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UNIT:- 4 Product Pricing

Price is also the marketing variable that can be changed most
quickly, perhaps in response to a competitor price change. Put
simply, price is the amount of money or goods for which a thing is
bought or sold.
The price of a product may be seen as a financial expression of
the value of that product. For a consumer, price is the monetary
expression of the value to be enjoyed/benefits of purchasing a
product, as compared with other available items.
The concept of value can therefore be expressed as:
(Perceived) VALUE = (perceived) BENEFITS - (perceived)
COSTS
A customers motivation to purchase a product comes firstly from
a need and a want example; Need: I need to eat.
want: I would like to go out for a meal tonight.
The second motivation comes from a perception of the value of a
product in satisfying that need/want (e.g. I really fancy a
McDonalds).
The Role of Pricing in the Marketing of Consumer Products
Many marketing campaigns stress that their products offer the
best quality at the lowest price. In a rational economy, quality and
price should be in direct proportion; the higher an items quality,
the more it should cost. Marketing obscures this relationship by
introducing intangible elements, such as status, desire and
branding, into the equation.
Targeted Marketing
The price of merchandise depends as much on how and to whom
it is being marketed as on its inherent value. Cheap goods are
promoted to the market at low prices to encourage mass buying;
other goods, sometimes no better in quality, are sold at higher
prices as luxury items to people who can afford them. Grocery
stores emphasize a basic, no-frills nature to lure price-conscious
consumers, whereas spas and hotels promote themselves as
places of luxury and indulgence.
Competition

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Increased competition causes prices to drop, because most

consumers, when presented with two similarly priced products
from competing companies, will purchase the less expensive one.
As competition increases, marketing attempts to convey the
image of the product as superior in quality but less expensive
than its rivals. In the world of marketing, public perception counts
for more than the veracity of marketing statements. In a field with
little competition, a manufacturer is less compelled to lower
prices or to market its merchandise as low-priced, because
consumers do not have much choice about where to buy it.
Product vs. Experience
Products that are sold in particular environments can display
greatly increased prices. For example, the actual amount of coffee
purchased in a high-end coffee shop is miniscule, but a single cup
can cost more than a pound of coffee at the grocery store. In this
example, the consumer is paying not for coffee but for the
experience of being in the coffee shop, relaxing with friends or
being seen with his new laptop. The more expensive an item is,
the more its price is influenced by the customers perceived
experience of buying it.
Pricing and Demand
When demand increases for an item, its price rises as the
competition to acquire it increases. This is an ideal situation for a
marketer; when there are many eager buyers, the marketer
spends less money on advertising because people are already
seeking the product. Price will rise with demand, until the items
price becomes prohibitive to a large enough proportion of the
buying public; at that point, it is no longer advantageous for the
seller to raise the price any higher.
Factors Affecting Pricing Product: Internal Factors and External Factors
The pricing decisions for a product are affected by internal and external
factors.
A. Internal Factors:
1. Cost:
While fixing the prices of a product, the firm should consider the cost involved
in producing the product. This cost includes both the variable and fixed costs.

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Thus, while fixing the prices, the firm must be able to recover both the
variable and fixed costs.
2. The predetermined objectives:
While fixing the prices of the product, the marketer should consider the
objectives of the firm. For instance, if the objective of a firm is to increase
return on investment, then it may charge a higher price, and if the objective is
to capture a large market share, then it may charge a lower price.
3. Image of the firm:
The price of the product may also be determined on the basis of the image of
the firm in the market. For instance, HUL and Procter & Gamble can demand
a higher price for their brands, as they enjoy goodwill in the market.
4. Product life cycle:
The stage at which the product is in its product life cycle also affects its price.
For instance, during the introductory stage the firm may charge lower price to
attract the customers, and during the growth stage, a firm may increase the
price.
5. Credit period offered:
The pricing of the product is also affected by the credit period offered by the
company. Longer the credit period, higher may be the price, and shorter the
credit period, lower may be the price of the product.
6. Promotional activity:
The promotional activity undertaken by the firm also determines the price. If
the firm incurs heavy advertising and sales promotion costs, then the pricing
of the product shall be kept high in order to recover the cost.
B. External Factors:
1. Competition:
While fixing the price of the product, the firm needs to study the degree of
competition in the market. If there is high competition, the prices may be kept
low to effectively face the competition, and if competition is low, the prices
may be kept high.
2. Consumers:
The marketer should consider various consumer factors while fixing the
prices. The consumer factors that must be considered includes the price
sensitivity of the buyer, purchasing power, and so on.
3. Government control:
Government rules and regulation must be considered while fixing the prices.
In certain products, government may announce administered prices, and
therefore the marketer has to consider such regulation while fixing the prices.
4. Economic conditions:

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The marketer may also have to consider the economic condition prevailing in
the market while fixing the prices. At the time of recession, the consumer may
have less money to spend, so the marketer may reduce the prices in order to
influence the buying decision of the consumers.
5. Channel intermediaries:
The marketer must consider a number of channel intermediaries and their
expectations. The longer the chain of intermediaries, the higher would be the
prices of the goods.

Methods of Price Determination

Price Determination ,Pricing Policy, Pricing Strategies
Price Determination

Determination of the prices depends internal and external factors. Pricing goals represe
price policy should be aligned on several other factors.

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Demand is the key determinant for market oriented company. Demand is the starting point for all
activities.
Simply, the average customer will be demanding different product quantities, depending on
price. Law of the
market says that demand and price are counter proportional ( price increase leads to demand
decrease and vice
versa ).

Competition has a significant influence to price determination of market oriented companies.

Prices need to be
adjusted in order to address the competition. Every company should research market and
competition, prior to
launch of the new product. Survey should include direct competitors but also the substitutes.
Based on market
survey and the strength of the company the prices can be the same, lower or higher.

Costs While demand and competition are external factor, the costs are internal.
The costs must be embedded in
every stage of price determination process. There are several methods of cost embedding into
price:
1.) Costs Plus company calculates the costs and increase price for the specific profit.
2.) Markup price based on cost increased for amount of specific markup percentage.
3.) Target Return Method calculated required markup, in order to achieve return on
investment.
4.) Profit Maximizing is the price where the marginal profit equals marginal cost.
5.) Breakeven Analysis is the number of units sold that generates profit that can cover cost.
This point does not

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have profit nor lost.

Life Cycle pricing approach analysis the current phase of product life in market.
1.) Entering phase usually requires higher sales prices in order to payback initial development
costs. Also
customers are willing to pay more for a new product.
2.) Growth phase is bringing the market stabilization. Prices are more or less stabile.
3.) Saturation phase leads to price decline, due to competition entrance and loss of consumer's
interest
4.) Declining phase is the last part of product life cycle. Prices are still going down.

Sales Channels have the different shopping occasion. Consequently the pricing is
adjusted to sales channel. For
example, the same products is cheaper in hypermarket than on petrol station.
vernment is usually do not interfere into price determination. Exceptionally it may limit maximal
prices for a
certain products. Still, government is influencing pricing, since the taxes & custom duties are the
part of the price.

Pricing Strategies
There are many ways to price a product. Let's have a look at some of them and try to
understand the best policy/strategy in various situations.

Premium Pricing.
Use a high price where there is a uniqueness about the product or service. This approach is
used where a a substantial competitive advantage exists. Such high prices are charge for
luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights.

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Penetration Pricing.
The price charged for products and services is set artificially low in order to gain market share.
Once this is achieved, the price is increased. This approach was used by France Telecom and
Sky TV.
Economy Pricing.
This is a no frills low price. The cost of marketing and manufacture are kept at a minimum.
Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming.
Charge a high price because you have a substantial competitive advantage. However, the
advantage is not sustainable. The high price tends to attract new competitors into the market,
and the price inevitably falls due to increased supply.Manufacturers of digital watches used a
skimming approach in the 1970s. Once other manufacturers were tempted into the market and
the watches were produced at a lower unit cost, other marketing strategies and pricing
approaches are implemented.Premium pricing, penetration pricing, economy pricing, and price
skimming are the four main pricing policies/strategies. They form the bases for the exercise.
However there are other important approaches to pricing.

Psychological Pricing.
This approach is used when the marketer wants the consumer to respond on an emotional,
rather than rational basis. For example 'price point perspective' 99 cents not one dollar.
Product Line Pricing.
Where there is a range of product or services the pricing reflect the benefits of parts of the
range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole
package $6.
Optional Product Pricing.
Companies will attempt to increase the amount customer spend once they start to buy. Optional
'extras' increase the overall price of the product or service. For example airlines will charge for

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optional extras such as guaranteeing a window seat or reserving a row of seats next to each
other.
Captive Product Pricing
Where products have complements, companies will charge a premium price where the
consumer is captured. For example a razor manufacturer will charge a low price and recoup its
margin (and more) from the sale of the only design of blades which fit the razor.
Product Bundle Pricing.
Here sellers combine several products in the same package. This also serves to move old
stock. Videos and CDs are often sold using the bundle approach.
Promotional Pricing.
Pricing to promote a product is a very common application. There are many examples of
promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing.
Geographical pricing is evident where there are variations in price in different parts of the world.
For example rarity value, or where shipping costs increase price.
Value Pricing.This approach is used where external factors such as recession or increased
competition force companies to provide 'value' products and services to retain sales e.g. value
meals at McDonalds.
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