PRICING

This Chapter will Cover

1. Introduction to Price
2. Factors Influencing Pricing Decisions
3. Steps in Price setting (Including
Various Pricing Methods)
4. Adapting the Price
5. Initiation & Responding to price
Change

PRICE
Price is not just number tag
Price is the only element of Marketing Mix
that produces revenue.
Price is the easiest marketing mix element
to adjust
Price also communicates to the market the
companys intended value positioning of
its product or brand

Factors Influencing Pricing Decisions

Internal Factors
Image sought by the firm through pricing Dark
Fantasy Biscuits, Dove Soap, Perfumes &
cosmetics
Product Attributes - Apple Phone, Casting hair
Colour
Stage of Product Life cycle Electronic Goods
Consumer Psychology & Pricing Bata Prices

Factors Influencing Pricing Decisions

External Factors
Market Characteristics (Demand, Customers)
Flats in Metro cities , Coffee, Sanitizer
Availability of substitutes or alternatives in the
marketCoke & Pepsi, Tour Packages
Buyer behaviour and purchasing power in
respect of product - Onions
Availability of resources - Expensiveness of
Home Loans

Factors Influencing Pricing Decisions

External Factors
Bargaining power of major customers and
suppliers Walmart , (organised retail)
Competitive Pricing policy _Coke & Pepsi, Nirma
(wheel by HUL)
Technological upgradation Mobile Handsets,
laptops
Government controls and relevant legal aspects LPG Gas
Taxes and duties BEST fare, Air fare
Nature & climatic conditions Raincoats, Woolen
Products, Cold drinks
Social considerations and political intervention
Price of Gold, Electricity

Steps in Price setting

1.
2.
3.
4.
5.
6.

Selecting Pricing Objective

Determining the Demand
Estimate Costs
Analyzing Competitors cost
Selecting Pricing Method
Selecting Final Price

Step 1- Selecting the Pricing Objective

Survival : ITC Glucose Biscuits,
Two wheelers sold by Chinese
manufacturers in African
Market

Maximum market Share Big Bazar, tide?

Maximum Market skimming
- Medicine for Aids
Product quality leadership Apple Phone, Taj, BMW
Penetration Pricing - Nano,
Nirma

Step 1- Selecting the Pricing Objective

Other Objectives Partial cost Recovery LPG prices, News
Papers

Step 2 - Determine the Demand

Each price will lead to a different level

of Demand
The relationship is usually reverse
In case of prestigious goods the
demand curve may lead upwards

First step in estimating

demand is to understand
what affects price

Estimate the Demand

Changes in Demand can be estimated by
using
Survey technique,
Price Experiments
Statistical analysis
Factors leading to price sensitivity Page
354

Comprehensive study of 40 year

period showed that
Price elasticity is more for durable goods
Price elasticity is higher for products in
the introduction/growth stage of PLC
Inflation led to substantially high price
elasticity
Price elasticity is higher at the individual
item level than at the overall brand level

Step 3- Estimate costs

Fixed Costs
Variable Cost
Total cost

Step 4 - Analyze Competitor's costs,

prices and offers
Compare Features of the products
with that of competitor and decide
the price
Competitors price can be a special
problem when Number of firms are
few, Product is homogeneous and
buyers are highly informed

Pricing method
Only the method have changed

High Price
No Possible Demand At this
Price

Step 5 Select the

Pricing
Method

Ceiling Price
Customers Assessment of Unique Product
Features
Orienting Point
Competitors Prices & Price of
Substitutes
Costs
Floor Price
Low
PriceProfit at this Point
No Possible

Compare EON with Nano

Pricing Methods
1.
2.
3.
4.
5.
6.

Mark Up Pricing
Target Return Pricing
Perceived Value Pricing
Value Pricing
Going Rate Pricing
Auction Type Pricing

Mark Up Pricing
Elementary method
Add a standard mark up to the
products cost
It gives clear indication of profit
earned.
Used for : Home made products,
Bouquets, Flower arrangements

Target Return Pricing

Firm determines the price that would
yield its target return on investment
Target Return Price =
Unit Cost + Desired Return X
Invested Capital
___________________________________________

Unit Sales

Used for - Turnkey Projects

Perceived Value Pricing

Value as perceived by the customer.
Made up of several elements :Quality, Customer support
Softer attributes such as suppliers
reputation, trust worthiness and
esteem.
Companies must deliver the value
promised by their value proposition

Perceived Value Pricing - example

Nike, a well-known brand of today,
endorsed in professional NBA player
Michael Jordan and created a special line
of shoes called the Air Jordan(s). Nike
seems to understand all too well the need
to develop strong customer-perceived
value.
In addition, Air Jordans released a limited
edition every year with a set amount
available.

Value Pricing
Win Loyal customers by charging fairly
low price for high quality offering.
It is a matter of reengineering the
companys operations to become a
low cost producer without sacrificing
quality to attract a large number of
value conscious customers.
E.g. Gillette (page 361)

Going Rate Pricing

Firm bases its price largely on
competitors prices
E.g. Coke & Pepsi, Staple products

Auction Type Pricing

English Auctions (Ascending Bids)
One seller and many buyers
Dutch Auctions (Descending bids)
One seller and many buyers or one
buyer and many sellers
Sealed bid auctions

Step 6 Selecting the Final Price

Must consider following factors

Impact of other Marketing Activities
Company Pricing Policies
Gain & Risk Sharing pricing Seller
offers to absorb part or all the risk if
it does not deliver the full promised
value.
Impact of price on other parties

Managing the Price (Adapting)

1.
2.
3.
4.

Geographical Pricing
Price discounts & Allowances
Promotional Pricing
Differentiated Pricing

Geographical Pricing
Different price to different customers
at different locations
Perishable items like alphanso
mangoes, Mithai

Geographical Pricing
Various forms of Counter trade (to collect
money)

Barter
Compensation deal : British
Manufacturer sold planes to Brazil for
70% cash & rest in Coffee
Buy back arrangement : Sulzer Group
buying tires from Ligdag of Pune
Offset - Seller receives full payment in
cash but agrees to spend substantial
amount of the money in that coutnry
within a stated time period

Price Discounts and Allowances

Discount Price reduction to buyer.
1. Quantity discount
2. Functional Discount (Offered by a
manufacturer to trade channel
members if they will perform certain
functions)Offers by liquor companies in
Diwali
3. Seasonal discounts
Allowance An extra payment designed to
gain reseller participation in special
program.

Promotional Pricing
Loss leader pricing Stores drop the price on well
known brands to stimulate additional store traffic.
Special Event Pricing Diwali Offers
Cash Rebates Pantaloons offer of cash discount
on credit card buying
Low interest Financing Auto loans at 0% interest
Longer Payment terms Housing loans
Warranties and service contracts Laptops giving
additional warranties
Psychological discounting Buy 3 get 1 free

Differentiated Pricing
Charge price depending on intensity of
customers need
Charge less who buy large volumes
Different amounts to different class of
buyers as follows
Leevise offer for loyal customers of free
leevise purchases

Different amounts to different class of

buyers
Customer Segment pricing : Lower fare to
senior citizens
Product form pricing Image Pricing Garnier hair colour & Loreal
Hair colour
Channel Pricing Coke in Five Star Hotel & in
ordinary restaurant
Location Pricing Theater varying seat prices
Time Pricing Happy hour Pricing of tourist
buses

Initiating and Responding to Price

change

Initiating Price Cut

Price cut initiated due to
Excess plant capacity, to dominate
the market.
It may lead to certain traps
Low Quality trap
Fragile Market share trap
Shallow Pockets trap
Price war trap

Initiating Price Increases

Prices are increased due to
Inflation
In anticipation of something
happening e.g increase in taxation
Over demand