Pricing Decision

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Pricing
Price represents the value of a good or service for
both the seller and the buyer.
Price is the amount of money charged for a product
or service, or the sum of values exchanged for the
benefits of having or using the product or service.
Price is the only element of the marketing mix which
generates revenue other wise all the elements have
cost.

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Factors Affecting Pricing

Demand

Competition

Pricing

Objectives
of
Business

Government
policy

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Factors Affecting Pricing

Economic
environment

Cost of
the Product

Pricing

PLC

Other Marketing
Mix elements

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Procedure for
Establishing Prices
1. Selecting the pricing
objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors
costs, prices, and offers

5. Selecting a pricing
method
6. Selecting final price
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Procedure for
Establishing Prices
1. Selecting the pricing
objective

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1. Selecting Pricing Objective

Sales-Based
*Volume
*Market share

Possible
Pricing
Objectives

Status Quo-Based
*Favorable business
climate
*Stability

Profit-Based
*Profit maximization
*Satisfactory profit
*Return on investment
*Early recovery of
cash
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Procedure for
Establishing Prices
1. Selecting the pricing
objective
2. Determining demand

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2. Determining Demand
The different price structures lead to a different level
of demand.
For that marketer has to formulate the demand
schedule.
The demand schedule shows the number of units the
market will buy in the given period of time, at the
alternative price that might be charged during the
period.
In determining demand marketer must consider
following aspect
Price Sensitivity
Price elasticity of demand.
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Procedure for
Establishing Prices
1. Selecting the pricing
objective
2. Determining demand
3. Estimating costs

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3. Estimating Costs
Fixed Costs
(Overhead)

Variable Costs

Costs that dont

vary with sales or
production levels.

Costs that do vary

directly with the
level of production.

Executive Salaries
Rent

Raw materials

Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
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Procedure for
Establishing Prices
1. Selecting the pricing
objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors
costs, prices, and offers

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4. Analyzing Competitors
For the marketer it is necessary to know and analyze
the competitors prices and offers.
If the firms offer is similar to a major competitors,
often the fir have to price close to the competitors.
If the firms offer is superior, the firm can charge
more than its competitors.

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Procedure for
Establishing Prices
1. Selecting the pricing
objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors
costs, prices, and offers

5. Selecting a pricing
method
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5. Selecting Pricing Strategy

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1. Cost-Based Pricing
A firm sets prices by computing
merchandise, service, and
overhead costs and then
adding an amount to cover
its profit goal.
It is easy to derive.
The price floor is the lowest
acceptable price a firm can
charge and attain profit.
Goals may be stated in
terms of ROI.

+Profit goals

I
Price
Floor

(Merchandise,
service, and
overhead
costs)

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Cost-Based Pricing Techniques

Cost-Plus Pricing
*Pre-determined
profit added to costs

Markup Pricing
*Calculates
percentage markup
needed to cover
selling costs and
profit

Traditional BreakEven Analysis

*Determines sales
quantity needed to
break even at a
given price

Price-Floor Pricing
*Determines lowest
price at which to offer
additional units for
sale

Cost-Based
Pricing
Techniques
Target Pricing
*Seeks specified rate
of return at a standard
volume of production

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a. Cost-Plus Pricing
Prices are set by adding a pre-determined
profit to costs. It is the simplest form of costbased pricing.

Price = Total fixed costs + Total variable costs + Projected profit

Units produced

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b. Markup Pricing
A firm sets prices by computing the per-unit costs of
producing (buying) goods and/or services and then
determining the markup percentages needed to cover selling
costs and profit. It is most commonly used by wholesalers
and retailers.
Price =

Product cost
(100 Markup percent)/100

Some firms use a variable markup policy, whereby

separate categories of goods and services receive
different percentage markups.
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c. Traditional Break-Even
Analysis
Break-even point
(units)

Break-even point
(sales dollars)

Total fixed costs

Price - Variable costs (per unit)

Total fixed costs

Price - Variable costs (per unit)
Price

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d. Target Return Pricing

Seeks specified rate of return at a standard
volume of production.

TRP = Unit cost + Desired Return X Invested Capital

Unit Sales

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2. Demand Based Pricing

A firm sets prices after studying consumer desires
and finding a range of prices acceptable to target
market.
It begins with selling price and works backward to
cost variables.
It identifies a price ceiling or maximum customer will
pay for a good or service.

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a. Skimming Pricing
This strategy is aimed at the segment interested in
quality, uniqueness, and/or status.
Goals are profit maximization, return on investment,
and early recovery of cash.
In this method firm skims the market in the first
instance through high price, and subsequently settles
down for a lower price.

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Situations give rise to

Skimming
There are no competitors or they are rather weak;
there for buyers are willing to pay a premium price
for a unique price.
Pricing objectives are aimed at rapid return on
investment.
If segments are relatively insensitive to price, firms fix
initial high prices to skim the market.
The firm holds a monopoly or patent protection can
fix the higher price in the market.
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b. Penetration Pricing
This approach aims toward the mass market to gain
high sales volume.
Goals are volume and market share.
In this case marketer sets a low initial price in order to
penetrate the market quickly and deeply.

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Situations give rise to

Penetration

Buyer are sensitive to price.

Significant economies of scale in production and
distribution.
No buyers to pay a premium price for the newest or
best product.
Intensive competition.

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3. Competition Oriented
Pricing
Premium Pricing
Discount Pricing
Parity Pricing/ Going Rate Pricing

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4. Buyer Based Pricing

Perceived Value Pricing
Perceived value pricing is based on the basis of value
perceived by the buyer of the product rather than the
seller cost.
If the seller charges more than the buyer perceived
value, then the seller sales would be suffered.

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5. Differentiated /
Discriminatory Pricing
Some firms charge different prices for the same
product in different zones/areas of market.
Some times, the differentiation in pricing is made on
the basis of customer class rather than market
territory.
Some times, the differentiation is on the basis of
volume of purchase, which is the most commonly
used method in this category.

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Discriminatory Pricing
Customer Segment
Product-form

Location
Time
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6. Psychological Pricing
In this type, the marketer attempts to influence
buying decision by setting prices that are emotionally
pleasing to buyers.
Prestige Pricing
Leader Pricing
Odd Pricing
Bait pricing
Price Lining

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7. Dual Pricing
When the manufacturer sells the same product at two
or more different prices in the same market , it is dual
market pricing.

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8. Negotiated Pricing
Usually followed in Industrial Market.

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Procedure for
Establishing Prices
1. Selecting the pricing
objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors
costs, prices, and offers

5. Selecting a pricing
method
6. Selecting final price
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6. Selecting the Final Price

After analyzing the all pricing method and strategies
company has to select the final price.
In selecting final price company should consider
additional factors like risk, other marketing mix
elements, company objectives etc.

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Pricing of New Products

Penetration Pricing
Meet the Competition Pricing
Skimming Pricing Approach

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Product Mix Pricing

Product-Line Pricing
Optional-Feature Pricing
Captive-Product Pricing
Captive products
Two-Part Pricing
By-Product Pricing
Product-Bundling Pricing
Pure bundling
Mixed bundling
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Product Mix Pricing

Cash discount
Quality Discount
Functional Discount
Seasonal discount
Allowance

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