PRICING: -

Price is:

The money charged for a product or service

Everything that a customer has to give up in order to acquire a product or

service

Usually expressed in terms of per unit

You can see from the above that price is not the same thing as cost.
The price is the amount customers pay for a product. The cost is the amount spent by
a business making the product. However, as we see later, a firm needs to take account
of the cost of production when setting price to ensure that it is making a profit on the
products it offers.

The price a business charges for its product or service is one of the most important
business decisions management take.
For example, unlike the other elements of the marketing mix (product, place &
promotion), pricing decisions directly affect revenues rather than costs.

Pricing also has to be consistent with the other elements of the marketing mix, since it
contributes to the perception of a product or service by customers.
Setting a price that is too high or too low will - at best - limit the business growth. At
worst, it could cause serious problems for sales and cash flow.
So pricing is important, but it is really tough to get right. There are so many factors to
consider, and much uncertainty about whether a price change will have the desired
effect.

Pricing objective:
A goal that guides a business in setting the cost of a product or service to potential
consumers. A pricing objective underlies the pricing process for a product, and it
should reflect a company's marketing, financial, strategic and product goals, as well as
consumer price expectations and the levels of available stock and production
resources.
 Some examples of pricing objectives include maximizing short run profits, increasing
sales volume, matching competitors' prices, encouraging smaller competitors to
change industries, or meeting target rates of return. Each pricing objective requires a
different price-setting strategy in order to successfully achieve business goals.

Objectives:
maximize long-run profit

maximize short-run profit

increase sales volume (quantity)

increase monetary sales

increase market share

obtain a target rate of return on investment (ROI)

obtain a target rate of return on sales

Stabilize market or stabilize market price: an objective to stabilize price means

that the marketing manager attempts to keep prices stable in the marketplace and
to compete on non-price considerations. Stabilization of margin is basically a cost-
plus approach in which the manager attempts to maintain the same margin
regardless of changes in cost.

company growth

maintain price leadership

desensitize customers to price

discourage new entrants into the industry

match competitors prices

encourage the exit of marginal firms from the industry

 survival

avoid government investigation or intervention

obtain or maintain the loyalty and enthusiasm of distributors and other sales
personnel

enhance the image of the firm, brand, or product

be perceived as fair by customers and potential customers

create interest and excitement about a product

discourage competitors from cutting prices

use price to make the product visible"

help prepare for the sale of the business (harvesting)

social, ethical, or ideological objectives

Methods:
There are several methods of pricing products in the market. While selecting the
method of fixing prices, a marketer must consider the factors affecting pricing.
The pricing methods can be broadly divided into two groupscost-oriented
method and market-oriented method.

A. Cost-oriented Method:
Because cost provides the base for a possible price range, some firms may consider
cost-oriented methods to fix the price.

Cost-oriented methods or pricing are as follows:

1. Cost plus pricing:

Cost plus pricing involves adding a certain percentage to cost in order to fix the price.
For instance, if the cost of a product is Rs. 200 per unit and the marketer expects 10
per cent profit on costs, then the selling price will be Rs. 220. The difference between
the selling price and the cost is the profit. This method is simpler as marketers can
easily determine the costs and add a certain percentage to arrive at the selling price.

2. Mark-up pricing:

Mark-up pricing is a variation of cost pricing. In this case, mark-ups are calculated as
a percentage of the selling price and not as a percentage of the cost price. Firms that
use cost-oriented methods use mark-up pricing.

Since only the cost and the desired percentage markup on the selling price are known,
the following formula is used to determine the selling price:

Average unit cost/Selling price

3. Break-even pricing:

In this case, the firm determines the level of sales needed to cover all the relevant
fixed and variable costs. The break-even price is the price at which the sales revenue
is equal to the cost of goods sold. In other words, there is neither profit nor loss.

For instance, if the fixed cost is Rs. 2, 00,000, the variable cost per unit is Rs. 10, and
the selling price is Rs. 15, then the firm needs to sell 40,000 units to break even.
Therefore, the firm will plan to sell more than 40,000 units to make a profit. If the
firm is not in a position to sell 40,000 limits, then it has to increase the selling price.

The following formula is used to calculate the break-even point:

Contribution = Selling price Variable cost per unit

4. Target returns pricing:

In this case, the firm sets prices in order to achieve a particular level of return on
investment (ROI).

The target return price can be calculated by the following formula:

Target return price = Total costs + (Desired % ROI investment)/ Total sales in units

For instance, if the total investment is Rs. 10,000, the desired ROI is 20 per cent, the
total cost is Rs.5000, and total sales expected are 1,000 units, then the target return
price will be Rs. 7 per unit as shown below:

5000 + (20% X 10,000)/ 7000

Target return price = 7

The limitation of this method (like other cost-oriented methods) is that prices are
derived from costs without considering market factors such as competition, demand
and consumers perceived value. However, this method helps to ensure that prices
exceed all costs and therefore contribute to profit.

5. Early cash recovery pricing:

Some firms may fix a price to realize early recovery of investment involved, when
market forecasts suggest that the life of the market is likely to be short, such as in the
case of fashion-related products or technology-sensitive products.
Such pricing can also be used when a firm anticipates that a large firm may enter the
market in the near future with its lower prices, forcing existing firms to exit. In such
situations, firms may fix a price level, which would maximize short-term revenues
and reduce the firms medium-term risk.

B. Market-oriented Methods:

1. Perceived value pricing:

A good number of firms fix the price of their goods and services on the basis of
customers perceived value. They consider customers perceived value as the primary
factor for fixing prices, and the firms costs as the secondary.

The customers perception can be influenced by several factors, such as advertising,

sales on techniques, effective sales force and after-sale-service staff. If customers
perceive a higher value, then the price fixed will be high and vice versa. Market
research is needed to establish the customers perceived value as a guide to effective
pricing.

2. Going-rate pricing:

In this case, the benchmark for setting prices is the price set by major competitors. If a
major competitor changes its price, then the smaller firms may also change their price,
irrespective of their costs or demand.

The going-rate pricing can be further divided into three sub-methods:

a. Competitors parity method:

A firm may set the same price as that of the major competitor.
b. Premium pricing:

A firm may charge a little higher if its products have some additional special features
as compared to major competitors.

c. Discount pricing:

A firm may charge a little lower price if its products lack certain features as compared
to major competitors.

The going-rate method is very popular because it tends to reduce the likelihood of
price wars emerging in the market. It also reflects the industrys coactive wisdom
relating to the price that would generate a fair return.

3. Sealed-bid pricing:

This pricing is adopted in the case of large orders or contracts, especially those of
industrial buyers or government departments. The firms submit sealed bids for jobs in
response to an advertisement.

In this case, the buyer expects the lowest possible price and the seller is expected to
provide the best possible quotation or tender.

If a firm wants to win a contract, then it has to submit a lower price bid. For this
purpose, the firm has to anticipate the pricing policy of the competitors and decide the
price offer.

4. Differentiated pricing:

Firms may charge different prices for the same product or service.

The following are some the types of differentiated pricing:

a. Customer segment pricing:

Here different customer groups are charged different prices for the same product or
service depending on the size of the order, payment terms, and so on.

b. Time pricing:

Here different prices are charged for the same product or service at different timings
or season. It includes off-peak pricing, where low prices are charged during low-
demand tunings or season.

c. Area pricing:

Here different prices are charged for the same product in different market areas. For
instance, a firm may charge a lower price in a new market to attract customers.

d. Product form pricing:

Here different versions of the product are priced differently but not proportionately to
their respective costs. For instance, soft drinks of 200,300, 500 ml, etc., are priced
according to this strategy.

Selecting the Final Price:

Pricing methods help business to find out the final price. Other factors that help to set the final price are:
 Psychological pricing

The influence of other Marketing-Mix elements

Company pricing policies

Impact of price on other parties.

Let us discuss each of them one by one.

I.Psychological Pricing

Many consumers feel high priced product offers high quality. If a consumer knows
about the quality features of a product, price plays a less significant role in
comparison to quality. When a consumer thinks of buying a product they keep some
budget in the mind which is decided by the past prices, current prices, or the buying
situation. Mostly high priced product is thought of to have a high quality. So at times
increasing the rates of a product increases the sales also.

ii. The influence of other Marketing Mix Elements

The final price of a product depends on the other marketing mix elements also like the
advertising, brand name etc.

iii. Company Pricing Policies

The price of any product set should be decided according to the company's pricing
policies. In many companies a pricing department is set up to make sure that product
price should be reasonable for the customers, and that should give profit to the
company also.

iv. Impact of Prices on Other Parties

According to Kotler, Management must also consider the reactions of other parties to
the contemplated price.

How will distributors and dealers feel about it?

Will the sales force be willing to sell at that price?

How will competitors react?

 Will suppliers raise their prices when they see the company's price?

Will the government intervene and prevent this price from being charged? - In
this case the marketers should know the laws regulating prices.

ADOPTING PRICING:

Adoption process is a series of stages by which a consumer might adopt a new

product or service. Whether it be Services or Products, in todays competitive
world, a consumer is faced with a lot of choices. How does he make a decision to
adopt a new product is the Adoption process.

There are numerous stages of adoption which a consumer goes through. These
stages may happen before or even after the actual adoption

1. Awareness This is the area where major marketers spend billions of dollars.
Simply speaking, if you are not aware of the product, you are never going to buy
the product.

2. Interest and Information Search Once you are aware, you start searching
for information. Whether it be your daily soap, your car or for that matter your
home, you wont buy it unless you know about it.

3. Evaluation / Trial Evaluation is wherein you test or have a trial of the

product. This is pretty difficult in services as services are generally intangible in
nature. However service marketing managers do find ways of offering Trial
packs to users. Comparatively, it is pretty easier in Product marketing and finds
a major usage in BTL (Below the Line) sales promotion.
 4. Adoption The actual adoption of the product. Wherein the consumer finally
decides to adopt the product.

Although this is a well scripted adoption process, however consumers might tend to
skip over the whole process. For example you wife asks you to buy a product for her.
Would you go through the process of actually collecting information, evaluating it and
then making a decision??? I dont think so!!! So in this case (Word of Mouth) the
consumer tends to directly adopt the product rather than going through stages. This is
one of the primary reason word of mouth is so much in demand.

PRICE CUTS:

There are genuine reasons for cutting prices:

Here, either the company starts with lower costs than its competitors or it
initiates price cuts in the hope of gaining the market share and lower costs to price
cutting policy involves the following possible traps:
Low-quality trap:

Initiation Price Changes:

Companies are bound to face market situations where they are required to initiate
price changes. It means, either they are to cut the prices or increase the present prices
to survive, maintain status quo or further growth. Initiating price changes involves two
possibilities of price cuts and price increases.

Initiating Price Cuts:

There are good many circumstances where a firm is to resort to price cuts.
There are genuine reasons for cutting prices:

First may be existence of excess capacity. In such situation the firm is badly in need of
additional business and cannot generate it through increased sales efforts, product
improvement or even price rise.

It may resort to aggressive pricing, but in initiating price out, the company may trigger
a price war. Second reason for initiating price cut is a drive to dominate the market
through lower costs.

Here, either the company starts with lower costs than its competitors or it initiates
price cuts in the hope of gaining the market share and lower costs to price cutting
policy involves the following possible traps:

1. Low-quality trap:

Consumers will assume that quality is low.

2. Fragile-market share trap:

A low price buys market share but not market loyalty. The same customers will shift
to any lower- priced firm that comes along.

3. Shallow-pockets trap:

The higher priced competitors may cut their prices and may have longer staying
power because of deeper cash resources.

Initiating Price Increases:

Price increase is a source of maximizing the profit or maintaining it if done carefully.
Say a company earns 3 percent profit on sales, and one percent price increase will
increase profits by 33 per cent if sales volume is not affected.

The factors leading to price increase can be:

1. Increase in cost inflation. That is rising costs unmatched by productivity gains

squeeze profit margins and lead companies to regular rounds of price increases.
Companies often raise their by more than the cost hike, in anticipation of further
inflation or government price controls, in a practice called anticipatory pricing

2. Over demand can be another cause that leads to price increase. When the company
cannot supply all of its customers, it can raise its prices, ration or cut supplies to
customers or both.

The price can be increased by at least four ways:

1. Delayed quotation pricing:

Here, the company does not set final price until product is finished or delivered. This
pricing is prevalent in industries with long production lead times like construction and
heavy industrial equipments.

2. Unbundling:
The company under this plan maintains its price but removes or prices separately one
or more elements that were part of the former offer, such as free delivery or
installation.

Automobile companies, sometimes, add antilock brakes and passenger-side air-bags

as supplementary extras to their whiles.

3. Escalator clauses:

Under this, the company asks the customer to pay todays price and all or part of any
inflation increase that takes place before delivery. This hike based on specified price
index. These escalation clauses are quite common in construction line whether it is a
house or industrial project or air-craft and ship building.

4. Reduction of discounts:

The company asks the sales force to offer its normal cash and quantity discounts at
reduced rate. To gain four such attempts, the company must avoid looking like a price
gouger. Companies also think of who will bear the brunt of the increased prices.

It is so because, customer memories are long, and they can turn against the company
which is perceived as price gauge.

Reactions to Price Changes:

Naturally any price change provokes response or reaction from customers,

competitors, distributors and suppliers and even the government. Here, we shall touch
only the reactions of consumers and competitors.
Customer Reactions:

Consumers are more interested in knowing the cause or causes of price change.

A price cut can be interpreted in several ways:

1. The item or product is about to be replaced by a new model.

2. The item is faulty and it is not selling well.

3. The firms financial position is badly affected.

4. The price will come down further.

5. The quality has been reduced.

A price hike may have some positive meanings:

1. The items is hot

2. It has a high value because of quality.

Competitor Reactions:

Competitors are most likely to react when the number of firms is few, the product is
homogeneous, and buyers are highly informed. Competitor reactions can be a special
problem when they have a strong value proposition. The price hike them to take steps
based on objectives of such price hike where they will resort to advertising and
product improving efforts.

In case of price cuts, they have different interpretations:

1. That the companys trying to steal the market

2. That the company is doing poorly and trying to boost its sales

3. That company wants the whole industry to reduce prices to stimulate total demand.

COMPETETOR PRICE PRICE CHANGES:

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.

BREAKING DOWN 'Competitive Pricing'

Businesses have three options when setting the price for a good or service: set it
below the competition, at the competition or above the competition. Above the
competition pricing requires the business to create an environment that warrants the
premium, such as generous payment terms or extra features.

A business may set the price below the market and potentially take a loss if the
business believes that the customer will purchase additional products from their
business once the customer is exposed to the other offerings.

Competitive Pricing and Price Matching Offers

When a company is unable to anticipate competitor price changes or is not equipped
to make corresponding changes in a timely fashion, a retailer may offer to match
advertised competitor prices. This allows the retailer to maintain a competitive price
point for those who become aware of the competitor's offer without having to
officially change the price within the retailers point of sale system.

For example, in November 2014, Amazon projected price changes to approximately

80 million items in preparation for the holiday season. Other retailers, including Wal-
Mart and Best Buy, announced a price-matching program. This allowed customers of
Wal-Mart or Best Buy to receive a product at the lower price without risking
customers taking their business to Amazon solely for pricing reasons.
Premium Pricing
In order for a business to charge an amount above that of the competition, the business
must differentiate the product from those created by competitors. For example, Apple
employs the strategy of focusing on the creation of high-end products and ensuring
the consumer market sees its products as unique or innovative.

Loss Leaders
A loss leader is a good or service being offered at a notable discount, at times resulting
in a loss if the products are sold below cost. The technique looks to increase traffic to
the business based on the low price of the aforementioned product. Once the potential
customer enters the store environment, shifting to the role of customer once the
decision to purchase the loss leader is made, the hope is to attract them to other store
products that generate a profit. Not only can this attract new customers to a store, it
can also help a business move inventory that has become stagnant.

At times, loss leader prices cannot be officially published as a minimum advertised

price has been set by the manufacturer. The practice is also forbidden in certain states.

Market Leader:

A market leader is a company that has the largest market share in an industry, and
which can use its dominance to affect the competitive landscape and direction the
market takes. Companies may be the first to develop a product or service. This allows
them and to become engrained in the public eye as the brand that consumers associate
with the product itself.

BREAKING DOWN 'Market Leader'

A company that enters a market as a competitor can differentiate itself and obtain
majority market share by aggressively marketing its version of the product, and may
indicate that whoever developed the original product version is dated or old-
fashioned. Companies may also invest heavily in market research and product
development, and then use consumer information to develop features that update an
existing product.
Price War:
A price war is when companies continuously lower prices to undercut the competition.
A price war may be used to increase revenue in the short term or as a longer term
strategy to gain market share. Price wars can be prevented through strategic price
management (with non-aggressive pricing), thorough understanding of the
competition, or even communication with competitors.

BREAKING DOWN 'Price War'

When a company wants to increase market share, usually the easiest way is to reduce
prices, which increases product sales. The competition may be forced to follow suit if
its products are similar. As prices get lower the quantity of sales increases and
customers receive the benefits. Eventually, a price point is reached that only one
company can afford. Some companies will even sell at a loss in an attempt to
eliminate the competition completely.