2. What is a price?
• In the narrowest sense, price is the amount of money charged for a
product or service.
• More broadly, price is the sum of all the values that consumers exchange for
the benefits of having or using the product or service.
• Price goes by many names, the rent paid for apartment, tuition for your
education, fee to your physicians or dentist, fare paid for bus, airline or
taxi, interest charged by bank on money borrowed, the salary paid to
employees, wages paid to labors, premium paid to insurance companies
etc. are all price
• Price is the only element in the marketing mix that produces revenue, all
other elements represent costs. Price is also one of the most sensitive and
flexible marketing mix elements.
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3. Concept of pricing
ç Pricing is the act or process of determining of price of a product. Pricing
means the process of selecting the pricing objectives, determining the possible
range of prices, developing price strategies, setting the final price and
implementing and controlling pricing decision.
ç The determination of price is a very important and crucial decision. It affects
all parties in the production, distribution and consumption of goods. Price
affects volume of production, sales and the amount of profit. It is the source of
income to producers and distributers.
ç According to W.J.Stanton:- Pricing is the functions of determining the products
value in monitory terms.
ç In conclusion, pricing is the process of fixing price of the product. It is very
complex process. Both internal and external environmental factors affect this
process of pricing. The price of the product should be equal with its utility or
value. It is very sensitive element in marketing mix so, the marketer should
have deep knowledge and to be aware while price determination.
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6. Internal factors affecting price
Company objective plays crucial role in determining the price of the
product. Common company objectives can be survival, current profit
maximization, market share leadership and product quality leadership. Firm
adopting survival strategy set a low price, hoping to increase demand. Firms
adopting current profit maximization as their pricing goal and use a price
that will produce the maximum current profit. To achieve market share
leadership firms set price as low as possible. To achieve product quality
leadership, firm set high price to cover higher performance quality and the
high cost of R&D.
For example when Toyota and Honda decided to enter and compete with
European luxury performance cars for their Lexus and Acura brands, set
high price.
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7. Internal factors affecting price cont….
Marketing Mix strategy is another factor that affect the price of the product.
Price decisions must be coordinated with product design, distribution, and
promotion decisions to form a consistent and effective marketing program. If
business organization decides to use many resellers , heavy promotion, and
superior features in product need to invest more money for those activities hence
set higher price for their product and vice- versa.
Company wants to charge a price that both covers all its costs of producing,
distribution and selling a fair rate of return for its effort and risk. If these costs are
high for company, its price will be high and vice-versa.
Structure of pricing or organizational consideration means who within the
organization should set prices. For example If finance manager has to set price
then he would rather consider through the costs of the product, if by top
executives then they consider competitor’s price and standardized formats.
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8. External factors affecting pricing
• Market and demand- price and the demand of the product have adverse
relationship. In economics, higher the price lower will be the demand of
the product and vice-versa. Market is another consideration for price
determinant. If the market is characterized by monopoly conditions, the
price would be higher. If it is a pure competition the price would be
uniform among all sellers. Price elasticity of demand need to be
considered for this determining price while considering this element.
• If Competitors’ costs, prices and offers are better then company costs,
prices and offers should be adjusted. For example, last year Pepsi
deducted its price on its 200 ml cola bottle. By next 24 hours Coca-Cola
also deducted its price to the price of Pepsi.
• Other considerations like economic conditions, inflation, intermediaries
interests, social concern, government regulations also need to be
considered for setting price.
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10. General Pricing Approaches
• The price the company charges will be somewhere between one that is too
low to produce a profit and one that is too high to produce any demand.
• Companies set prices by selecting a general pricing approach that includes
one or more of these sets of factors.
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General Pricing
Approaches
Cost based
approach
Value based
pricing and
competition
based
approach
11. Cost based pricing
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• Generally, most of the organizations set their product price on the
basis of costs. While setting pricing, it should be covered at least total
costs (Production, distribution, promotion) of their product. Mark-up
pricing, target return and break even methods are mostly used in
different organizations.
• Cost based pricing method ignores the competition and market
demand of the product.
12. Cost based pricing
Cost -Plus pricing/ Mark -Up pricing method:-
This pricing method is very simple and popular. Under this pricing method a
particular profit margin should be added to the unit cost of a product.
This method is popular in intermediaries and small business organizations.
It is traditional way of price determination. The margin may be expressed in
terms of percentage or may be in value.
For example
Total per unit cost = Rs 150000
Mark up = 15%
Cost plus price= Total cost + mark-up
= Rs.150000+ 15% of 150000
= Rs.150000+ Rs15000
= Rs.165000
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13. Cost based pricing cont…
Target return pricing:-
Under this pricing method a desired rate on investment should be added to the
total cost of the product while setting pricing. Target return pricing is a pricing
method in which a formula is used to calculate the price to be set for a product
to return a desired profit or rate of return on investment assuming that a
particular quantity of the product is sold. This pricing method is used almost
exclusively by market leaders.
For example
Total investment = Rs. 9,00,000
Target return on investment = 20%
Total cost= Rs 5,00,000/-, unit sales = 10,000
ROI = 20% of 9,00,000 = 1,80,000/-
Per unit price =
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡+𝑇𝑎𝑟𝑔𝑒𝑡 𝑅𝑂𝐼
𝑈𝑛𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
=
5,00,000+1,80,000
10,000
= 𝑅𝑠. 68
Per unit price would be Rs. 68/-
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14. Cost based pricing cont…
Break even pricing
Breakeven point is no profit no loss situation, where revenue equals to total costs. It is very popular
and important method of pricing. Under this pricing method, price is determined on that point
where revenue equals to cost, that point is called breakeven point or BEP. The objectives of
breakeven pricing is to use low prices as a tool to gain market share and drive competitors from the
market place. It is a difficult approach for a smaller, resource-poor company that cannot survive for
long with zero margins.
For example
Fixed cost = Rs.500000
variable cost per unit= Rs. 10
Selling price per unit= Rs 20
BEP point in unit =
Fixed cost
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
=
𝑅𝑠 500000
𝑅𝑠.20−𝑅𝑠.10
= 50000 units.
BEP Point in rupees =
Fixed cost
1−𝑉𝐶/𝑆𝑃
=
Rs.500000
1−10/20
= Rs. 1000000
•
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15. Demand-based/Value-based pricing
• Value-based pricing (VBP) is the most highly recommended pricing
technique by consultants and academics. The basic concept is setting
a price to capture the majority of what your customers are willing to
pay.
• Under this method price is set on the basis of customer's value
perception and demand. In this method marketers ignores the
production costs and market prices to determine the product price.
This pricing method also ignores the market competition and total
cost of the product.
• Perceived value pricing and customer value pricing are the major
value oriented pricing method.7/18/2017 15
16. Demand-based/Value-based pricing cont…
1. Perceived value pricing
In perceived valued pricing method, first, the producer collects buyer's
views, experiences, feelings and perception of the value and fixed the price
around the average perceived value of the product.
Costs and demand of product are secondary factors in perceived value
pricing. This method can implement on the basis of market survey and
market research and understand the customer's product perception.
This types of pricing reflects a sustainable competitive advantage where
there is little or no competition.
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17. Demand-based/Value-based pricing cont…
2. Customer value pricing:-
•In the method, low price is charged for high quality
product to attract value conscious customers.
•companies may apply this method only to some products
but not to all product. They sell other products or services
at premium prices. Many companies have a significant
opportunity to differentiate themselves from competitors
by learning how to create, quantify, communicate and
capture customer value by implementing customer value
based pricing strategies.
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18. Competition based pricing
Under this pricing method prices are set on the basis of competitor's
price.
This pricing method does not force to change their price, like same as the
competitors. It depends on nature of competition and product market
expectations.
This method ignores the market demand and cost of the product.
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19. Competition based pricing cont…
i. Going rate pricing:- Going rate pricing (also known as meet
competition pricing) is a popular pricing method that involves pricing a
product at the same rate as the rest of the competitor's prices. If the
marketers cannot control the market, they take force to determine their
price to meet the competitor's price of their goods and services.
Generally agriculture products set prices under this pricing method. In
Nepal noodles companies are setting this pricing method in the market.
ii. Pricing Below competitor:- It is a competitive pricing method in which
initial price is set at levels intended to be below competitors' price. The
main purpose of this method is to attract price sensitive customers by
sweeping market competitors aside. In this method, price of every
product is fixed lower than the competitor's price. Nepal Airlines
Corporation has fixed its fare lower than other airlines in our country.
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20. Competition based pricing cont…
iii. Pricing above competition:- Under this method product prices are
set above the competitor's price level. Marketers determine their
product price above the prevailing market price. It supports to
increase market image or goodwill of the product and its
organization. Most of the technical equipment's prices are
determined by the above competitor's level.
iv. Sealed bid pricing method:- Organization buying decision are based
on sealed -bid pricing method. Sealed bid is mainly used for pricing
the tender transaction. Sealed bid price is determine confidentially.
A bidder tries to bid at lower price rather than other bidders say
competitors to win the contract. Because the lowest bid is awarded
order. If the price becomes higher than the competitor's price, such
sealed bid may be rejected.
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22. Strategies are action plan organization's overall function. They help to the
marketer to achieve pricing objective.
Marketing managers can begin developing pricing strategies by
determining company pricing goals, such as increasing short term and
long term profits, stabilizing prices, increasing cash flow and facing
competition.
The effective pricing strategies are as follows.
i. Product lifecycle pricing strategy:-
ii. Price change pricing strategy:-
iii. Price response pricing strategy:-
iv. Psychological pricing strategy:-
v. Traditional/ customary pricing strategy
vi. Promotional pricing strategy
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24. Product lifecycle pricing strategy:-
1. Introduction Stage
At the introduction stage, new products enter in the market. Marketers implement different
pricing strategies for different kinds of new product.
i. Pricing skimming strategy:- Market skimming pricing strategy attempts to "skim the
cream" top of the market by setting a high price and selling to those customers who are less
price sensitive. Skimming strategy is used to pursue the objective of profit margin
maximization. Price skimming strategy implements high price for an innovative product in
the initial stage for assuming that the customer will pay high price for a new product.
ii. Penetration pricing strategy:- Market penetration pricing is the setting a low price for a
new product in order to attract a large number of buyers and a large market share. In this
strategy, the price of new products is fixed lower than the expectation of the target market.
This strategy is most effective for increasing market share and sales volume and
discourages to competitors.
iii. Competitive pricing strategy:- At the introduction stage, products are modified from
existing product and they become new product in the market. The marketers implement
this competitive pricing strategy by setting equal price with competitors. Competitive
pricing strategy is used if there are already same type of product in the existing
market.
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25. Product lifecycle pricing strategy:-
2. Growth stage:- At this stage, rapidly sales grow. High volume of the
production remains price will be falling down. Generally the marketer
wants high market share with lower price strategy.
3. Maturity stage:- There is high competition. Producers segments their
product and expand different product line as possible. Producer charge
low price to defend the market share and competition.
4. Decline stage:- Sales decline rapidly. Hardcore loyal and laggards buy
the product. Price is decreased.
•
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26. Price change strategy
In order to adopt with the changing environmental factors and meet the
increasing competition an organization has to be careful while determining
its pricing strategy. In such types of situation marketers implement the
price change strategy. These strategy are mentioned below.
i. Price increase strategy:- Environmental factors are not favorable forever. In
price increase strategy, the company increased its product prices due to the
cause of shortage of raw materials, implementation of new tax, inflation, quality
increment, competitor's price, and other forces.
ii. Price decrease strategy:- In price decrease strategy, the company decreased its
product price to capture the market share, to sweep the competitors to win price
war, and so on. When they decrease the product prices it helps to increase the
number of customers and can sell high volume of product.
iii. Price maintain strategy:- Under this strategy, the producer try to maintain its
product price by adjusting the value of the product. The value of product might
be increased or decreased but price of the product remain same.
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27. Product mix pricing strategies
The strategy for setting a product’s price often has to be changed when
the product is part of a product mix. In this case, the firm looks for a set of
prices that maximizes the profits on the total product mix. Pricing is
difficult because the various products have related demand and costs and
face different degrees of competition.
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Product line pricing Setting price steps between product line items
Optional product pricing Pricing optional or accessory products sold with the main product
Captive product pricing Pricing products that must be used with the main product
By-product pricing Pricing low value by products to get rid of them
Product bundle pricing Pricing the bundles of products sold together
28. • Product line pricing:
companies usually make product lines rather than a single product. Sony offers not just
one type of television, but several lines of televisions, each containing many models. In product
line pricing management must decide on the price steps to set between the various products in a
line based the products, customer evaluations of different features, and competitors’ prices.
• Optional product pricing:
those companies who sell optional or accessory products along with their main product
use optional product pricing strategy. For example refrigerators come with optional ice makers,
car buyer may choose to order power windows, cruise control. Optional product pricing sets the
price of optional or accessory products along with main product.
• Captive-product pricing:
companies that make products that must be used along with a main product are using
captive product pricing. Examples of captive product include razor blades, memory card for
mobiles, printer cartridges.
• By-product pricing:
setting a price for by-products in order to make the main product’s price more
competitive.
• Product bundle pricing:
combining several products and offering that bundle at a reduced price. Theaters and sports teams sell
season tickets at less than the cost of single tickets; hotels sell specially priced packages that include room,
meals, and entertainment.
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29. Psychological pricing strategy
This strategy is used when the marketer think the customers respond to the
product on an emotional, rather than rational basis. Customers buying activities
affects the emotional factors. Psychological pricing strategies are as follows
i. Prestige pricing strategy:- This strategy focus on high price for prestigious products.
Price is set at an artificially high level. Perfumes, ornaments, watches, wine are suitable
for such pricing strategy.
ii. Odd - Even pricing strategy:- Odd and even pricing strategies are mostly used in Nepal,
India and China. In practical, both pricing strategies are used only on physical product
not on service products. Odd number pricing entertains on economic image of the
product. For example Rs.199, 999 etc. Similarly even numbers focus on quality image on
the product. For example Rs.200, 250, 300 etc. This strategies are used by Philips, Sony
and LG companies.
iii. Psychological discount strategy:- This pricing strategy is seller's tactics while selling
process of the product. Most of the street shops/ venders and retailers implement this
pricing strategy. In this strategy price is set highly in first and provides heavy discount to
attract customers. Some organizations use 'sale' or 'discount' offer for their product in
the market. for example
• Original price= Rs.2500
• Discount= Rs.500
• Product selling price = Rs.15007/18/2017 29
