The Marketing Mix Pricing Decisions Ch 10

Demand for a Product

Total amount of a particular product which consumers wish to buy at a given price, over a
given period of time.
Factors that influence Consumer Demand
Price
Size of population
Consumers income
Advertising and promotion
New improved products
Taxation
Substitute products
Price
The amount of money or products needed to acquire some combination of another product
and its accompanying services.
Elasticity of Demand
The degree of responsiveness of demand to change in demand conditions is called Elasticity.
Formula of Price Elasticity of Demand
Percentage change in quantity demanded
Percentage change in price
(See Page 180 Table 10.1)
Factors that determine Price Elasticity of Demand
How necessary the product is
How many similar competing products are in the market
Degree of consumer loyalty
Nature of product
Applications of Price Elasticity of Demand
Sales forecasting
Decisions regarding Pricing strategy
Factors that affect Pricing Decisions
Objectives of Business
Marketing Mix
Cost of production ( Fixed Cost + Variable Cost )
Competitive conditions in the market
Prices set by the competitor
Consumers expectations about the products price
Nature of product
Pricing Methods
Cost Based Pricing
Competition Based Pricing
Market Oriented Pricing
Cost Based Pricing
The basic idea is that firms will assess their cost per unit and add an amount as their profit.
There are several methods for doing this.
o Cost Plus Pricing / Mark-up Pricing This strategy is used by retailers. They
add a mark-up on the cost which they had paid to the producer or wholesaler.
E.g. 10,000 units purchased for Rs.50, 000 for resale.
Per unit cost = 50,000 = Rs.5
10,000
20% Mark-up = 20% 5 =Rs.1
Therefore Selling price = 5+1 = 6

o Target Pricing A required rate of return is expected on the investment. e.g. 20%
We spend Rs.400, 000 and produce 10,000 units.
We add 20% in cost: - 400,000 + (20% 400,000) = Rs.480, 000
Selling price = 480,000 = Rs.48 per unit
10,000
o Full Cost Pricing / Absorption Cost This method of pricing is used when the
producer is producing a range of products A, B, C & D. The producer allocates
fixed cost to each product and then calculates total cost as well as per unit cost.
And the profit margin is added at last.
Note: - Difference between Mark-up and Full Cost is related to Fixed Cost which
is allocated to different products in Full Cost.
E.g. Fixed Cost is Rs.10.000. Variable Cost per unit is Rs.5
5,000 units are produced. Profit Margin is 300%.
Fixed Cost + Variable Cost
10,000
+ 5(5,000)
= 35,000
Per unit cost = 35,000 = Rs.7
5,000
Profit Margin = 300% = 7 300%=Rs.21
Total Selling Price = Cost + Profit Margin
= 7 + 21
=Rs.28
o Contribution Pricing
If a company produces a wide range of products, then the producers collect
Variable cost for each product. Some extra amount is added which will help to
cover the Total Fixed Cost of the company. This extra amount is known as
Contribution to Fixed Cost. The reason for adding the contribution cost is that its
very difficult for a producer to allocate Fixed Cost to each product as in the case
of Full cost.
Advantage: - By using this approach, we can find out about the contribution of
any product in our product range. In other words, we find out which product is
more successful and profitable.
Competition Based Pricing and Market Oriented Pricing
The producer will set the same price, which is set by the market leader.
To avoid a price war, the producers make an agreement for price. This agreement is called
cartel.
When a producer sets a low price for its product in order to force its competitors out of the
market, this strategy is known as Destroyer pricing.
After the market research, price of the product is set by the producer.
Penetration Pricing Setting a low price to reach the mass marketing immediately. This
strategy can also be employed at a later stage in Product life cycle.

Skimming Pricing Setting a high price. This can happen if the product is unique. The
high price is charged for a short period when there is no competition
in the market.
Price discrimination when its possible to charge different prices to different groups for
the same product. e.g. in Telecommunication sector
From 8a.m. to 8p.m. the rate is different
From 8p.m. to 8a.m. the rate is different
Note the product / service is same but the prices charged to
different groups of consumers are different.

Loss Leaders
Psychological Pricing