Pricing

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What is Pricing?

Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business’s marketing plan.

As can be noticed there are few important and fundamental aspects of pricing:

  • Price brings in revenues
  • Price is adjustable and controllable
  • Price has an association with brand perception, utility consumer psychology and product differentiation as well.
  • Price has an association with quality and quality perception from the side of the consumer as well as the marketer.
  • Price influences demand
  • Price is a tool to fight competition
  • Price is associated with accounting markets like breakeven decided by the marketer.
  • Price is associated with financial mark-ups like rate of return etc.,
  • Price is the resultant of a marketer’s vision about his product/ services market association along with his desire for profits.

Deciding Pricing Strategy

Managers can set prices as an addition to what cost they have incurred in developing and marketing the product. In many instances price is the rupee equivalent of the value of the company’s product.

Pricing decision involves the following:

  • Decide the price objectives
  • Determine the demand
  • Estimate the costs
  • Analyse the competitors cost, prices and offers
  • Select the final price

Pricing Objectives

Pricing decisions are usually considered a part of the general strategy for achieving a broadly defined goal. While setting the price, the firm may aim at one or more of the following pricing objectives:

Pricing Objectives are:

  1. Maximisation of profits for the entire product line
  2. Promotion of the long-range welfare of the firm
  3. Adaptation of prices to fit the diverse competitive situations
  4. Flexibility to vary prices in response to changing market condition
  5. Stabilisation of prices and margins
  6. Market Penetration
  7. Market Skimming
  8. Early Cash Recovery
  9. Satisfying

Maximisation of profits for the entire product line

Firms set a price, which would enhance the sale of the entire product line rather than yield a profit for one product only. In this process it is possible to maximise the profit for the entire product line.

Example: Starbucks raised the price of the tall size brew exclusively in order to persuade customers to purchase larger sizes. The goal of the company is to use the price increases to guide the customer towards your most profitable product.

Promotion of the long-range welfare of the firm

Promotion of the long-range welfare of the firm can also influence the pricing decisionThe firm may decide to set a price, which looks unattractive to competitors, and hence, the entry of competitors can be discouraged for a long period of time. In this way the firm can take a decision for the long-term welfare of the firm rather than the short-term profit maximisation.

Example: The introduction of Low-priced burgers by Mc Donald’s has restricted entry or success of many burger producers in India. There prolonged strategy to remain stable in market is not giving boost to any other player.

Adaptation of prices to fit the diverse competitive situations

The Company may decide to go for different kinds of pricing strategies depending on the individual product’s product-market situation. The company will try to maximise the profit from a market where it has cash cows and invests in other markets where it has to stay put for long term benefits.

Example: HUL has launched its products at all the price points to cater to every market segment. It has its products catering to every strata of the market ranging from rural to urban and even for niches.

Flexibility to vary prices in response to changing market condition

One cannot decide about prices in isolation, as the firm is only a member of the market. So it has to decide on prices in response to changing economic conditions. The macro economic conditions also influence the pricing decision.

Example: Many airlines slash their prices when a dip in the market is observed. They come up with low-frill packages for flyers and special packages for frequent fliers in the market. Airline companies focus upon gaining customers in their stride.

Stabilisation of prices and margins

The firm may decide to stabilise the prices and margins for long term goals and price the products in a different way than they would have done with a profit maximisation objective.

Firms may pursue additional objectives as mentioned by Kotler. We present a small list of these objectives to augment the above list:

Market Penetration

The firm may decide in favour of a lower price to penetrate deeper into the market and to stimulate market growth and capture a large market share.

Example: When telecom players like ‘Aircel’ and ‘MTS’ entered Indian market, they found market already saturated. Hence, they adopted strategy of low tariffs to attract the potential customer base.

Market Skimming

The firm may decide to charge high initial price to take advantage of the fact that some buyers are willing to pay a much higher price than others as the product is of high value to them.

Example: When a new highway is constructed connecting twocities or states, during initial few years toll is charged to recover the cost of construction. Thereafter, either the tax or toll is slashed or removed when the invested amount is recovered.

Early Cash Recovery

This is an aggressive form of skimming pricing. Some firms try to set a price, which will enable them to recover the cash rapidly as they may be financially tight or may regard the future as too uncertain to justify a delayed and smooth cash recovery.

Example: Apple when ever comes up with a new launch of its products, it commands very high prices on its sales. By the time other mobile industry players when copy their introduced technology, Apple usually tires to recover the money it invested in the mobile’s R&D.

Satisfying

Companies may pursue a pricing strategy if it satisfies a satisfactory rate of return, although it is possible for another price level to give a higher return. The pricing decisions depend on the motives of the manager. The motives of managers can be of different types.


Factors Influencing Pricing Decision

Formulating price policies and setting the price are the most important aspects of managerial decision-making. Price is the source of revenue, which the firm seeks to maximise. It is the most important device a firm can use to expand its market share.

Factors influencing pricing decisions are:

  1. Objectives of Business
  2. Competitive Environment
  3. Product and Promotional Policies of the Firm
  4. Nature of Price Sensitivity
  5. Conflicting Interests between Manufacture and Intermediaries
  6. Routine Pricing Decision
  7. Active Entry of Non-business Groups in Pricing Decisions

Objectives of Business

Pricing is not an end in itself but a means to an end. The fundamental guide to pricing, therefore, is the firm’s overall goals. The broadest of these is survival or assured continued existence. On a more specific level, objectives relate to rate of growth, market share, maintenance of control or ownership and finally profit.

Example: Nirma wanted to gain huge share of market at the time
when HUL was an established player in the area of washing powders.
Hence it came up with a very low priced detergent to woo the target
market.

Competitive Environment

An effective solution to the pricing problem requires an understanding of the competitive environment. In perfect competition, sellers have no pricing problems because they have no pricing discretion. Pricing policy has practical significance only where there is a considerable degree of imperfection in competitive structures and where there is some room for managerial discretion.

Example: Samsung floated mobiles in low price segment as Nokia was generating good business from that segment. Samsung later launched android versions which had more features in less price and became an attractive option for customers, leaving Nokia behind in the competition.

Product and Promotional Policies of the Firm

Pricing is only one aspect of marketing strategy and a firm must consider it together with its product and promotional policies. Thus, before making a price change, the firm must be sure that the price is at fault and not its sales promotion program or the quality of the product or some other element.

Example: Luxury suites of plush hotels are priced high for ultra-rich class to attract them. This satiates their esteem and status needs and the pricing of suites is kept accordingly.

Nature of Price Sensitivity

Businessmen often tend to exaggerate the importance of price sensitivity and ignore many identifiable factors at work that tend to minimise its role. The various factors which may generate insensitivity to price changes are variability in consumer behaviour, variation in the effectiveness of marketing effort, nature of the product, importance of after sales service, the existence of highly differentiated products which are difficult to compare and multiple dimensions of product quality.

Example: Prices of essential drugs and basic food items such as sugar, salt, wheat etc. affect the pockets of consumers a lot if there is a slight change in prices. Whereas price of diamond and platinum doesn’t affect the pocket of consumer too much as only people who can afford it will buy it.

Conflicting Interests between Manufacture and Intermediaries

The interests of manufacturers and middlemen (through whom the former often sell) are sometimes in conflict. This is called vertical conflict.

For instance, the manufacturer would desire that the middleman should sell his product at a minimum mark-up, whereas the middleman would like his margin to be large enough to stimulate him to push up the product. The manufacturer may like to control the middleman’s prices and even the retail prices; but the middlemen may seek to expand their sales through price-cuts or obtain larger margin than allowed by the suggested prices.

Routine Pricing Decision

Pricing in practice is often routinised though its extent may differ from company to company and from product to product. For example, the management may prefer to depend on suggested prices, which is a mechanical formula for pricing decisions.

The degree of routinisation depends on the following factors:

  • Number of Pricing Decisions: A firm may have to take thousands of pricing decisions on a wide range of products, none of which provides a substantial proportion of sales. In this case it will find that the costs of separate analyses on each product are too high. It would, therefore, find it economical to adopt relatively mechanical routine for pricing.

  • Speed in Making a Pricing Decision: Mechanical formulae, such as a pre-determined mark-up on full cost, have the advantage of speed, though flexibility and adaptability to special conditions is lost.

  • Quality of Available Information: If the data on demand and costs are highly conjectural, the best the firm may be able to do is to rely on some mechanical formula such as cost plus formulation.

  • Competitive Market: If a firm is selling its product in a highly competitive market, it will have little scope for pricing discretion. This will pave the way for routinised pricing. Active Entry of Non-business Groups in Pricing Decisions

Active Entry of Non-business Groups in Pricing Decisions

The government, acting on behalf of the public, seeks to prevent the abuse of monopolistic power and collusion among businessmen.

Pricing is not an exact science. There is no infallible formula for determination of right price for a product. Every pricing situation is unique and should be explored in its own right.

The pricing decision should result from the balancing of a number of considerations. In fact, pricing is a matter of judgment. But to be effective, judgment should be based on sound principles and the fullest information possible.


Pricing Strategies

  1. Mark-up Pricing
  2. Full Cost Pricing
  3. Marginal Cost Pricing
  4. Break-Even Concept
  5. Skimming Pricing
  6. Penetration Pricing
  7. Charging What the Traffic Will Bear
  8. Discount Pricing
  9. Premium Pricing
  10. Going Rate Pricing
  11. Perceived Value Pricing Method
  12. Value Pricing Method
  13. Sealed Bid Pricing
  14. Psychological Pricing
  15. Odd Pricing
  16. Geographical Pricing
  17. Discriminatory Pricing

Methods of Pricing

Majorly there are three methods of pricing determination strategy

  1. Cost based Pricing
  2. Demand Based Pricing
  3. Competition-based pricing
  4. Other popular methods

Reference

  • V. S. Ramaswamy, S. Namakumari; 2009; Marketing Management; MacMillan Publishers Pvt Ltd.
  • Kotler, Keller, Koshy, Jha; 2009; 13th Edition; Marketing Management: A South Asian Perspective.

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