Unit 6: Pricing

Dibakar Bashistha

Concept of Price and Pricing

It is very important marketing mix. Price is
what customers pay for what they get. It is the
amount of money that customer pay for the
product. It is the value of what is exchanged.
According to William Stanton Price is the
amount of money and or what items with
utility needed to acquire a product.

 It is one of the major elements that the marketing manger

must consider for generating the return on capital invested
in a business organization. It is what customer pay for what
they get. It is the amount of money that customer pay for
the product. It is consider as the exchange value of a good,
a services, or idea. It is amount of money sacrificed to
obtain a particular product or service. Goods, services,
ideas, advice, right, etc. are exchanged and their value
measured by their price.

So pricing means the determination of appropriate

value to a particular goods or services. Price has various
names like interest, rent, commission, fee, salary and
wages, taxes etc. It can also be a combination of money
and other items of value.

Price has various names:

Interest: Price paid for a bank loan
Rent: Price paid for hiring physical assets.
Fare: Price paid for using transportation service
Fee: Price paid for professionals service.
Salary and wages: Paid for services of workers.
Taxes: Paid for the privilege of making money.

 Importance:
Pricing activity is performed by all types of organization. It is very important
variable in the economy. Price affects both demand and savings. It is one of
the major activities of the government in an underdeveloped economy. The
importance of prices is given below.
1. Importance to the economy:
* Price influences factors of production
* Price determine supply and demand
* Price is a tool for economic management
2. Importance to the organization or firm
* Price determine profitability
* Price determine market share
* Price influence no price competition
3. Importance to customers
* Price influences customer's choice of the products
* Price influences perception of the product.
* Price influences customer value in terms of potential benefits.

 Objectives of pricing
1. Profit oriented pricing
a. Target return (Achieve target return on investment or net sales)
b. Satisfactory profit (Maximize profit)
2. Sales oriented pricing
a. Increase sales volume (Fulfill this objectives through product
or services at concessional prices or some time at loss)
b. Increase market share
3. Status- que oriented Pricing ( Maintain good will )
a. Stabilization of price
b. Meeting competition
c. Survival
4. Quality oriented Pricing
a. Quality leadership
b. Quality imitation

Internal and external factors affecting pricing

Price determination is affected by several internal and external factors internal
price factors are controllable while external factors are mostly independent.
Internal price factors
Pricing objectives (target return objectives/sales oriented objective)
Marketing mix ( product/distribution/ promotion ) affect the price
determination for the products.
Structure for pricing ( type of pricing/ image / product positioning )
Costs ( production and distribution cost)
a. Costs of product (expenses incurred in the manufacture and packaging of the
product like labor, material, factory overhead etc)
b. Selling cost ( physical distribution, sales force management, and incentive
paid to channel members)
c. Promotion costs( Advertising/ sales promotion and publicity )

External price factors

Market demand ( Market demand are different in different
life cycle / Depression / prosperity, recovery )
Prevailing market price ( most of the similar or
undifferentiated products are sold at the prevailing market
prices)
Competition ( the type of competition the organization face
in the market determines the price of the product)
Government control (government control on the price level
and legislation regarding price regulations are important
variable in the pricing milieu)
Market intermediaries interests(Resellers expect a fair share
from the price as markups, commissions and incentives)
Social concerns (voice of consumer associations but in Nepal
they are motivated by political parties )

Cost Oriented

Cost-Plus
Target return
Break-even

Competition
Oriented

Meet
competition
Below
competition
Above
competition
Sealed-bid

Pricing Methods

Demand
Oriented

Value
Perceived value

Methods or Approaches of Price determination:

1. Cost oriented method:
Cost oriented pricing methods are based on the notion that the
price should cover all types of costs and be able to give the
organization a fair amount of profit. These methods include:
a. Cost-Plus / Mark-up pricing:
This is the simplest method of pricing which involves a
calculation of the fixed and variable costs per unit and adding the
desired profit margin on the total cost.
For example:

Direct cost (labor and materials ..........Rs, 10,000/

Fixed overhead
...........Rs, 5,000/

Total cost
...........Rs, 15,000/

Average cost per unit 15000/1000 .......Rs, 15/

Mark-up profit per unit

....Rs, 5/

Price per unit

...... Rs 20/

 b. Target return on investment

This method is popular among manufacturing
organizations that need to recover a fixed
target return or profit on their investment from
the price. The desired return on investment is
added to the total cost to arrive at the price.
Target return price: Total cost + desired ROI /
Unit sales

c. Break-even point (Break-even analysis ) :

It is a no profit no loss point where revenue equals costs. The
assumptions made for calculating BEP are:
Total fixed costs are constant.
Variable cost per unit remain constant
Sales price per unit remain constant
BEP = TFC / Selling price per unit * variable cost per unit
It is a good guide for setting price in the short run where cost
and demand structure are stable.
BEP is the most popular used method of pricing. Actually it
doesn't help to establish price rather in this system price is
already assumed. But it helps to know the relationship
between cost and revenue and find out a point where revenue
equals to the cost. Price is determined at that point where
revenue equals total cost.

2. Competition oriented pricing:

This method focuses on market price because a
company sets its price on the basis of what its
competitors are changing. Here costs and demand are
not considered. But it is not necessary that the company
should charge the same price as its competitors charge.
Price may be determined below the market price
depending upon the nature of competition, nature of
product and market expectations etc.

Meet competition method: Equal to competitor's Price.

Below competition method: Below than competitors Price.
Above competition method: Higher than competitors price.
Sealed-bid pricing method: Confidential Price.

3. Demand oriented pricing method

Under this method price is determined on the basis of the consumer's
perceptions and demand intensity rather than on costs. Because the
cost oriented method fail to take in to account the demand for the
products at various prices. Under this method price is determined by
two methods.
Perceived value pricing (Response to each product)
"Consumers wish to pay for company's product"
Here demand and cost are not considered. Customer's perception of
product value is found through market research. New products are
generally priced by this method.
Demand differential pricing:
(Value pricing)
Pricing will be determined o the basis of customer's paying capacity
product form, placer and timer, quality etc. High value to customer and
low value to product is exercised.

New product pricing

The new product pricing involve price setting during the
introduction stage of product life cycle. It is a major challenges for
the innovator. Price is a indicator of product quality in most cases.
There are four pricing options during the introduction stage.
1. Premium pricing strategy ( Price high , quality high )
2. Good value pricing strategy: ( good quality product at lower
price )
3. Overcharging pricing strategy ( firms over prices its new
products )
4. Economy pricing strategy ( Low quality products in lower prices
for example china made mobile phone )

 Actually two more pricing strategies are very relevant

during the introduction stage of the product life cycle.
A. Market-skimming strategy: It is implemented by many
innovators who spend huge amount of money in the product
development process. This involves keeping the high price
during the introduction and growth period and less price
during the maturity period of the product life cycle. Today
the I-phone cost more than 50 thousand. And the next six
months onwards its price will gradually decline.
B. Market- penetration strategy: It involves setting the low
price for their new products and on the basis of low price the
product quickly penetrate in to the market. Once the firm is
able to achieve effective penetration and capture significant
market share the price is gradually increased.

Price Skimming:
*Setting high price for new product
* Assuming that customers pay high price for the new product.
* Charging the very high price during the introduction stage
*This strategy is suitable only for innovative product because research and
development costs are very high.
Price Penetration
It is adopted by organization an imitative or copy product.
It is viable only when the market for the product is price sensitive.
Setting low price for the new products.
Large sales volume and large market share.
Price competition
*It is related with new modified products
* Competitive price level
* Premium product value for consumers by offering the improved products

Pricing policy and

strategy
Pricing Policy:
1. Geographical ( high / low / uniform )
2. Discount and allowances ( early payment, volume
purchase, off-seasons )
3. Promotional ( set below the list price or even below
pricing the cost ) odd and even pricing
4. Discriminatory ( living standard, age group, bargaining,
location etc ) visiting Zoo adults are charged higher
prices and children low prices etc )
5. Product mix

 Strategy of Pricing:
1. Market entry pricing:
. Market Skimming: It involves setting high
price for a new product in the initial stage
assuming that the consumers will pay high
price for new products.
. Market Penetration: It involves setting low
price for the new product in initial period
with a view to penetrate the mass market
immediately and thus obtain a large sales
volume and larger market share.

2. Discount and allowances:

Discount of price, quantity, seasonal,
3. Geographical pricing
Point of purchase pricing ( point of production get
heavy discount than point of consumption )
Uniform delivery pricing: The same delivery price
is quoted to all the buyers of a particular
geographical region for example unofrm postage
stamp price for the whole SAARC region.
4. Psychological or odd pricing etc and resell
pricing strategy etc
4. International Pricing strategy

Product Mix Pricing /Pricing Policy

Product Mix Pricing

Concept:
It is a set of product line and other items. In each products line different
pricing strategy may be required. We can analysis Six situation in this
case:
1. Product line price Under the price lining the organization maintains four
of five points at which the product items of a product line are priced. When
cost or demand forces the organization to revise the price of an item, the
marketers has to revise the prices of all items in the product line in
maintaining the relationship(different process of mobile or track shoes etc.)
2. Optional feature price: Separate price is charged for optional features
offered. (For example attached cassette player etc.) Most of the companies
produce several items along with the main item. Restaurants offer food as
the main item and cold drinks as the optional items. Some companies offer
low prices to the main products and high prices to the optional items.

3. Product bundling price: Some companies produce interrelated

products. Sellers don not like to sell them separately, they often sell
this products in sets like spoon sets, dinner sets, and so on. Since
most of the customers don't like to buy goods in sets. Sellers have
to sufficiently reduce their price, sometimes during occasions they
may offer even below the cost.
4.Ancillary product price or captive product price: Blade for razor,
film for camera, (High price for ancillary product and low price for
main products. Shaving machines are useless if there are no films. )
And low price for main products. It means Tuitions fee is high than
books.
5. Two part price ( Higher uses and lower uses ) Some times
customers have to pay two part prices for the same product or
services. For example telephone user has to pay a minimum
monthly fee as basic charge and plus charges for calls beyond the
minimum number as extra charges.

 6. By product pricing: Wastage of the

industries are known as by products. Since
disposition of these by products involves
certain cost, the companies try to offer these
products to those customers for whom these by
products may be valuable of useful. Because
any income earned from the by-products will
make company easier to charge a lower price
on its products.

Price adjustment strategies

Companies usually adjust their basic prices to account for
various
customer
differences
and
changing situations. Fig summarizes six price-adjustment
strategies:
discount and allowance pricing,
segmented pricing,
psychological pricing,
promotional pricing,
geographical pricing, and
international pricing.

 Discount pricing policy:

Discounts are financial incentives provided to the customers
through price reduction.
o Cash discount /Quantity discount/ trade discount ( resellers like
whole seller and retailers ) / Price-off/ seasonal discount.
Allowance pricing:
Allowances are another type of reduction from the list price. For
example,
trade-in
allowances
are
price reductions given for turning in an old item when buying a
new
one.
Trade-in
allowances
are
most common in the automobile industry but are also given for
other
durable
goods.
Promotional
allowances are payments or price reductions to reward dealers for
participating
in
advertising
and
sales support programs.

 Segmented pricing:
Companies will often adjust their basic prices to allow for differences in
customers, products, and locations. In segmented pricing, the company
sells a product or service at two or more prices, even though the difference
in prices is not based on differences in costs. Segmented pricing takes
several forms. Under customer-segment pricing, different customers pay
different prices for the same product or service. Museums, for example,
will charge a lower admission for students and senior citizens. Under
product-form pricing, different versions of the product are priced
differently but not according to differences in their costs. Using location
pricing, a company charges different prices for different locations, even
though the cost of offering at each location is the same. For instance,
theaters vary their seat prices because of audience preferences for certain
locations. Finally, using time pricing, a firm varies its price by the season,
the month, the day, and even the hour. Public utilities vary their prices to
commercial users by time of day and weekend versus weekday. The
telephone
company
offers
lower
off-peak
charges,
and
resorts
give
seasonal
discounts.

 Psychological pricing
Price says something about the product. For example,
many consumers use price to judge quality. An Rs1000
bottle of perfume may contain only Rs300 worth of
scent, but some people are willing to pay the Rs 1000
because this price indicates something special. In using
psychological pricing, sellers consider the psychology
of prices and not simply the economics. For example,
one study of the relationship between price and quality
perceptions of cars found that consumers perceive
higher-priced cars as having higher quality. By the
same token, higher-quality cars are perceived to be
even higher priced than they actually are. When
consumers can judge the quality of a product by
examining it or by calling on past experience with it,
they use price less to judge quality. When consumers
cannot judge quality because they lack the information
or skill, price becomes an important quality signal:

It is a useful strategy for marketing of

consumer goods. It encourages emotional
buying.
Prestige pricing: (Jeweler / watches / etc are
suitable example, as well as fees of private
college or schools.
Odd-even pricing strategy
Psychological discounting
Customary pricing ( based on tradition )
Promotional pricing

 Promotional pricing,
Companies will temporarily price their products below list price and
sometimes even below cost. Promotional pricing takes several forms.
Supermarkets and department stores will price a few products as loss
leaders to attract customers to the store in the hope that they will buy
other item sat normal markups. Sellers will also use special-event
pricing in certain seasons to draw more customers. Manufacturers will
sometimes offer cash rebates to consumers who buy the product from
dealers within a specified time; the manufacturer sends the rebate
directly to the customer. Rebates have been popular with automakers
and producers of durable goods and small appliances, but they are also
used with consumer-packaged goods. Some manufacturers offer lowinterest financing, longer warranties, or free maintenance to reduce the
consumer's "price." This practice has recently become a favorite of the
auto industry. Or, the seller may simply offer discounts from
normal prices to increase sales and reduce inventories.

 Geographical pricing,
Pricing a product on the basis of location. High price
are charged to distant customers because of high
transportation charge and low price to the customer of
nearest locations.
FOB Pricing (Free on board): Here doesn't include any
of the freight costs. Nepalese exporters set FOB price
to their exports cargoes for up to the Calcutta port.
Zone delivered price: Petrol or cement are sold at
different geographical areas of Nepal.
Basing point price: It involves pricing set differently for
the customers willing to purchase goods at different
territories.
uniform delivered price : The same delivery prices
quoted to all buyers of a particular geographical
regions.

 International Pricing:
Companies that market their products internationally must decide what
prices to charge in the different countries in which they operate. In some
cases, a company can set a uniform worldwide price. The price that a
company should charge in a specific country depends on many factors,
including economic conditions, competitive situations, laws and
regulations, and development of the wholesaling and retailing system.
Consumer perceptions and preferences also may vary from country to
country, calling for different prices. Or the company may have different
marketing objectives in various world markets, which require changes in
pricing strategy. Costs play an important role in setting international prices.
Travelers abroad are often surprised to find that goods that are relatively
inexpensive at home may carry outrageously higher price tags in other
countries. In some cases, such price escalation may result from differences
in selling strategies or market conditions. In most instances, however, it is
simply a result of the higher costs of selling in foreign markets the
additional costs of modifying the product, higher shipping and insurance
costs, import tariffs and taxes, costs associated with exchange-rate
fluctuations, and higher channel and physical distribution costs.

Price changes: Initiating and responding to

price changes.
Price is charged on the basis of environmental changes that may be
price increase, decreases and maintain.
A. Initiating price changes: Firms needs to initiate price change on
the basis of changing environment. ( price increase and decrease )
i. Price increase: most price increases are the result of inflation
that causes the organizations costs to increase. / Govt. introduce
new taxes and raise current taxes and increase the price of any
factor of production.
ii. Price Decrease: Excess capacity, extra sells, capture larger
market share, low quality, fragile market trap (here price sensitive
customers wait for further price cuts or search for cheaper
products ) etc.

B. Responding to price changes:

* Competition (to meet the competition)
* Do nothing (silent nature, for utilize excess capacity in the short run
no response is needed)
* Non price competition. (Through product differentiation aggressive
promotion and effective distribution)
The leader organization may take one or more of the strategic options
for respond to with and meet the competitors strategies.
I. Increase customers perceived value of the products by increasign
promotional level
II. Increase the price complemented by and improvement in quality and
features of the product.
III. Add a new lower price brand to the current product line and position
it directly with the attackers brand.
IV. As a last option, reduce the price to off-set the negative effects of
their price attack.

 Pricing Scenario in Nepal

Most of the Nepalese organizations adopt profit
oriented pricing rather than competition oriented and
demand oriented pricing. Some organization set their
prices and changes the prices of the product in
different market situations also give more emphasis in
profit rather than capturing the market or satisfying the
customers. Most government organizations and big
organization follow one price policy.
Competitive
Cost based
Value based
Don't care with demand base
Price discrimination policy.
Psychological pricing is practiced
Global organizations have emerged in Nepal , WTO

Most Nepalese products are imitation of Indian and Chinese products.

Profit oriented pricing and sales oriented pricing,
Costs and promotion are most important factors in price determination.
Nepalese products are generally poor in quality.
Cross border smuggling also affects pricing
Low volume of market demand also affect on price
Government control also affect pricing like electricity, fuels, water,
etc.
Competition oriented and sealed bid pricing method is dominant in
Nepal.
Cost-Plus method is generally used. BEP is poorly practiced.
Flexible pricing policy is widely used. Price discrimination is done
according to customer, place and time.
Allowances and discounts are also used in practiced.
Price response strategy are common in Nepal to meet the competition.

Important Questions
Define the term pricing and price. Explain its importance.
Explain the internal and external factors affecting price of
a product.
What are the difference between cost-based and value
based pricing? Discuss
As a marketing manager, how you will implement various
pricing approaches for better pricing of your products.
Discuss.
Explain the different pricing objectives. And Write and
explanatory note on pricing in Nepal.