MODULE-3 Price

MODULE -3 PRICE

LEARNING OBJECTIVES
After reading this module, students should:
 Know why pricing is important
 Know what is the scope of pricing
 Know some of the objectives of pricing
 Understand the different approaches of pricing
 Know the effects of changes in price

INTRODUCTION:

Among the traditional 4 Ps in marketing that we learn of, Price is the only P which takes brings in revenue for
the firm. All the other Ps, whether it is making a product, creating channels to distribute it and promotion of the
product, just add on to the cost of the organization. It reflects (or rather should reflect) the demand-supply
situation present in the economy.

Pricing is considered by many the key activity within the capitalistic system of free enterprise. Price becomes a
hub around which the system revolves; it is the balance wheel which keeps the system operating on an even
keel. Imperfections in pricing are an indication of imperfections in the system. Despite the increased role of
nonprice factors in modern marketing, price remains a critical element of the marketing mix. Price is the only
element that produces revenue; the others produce costs. In setting pricing policy, a company follows a six-step
procedure. It selects its pricing objective. It estimates the demand curve, the probable quantities it will sell at
each possible price. It estimates how its costs vary at different levels of output, at different levels of
accumulated production experience, and for differentiated marketing offers. It examines competitors’ costs,
prices, and offers. It selects a pricing method. It selects the final price.

Companies do not usually set a single price, but rather a pricing structure that reflects variations in geographical
demand and costs, market-segment requirements, purchase timing, order levels, and other factors. Several price-
adaptation strategies are available: (1) geographical pricing; (2) price discounts and allowances; (3) promotional
pricing; and (4) discriminatory pricing.

After developing pricing strategies, firms often face situations in which they need to change prices. A price
decrease might be brought about by excess plant capacity, declining market share, a desire to dominate the
market through lower costs, or economic recession. A price increase might be brought about by cost inflation or
overdemand. Companies must carefully manage customer perceptions in raising prices. Companies must
anticipate competitor price changes and prepare contingent response. A number of responses are possible in
terms of maintaining or changing price or quality.

The firm facing a competitor’s price change must try to understand the competitor’s intent and the likely
duration of the change. Strategy often depends on whether a firm is producing homogeneous or
nonhomogeneous products. Market leaders attacked by lower-priced competitors can seek to better differentiate
itself, introduce its own low-cost competitor, or transform itself more completely. Pricing is considered by
many the key activity within the capitalistic system of free enterprise. Price becomes a hub around which the
system revolves; it is the balance wheel which keeps the system operating on an even keel. Imperfections in

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pricing are an indication of imperfections in the system.

MEANING & DEFINITION OF PRICING:

Pricing can be defined as the method by which a marketer decides in quantitative (monetary) terms the value of
a product at any particular point of time. In a very narrow sense we can define Price as the money that a
customer shells out in order to acquire or use the product/service. However, this will not be a sufficient way of
describing the price. In a broader sense, we can define price as “the sum total of all the values that a customer
exchanges for the benefit of using a particular product/service.” Pricing is a managerial task. It involves
establishing objectives, determining the factors affecting price and their corresponding significance, setting the
price and controlling it when required. Price in fact means different things to different participants in an
exchange process:

Buyer’s view: For those making a purchase, price refers to what has to be given up in order to obtain the befits
from a product.

Seller’s view: As far as sellers as concerned, price would reflect the revenue generated from a product and thus
would ultimately determine the profits they can generate.

ROLE OF PRICE MIX:

The market price of product influences wages, rent, interest and profits. That is, the price of a product
influences the income earned by, or the price paid for, the factors of production labor, land capital and
entrepreneurship. In this way, price becomes a basic regulator of the entire economic system because it
influences the allocation of these resources. High wages attract labor; high interest rates attract capital and so
on. Conversely, low wages, low rent or low profits reduce the availability of labor, land and risk takers.

The price of a product or service is a major determinant of the market demand for the item. Price will affect the
firm's competitive position and its share of the market. As a result, price has considerable bearing on the
company's revenue and net profit. The revenue is equal to unit price times the volume of units sold. The volume
itself, that is, the quantitative measure of demand, is affected by the price. The profit is equal to revenue minus
costs. To some extent, costs are a function of volume and costs themselves are measured by their price. Price
affects the market segment that will be reached by a firm. Because a person's income so often determines his
other socioeconomic characteristics, the price may influence the qualitative nature of the company's market as
well as its quantitative limits.

As far as the buyers are concerned, they must be able to derive a good value out of any purchase that they
make.

Value = Perceived benefits received

Perceived price paid

The price of the product is a direct means for the customer to either choose to buy the product or not.

The price of a product also affects the firm's marketing program. In product planning, for example, if
management wants to improve the quality of its product or add differentiating features, this decision can be
implemented only if the market will accept a price high enough to cover the costs of these changes. In the
channels of distribution, a properly priced product not only helps to attract the general types of middlemen
needed, but it can also attract desirable individual whole sales and retailers. The pricing structure will determine
whether the manufacturer or his retailers will be expected to finance the bulk of the promotional program.

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Unless a price can be set high enough to pay for the advertising or personal selling, these efforts will have to be
curtailed or omitted.

IMPORTANCE OF PRICING: Fixing the price is not an easy task for anybody. Wrong pricing of a product
could drastically reduce the sales in an organization. Some other factors which make price important are listed
below:

1. Most flexible marketing mix variable

2. Setting the right price can make the product viable/profitable
3. Triggers first impression about the product
4. Important part of sales promotions
5. Price regulates demand
6. Is a competitive weapon
7. It is a decision input

Price And Pricing Objectives

Markets attempt to accomplish certain objectives through their pricing decisions. Research has shown that
pricing objectives vary from firm and many companies pursue by setting high prices, while others set low prices
to attract new business. The four basic categories of pricing objectives are:
♦ Profitability
♦ Volume
♦ Meeting competition
♦ Prestige

Profitability Objectives

Most firms pursue some type of profitability objectives in their pricing strategies. Marketers know that:

Profit = Revenue = Expenses

Also, revenue is a result of the selling price times the quantity-sold:
Total Revenue = Price X Quantity Sold

Some firms try to maximize profits by increasing prices until sales volumes decline. This approach may or may
not work.

Some marketers seem to believe that price consciousness is a personality trait. Price consciousness is the result
of how much spending money (discretionary income) a consumer has and how much the consumer thinks the
product is worth (value). Far too often, low-price strategies compromise long-term plans.

Since price is an easily observed characteristics of competing products it represents a powerful marketing
weapon. However, it is also one of the easiest product traits to match by competitors. In marketplace
confrontations based on price cutting, the reduction in per-unit revenues or they will leave all firms worse off
than before the changes. Credit card companies are learning this lesson the hard way as they seek to entice
cardholders to switch companies by offering below-average interest sales. They gain customers, but as soon as
the introductory rate period ends, savvy borrowers surf the financial web for another deal. In this promotion,
credit-card marketers have succeeded only in creating a new, highly disloyal consumer group, the card surfers.

The principle of profit maximization forms the basis of much of economic theory, yet its application often
creates difficult problems in practice. Many firms have turned to a simpler profitability objective the target-
return goal. Most target-return pricing goals state desired profitability levels as financial returns on either sales
or investment.
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Volume Objectives
In other approach to pricing strategy called sales maximization; managers set an acceptable minimum level of
profitability and then set prices that will generate the highest possible sales volume without driving profits
below that level. This strategy views sales expansion as a more important priority than short-
run profits to the firm’s long-term competitive position. In order to attract customers, stores may advertise
certain products called loss leaders at or below costs.
A second volume objective bases pricing decisions on market share. One firm may seek to achieve a 25 %
market share in a certain industry. Another may want to maintain or expand its market share for particular
products or product lines.
Pricing objectives based on market share have become popular for several reasons. One of the most important is
the ease of applying market share statistics as yardsticks for measuring managerial and corporate performance.
Another is that increased sales may reduce Per-unit production costs and boost profits.

Pricing to Meet Competition

A third set of pricing objectives seeks simply to meet competitors' prices. In many lines of business, firms set
their own prices to match those of established industry price leaders. These types of objectives de-emphasize
the price element of the marketing mix and focus competitive efforts on non price variables. Price is a highly
visible component of a firm's marketing mix and an easily used and effective tool for obtaining an advantage
over competitors. The ease of duplicating prices leads many marketers, to try to avoid price wars by favoring
non price strategies, such as adding value, improving quality, educating consumers and establishing
relationships. The airline industry's recent experience exemplifies competitors' actions and reactions to price
cuts.
In markets characterized by competitive pricing, other marketing mix elements gain importance in purchase
decisions. In such instances, overall product value, not just price, determines product choice. In recent years,
value pricing has emerged to emphasize benefits a product provides in comparison to the price and quality
levels of competing offerings. Many marketers follow value-pricing principles to attract consumers who want
more quality for their money. While value-priced prod u c t s generally cost less than premium brands, marketers
point out that value doesn't necessarily mean a cheap price.

Prestige Objectives
Another category of objectives, unrelated to either profitability or sales volume, encompasses the effect of
prices on prestige. Prestige pricing establishes a relatively high price to develop and maintain an image of
quality and exclusiveness. Marketers set such objectives because they recognize the role of price in
communicating an overall image for the firm and its products.

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SETTING THE PRICE

A firm must set a price for the first time when it develops a new product, when it introduces its regular product
into a new distribution channel or geographic area, and when it enters bids on new contract work.
A) The firm must decide where to position its product on quality and price.
B) The firm has to consider many factors in setting its pricing policy.
1) Six-step procedure
i.
ii.
iii.
PROFIT CENTRED
Selecting the pricing objective
Determining demand
Estimating costs
iv. Analyzing competitors’ costs, prices, and offers
v. Selecting a pricing method
vi. Selecting the final price

Step 1: Selecting the Pricing Objective

The company first decides where it wants to position its market offering. The clearer a firm’s objectives, the
easier it is to set price. The five major objectives are: survival, maximum current profit, maximum market
share, maximum market skimming, and product-quality leadership.

Survival
Companies pursue survival as their major objective when they are plagued with overcapacity, intense
competition, or changing consumer wants.
A) Survival is a short-run objective.

Maximum Current Profit

GOWTH IN
Many companies try to set a price that will maximize current profits. They estimate the demand and costs
associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate
of return on investment.

Maximum Market Share

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MODULE-3 Price
Some companies want to maximize their market share. They believe that a higher sales volume will lead to
lower unit costs and higher long-run profit.
A) This practice is called market-penetration pricing.
B) The following conditions favor setting a low price:
1) The market is highly price-sensitive, and a low price stimulates market growth.
2) Production and distribution costs fall with accumulated production experience.
3) A low price discourages actual and potential competition.
Maximum Market Skimming
Companies unveiling a new technology favor setting high prices to maximize market skimming.
A) This is also called market-skimming pricing, where prices start high and are slowly lowered
over time.
B) Market skimming makes sense under the following conditions:
1) A sufficient number of buyers have a high current demand.
2) The unit costs of producing a small volume are not so high that they cancel the advantage of charging
what the traffic will bear.
3) The high initial price does not attract more competitors to the market.
4) The high price communicates the image of a superior product.
Product-Quality Leadership
A company might aim to be the product- quality leader in the market.
)A Many brands strive to be “affordable luxuries”—products or services characterized by high levels of
perceived quality, taste, and status with a price just high enough not to be out of consumer’s reach.

Step 2: Determining Demand

Each price will lead to a different level of demand and therefore have a different impact on a company’s
marketing objectives.
A) The relation between alternative prices and the resulting current demand is captured in a demand curve.

Price Sensitivity
The demand curve shows the market’s probable purchase quantity at alternative prices. The first step in
estimating demand is to understand what affects price sensitivity.
A) Generally speaking, customers are most price-sensitive to products that cost a lot or are bought
frequently.
B) Customers are less price-sensitive to low-cost items or items they buy infrequently.
C) They are also less price-sensitive when price is only a small part of the total cost of obtaining,
operating, and servicing the product over its lifetime (total cost of ownership—TCO).
D) Companies prefer customers who are less price-sensitive.

Estimating Demand Curves

Most companies attempt to measure their demand curves using several different methods.
A) Surveys can explore how many units consumers would buy at different proposed prices.
B) Price experiments can vary the prices of different products to see how the change affects sales.
C) Statistical analysis of past prices, quantities sold, and other factors can reveal their relationships. These can be:
1) Longitudinal or

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2) Cross-sectional
Price Elasticity of Demand
Marketers need to know how responsive or elastic, demand would be to a change in price.
A) If demand hardly changes with a small change in price, we say the demand is inelastic.
B) If demand changes considerably, demand is elastic.
C) Demand is likely to be less elastic under the following conditions:
1) There are few or no substitutes or competitors.
2) Buyers do not readily notice a higher price.
3) Buyers are slow to change their buying habits.
4) Buyers think the higher prices are justified.
D) If demand is elastic, sellers will consider lowering the price.
1) A lower price will produce more total revenue as long as the costs of producing and selling more units do
not increase disproportionately

Step 3: Estimating Costs

Demand sets a ceiling on the price the company can charge for its product. Costs set the floor.

Types of Costs and Levels of Production

A company’s costs take two forms, fixed and variable.
A) Fixed costs (also known as overhead) are costs that do not vary with production or sales revenue.
B) Variable costs vary directly with the level of production.
C) Total costs consist of the sum of the fixed and variable costs for any given level of production.
D) Average cost is the cost per unit at that level of production
E) Management wants to charge a price that will at least cover the total production costs at a given level of
production.

Step 4: Analyzing Competitors’ Costs, Prices, and Offers

Within the range of possible prices determined by market demand and company costs, the firm must take
competitors’ costs, prices, and possible price reactions into account.
A) The firm should first consider the nearest competitor’s price.
B) The introduction of any price or the change of any existing price can provoke a response from
customers, competitors, distributors, suppliers, and even the government.
C) How can a firm anticipate a competitor’s reactions?
1)One way is to assume the competitor reacts in the standard way to a price being set or changed.

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Step 5: Selecting a Pricing Method
Given the customers’ demand schedule, the cost function, and competitors’ prices, the company is now ready to
select a price.
A) Costs set the floor to the price.
B) Competitors’ prices and the price of substitutes provide an orienting point.
C) Customers’ assessment of unique features establish the price ceiling.
D) There are six price-setting methods:
1) Markup pricing
2) Target-return pricing
3) Perceived-value pricing
4) Value pricing
5) Going-rate pricing
6) Auction-type pricing
Markup Pricing
A) The most elementary pricing method is to add a standard markup to the product’s cost
B) Does the use of standard markups make logical sense?
1) Generally, no. Any pricing method that ignores current demand, perceived value, and competition is not
likely to lead to the optimal price.
C) Markup pricing remains popular.
1) Sellers can determine costs much more easily than they can estimate demand.
2) By tying the price to cost, sellers simplify the pricing task.
3) Where all firms in the industry use this pricing method, prices tend to be similar.
4) Many people feel that cost-plus pricing is fairer to both buyers and sellers.
Target-Return Pricing
)A In target-return pricing, the firm determines the price that would yield its target rate of return on
investments (ROI).
)B Target-return pricing tends to ignore price elasticity and competitors’ prices.

Perceived Value Pricing

An increasing number of companies base their price on the customer’s perceived value. They must deliver the value
promised by their value proposition, and the customer must perceive this value.
A) Perceived value is made up of several characteristics:
1) Buyer’s image of the product performance
2) Channel deliverables
3) The warranty quality
4) Customer support
5) Supplier’s reputation
6) Trustworthiness
7) Esteem

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The key to perceived-value pricing is to deliver more value than the competitor and to demonstrate this to prospective
buyers.
Value Pricing
In recent years, several companies have adopted value pricing: they win loyal customers by charging a fairly low
price for a high-quality offering.
A) Value pricing is not a matter of simply setting lower prices.
B) It is a matter of reengineering the company’s operations to become a low-cost producer without sacrificing
quality.
C) Lowering pricings significantly helps to attract a large number of value-conscious customers.
D) An important type of value pricing is everyday low pricing (EDLP) that takes place at the retail level.
E) A retailer who holds to an EDLP pricing policy charges a constant low price with little or no price promotions
and special sales.
F) In high-low pricing, the retailer charges higher prices on an everyday basis but then runs frequent promotions
in which prices are temporarily lowered below the EDLP level.
G) The two different pricing strategies have been shown to affect consumer price judgments
)1 Deep discounts (EDLP) can lead to lower perceived prices by consumers over time than frequent shallow
discounts (high-low) even if the actual averages are the same.
I) Some retailers have even based their entire marketing strategy around what could be called extreme everyday
low pricing.
Going-Rate Pricing
In going-rate pricing, the firm bases its price largely on competitor’s prices.
A) The firm might charge the same, more, or less than major competitor (s).
B) Going-rate pricing is quite popular where costs are difficult to measure or competitive response is uncertain.
Auction-type pricing
A) Auction-type pricing is growing more popular, especially with the growth of the Internet. E.g Ebay.
B) There are three types of auction-type pricing:
1) English auctions (ascending bids)
2) Dutch auctions (descending bids)
3) Sealed-bid auctions
Step 6: Selecting the Final Price
Pricing methods narrow the range from which the company must select its final price. In selecting the price, the
company must consider additional factors, including the impact of other marketing activities, company pricing
policies, gain-and-risk sharing pricing, and the impact of price on other parties.

Impact of Other Marketing Activities

The final price must take into account the brand’s quality and advertising relative to the competition.

Company Pricing Policies

The price must be consistent with company pricing policies.
A) Many companies set up a pricing department to develop policies and establish or approve pricing decisions.
1) The aim is to ensure that salespeople quote prices that are reasonable to customers.
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2) Profitable to the company
Impact of Price on Other Parties
Management must also consider the reactions of other parties to the contemplated price:
A) How will distributors and dealers feel about it?
B) Will the sales force be willing to sell at that price?
C) How will competitors react?
D) Will suppliers raise their prices when they see the company’s price?
E) Will the government intervene and prevent this price from being charged?
F) Marketers need to know the laws regulating pricing in the United States.

ADAPTING THE PRICE

Companies usually do not set a single price, but rather a pricing structure that reflects variations in:
Geographical Pricing - Geographical pricing involves the company in deciding how to price its products to different
customers in different locations and countries.
1) Should the company charge higher prices to distant customers to cover the higher shipping costs or a
lower price to win additional business?
2) How should exchange rates and the strength of different currencies be accounted for?
3) Another issue is how to get paid.
a. Many buyers want to offer other items in payment, a practice known as countertrade.

Price Discounts and Allowances

Most companies will adjust list prices and give discounts and allowances for early payment, volume purchases, and
off-season buying.
• Cash discount
• Quantity discount
• Functional discount
• Seasonal discount
• Allowance
Promotional Pricing
Companies can use several pricing techniques to stimulate early purchase:
A) Loss-leader pricing
B) Special-event pricing
C) Cash rebates
D) Low-interest financing
E) Longer payment terms
F) Warranties and service contracts
G) Psychological discounting
Differentiated Pricing
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Companies often adjust their basic price to accommodate differences in customers, products, locations, and so on.
A) Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect
a proportional difference in costs.
1) In first-degree price discrimination, the seller charges a separate price to each customer depending on
the intensity of his or her demand.
2) In second-degree price discrimination, the seller charges less to buyers who buy a larger volume.
3) In third-degree price discrimination, the seller charges different amounts to different classes of buyers:
Customer-segment pricing
Product-form pricing
Image pricing
Location pricing
Time pricing

FACTORS INFLUENCING PRICING:

While setting the price for any product/service there are many factors that have to be taken into consideration.
These can be broadly classified into 2 major groups: internal & external factors.

INTERNAL FACTORS:

• Company and marketing objectives: The main factor that the company should take into consideration
while deciding the price is the proposed positioning strategy. For example the hotel groups like the Taj
& Ashoka are targeted towards the high end of the society and hence they are priced at a premium.
Some other factors that the company will set objectives on are:
o ROI: What is the return they are expecting from the particular product?
o Market share: The market share that they intend to have.
o Profits: At what particular price level, will they get the intended profits?
o Product quality leadership
• Marketing mix Strategy: The marketer should take into consideration all the 4 Ps before he comes to
decide the price for the product. Understand the gap existing in the market, the cost involved in making
a product to fill the gap, promoting and distributing the product and then arrive at the price.
• Stage of the product in the PLC: A company generally cannot price a product high when it is in the
stage of decline.
• Image sought through pricing: A company seeking a prestigious image will not price the product low.
• Cost: Both the fixed & variable costs involved in the production of the product should be covered up
while setting the price of the product else the company might face a loss.
• Organizational Considerations: There could be other organizational considerations while setting the
price.

EXTERNAL FACTORS:

• Nature of market and demand: Pricing can be done based on the different market and demand
scenarios. In a pure competition scenario, price is fixed based on the going rate. In a monopolistic
market scenario, the player can decide the price at which he wants to sell the product/service. In a
scenario of oligopolistic competition, based on the product (whether it is uniform or not) the price of the
product can be set.

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• Elasticity of demand: The marketer should understand that there is a change in the customer’s
behavior with any change in price. This can be explained with the concept of elasticity of demand.

Elasticity deals with three types of demand scenarios:

Elastic demand: A certain change in the % of price will result in a larger and opposite % change in the demand

Inelastic demand: In this case, a certain change in the percentage of price will result in a smaller and opposite
change in the demand

Unitary demand: This occurs when a percentage change in price leads to an equal and opposite change in
demand.

• Customer & channel partner expectations: It is difficult to measure the expectations that a customer
might have regarding the product and then fix the price. However, this can be done with the help of test
marketing.
• Competition, related products: Again based on the competition level in the market and other similar
and competing products, the company can finalize the price levels for each product.
• Levels in distribution channel & costs involved:
• Other external factors: These might include the following:
o Government regulations
o Economic condition
o Social concerns

PRICE SETTING STRATEGIES: The pricing policies adopted by the company can fall into any one of the
following three major classifications:

Price in line: This strategy is normally adopted in a traditional scenario when there are no product
differentiators at all. Here pricing is done in accordance to the competition.

Market plus: This strategy is adopted when there are certain product differentiators. The company can charge a
premium for this unique feature.

Market minus: This strategy, of offering prices lower than that of the competition, can be profitably adopted
only by large discount houses.

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PRICING APPROACHES:

Cost based pricing: This is the most commonly adopted method to set the price for most of the products. Some
methods adopted under this strategy are:

• Cost plus pricing: Also called mark up pricing, this could be the easiest method to set the price for any
product. The marketer finalizes the costs involved in making his product, adds a small percent as his
profit and then fixes the price for the product/service.
• Break even pricing: The marketer decides the price by determining the level at which he will attain the
breakeven point faster at an estimated level of demand for the product in the market.

Value based pricing: Here the marketer focuses on the value of the product/service as perceived by the
customer instead of focusing on the cost of the product. It is almost a reverse process of the cost based pricing.
PRICE
HIG
Competition based pricing: One method of setting the price when in a market laden with competition is to set
a price in comparison with competitors. This method is also called fixing the price at the ongoing rate.

While a new product is entering the market, there are 2 major options available for the marketer to choose
from in order to set the price. These are either choosing a penetration pricing level or a skimming pricing
level.

Penetration Pricing: This type of pricing is used for products identified as being in the "introductory" stage of
the product life cycle to enable the product to get a foothold in the market. Prices are artificially reduced to
attract the largest possible audience. It is often used to prevent or discourage competitors from capturing the
market and used for products that are mass-produced.

Price Skimming: While penetration pricing keeps the price below the real market price; price skimming raises
the price artificially to enable quick recovery of costs & gain immediate profit. This type of pricing structure
works very well for products that are in demand or where there are few competitors (say electronic equipments).
Caution has to be used when employing this strategy as competitors may well take advantage of these high
prices and enter the market quickly with a realistic price thus stealing the market.

Product Line Pricing: Pricing different products within the same product range at different price points. An

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example would be a video manufacturer offering different video recorders with different features at different
prices. The greater the features and the benefit obtained the greater the consumer will pay. This form of price
discrimination assists the company in maximizing turnover and profits.

Bundle Pricing: The organization bundles a group of products at a reduced price.

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Psychological pricing: The seller here will consider the psychology of price and the positioning of price within
the market place. The seller will therefore charge Rs. 99.99 instead Rs. 100 or Rs. 999 instead of Rs. 1000.

Premium pricing: The price set is high to reflect the exclusiveness of the product. An example of products
using this strategy would be Harrods, first class airline services, Porsche etc.

Optional pricing: The organization sells optional extras along with the product to maximize its turnover. This
strategy is used commonly within the car industry.

Loss Leader Pricing: This involves lowering prices on a number of key products in order to attract a customer
to purchase the products. Customers obviously like a bargain and like may be attracted to buy this item even if
they had never considered purchasing this item before. Price reductions could be used to entice customers to
look at your other products, and any profit lost might well be made up should the customer be persuaded to
shop around and purchase other produces not reduced in price. Loss leader pricing might be used to sell off or
stimulate interest in products considered to be in the maturity or decline stage of their life cycle.

Differential Pricing: This method involves allowing the same product to be priced at 2 or more levels. This can
be justified when the product is sold in areas with differing economic climates/when sold through differing
distribution channels/to appeal to a different market segment.

Auction Pricing: It is the reverse of bid pricing, as it is the buyer who bids the highest that gets the product.

EDLP: Everyday low pricing method is the strategy adopted by large retailers (like Walmart, Big Bazaar), who
can buy in bulk at low prices and then pass on the price benefit to the customers.

Product mix pricing strategies:

• Product line pricing: Setting price steps between various products in a line based on cost differences
• Optional product pricing: Pricing optional products along with main (Car with accessories)
• Captive Product pricing: Setting price for products used along with main (Razor & blades, camera &
film)
• By – product pricing: Setting price for by products
• Product bundle pricing: Combining several products and offering at low price

PRICING IN DIFFERENT MARKET CONDITIONS:

 Pure competition: Here company might be forced to take a ‘going rate’ policy.
 Monopolistic competition: Monopolistic competition is a scenario when players bring in different
products at different price ranges. And hence competition is at different levels. Eg: In the car industry,
there are players with cars priced in different ranges.
 Oligopolistic competition: In this case there are very few players with hardly any differentiation in the
product. Change in price by any player can shift demand too. Highly sensitive towards changes in price.
 Pure monopoly: The monopoly can be enjoyed by government (Indian Post, railways) or by a private
player (DuPont when it introduced Teflon/nylon). And hence pricing policies may vary as per case.

PRICE VARIATION POLICIES:

Different companies may decide upon different methods of pricing. There are basically 3 methods of variations
in pricing that can be brought up by the company.

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Variable Price Policy: In this method the company may choose to give like product at variable prices to
customers buying different quantities of the product. It may be suitable for small companies where the product
is not standardized. The bargaining power of individuals will depend on the size of the transaction. It is a very
flexible method of pricing.

Non-variable Price Policy: Here the company may charge similar price for like goods sold to a particular class
of customers. E.g.: A particular rate for wholesalers and another rate for the retailers.

Single Price Policy: This is a fixed price policy. Here the company sells the product at one single price
irrespective of the quantity purchased and the type of customer making the purchase.

ADVANTAGES OF SINGLE PRICE POLICY:

 Uniform return from each sale
 Lower selling costs
 Confidence of customer is secured
 Suitable for self service retailing

ADVANTAGES OF VARIABLE PRICE POLICY:

 Seller has flexibility in his dealings
 Catering to different kinds of customers

DISCOUNTS AND ALLOWANCES:

Discounts and allowances can be defined as the price adjustments done in order to reward either the end
consumer/the channel members.
Discounts can be of different types. These are:
• Cash discounts: This is adopted in order to make the customers pay promptly. So the seller might give
a discount to those who have ready cash to pay.
• Quantity discounts: As the name indicates this discount is made available to those who buy in larger
quantities
• Trade discount/Functional discount: This is a discount made available to the trade channel members.
• Seasonal discount: Mangoes being sold at a lesser price when they are in season and at a higher price at
other times.

Allowances can be of many kinds such as:

• Trade in allowances: Allowances obtained while exchanging (trading in) one product for another.
Example: Buying a new mobile phone and giving the old one for an exchange value.
• Promotional allowances: This is to reward dealers for participating in advertisements and other sales
programs.

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PRICE CHANGES:
There are times when the company might need to change the exiting price levels. Based on the situation at hand,
they might need to make a cut in the price or increase the price of the product. Some of the changes in price are
standard price adjustments made by the company, while some are just adopted for promotional aspects.

Standard price adjustments: Some methods adopted are:

o Quantity discounts: Offering discounts to those who buy in huge quantities.
o Trade allowances: A functional discount meant for resellers.
o Special segment pricing: Offering products/services at a lower cost to some segments (say
senior citizens). This might be done for the following reasons: Building future demand,
improving brand’s image, rewarding long time customers
o Geographic pricing: Making adjustments in price to compensate for extra charges incurred by
the company.

Promotional Price adjustments: The methods adopted are:

o Mark downs: these can be done on a temporary basis (just to attract sales), permanent basis(if
the product has become outdated) or on a seasonal basis(offers during most festivals)
o Loss leaders: This is a strategy adopted by some retailers. Some products are offered at a price
less than the cost involved in obtaining them by the retailer. This is done in the hope that the
retailer gets extra business from other items which are not sold at a lesser price.
o Sales Promotions: To stimulate demand through rebates, coupons, and loyalty programs.
o Bundle pricing: Offering discounts when the customer is buying many products together.
o Dynamic pricing: The concept evolved out of internet purchases. The prices are fixed based on
customer’s interactions with the seller.

Price cuts: These may be initiated when:

- The company has excess capacity which is not being fully utilized.
- The company’s market share is falling and it wants to regain its position.

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Price hikes: The major reason that causes a price hike is cost inflation. Prices can be raised directly/indirectly.

Price changes can influence the customers mind. Customers might question the need for the change and
may/may not accept the product with the changed price levels. Hence any change in the price levels must be
dealt with care.

REFERENCES:
 ‘Marketing management : A south Asian Perspective’ 13th ed. by Philip kotler, Kevin Lane Keller, Abraham
Kosley and Mithileshwar Jha. Pearson Education.
th
 Marketing Management:S.A. Sherlekar, 13 edition, Himalaya Publishing House
 http://www.managerialmarketing.com/index.php?option=com_content&task=view&id=25&Itemid=44
 http://www.learnmarketing.net/Price.htm
 http://www.knowthis.com/principles-of-marketing-tutorials/setting-price-part-2/

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