definition, different pricing methods

1. PRICING

2. Definition :
• Price is the exchange value of a product.
• (Price) = Bundle of Expectations or Satisfactions
• Pricing is equivalent to the total product offering.
This offering includes a brand name, a package,
product benefits, service after sale, delivery credit
and so on.
• Price is the only one of the four Ps that produces
revenue. The others produce costs.
• Price is also one of the most flexible elements: It can
be changed quickly, unlike product features and
channel commitments.

3. OBJECTIVES :
• 1) To Maximize the Profits :
• (2) Competitive Situation :
• (3) Achieving a Target-return :
• (4) Capturing the Market :
• (5) Ability to Pay :
• (6) Long-run Welfare of the Firm :
• (7) Stabilize Price
• (8) Resource Mobilization :

4. • METHODS OF PRICING:
• To develop a pricing strategy, retailer needs to use a
method for arriving at a price at the initial stage.
Cost is the base of any price, but not the only base.
There are four different methods of pricing:
• 1. Cost based pricing
• 2. Demand based pricing
• 3. Competition oriented pricing
• 4. Affordability based pricing (Government
regulated pricing)

5. 1. Cost based pricing
COST ORIENTED PRICING
• Basic mark up is added to the cost of merchandise
• Retail price is considered to be a function of the cost and the mark
up
Thus Retail Price = Cost + mark Up
Or Cost = Retail Price – Mark Up
Or Mark Up = Retail Price - Cost
Difference between the selling price and cost is Mark Up
Mark up should cover for operating expenses and transportation etc

6. 2. Demand based pricing
• DEMAND BASED PRICING:
• In demand based pricing or discriminating pricing,
companies charge differently to different customers for the
same product on the basis of their paying capacity or other
aspects. It is suitable for monopoly or oligopoly markets.
Discrimination may be by customer, time or place.
a) Time based price discrimination: It involves
discriminating on the time basis. For example, market
skimming, it means keeping high prices at the time of
introducing the product and then reducing the prices
afterwards. Another example is market penetration, it
means keeping low prices in the beginning to capture larger
market share then reducing the prices afterwards.

7. • B) Place based discrimination: It involves charging
different prices for the same product at two
different places. For example, publishers charge
different price for the international edition of the
book and low price for the same book for Indian
edition.
• C) Customer based discrimination: It involves
different price of same product offered to two
different customers. For example, doctors charge
different fees from different patients.

8. 3) COMPETITION BASED PRICING:
• Competitor’s price serves as reference price. In this
method, pries are decided keeping in mind the
prices of the competitor. They are of four types:
• Premium pricing: Pricing above competition.
• Discount pricing: Pricing below competition.
• Parity pricing: matching competitor’s price.
• Differentiated pricing: Pricing at a price different
than competition due to differentiation in product,
place or promotion.

9. • AFFORDABILITY BASED OR REGULATED PRICING:
In this method Government regulates or decides the
prices. This pricing is to meet the basic needs of all
sections of society. Cost is not the basis of this
pricing method and profit is also not the aim.
Government subsidy is available so it is also called a
social welfare pricing. For example, sugar and petrol
are regulated products. No firms can charge prices
above regulated prices set by Government

10. FACTORS AFFECTING PRICING DECISIONS / POLICIES:

11. • 1.Objectives of the Business:
There may be various objectives of the firm such as getting a reasonable
rate of return, to capture the market, maintenance of control over sales and
profits etc. A pricing policy thus should be established only after proper
considerations of the objectives of the firm.
• 2.Cost of the Product:
Cost and price of a product are closely related. Normally, the price cannot or
shall not be fixed below its cost (including the product, administrative and
selling costs). Price also determines the cost: The product ultimately goes to
the public and their capacity to pay will fix the cost otherwise product will
fail in the market.
• 3.Market Position:
The position of the products of the different producers is different either
because of difference in quality or because of the goodwill of the firm. A
reputed concern may fix higher prices for its products and on the other
hand, a new producer may fix lower prices for its products. Competition
may also affect the pricing decisions.

12. • 4. Competitor’s presence:
Competitive conditions affect the pricing decisions. The company
may consider the prices fixed and quality maintained by the
competitors. The company may decide that in no case should the
quality and price of its products be lower than that of the
competitors. Even in monopolistic conditions, the producer would
have to consider the competition before fixing the prices of his
own products. If the cost of production is lower, the prices may be
fixed lower to oust the competitors from the market. Number of
competitors also affects the price decisions. If they are few they
can make an association to fix the prices, which may be
reasonable.
• 5. Distribution channel’s Policy:
The nature of distribution channels used and trade discounts
which have to be allowed to distributors and the distribution
expenses also affect the pricing. If a distribution channel is lengthy,
the prices will be fixed higher making an allowance for the
distribution expenses made by each middleman.

13. 6 Price Elasticity and Demand Elasticity:
• Price elasticity affects the decisions of price fixation. Price
elasticity means the consequential change of demand for the
change in the prices of the commodity. If the demand of the
product is inelastic, high prices may be fixed. If the demand is
highly elastic, the price reduction strategy would pay.
7. Product’s Stage in the Life Cycle of the Product:
Pricing decision is affected by the stage of product in its life
cycle. In the introductory stage of the product, it is the price
strategy which determines the price of the product. It may be
lower to create a demand or may be higher to earn high profits
initially under market skimming policy of price fixation. The
policy may then lead to slow reduction of prices with a view to
expand the market. In the maturity stage, penetrating pricing,
the opposite of skimming policy, should be preferred. In the
obsolescence stage, prices should be reduced to postpone the
obsolescence stage.

14. • 8. Product Differentiation:
• The price of the product also depends upon the characteristics of the
product. In order to attract the customers different characteristics are
added to the product such as quality, size, colors, alternative uses,
etc. and high prices may be charged in a non price sensitive market.
Customers pay more price for the product which is of the new
fashion, style, or better quality, or packaging, or durability, etc.
• 9. Buying Patterns of the Consumers:
• If the purchase frequency of the product is higher, lower prices
should be fixed to have a low profit margin. It will facilitate increasing
the sale volume and the total profits of the firm. All consumer items
of daily use have high purchase frequency. Low purchase frequency
products are sold at high profit margin and therefore at high prices.
Durable consumer items like TV and Refrigerators are priced higher.

15. • 10. Economic Environment:
• In recession period, the prices are reduced to a sizeable extent to
maintain the level of turnover. On the other hand, the prices are
increased in boom period to cover the increasing cost of production
and distribution.
• 11. Government Policy:
• Price discretion is also affected by the price control by the
government through enactment of legislation when it is thought
proper to arrest the inflationary trend in prices of certain
commodities. If producer fixed a high price, the government may
nationalize the concern. Sometimes, government starts selling that
product through fair price shops. So, the prices cannot be fixed higher
due to the fear of government action.

16. • 13.Organizational factors:
Pricing decisions occur on two levels in the organization. Over-all
price strategy is dealt with by top executives. They determine the
basic ranges that the product falls into in terms of market segments.
The actual mechanics of pricing are dealt with at lower levels in the
firm and focus on individual product strategies. Usually, some
combination of production and marketing specialists are involved in
choosing the price.
• 14. Marketing Mix:
Marketing experts view price as only one of the many important elements
of the marketing mix. A shift in any one of the elements has an immediate
effect on the other three-product, promotion and distribution. In some
industries, a firm may use price reduction as a marketing technique. Other
firms may raise prices as a deliberate strategy to build a high-prestige
product line. In either case, the effort will not succeed unless the price
change is combined with a total marketing strategy that supports it. A
firm that raises its prices may add a more impressive looking package and
may begin a new advertising campaign.

17. • 15) Demand:
• The market demand for a product or service obviously has a big impact on
pricing. Since demand is affected by factors like, number and size of
competitors, the prospective buyers, their capacity and willingness to pay,
etc. are taken into account while fixing the price. A firm can determine the
expected price in a few tests markets by trying different prices in different
markets and comparing the result with a controlled market in which price is
not altered. If the demand of the product is inelastic, high prices may be
fixed. On the other hand, if demand is elastic, the firm should not fix high
prices, rather if should fix lower prices than that of the competitors.
• 16) Suppliers:
• Suppliers of raw materials and other goods can have a significant effect on
the price of a product. If the price of cotton goes up, the increase is passed
on by suppliers to manufactures. This in turn will result in higher cost of
production of garments which will ultimately result in higher prices for
garments. In other words, the price of a finished product is intimately linked
up with the price of the raw materials. Scarcity or abundance of the raw
materials also determines pricing.