2. • Price:
• Price is a value that will purchase a finite quantity , weight or other measure of goods or
services.
• Price is one of the primary elements of marketing mix that the marketing manager must
consider while preparing a marketing program.
• In economic term, price is the quantity of money or commodity(barter economy) , which
must be exchanged for one unit of good or service.
• In marketing term, price is considered as the exchange value of good, service or an idea that
may take place between two or more than two parties in a particular transaction.
3. Pricing:
• The amount of money charged for a product or service, or the sum of the values that customers exchange
for the benefits of having or using the product or service is called pricing.
• Pricing is the act of determining the exchange value between the purchasing power and utility or
satisfaction acquired by an individual, group or an organization through the purchase of goods,
services, ideas, rights etc.
• Price is the only element in the marketing mix that produce revenue; all other elements represent costs.
• Pricing is an act of determining an exchange value for the goods and services from the customers.
• It is determined by considering the cost of a product, value of the product and competition present in the
external environment.
4. Factors affecting price determination
Internal factors (Controllable factors)
• Pricing objectives: Pricing differs according to the objectives of an organization. If an
organization wants to gain maximum profit then it can charge higher price to the
products/service. This strategy is useful for the pioneers (new-comers) in the business. If
an organization wants to increase the size of sales then it can remain in breakeven or
charge minimum profit. This is useful in perfect competition.
• Marketing mix: Pricing is affected by the other marketing mix as product, place and
promotion. For example: if a new product is introduced in a market then pricing can be
higher than the existing product. Similarly, pricing also change as per the length of the
distribution channels. If the length is small, then prices can be lowered and vice-versa.
Finally, we can also say that higher promotion can be backed by higher prices.
5. • Level of organizational involvement: The flow of authority and responsibility
also affects the pricing. For example: if price is set by the top management then
price differentials is merely seen between the models and brands. If the brand
manager sets a price then prices are differentiated as per the market to create
brand image and implement good positioning strategy.
• Costs: The cost is the expense made by an organization to manufacture the
product/service. Organization cannot sell below costs. Pricing is always affected
due to the cause of costs and a strategy of an organization to maintain profit.
Costs can be in the form of product cost, selling cost and promotion cost etc.
6. • Product differentiation: when the markets are highly specialized , firms
usually deal in differentiated products. The more a firm’s product is
differentiated from competitive offerings, the more freedom it has in setting
prices. For differentiated products, consumers cannot compare prices ,
because the attribute contents in the products widely vary.
7. External or uncontrollable factors:
• Market demand: When demand for a product is higher then higher prices can be
charged by an organization to gain maximum profit. Prices highly fluctuate in
luxury goods than in necessity goods. So an organization can gain maximum
benefit in luxury goods due to the increase in demand.
• Prevailing market price: If an organization does not have any differentiated
products then it has to sell the products in prevailing prices but if an organization
has differentiated products then the price setter can go far beyond the prevailing
prices.
8. • Competition: If there is intense competition in the market and close
substitutes are readily available, then prices have to be lowered but in the
case of monopoly market where competition is not present, prices can be
set very high.
• Government control: Government heavily controls the prices of
necessity goods as rice, sugar, wheat, bread etc. Besides, some control is
done by the government in other goods to control the monopoly creation
in the market.
9. Importance of pricing
The importance of pricing can be classified under three headings described as follows:
To the economy:
• Allocation of goods and services: Pricing helps to allocate the goods are services to different
members of the society and also helps to develop free market economy. Goods and services
are allocated to those people who demand them
• Regulation of factors of production: The factors of production like wages, rent, interest and
profits directly depend upon the price of commodities in the market. If there is high price for
the commodities then the wage, rent, interest and profits will also increase and vice versa.
• Saving: Pricing directly affects the saving of people in the economy. If high prices are
charged for the products then the saving of people will decrease and vice versa.
10. To the firm:
• Determinant of market demand: When price of the commodities increase in the market the demand for
the commodities will decrease and vice versa in the perfectly competitive market. If the market is
monopoly or customers have high regard for the product, pricing doesn’t affect the demand much.
• Source of revenue: Among the 4P’s, only price is the source of revenue for the organization. Increasing
the sales and increasing the price of commodities in the market are the only source of revenue and profits
for the organization.
• Competitive tool: Pricing is the most important factor that helps to sustain an organization in the
competitive market. A right price will not only increase the sales but also generate huge revenue and
profits. This always makes an organization competitive.
• Position: Pricing directly affects the position, brand and image of the firm in the mind of customers. For
example, if a product is highly priced then the customers may perceive it as a high quality product.
11. To the customer:
• Selection of goods and services: Pricing is a very important factor that
helps a customer to select the goods and services in the market. Depending
upon the price, customer can take a decision about the products they
should buy or not.
• Quality: Pricing provides confidence to the customers about the quality of
goods. If products are highly priced then customers may perceive it as of
good quality and vice versa.
12. Pricing Approaches
• 1. Cost-Oriented Pricing:
• Cost based pricing is a process in which an organization will at first design
a product after a proper discussion with top management. They will then
set a price for the product as per the costs incurred for the product
development. After determining the cost, the organization will now
convince the buyers to make a purchase decision.
• The cost based pricing can be done in different ways but the best ways are
as follows:
13. • A) Mark Up or Cost plus pricing:
• Mark up pricing is a most popular and traditional approach of pricing. Under
this approach a certain profit margin is added to the total cost associated
with product , place and promotion.
• B) Target return pricing: In target return pricing , an average rate of return is
estimated on either total investment or total sales. In both the cases , the
price setter seeks to obtain a percentage return or specific total value in rupee
or dollar.
14. • C) Breakeven approach: Break even approach or target profit pricing is the
most popular approach of pricing. Break even approach helps to know the
relationship between cost and revenue and find out a point where revenue
equals to total cost. According to this approach, price is determined at a
point where revenue equals to cost. This point is called Break- Even Point or
BEP.
15. 2. Demand Oriented Approach :
Under this approach price is determined on the basis of the consumer’s perception
and demand intensity rather than costs. Under this approach price is determined by
three approaches:
a)Perceived Value Pricing:
Under this pricing , companies see the buyer’s perception of value as the key to
pricing. They attempt to measure the relative perceived value of their offer and utilize
this in setting price. The approach is based on the market research to establish the
market’s perception.
16. • Perceived- value pricing is in line with modern market positioning thinking.
A company develops a product for a particular target market with an
appropriate market positioning in mind with respect to price, quality and
service. More specifically, the process of setting perceived – value price is as
follows:
• First : identify product features, performance and company’s services.
• Second: Conduct market survey to determine the customer’s response on
each product feature , performance and company’s service.
17. • Third : Rank their emphasis on the basis of the value they placed,
• Finally : identify the price they wish to pay for the company’s product or
service. This price is called as perceived – value price.
• The key to perceived – value pricing is to make an accurate determination of
the marketer’s perception of the value of the total offer.
18. • B) Value pricing / Value – based Pricing:
• It is defined by offering the product at a fair and reasonable price that makes
sense to the purchasing customer.
• As the name suggests price of the product / service is set according to value
perceived by the customer. In this case , the customer expects certain level of
quality service or benefit from the seller , for which he pays certain amount
of money; but he does not directly compare with the benefit from product,
rather he estimates or expects benefits from the seller or marketer.
19. Cont…
3) Competition oriented pricing: If the price of commodities are determined on the basis of the
level of competition present in the market then it is called competition oriented pricing. If
competition is high then the price of commodity will be lower and vice versa. There are two
approaches of pricing here as follows:
a. Going rate pricing: Price of the product will be kept similar to that of the competitor’s
product. This strategy is adopted in a very competitive market where costs are difficult to
measure. However if the products are of differentiated nature, price can be charged either high
or low depending upon the strategy of the company.
b. Sealed-Bid pricing: Under such pricing, an organization will charge lower price than the
competitors in the sealed bids. This strategy is adopted by an organization to get the contracts.
20. Price changes
Initiating price changes: Before initiating a price change i.e. either price cut or
price increase, an organization must anticipate possible buyer and competitors’
reaction.
• Initiating price cuts: Organization can cut its price due to excess capacity, falling
demand, excessive production etc. In such situations, an organization can cut the
prices to increase sales. Such strategy can be more effective if it is backed with
good promotional activities. Only price cuts can be an in-effective strategy
because it can lead to intense price war between competitors.
21. • Initiating price increase: Increasing the price of the commodities is one
of the most difficult things that the marketers must face. If the price
increase is not done with proper research, then it can negatively affect the
sales of the product leading to the decrease in market share of the product.
So, a company must back the price increase by the sense of fairness
surrounding any price increase. Besides, price increase must be supported
by good communication between the organization and the customers.
Different reactions are shown by the buyers and the competitors
depending upon the situation during price increase.
22. Responding price changes:
The response to the price change can either be given by the competitors or by the buyers
• Buyer’s response to price change: There can be different response of the buyers for
the price change. If the market is monopoly market then customers have no choice
rather than purchasing the product available in the market. If the market is perfect
competition then buyers can either purchase the product if they think that the value of
product is still higher or equal to value of money spent. If they think that the value of
product is lesser than the value of money spent then they can shift to the substitute
product.
• Competitor’s response: Competitors can show various responses to the price change
described as follows:
• Maintaining the price: Organization maintains the price in the market because it
thinks that reducing the price may reduce the profit margins or does not affect the
market share of the company or there is probability of regaining the market share in
future
23. • Non price counter attack: Company maintains the price by providing non price
services as warranty, quality service, good communication etc. to attract the
customers
• Price reduction: If the market is price sensitive and there is a chance to lose the
market share due to higher price, the company decides to lower the price of
product
• Price increase: Company increases the price of product in the market by
introducing some brands, redesigning the product, adding new utilities with
product, providing quality services like free repair and maintenance etc
