum Market Skimming
 Product Quality Leadership

16. Survival
 This objective is pursued in case of a companies plagued
with:
 1. Overcapacity
 2. Intense Competition
 3. Changing Customer wants.
 Prices often cut down, with less importance to profits to
keep the plant going and inventories turning over.
 Companies stay in business as long as prices cover
variable costs and some fixed costs.
 It’s definitely a short run objective !!!

17. Maximum Current Profit
Setting prices that maximize current profits
 Estimate demand and costs associated with alternative
prices and choose the price that produces maximum
current profit, cash flow or ROI
 Disadvantages:
 Assumes that the firm has knowledge of its demand and
cost functions
 More emphasis on current financial performance rather
than long run performance
 Ignores effects of other marketing mix variables,
competitors reactions and legal restraints on price.

18. Maximum Sales Growth
 Higher sales volume leads to lower unit costs and higher
long run profits.
 Set lowest prices assuming is price sensitive [ Market
Penetration Pricing]
 Requisites:
 Low price discourages actual and potential competition.

19. Maximum Market Skimming
 Setting high prices to ‘skim’ the market.
 Estimate highest price that can be charged given the
comparative benefits of its new product v/s available
substitutes.
 Each time sales slow down, the company lowers down
the price to draw in the next price sensitive layer of
customers.
 Thus the company skims maximum amount of revenue
from the various market segments.

20. Product Quality Leadership
 Employed in case of company aiming to be product
quality leader in the market
 Pricing slightly higher than competitors because of the
above feature.

21. 2. Estimating The Demand
 Each price set leads to a different level of demand
 Demand schedule depicts the relation between current
price charged and resulting demand.
 Demand schedule shows the number of units the market
will buy in a given time period at alternative prices that
may be charged during the period.
 … In normal cases, demand and price are inversely
related.

22. Demand curve shows markets overall reaction to alternative
prices that might be charged.
Can also be perceived as sum of reactions of many
individuals who have different price sensitivities.
PRICE SENSITIVITY OF DEMAND =
% CHANGE IN QUANTITY DEMANDED
------------------------------------------------------
% CHANGE IN PRICE

23. @ Elastic Demand : Demand changes considerably with price
@ Inelastic Demand : Demand hardly changes with a small change in price.
…. Less elastic the demand, more flexibility for the seller to ‘Raise the Price’.

24. Demand less elastic under the following conditions –
* There are a few or no substitutes/competitors
* Buyers do not readily notice the higher price
* Buyers are slow to change their buying habits to
search for low prices
* Buyers think the higher prices are justified by quality
improvements / normal inflation.

25. 3.Estimating the Cost
 Demand’ sets ‘CEILING’ to the Price that the company
can charge for its product
 WHILE
 Company ‘Costs’ set the ‘ FLOOR’ !!!
 Company wants to charge a price that covers its cost of
producing, distributing and selling the product
 PLUS
 a fair return for its efforts and risk taken.

26. Types of Costs
 Fixed Costs - Do not vary with production or sales volume. These
costs go on irrespective of production levels.
 Ex: Rental Charges, Interests to be paid to banks, Salaries
 Variable Costs - Vary directly with the level of production. These
costs tend to be constant per unit produced and their total varies with
the number of units produced.
 Total Costs – It is a summation of the fixed costs and variable costs
at any given level of production.

27. Management charges a price that at least covers total production costs
at a given level of production.
ACCUMULATED PRODUCTION EXPERIENCE [ Benefits ]
* Better methods of production are employed
* Flow of materials is improved
* Cut in procurement costs
… Average cost tends to fall with accumulated production experience.
This decline of average costs with accumulated production experience
is called “EXPERIENCE /LEARNING CURVE”.

28. 4. Analyzing Competitors Price & Offers
 Competitor prices and possible price reactions help the
firm establish the prices and level of setting the price.
 Company learns price and quality of each competitor
offer
 Use competitors price as an orienting point for your own
pricing.

29. 5. Selecting a Pricing Method
 Markup pricing
 Target return pricing
 Perceived value pricing
 Going rate pricing
 Sealed bid pricing

30. Markup Pricing
 Adding a standard mark up to the cost of the product
 Mark up’s generally higher on seasonal items to cover risk of low
sales, specialty items, slow moving items and demand inelastic
items.
 Mark up pricing works only if that price actually brings
 in the expected level of sales.
 High mark up strategy fatal if competitors prices are low.

31. Illustration
 Variable Cost [VC] = Rs.10 Fixed Cost [FC] = Rs.3,00,000
 Expected Unit Sales = 50,000
 -----------------------------------------------------------------------------------
 Manufacturing cost per unit = VC + FC
 ---------
 Unit Sales
 = 10 + 3,00,000
 -----------
 50,000
 = Rs.16/-

32. Assuming 20% mark up expectations from the Management,
Mark up Price = Unit Cost
---------------------------
{ 1 – Desired Return on Sales }
16
= -------
{ 1- 0.2 }
= Rs.20/-
•Advantages
•Sellers more certain about costs than demand
• No frequent adjustments as demand change
•Minimizes price competition as they tend to be similar if all firms in this industry
use this method.
•General feeling that ‘Cost Plus Pricing’ fair to both Buyers and Sellers

33. Target Return Pricing
 Firm determines the price that would yield its target rate of return on its
investment [ ROI ]
 Target Return Price = {Unit Cost + Desired return x Invested
Capital}
 Unit Sales
 A Company has invested Rs.10,00,000 in business and wants to set price on its products to
earn 20% ROI .
 Estimated Sales = 50,000 Unit Price estimated at Rs.16/-
 -----------------------------------------------------------------------------------
 .. Target Return Price = 16 + { 0.2 x 10,00,000 }
 --------------------
 50,000
 = Rs.20/-
 Manufacturer realizes this 20% ROI provided its costs and estimated sales turnover are
accurate.

34. Perceived Value Pricing
 Basing price on product’s ‘Perceived Value’
 Impetus on ‘Buyer’s perception of value’ and not the
sellers cost as a key to pricing.
 Use of ‘Non-Price variables’ in Marketing mix to build up
perceived value in the buyers mind.
 Key to perceived value pricing is to accurately determine
‘market’s perception’ to the ‘offer’s value’
 Marketing Research needed to establish markets
perception of value as a guide to effective pricing.

35. Going Rate Pricing
 Firm bases its price largely on “ Competitors price” with
less attention paid on its own cost or demand.
 Firm might charge the same, more or less than its major
competitor
 Smaller firms ‘follow the leader’ …. Change their prices
when leaders change theirs’.
 …. Method popular where costs are difficult to measure
OR competitive response is uncertain.

36. Sealed Bid Pricing
 Firm bases its price on ‘expectations of how competitors
will price’ rather than on a rigid relation of firms cost or
demand.
 Criterion adopted for setting price would be ‘Expected
Profit’.
 Bid the price that would ‘maximize the expected profit’.

37. 6. Selecting the Final Price
 Some additional factors influencing selection of final price –
 [ a ] Psychological Pricing : Prices to end in odd numbers.
 Ex: Rs.99 instead of Rs.100
 [ b ] Image Pricing : Effective with ego sensitive products
like perfumes, expensive cars etc.

38. [ c ] Influence of other Mktg. Mix elements on Price :
Final price to take into account –
‘Brand Equity’ and ‘Advertising’ relative to competition
Consumer willing to pay higher prices for ‘known products’ than for unknown products
Brands with low quality and low advertising charge ‘lowest price’.
[ d ] Company Pricing Policies
Contemplated price to be consistent with company’s pricing policy.
Policy to ensure that salespersons quote prices reasonable to customers and profitable to the
company
[ e ] Impact of Price on other parties
Management to consider reactions of other parties to stated price.
Feelings of ‘Distributor’ / ‘Dealer’/ ‘Sales force’
Reaction of Competitors
Will Suppliers raise their price due to rise in prices from the company?
Know laws affecting price and make sure that your pricing policies are defensible.

39. 7. Adapting the Price
 Companies do not set a single price, they set a
pricing structure that covers different products
reflecting ….
 ‘Variations in geographical demand, Market
segment variations, purchase timings etc.

40. [ a ] Geographical Pricing
 Pricing products to customers at different locations based on ‘transportation
costs’.
 Types:
 FOB Origin Pricing: in which goods and services are placed free on board
carrier the customer pays the freight from the factory to destination.
 Uniform Zone Pricing: in which the company charges the same price plus
freight to all customers, regardless of their location.
 Basing Point Pricing: in which seller destinates some city as a basing point
and charges all customers from freight cost from that city to the consumer.
 Freight Absorption Pricing: in which the seller all or part of the freight
charges in order to get desired business.
 Zone Pricing: in which company set up two or more zones. All customers
with in that zone pay the same total price, more distant the zone higher the
price

41. [ b ] Price Discounts and Allowances
 Modification of ‘basic price’ to reward customers for early payments, volume
purchases and off-season buying.
 Discounts and Allowances are ‘Price Adjustments’ for the above.
 Discount: a strategic reduction in price on purchases during a stated
period of a time
 Types:
 (1) Cash Discounts -
 Price reduction to the buyer who promptly pay their bills
 [ 2% discount if payment made within 30 days ].
Serves purpose of improving sellers liquidity and reduces credit collection costs.

42. (2) Quantity Discounts -
Price reduction to buyers who buy large volumes
{ Rs.10 per unit for less than 100 units ; Rs.9 per unit for more than 100 units bought }
Types:
a) Non-Cumulative basis :
Discount is applicable on each order placed and is on case to case basis.
b) Cumulative Basis :
Discount is effected on the number of units ordered over a given time period. Its more of
a policy matter
3) Functional Discounts [ Trade Discounts ] :
Offered by manufacturer to Trade Channels for performing functions of storing,
selling etc.
(4) Seasonal Discounts :
Price reduction to buyers who buy products/services ‘Out of Season’. .. Ensures
steadier production during the year.

43. Allowances : Promotional money paid by Manufacturer to Retailers
in return for an agreement to feature the manufacturers products in some
way.
These are other types of reductions from the list price
@ Trade in Allowances - Price reduction granted for turning in an old item when
buying a new one.
@ Promotional Allowances- Payments/price reductions to reward dealers for
participating in advertising and sales support systems.

44. [ c ] Promotional Pricing
Companies temporarily ‘price their products below
the list price’ and sometimes even below cost.
Types of Promotional Pricing:
(1) Loss Leader Pricing -
Supermarkets and Departmental stores drop
prices on well known brands to stimulate customer
interest.
But manufacturers disapprove this as their brands
are being used as ‘loss leaders’ and can cause
‘dilution of brand image’.

45. (2) Special Event Pricing –
Sellers establish special prices in certain seasons
to draw in more customers
(3) Cash Rebates –
Offered to encourage more purchases within a
specified time period. …. Helps clear inventories
without cutting list prices.
(4) Low Interest Financing –
Company can offer customers low interest finance
instead of lowering the price.

46. (5) Warranties and Service Contracts –
Company can promote sales by adding a free warranty offer OR service
contract free of charge OR at a reduced price.
(6) Psychological Discounting –
Involves putting an artificially high price on a product and then offering it at a
substantial savings.
Ex: “ Was Rs.400, Now Rs.250 ”
….. But it’s a highly illegitimate discount tactic !!!
… Discounts from normal prices are a legitimate form of promotional pricing.,

47. [ d ] Discriminatory Pricing
# Companies modify their basic price to accommodate differences in customers,
products, locations.
This form of pricing occurs when a company sells a product at ‘two or more prices’
that do not reflect a ‘proportional difference in costs’.
Types of Discriminatory Pricing:
(1) Customer Segment Pricing :
Different customer groups charged different prices for the same product.
Ex: Museums charge lower fee for students/children

48. (2) Product Form Pricing -
Different versions of the product are priced differently but not proportionately
to their respective costs.
Ex: Standard Iron : Rs.400 ; Iron with indicator lamp : Rs.450
(3) Image Pricing-
Pricing products at two different levels based on image differences.
Ex: Perfumes in different bottle shapes priced differently.
(4) Location Pricing-
Different locations priced differently even though cost of offering to each location
is the same.

49. Ex: Theatre varies its seat prices according to audience preference for different
locations.
(5) Time Pricing -
Prices are varied by season, day or hours.
Ex: Public Utilities [ Phone Bills, Dial up Internet charges ]
[e] Product Mix Pricing
@ Firm searches for a set of prices that ‘maximize profits’ on the total product
mix.
@ Pricing difficult as various products have ‘different demand and cost’
interrelationships and are subject to ‘different degrees of competition’.

50. Different forms of Product Mix Pricing:
(1) Product Line Pricing -
Panasonic offers five different cameras ranging from a simple one to complex
one that includes lot many features.
… Each successive camera offers additional features permitting ‘Premium
Pricing’.
# Management to establish ‘Price points’ between various camera models
considering the following aspects:
* Cost differences between cameras
* Customers evaluation of various features
* Competitors prices

51. # Customers associate ‘Low’, ‘Average’ and ‘High’ quality with such products.
# Even if all the three prices are raised, people will normally buy the products at
their preferred price points/levels.
(2) Optional Feature Pricing -
@ Companies offer optional products or features along with their main product.
@ Pricing such options is always a problem as they have to decide ‘which items
to include in the price’ and ‘which to offer as options’.
Ex: Restaurants price liquor ‘high’ and their food ‘Low’. Food revenue covers food
and other restaurant costs while liquor generates the necessary profit for them.

52. (3) Captive Product Pricing –
@ Some products require the use of ‘Ancillary’ OR ‘Captive’ products for effective
usage.
Ex: Razor Blades, Camera Films
@ Manufacturers of main products [ Razors, Camera ] price them low and ‘set
high mark ups’ on ancillary product/supplies [ Blades, Film Rolls ]
… Those camera makers who do not sell films have to price their camera’s higher
in order to ‘make the same overall profit’.

53. Risks associated –
@ Danger in pricing captive products too high due to the following reasons :
* It could give rise to ‘Pirates’, counterfeit these parts and sell them to outlets
without passing the cost savings to the customers.
* Company to control above problem by advising users to ‘use products only
from authorized dealers’ for guaranteed performance.
(4) Two Part Pricing -
Used by Service Firms who charge a ‘fixed fee’ plus a ‘variable usage fee’.

54. Ex: Telephone user pays a minimum monthly fee plus charges for calls beyond the
minimum specified.
Problem of …
* How much to charge for basic service?
* How much for the variable usage?
… Fixed fee to be low enough to induce purchase of the service while profit can
be made on the usage fees.
(5) By-Product Pricing -
@ Pricing of main product is affected if by-products have little value and are
costly to dispose off.

55. @ Manufacturer to accept any price that covers more than the cost of disposal of
by-product.
@ If by-products have value to some customer groups, then they should be priced
on their value.
@ Any income earned on the by-products will make it easier for the company to
charge a lower price on its main product if forced by competition.

56. (6) Product Bundling Prices -
# Sellers ‘bundle their products’ at a set price.
# Savings on the bundle must be substantial to induce customers to buy the
bundle.
Ex: Auto manufacturer offers an option package at less than the cost of buying
all the options separately.

57. PRICING Strategies
Value and Competition Based
Cost Based Pricing Product Mix Pricing
Pricing
Value Based: 1.Product Line Pricing
1.Cost plus
1.Every day Low Pricing 2.Optional Product Pricing
2.Break even
2.High Low Pricing 3.Captive Product Pricing
Competition Based: 4.By-Product Pricing
1.Destroyer Pricing 5.Product Bundle Pricing
2.Price Matching or Going
Rate Pricing
3.Price Bidding or Close Bid
Pricing

58. Cost Based Pricing
COST PLUS
Adding and make up the total cost of the product
 Advantages:
 sellers are more certain about the cost than the
demand
 If all companies use this method Price become
Standard
 It is fairer to both buyers and sellers
 Disadvantages:
 It ignores demand and competition

59. BREAK EVEN:
The firm determines the price at which it will make a target profit
Value & Competition Based Pricing
Value Based Pricing: setting the price of a product
on the basis of consumers’ value rather than
manufacturers cost
Every Day Low Pricing: Competition Based Pricing: based on
Constant low prices and no competitors products
Discounts EX:
Destroyer: to eliminate competition ex: VK
Price Matching: price equal to competitors
High Low Pricing: Charging
Price Bidding: Normally it is used in
higher prices everyday but running
construction and Manufacturing services.
frequent promotions to lower the
This is done through quotations
prices on temporary bases

60.  Product line Pricing: setting the price for entire product line
ex: Nokia Mobiles
 Optional Product Pricing: giving accessory product with
main product ex: PC +4GB PEN drive etc
 Captive Product Pricing: setting the price for a product that
must be used along with the main product ex: Gillette razors
 By Product: determining the price of main product in order
to make the main products more attractive
 Product Bundle Pricing: several product together at the
reduced price ex: Anchor toothpaste + Brush etc