Pricing decisions: Significance of pricing, factor influencing pricing

(Internal factor and External factor), objectives, Pricing Strategies-Value

based, Cost based, Market based, Competitor based, Pricing Procedure.
Marketing Channels: Meaning, Purpose, Factors Affecting Channel Choice,
Channel Design, Channel Management Decision, Channel Conflict,
Designing a physical Distribution System, Network Marketing.
An enormous number of factors affect pricing decisions. A marketing manager
should identify and study the relevant factors affecting the pricing. Some factors are
internal to organization and, hence, controllable while other factors are external or
environmental and are uncontrollable.
Factors are also classified in terms of competition-related factors, market-related
factors, product- related factors, and so forth. However, we will consider internal
and external factors affecting pricing decisions. Due to these factors, price is set
high or low, fixed or variable, and equal or discriminative. Figure 2 shows a list of
internal and external factors. Let us analyze some of the main factors influencing
pricing decisions.
(A) Internal Factors:
Internal factors are internal to organization and, hence, are controllable. These
factors play vital role in pricing decisions. They are also known as organizational
factors. Manager, who is responsible to set price and formulae pricing policies and
strategies, is required to know adequately about these factors.
Factor Influencing Pricing Decisions

Important internal factors have been discussed here:

1. Top Level Management:
Top-level management has a full authority over the issues related to pricing.
Marketing managers role is administrative. The philosophy of top-level
management is reflected in forms of pricing also. How does top management
perceive the price?
How far is pricing considered as a tool for earning profits, and what is importance of
price for overall performance? In short, overall management philosophy and
practice have a direct impact on pricing decision. Price of the product may be high
or low; may be fixed or variable; or may be equal or discriminative depends on toplevel management.
2. Elements of Marketing Mix:
Price is one of the important elements of marketing mix. Therefore, it must be
integrated to other elements (promotion, product, and distribution) of marketing
mix. So, pricing decisions must be linked with these elements so as to consider the
effect of price on promotion, product and distribution, and effect of these three
elements on price.
For example, high quality product should be sold at a high price. When a company
spends heavily on advertising, sales promotion, personal selling and publicity, the
selling costs will go up, and consequently, price of the product will be high. In the
same way, high distribution costs are also reflected in forms of high selling price.
3. Degree of Product Differentiation:
Product differentiation is an important guideline in pricing decisions. Product
differentiation can be defined as the degree to which companys product is
perceived different as against the products offered by the close competitors, or to
what extent the product is superior to that of competitors in terms of competitive
advantages. The theory is, the higher the product differentiation, the more will be
freedom to set the price, and the higher the price will be.
4. Costs:
Costs and profits are two dominant factors having direct impact on selling price.
Here, costs include product development costs, production costs, and marketing
costs. It is very simple that costs and price have direct positive correlation.
However, production and marketing costs are more important in determining price.
5. Objectives of Company:
Companys objectives affect price of the product. Price is set in accordance with
general and marketing objectives. Pricing policies must the companys objectives.
There are many objectives, and price is set to achieve them.

6. Stages of Product Life Cycle:

Each stage of product life cycle needs different marketing strategies, including
pricing strategies. Pricing depends upon the stage in which companys product is
passing through. Price is kept high or low, allowances or discounts are allowed or
not, etc., depend on the stage of product life cycle.
7. Product Quality:
Quality affects price level. Mostly, a high-quality-product is sold at a high price and
vice versa. Customers are also ready to pay high price for a quality product.
8. Brand Image and Reputation in Market:
Price doesnt include only costs and profits. Brand image and reputation of the
company are also added in the value of product. Generally, the company with
reputed and established brand charges high price for its products.
9. Category of Product:
Over and above costs, profits, brand image, objectives and other variables, the
product category must be considered. Product may be imitative, luxury, novel,
perishable, fashionable, consumable, durable, etc. Similarly, product may be
reflective of status, position, and prestige. Buyers pay price not only for the basic
contents, but also for psychological and social implications.
10. Market Share:
Market share is the desired proportion of sales a company wants to achieve from
the total sales in an industry. Market share may be absolute or relative. Relative
market share can be calculated with reference to close competitors. If company is
not satisfied with the current market share, price may be reduced, discounts may be
offered, or credit facility may be provided to attract more buyers.
(B) External Factors:
External factors are also known as environmental or uncontrollable factors.
Compared to internal factors, they are more powerful.
Pricing decisions should be taken after analyzing following external
factors:
1. Demand for the Product:
Demand is the single most important factor affecting price of product and pricing
policies. Demand creation or demand management is the prime task of marketing
management. So, price is set at a level at which there is the desired impact on the
product demand. Company must set price according to purchase capacity of its
buyers.
Here, there is reciprocal effect between demand and price, i.e., price affects
demand and demand affects price level. However, demand is more powerful than
price. So, marketer takes decision as per demand. Price is kept high when demand

is high, and price is kept low when demand of the product is low. Price is constantly
adjusted to create and/or maintain the expected level of demand.
2. Competition:
A marketer has to work in a competitive situation. To face competitors, defeat them,
or prevent their entry by effective marketing strategies is one of the basic objective
organisation. Therefore, pricing decision is taken accordingly.
A marketer formulates pricing policies and strategies to respond competitors, or,
sometimes, to misguide competitors. When all the marketing decisions are taken
with reference to competition, how can price be an exception?
Sometimes, a company follows a strong competitors pricing policies assuming that
the leader is right. Price level, allowances, discount, credit facility, and other related
decisions are largely imitated.
3. Price of Raw Materials and other Inputs:
The price of raw materials and other inputs affect pricing decisions. Change in price
of needed inputs has direct positive effect on the price of finished product. For
example, if price of raw materials increases, company has to raise its selling price to
offset increased costs.
4. Buyers Behaviour:
It is essential to consider buyer behaviour while taking pricing decision. Marketer
should analyze consumer behaviour to set effective pricing policies. Consumer
behaviour includes the study of social, cultural, personal, and economic factors
related to consumers. The key characteristics of consumers provide a clue to set an
appropriate price for the product.
5. Government Rules and Restrictions:
A company cannot set its pricing policies against rules and regulations prescribed
by the governments. Governments have formulated at least 30 Acts to protect the
interest of customers. Out of them, certain Acts are directly related to pricing
aspects. Marketing manager must set pricing within limit of the legal framework to
avoid unnecessary interference from the outside. Adequate knowledge of these
legal provisions is considered to be very important for the manager.
6. Ethical Consideration or Codes of Conduct:
Ethics play a vital role in price determination. Ethics may be said as moral values or
ethical code that govern managerial actions. If a company wants to fulfill its social
obligations and when it believes to work within limits of the ethics prescribed, it
always charges reasonable price for its products. Moral values restrict managerial
behaviour.

7. Seasonal Effect:
Certain products have seasonal demand. In peak season, demand is high; while in
slack season, demand reduces considerably. To balance the demand or to minimize
the seasonal-demand fluctuations, the company changes its price level and pricing
policies. For example, during a peak season, price may be kept high and vice versa.
Discount, credit sales, and price allowances are important issues related to seasonal
factor.
8. Economic Condition:
This is an important factor affecting pricing decisions. Inflationary or deflationary
condition, depression, recovery or prosperity condition influences the demand to a
great extent. The overall health of economy has tremendous impact on price level
and degree of variation in price of the product. For example, price is kept high
during inflationary conditions. A manager should keep in mind the macro picture of
economy while setting price for the product.
Significance of Pricing and Marketing Strategy
Six significance of pricing and marketing strategy are as follows: (a) The planed
market position for the service product (b) The stage of the life cycle of the service
product (c) Elasticity of demand (d) The competitive situation (e) The strategic role
of price.
1. The planned Market Position for the Service Product:
Market position means the place the service product is intended to take up and
does take up in the customers eyes and in comparison with competitors. It refers to
the customers perceptual positioning of the service product: in other words how the
service product is seen in relation to others available.
Clearly price is an important element in the marketing mix influencing this position.
Tangible products may occupy a particular position by virtue of their physical
characteristics (e.g. a grade of industrial steel tubing). Services, on the other hand,
are more often positioned on the basis of their intangible attributes.
2. The Stages of the life Cycle of the Service Product:
The price of the service product will also relate to its life Cycle. For example in
introducing a new service an organization could opt to set low prices to penetrate
markets and gain rapid market share. Alternatively an organization could opt to
charge high prices to make as much profit as possible in a short time (skimming
policy). This strategy is only possible if there is no immediate competition and a
high level of buyer need urgency (e.g. windscreen replacement services).
3. Elasticity of Demand:
The discretion a service organization has to determine its pricing objectives will be
influenced by elasticity of demand in the market. Elasticity of demand refers to the

responsiveness of demand to changes in price. In some markets demand is much

influenced by price changes (e.g. urban bus services) in others this is less so.
Clearly it is vital for a service organization to understand how elastic or inelastic
demand for its services is in response to price change. For example, if a service
company reduces its prices and demand is elastic then the effect would be to
reduce margins with no compensating increase in demand. Elasticity may impose
limitations on certain price options.
4. The Competitive Situation:
The strength of competition in the market influences a service organizations
discretion over its prices. In situations where there is little differentiation between
service products and where competition is intense (e.g. a seaside resorts during a
poor tourist season) then price discretion is limited. Competition of course has
number of dimensions apart from inter-brand or inter-type competition.
In transport services, for example, there is competition between different modes of
transport (e.g. rail versus road), different brands, as well as alternative uses of the
potential customers time and money (e.g. not to travel at all).
Nevertheless a degree of price uniformity will be established in those markets with
little differentiation between service products and strong levels of competition. In
other settings tradition and custom may influence prices charged (e.g. Advertising
agencies commission system).
5. The Strategic Role of Price:
Pricing policies have a strategic role aimed at achieving organizational objectives.
Thus the pricing decision on any particular service product should fit in with
strategic objectives. For example, new holiday company intent upon establishing
itself in the package holiday market might use a deliberate policy of low prices to
obtain substantial market share although this could mean unprofitable trading for
some time.
Maximum sales would be won through penetration pricing as a deliberate policy.
Any pricing strategy must of course fit in with the way in which other elements of
the marketing mix are manipulated to attain strategic ends.
6. Price as an Indicator of Service Quality:
One of the intriguing aspects of pricing is that buyers are likely to use price as an
indicator of both service costs and service quality price is at once an attraction
variable and a repellent. Customers use of price as an indicator of quality depends
on several factors, one of which is the other information available to them.
When service cues to quality are readily accessible, when brand names provide
evidence of a companys reputation, or when level of advertising communicates the

companys belief in the brand, customers may prefer to use those cues instead of
price.
In other situations, however, such as when quality is hard to detect or when quality
or price varies a great deal within a class of services, consumers may believe that
price is the best indicator of quality many of these conditions typify situations that
face consumers when purchasing services.
Another factor that increases the dependence on price as a quality indicator is the
risk associated with the service purchase. In high-risk situations, many of which
involve credence services such as medical treatment or management consulting,
the customer will look to price as a surrogate for quality.
Because customers depend on price as a cue to quality and because price sets
expectations of quality, service prices must be determined carefully. In addition to
being chosen to cover costs or match competitors, prices must be chosen to convey
the appropriate quality signal. Pricing too low can lead to inaccurate inferences
about the quality of the service. Pricing too high can set expectations that may be
difficult to match in service delivery.
Importance of Pricing in Marketing Strategy
1. Price is the Pivot of an Economy:
In the economic system, price is the mechanism for allocating resources and
reflecting the degrees of both risk and competition. In an economy particularly free
market economy and to a less extent in controlled economy, the resources can be
allocated and reallocated by the process of price reduction and price increase.
Price policy is a weapon to realize the goals of planned economy where resources
can be allocated as per planned priorities.
Price is the prime mover of the wheels of the economy namely, production,
consumption, distribution and exchange. As price is a sacrifice of purchasing power,
it affects the living standards of the society; it regulates business profits and, hence,
allocates the resources for the optimum output and distribution. Thus, it acts as
powerful agent of sustained economic development.
2. Price regulates demand:
The power of price to produce results in the market place is not equalled by any
other component in the product-mix.
It is the greatest and the strongest P of the four Ps of the mix. Marketing manager
can regulate the product demand through this powerful instrument. Price increases
or decreases the demand for the products. To increase the demand, reduce the
price and increase the price to reduce the demand.

Price has a special role to play in developing countries where the marginal value of
money is high than those of advanced nations. De-marketing strategy can be easily
implemented to meet the rising demand for goods and services.
As an instrument, it is a big gun and it should be triggered exclusively by those who
are familiar with its possibilities and the dangers involved.
It is so because; the damage done by improper pricing may completely sap the
effectiveness of the well-conceived marketing programme. It may defame even a
good product and fame well a bad product too.
3. Price is competitive weapon:
Price as a competitive weapon is of paramount importance. Any company whether it
is selling high or medium or low priced merchandise will have to decide as to
whether its prices will be above or equal to or below its competitors. This is a basic
policy issue that affects the entire marketing planning process. Secondly, price does
not stand alone as a device for achieving a competitive advantage.
In fact, indirect and non-price competitive techniques often are more desirable
because, they are more difficult for the competitors to copy. Better results are the
outcome of a fine blend of price and non-price strategies. Thirdly, there is close
relationship between the product life-cycle and such pricing for competition.
There are notable differences in the kinds of pricing strategies that should be used
in different stages. Since the product life span is directly related to the products
competitiveness, pricing at any point in the life-cycle should reflect prevailing
competitive conditions.
4. Price is the determinant of profitability:
Price of a product or products determines the profitability of a firm, in the final
analysis by influencing the sales revenue. In the firm, price is the basis for
generating profits. Price reflects corporate objectives and policies and it is an
important ingredient of marketing mix. Price is often used to off-set the weaknesses
in other elements of the marketing-mix.
Price changes can be made more quickly than any other changes in the product,
channel, and personal selling and sales-promotion includes advertising. It is
because; price change is easily understood and communicating to the buyer in a
precise way. That is why, price changes are used frequently for defensive and
offensive strategies. The impact of price rise or fall is reflected instantly in the rise
or fall of the product profitability, thinking that other variables are unaffected.
5. Price is a decision input:
In the areas of marketing management, countless and crucial decisions are to be
made. Comparatively marketing decisions are more crucial because, they have

bearing on the other branches of business and more difficult as the decision-maker
is to shoot the flying game in the changing marketing environment.
Normally, profit or contribution is taken as a base for pay-off conditions. Price can
be a better criterion for arriving at cut-off point because; price is the determinant of
profit or contribution.
As pointed earlier, price as an indicator has a special role in the decision-making
process in developing countries because, consumer response to price changes will
be more quick and tangible as people have higher marginal value of money at their
disposal. For instance, if it is a decision regarding selecting product improvement
possibilities, select that possibility which gives the highest price as compared to the
cost.
These five points make product pricing an important and major function of
marketing manager. However, until recently, it has been one of the most neglected
areas of marketing management.
In fact, we must have a specialist in pricing as we do have in other functions of
marketing. This negligence is quite evident from the fact that even the well-known
companies in the world price their products on simple concepts of costs market
position competition and desired profit. Scientific pricing is much more than this
easy exercise.
Pricing objectives
Pricing decisions are salient to the achievement of corporate and marketing
objectives. Hence it is essential that pricing objective and strategies are consistent
with and supportive of these objectives. Environmental analysis provides crucial
inputs for the specification of operational and attainable pricing objectives, which
are in line with general company goals and strategies, and exploit the possibilities
offered by the marketplace.
Many pricing objectives can be pursued and these can be classified as:
(i)
(ii)
(iii)
(iv)

Profit-oriented objectives (e.g. profit maximization, profit satisfaction,

target return on investment);
Cost-oriented objectives (e.g. recover investment costs over a particular
time period, generate volume so as to drive down costs)
Demand/sales-oriented objectives (e.g. sales growth or maintenance,
market share growth or maintenance, use price of one product to sell
other products in the line, build traffic); or
Competition-oriented objectives (e.g. be the price leader, discourage entry
by new competitors, discourage others from lowering prices).

Companies may pursue more than one pricing objective: in that case, pricing
objectives should be mutually consistent, and priorities (or interrelationships)
clearly defined. Managers often concentrate on cost-oriented pricing objectives,
because these can easily be translated into rules of thumb that simplify the pricing

problem. In doing so, however, they disregard opportunities for profitable pricing
based on factors other than cost.

The Marketing Mix

Pricing Strategies
Introduction

Pricing is one of the most important elements of the marketing mix, as it is the only element of
the marketing mix, which generates a turnover for the organisation. The other 3 elements of the
marketing mix are the variable cost for the organisation;
Product - It costs to design and produce your products.
Place - It costs to distribute your products.
Promotion - It costs to promote your products.

Price must support the other elements of the marketing mix. Pricing is difficult and must reflect
supply and demand relationship. Pricing a product too high or too low could mean lost sales for
the organisation.
Pricing Factors

Pricing should take the following factors into account:

Fixed and variable costs

Competition

Company objectives

Proposed positioning strategies

Target group and willingness to pay

An organisation can adopt a number of pricing strategies, the pricing strategy will usually be
based on corporate objectives.

Types Of Pricing Strategies

The table below explains different pricing methods and price strategies with an example of each
pricing strategy.

Pricing
Strategy

Definition

Example

Here the organisation sets a low

price to increase sales and
A television satellite company sets a
Penetratio market share. Once market
low price to get subscribers then
n Pricing
share has been captured the firm increases the price as their customer
may well then increase their
base increases.
price.
The organisation sets an initial
A games console company reduces
high price and then slowly lowers
the price of their console over 5 years,
Skimming the price to make the product
charging a premium at launch and
Pricing
available to a wider market. The
lowest price near the end of its life
objective is to skim profits of the
cycle.
market layer by layer.
Some firms offer a price matching
Setting a price in comparison
service to match what their
with competitors. In reality a firm competitors are offering. Others will
Competitio
has three options and these are go further and refund back to the
n Pricing
to price lower, price the same or customer more money than the
price higher than competitors.
difference between their price and the
competitor's price.

Pricing
Strategy

Definition

Example

An example would be a DVD

manufacturer offering different DVD
recorders with different features at
Pricing different products within different prices e.g. A HD and non HD
Product
the same product range at
version.. The greater the features and
Line Pricing
different price points.
the benefit obtained the greater the
consumer will pay. This form of price
discrimination assists the company in
maximising turnover and profits.
Bundle
Pricing

The organisation bundles a

This strategy is very popular with
group of products at a reduced supermarkets who often offer BOGOF
price. Common methods are buy strategies.
one and get one free promotions
or BOGOFs as they are now
known. Within the UK some firms
are now moving into the realms
of buy one get two free can we

Pricing
Strategy

Definition

Example

call this BOGTF I wonder?

Premium
Pricing

The price is set high to indicate

that the product is "exclusive"

Examples of products and services

using this strategy include Harrods,
first class airline services, and
Porsche.

The seller will charge 99p instead 1

or $199 instead of $200. The reason
The seller here will consider the why this methods work, is because
Psychologic psychology of price and the
buyers will still say they purchased
al Pricing positioning of price within the
their product under 200 pounds or
market place.
dollars, even thought it was a pound
or dollar away. My favourite pricing
strategy.

Pricing
Strateg
y

Definition

Optional The organization sells optional extras along

Pricing with the product to maximize its turnover.

Example
This strategy is used
commonly within the car
industry as I found out
when purchasing my car.

Cost
Plus
Pricing

The price of the product is production costs

plus a set amount ("mark up") based on how
much profit (return) that the company wants
to make. Although this method ensures the
price covers production costs it does not take
consumer demand or competitive pricing into
account which could place the company at a
competitive disadvantage.

Cost
Based
Pricing

Cost based pricing can be

This is similar to cost plus pricing in that it
useful for firms that operate
takes costs into account but it will consider
in an industry where prices
other factors such as market conditions when change regularly but still
setting prices.
want to base their price on
costs.

Value
Based
Pricing

This pricing strategy considers the value of

Firms that produce
the product to consumers rather than the how technology, medicines, and
much it cost to produce it. Value is based on beauty products are likely

For example a product may

cost 100 to produce and
as the firm has decided that
their profit will be twenty
percent they decide to sell
the product for 120 i.e.
100 plus 100/100 x 20

Pricing
Strateg
y

Definition
the benefits it provides to the consumer e.g.
convenience, well being, reputation or joy.

Example

to use this pricing strategy.

What is 'Value-Based Pricing'

Value-based pricing is the setting of a product or service's price based on the benefits it provides
to consumers. By contrast, cost-plus pricing is based on the amount of money it takes to produce
the product.
Companies that offer unique or highly valuable features or services are better positioned to take
advantage of value-based pricing than companies with products or services that are relatively
indistinguishable from those of their competitors.

What is 'Competitive Pricing'

Competitive pricing is setting the price of a product or service based on what the competition is
charging. This pricing method is used more often by businesses selling similar products, since
services can vary from business to business, while the attributes of a product remain similar. This
type of pricing strategy is generally used once a price for a product or service has reached a level
of equilibrium, which occurs when a product has been on the market for a long time and there
are many substitutes for the product.

What is cost based pricing?

The commonly used methods under this category are mark-up pricing or cost plus
pricing, absorption cost pricing, target rate of return pricing, and marginal cost
pricing. Mark-up pricing involves fixing a price for a product by adding (marking up)
a margin to its cost price. The mark-ups will be different for markets and products.
Absorption cost pricing or full cost pricing is based on the estimated unit cost of the
product at normal level of production and sales. Variable and fixed costs of
production, selling and administration costs are all added to get the total cost. By
adding the required margin to the total cost, selling price is arrived at. While the
mark-up in absorption cost pricing is added arbitrarily, in target rate of return
pricing, a rational approach is used to arrive at the mark-up. The aim of marginal
cost pricing is to maximize contribution towards fixed costs. It aims at realizing all
the direct variable costs of the product, plus part of the fixed costs.
Most of the cost based methods of pricing evolve from the break even concept. The
break -even point is the level where the total costs exactly equal the total revenues;
that is, the costs and revenues break even at a particular level. Profit will be zero at

break-even point. At a level where revenues exceed costs, profits come in and at
the other level, losses are incurred. The number of units that are required to be
produced and sold to reach a no loss no profit situation at a given price is known as
the break-even-point.

'Market Price'
The market price is the current price at which an asset or service can be bought or sold.
Economic theory contends that the market price converges at a point where the forces of supply
and demand meet. Shocks to either the supply side and/or demand side can cause the market
price for a good or service to be re-evaluated.