Pricing

By Abdulla Israr & Simran Rani

PRICING

Description also available in video format (attached below), for better experience use your desktop.

Introduction

·       Pricing is the process of determining the value that a company will receive in exchange for its product or service.

·       It plays a crucial role in a firm's marketing strategy as it directly affects demand, profitability, and competitiveness.

Pricing Objectives

  1. Profit Maximization: Setting prices to achieve the highest possible profits.
  2. Sales Volume Maximization: Focus on increasing sales, sometimes at the cost of lower profits.
  3. Market Share Leadership: Competitive pricing to capture a larger portion of the market.
  4. Survival: Used in times of economic downturn or heavy competition to keep the business running.
  5. Status Quo Pricing: Maintaining existing prices or matching competitors to avoid price wars.
  6. Product Quality Leadership: High pricing to reflect superior product quality.
  7. Social Objectives: Pricing to ensure accessibility for all (e.g., essential drugs, public services).

Basic Price Concepts

  • Cost Price: The total cost incurred in producing a product.
  • Selling Price: The amount charged to the customer.
  • List Price: The original price before discounts.
  • Markup: The difference between cost price and selling price.
  • Margin: Profit percentage over selling price.
  • Break-even Point: The point at which total revenue equals total costs.

Price Determination

Internal Factors

  • Cost of Production: Includes raw material, labor, and overhead.
  • Organizational Objectives: Profit, market share, or brand positioning.
  • Product Life Cycle Stage: Introduction, growth, maturity, or decline.
  • Marketing Mix Elements: Price must align with product, promotion, and place strategies.

External Factors

  • Market Demand: Higher demand allows higher pricing.
  • Competition: Pricing is influenced by competitors’ pricing.
  • Customer Perception and Value: Willingness to pay depends on perceived value.
  • Government Policies and Regulations: Taxation, price controls, or subsidies.
  • Economic Conditions: Inflation, recession, or currency value fluctuations.

Factors Influencing Pricing Policy

  • Production and Distribution Costs
  • Target Customer and Market Segment
  • Brand Positioning and Image
  • Competitor Pricing
  • Legal and Ethical Considerations
  • Elasticity of Demand – If demand is elastic, small price changes affect demand.
  • Technological Advancements – May reduce cost and affect pricing.
  • Channel of Distribution – Each intermediary adds its margin.

Methods of Pricing

Cost-Oriented Pricing Methods

  1. Cost Plus Pricing: Adding a standard markup to the cost.
  2. Markup Pricing: Based on a percentage added to the cost.
  3. Break-even Pricing: Determining price to cover all costs.
  4. Target Return Pricing: Pricing to achieve a specific ROI.

Market-Oriented Pricing Methods

  1. Penetration Pricing: Low initial price to enter the market and gain share.
  2. Skimming Pricing: High price initially for premium or new products.
  3. Competition-Based Pricing: Price set based on competitor pricing.
  4. Value-Based Pricing: Based on customer perceived value.
  5. Psychological Pricing: Setting prices that appear lower (e.g., ₹99 instead of ₹100).

Pricing Policies and Strategies

Common Pricing Policies

  • Uniform Pricing Policy: Same price for all customers and locations.
  • Flexible Pricing Policy: Different prices for different segments or conditions.
  • One-Price Policy: Fixed price, no negotiation.
  • Geographical Pricing: Price varies based on location (FOB, zone pricing).

Popular Pricing Strategies

  1. Penetration Strategy: Low price to attract customers.
  2. Price Skimming: High price at launch, lowering later.
  3. Psychological Pricing: Creating a perception of value (e.g., ₹999).
  4. Bundle Pricing: Offering multiple products for one price.
  5. Optional Product Pricing: Base product with optional extras.
  6. Promotional Pricing: Temporary price reductions.
  7. Discount and Allowance Pricing: To increase volume or reward loyalty.
  8. Dynamic Pricing: Prices change based on real-time demand and supply.
  9. Prestige Pricing: High price to indicate high quality or exclusivity.

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