Price: Case

Indian economy is an example of contradictions. While it has

continued to grow in the last two decades, albeit at a moderate rate of
6.7%, and there are large numbers of consumers who are moving up
the socio-economic pyramid, still India continues to remain a price-
sensitive market.
This explains the introduction of small unit packaging most often
priced at less than Rs. 10. Be it a chocolate bar, shampoo, soup or
toilet soap or toothpaste. Whenever a price rise in a commodity is
expected, there is a tendency of the consumer to buy it in a larger
quant, so that impact of the price hike could be felt at a later date.
Nobody understands it better than the Big Bazaar.
Wednesday of each week, Big bazaar runs a special price promotion
offering a flat discount of 5% on all its product. Wednesday sees the
largest number of footfalls of housewife in Big Bazaar across all its
Stores in the country.
To Further soften the impact of high prices, Big Bazaar has launched
its own brands to offer customer an opportunity to buy unpacked and
unbranded staple food like wheat, rice, sugar and pulses.

Price sensitivity is not unique to India. Consumer all over the world
exhibit price sensitivity for different products and brand. Also, the
price sensitivity differs based on the time of consumption.
For example, airlines have responded to price-sensitive buyers by
offerings to them lower fares. In order to keep themselves afloat, the
airlines in India had to cut down on the freebies including the free
baggage allowance, meals, in-flight entertainment and even the
newspapers.
Today all airlines ask customers to pay for the meal on board and for
self-selection of the seat, especially those that are considered to be the
premium namely the front rows and the aisle and window seats.
Though initially low-cost airlines such as GoAir, Indigo and Spice Jet
offered no-fril flights, today even the full service flights like those of
Jet Airways and Air India also had to adopt the no-frill strategy as
they did not want to lose the price-sensitive customers. Same is true
with Tata, which designed the water purifier 'Swatch' for the price-
sensitive Indian market.

Pricing

 Pricing means deciding the value of the product/service that the

manufacturer will get in return in exchange for a particular
product/service.

 Pricing is the process of determining the price which is optimal

for both manufacturer and customers.

 There are various factors that play a significant role in the

determination of value price, like input costs, manufacturing
costs, customer expectations, general price level, profit margin,
prices of rival firms, external costs, etc.

 Pricing can also be defined as the value that customers need to

give up in order to have any particular product/service with
them.

 “Pricing is the amount of money charged for a product or

service or the sum of the values that the consumers exchange for
the benefits of having or using the product or service.” -Philip
Kotler
Objectives of Pricing
The objectives of pricing encompass a range of strategic goals that
businesses aim to achieve through their pricing decisions.

Key objectives of pricing include:

1. Revenue Generation: Pricing can be used to maximise total

revenue by finding the optimal balance between price and quantity
sold. This objective is particularly relevant when a business aims to
capture a larger market share.
2. Market Ruler: A business would want to rule the market and
acquire a significant share in the market against its rival firms. For
this, it will try to increase its revenue and customer base. In order to
do the same, the company will need to agree on an optimal price for
its product/service that the customers can afford.
3. Survival: Pricing decisions focus on generating revenue which
helps the firm to survive in the market. Without revenue and profits, a
firm can not survive for a longer period. Pricing generates revenue
and revenue is used in further production in order to produce goods.
4. Profit Maximisation: One of the primary objectives of pricing is
to generate maximum profit for the business. Pricing strategies are
designed to ensure that the revenue generated from sales exceeds the
costs incurred in producing and marketing the product or service.
5. Attraction and Retention of Customers: Having a proper and
affordable pricing strategy helps the business in acquiring new
customers and retention of previous customers. A more customer base
means more revenue.

Importance of Pricing

1. First Impression: Price is the first thing that the customers think of
while purchasing any product/service. Even if the customer makes
his/her overall decision on the overall benefit from the product he/she
is going to get, they are still going to compare the prices of other
similar goods. If the prices are too high than what customers can
afford, they are going to lose interest.
2. Right-Level Pricing: Setting up the wrong prices can even shut
down the company due to the non-generation of revenue. A thorough
market research is required before setting up the final prices for the
product.
3. Sales Promotion: As the basic idea of more sales includes
lowering the prices, a sales manager may suggest the business to cut
down the prices in order to generate more sales.
4. Flexible Element: Price is the most flexible element of marketing
in comparison to product, place, and promotion. Price can be changed
rapidly and is affected by many factors like customer perception of
value, inflation, economy, overall costs, etc.
5. Profit Generation: Pricing directly influences a company’s
revenue and profit margins. Setting the right price ensures that the
revenue generated from sales exceeds the costs incurred in
production, distribution, and marketing, thereby contributing to
profitability.
6. Competitive Edge: Pricing strategies can differentiate a business
from its competitors. Appropriate pricing helps create a competitive
advantage by appealing to customers through factors such as
affordability, perceived value, or quality.
7. Demand Management: Effective pricing can regulate demand for
products or services. Price adjustments, discounts, or promotions can
stimulate demand during slow periods or manage peak demand to
prevent stockouts.

Factors Affecting Pricing Decisions

1. Customer’s Perception of Value: The customers’ expectation of

the price of the product plays an important role in deciding the price
of the product. Customers only bear the cost of a product that they can
afford. If a business keeps the price of its product/service very high, it
will have a very small customer base. Customer-oriented price
approach is generally followed in order to cover the customers’
perception of value. In a customer-oriented price approach, the
customer is considered as the ‘king’ and all the decisions relating to
pricing are taken from the viewpoint of the customer.
2. Competitors: Competitors’ pricing strategies, market share, and
positioning can significantly impact how a product is priced.
Businesses may choose to price their products at a premium, match
competitors’ prices, or use other strategies to differentiate themselves.
3. Government Law and Regulations: Pricing decisions are also
affected by federal and state regulations. Some laws prevail in order
to protect the customers from getting exploited at the hands of
manufacturers, promotion of ethical behaviours from the end of
manufacturers, etc. For example, Firms coming together and joining
hands, agreeing on charging higher prices for a particular type of
product, is illegal.
4. Economy: Economic environment like fluctuations in the general
price level, interest rates, and unemployment level also affects the
pricing strategy of firms.
5. Product Costs: The total cost that the manufacturer incurred in the
production of the product affects the pricing decision. Production
costs can be of several types, like fixed costs, variable costs, semi-
variable costs, etc. Also, promotional costs, distribution channel costs,
packing costs, etc., are considered while deciding the price.
6. Market Demand: The level of demand for the product at different
price points affects pricing decisions. High demand might allow for
higher prices, while low demand could require competitive pricing to
attract customers.
7. Elasticity of Demand: Price elasticity measures how sensitive
demand is to price changes. Inelastic demand allows for price
increases without significant drops in demand, while elastic demand
requires more cautious pricing adjustments.
8. Market Segmentation: Different customer segments may have
varying willingness to pay. Businesses can tailor pricing strategies to
target specific segments and maximize revenue from each.
9. Branding and Positioning: Premium brands can command higher
prices due to their reputation and perceived quality. Pricing can be
used to reinforce the brand’s image as luxury, value-oriented, or
innovative.
10. Distribution Channels: The chosen distribution channels can
impact pricing. Direct-to-consumer sales might allow for more
flexibility in pricing compared to working through intermediaries.

Types of Pricing Methods

The pricing methods are broadly classified into two categories:
 Cost-Oriented Pricing Methods
 Market-Oriented Pricing Methods.
The Cost-Oriented Pricing Methods include
 Cost-Plus Pricing,
 Markup Pricing,
 Target Return Pricing.
The Market-Oriented Pricing Methods include
 Perceived Value Pricing,
 Value Pricing, Going Rate Pricing,
 Differential Pricing,
 Auction Type Pricing.

I. Cost-Oriented Pricing Methods

1. Cost-Plus Pricing:
Cost-plus pricing is the easiest and most basic method of pricing.
Under this method, the seller adds a pre-specified percentage on the
cost of producing one unit.

This pre-specified percentage, also known as Markup Percentage, is

used to determine the selling price.

The markup; thus, is the profit percentage implied on the cost of

production. Cost-plus pricing ensures the desired rate of return. Price
determination under cost-oriented pricing is calculated as follows:
Total Cost = Fixed Costs + Variable Costs

Unit cost =
Markup Price = Unit cost x Markup Percentage
Selling Price = Unit cost + Markup Price
For example, Assume that the cost of production of product A is
₹1,000 with a markup of 50% on the total cost, then the selling price
will be calculated as:
Markup Price = Unit cost x Markup Percentage = ₹1,000 x 50% =
₹500
Selling Price = Unit cost + Markup Price = ₹1,000 + ₹500
Selling Price = ₹1,500

2. Markup Pricing:
Markup Pricing is the method where markup is calculated on the
selling price of the product.
In other words, it is the method of adding a profit percentage to the
selling price of the product. Prices under markup pricing are
considered as:
Marked Price = Unit Cost / 1- Desired Return on sale
For example, Assume that the cost of production of product A is
₹1,000 and the seller wants to earn a profit of 20% on sales, then the
markup price will be calculated as:
Marked-up Price = unit cost/ 1- Desired Return on sale
= 1000/1-0.20
Marked-up Price = ₹1,250

3. Target Return Pricing:

Target Return Pricing is the method under which the firm decides to
set up the prices of products according to the pre-specified required
rate of Return on Investment (ROI).

For example, Assume that the manufacturer has invested ₹10,000 in

business and is expecting an ROI of 20% i.e., ₹2,000, given that the
unit price is ₹50 and the target sales is 100 units, then the target return
price is given by
Target Return Price =
= 50+\frac{0.20\times{10,000}}{100}
Target Return Price = ₹70

II. Market-Oriented Pricing Methods

1. Perceived Value Pricing:

Under this pricing method, the manufacturer undertakes the
customers’ perception of goods and services. The customer’s
expectation of the price of the product plays an important role in
deciding the price of the product. For Example,
Starbucks charges high prices for its coffee as compared to other
coffee brands, relying on the perception of a unique coffee experience
and ambience.
Organic food products are often priced higher than non-organic food
products, leveraging the perception of healthier and more sustainable
options.

2. Value Pricing:
Under this method of pricing, re-engineering is done to reduce the
cost of production as well as maintain the high-end quality. The cost
of product/services are thus low with better quality. For example,
Walmart is known for its value pricing strategy, offering a wide range
of products at lower prices than many of its competitors. This attracts
budget-conscious consumers who prioritise affordability.
McDonald’s offers a value-priced menu with items prices at low
prices, catering to customers looking for affordable meal options.
3. Going Rate Pricing:
Under this method of pricing, the firm undertakes the prices of rival
firms and sets its prices accordingly. Generally, to end the price wars
among the firms, the prices of all firms in an industry remain more or
less the same when they adopt the going-rate pricing method.
Oligopolistic firms like steel, fertilizers, paper, etc., practice going
rate pricing. For example,
Telecommunication firms like Jio, Airtel, and Vodaphone charge
almost the same rates under the going rate pricing method.
Ride-sharing companies like Uber and Lyft use dynamic pricing,
adjusting fares based on factors like demand and supply.
4. Differential Pricing:
Differential pricing is practiced under price discrimination where the
sellers charge different prices from different buyers. The prices can
also vary from age, gender, location, customer standard, etc. For
example,
The price of Mineral Water charged is different in different places,
hotels, restaurants, general stores, etc.
Movie Theaters often use differential pricing based on factors like
age, time of the day, and special occasions.
5. Auction Type Pricing:
This type of pricing method came into existence with the increased
usage of the internet. Websites like OLX, Quikr, eBay, etc., practice
auction-type pricing. There are three types of auctions:
English Auctions: English Auctions consist of one seller and multiple
buyers. The sellers tend to increase the price until the product reaches
the best bid.
Dutch Auctions: Under Dutch auctions, there may be one seller and
many buyers or many sellers and one buyer. The former type consists
of setting up the best price and adjusting it according to the capacity
of bidders and the latter type undertakes the bidder asking for the
product and multiple sellers offering reasonable prices.
Sealed-Bid Auctions: Government and industrial purchases generally
follow this method of pricing. Under this, potential buyers
communicate their prices with suppliers only and do not disclose
them to anyone else.

Pricing Strategies
Different pricing strategies that a company can adopt to decide the
price of its product/service include:
1. New-Product Pricing Strategies
The time business faces the most difficulty in setting up the pricing
strategy is when they launch a new product/service. The introductory
stage is tough for almost all businesses. In this scenario, businesses
mostly go for either Market-Skimming Pricing or Market-Penetration
Pricing.
Market-Skimming Pricing is opted by those companies who have
launched new products and have no competition. They charge high
prices at first and later on lowers them.

Market-Penetration Pricing is the opposite of market-skimming

pricing. In Market-Penetration Pricing, business sets low prices at first
to gain a significant market share and later on increase their prices.

2. Product Mix Pricing Strategies

When a product is a part of the product mix, the
business would like to charge higher prices for the
product in order to increase the overall profits of the
product mix. There are various strategies coming
under Product Mix Pricing Strategy, stated as:

a. Product Line Pricing

In product line pricing, companies must set the price for the entire
product line. For example, you may have seen various series of Cars
and their price difference based on the model.
Most companies are more interested in product line pricing instead in
launching a single product. Because it provides better features and
price comparisons for the customers. At the same time, it is also more
beneficial for the companies.
b. Optional Product Pricing
In optional product pricing, organizations combine an optional
product with the main product. For example, you can purchase an
optional ice maker with a refrigerator or optional alloys with the car.
Organizations intentionally separate some optional products from the
main ones to avoid making customers feel that products are costly. It
also benefits the organizations through extra sales of other products.
c. Captive Product Pricing
Captive product pricing refers to setting prices for two different
products simultaneously. However, one is used as the main product
while the other is used with the main product. For example, Gillette’s
razor with its blades and Cameras with films.
Here, companies sell the main product at a low price while they earn
with the recurring products, including cartridges for razors and films
for cameras.
d. By-Product Pricing
By-Products are often produced with the main products. And, In By-
Product pricing, organizations set up the prices for the by-products to
increase the competitiveness of the main product’s price and reduce
the additional cost of disposing of the by-products.
It also helps the companies to find a separate market to sell these by-
products. Often, by-products sell at a reasonable price and make a
significant profit for your company.
e. Product Bundle Pricing
Product Bundle Pricing is one of the most prominent strategies these
days. Organizations sell various products together in the Product
Bundle Pricing after forming them as a bundle. For example, at a
reasonable price, you may have seen a bundle of a burger, fries, and
soft drinks in Mcdonald’s.
These bundles benefit the customers and the organizations by selling
more products at a time. It simply encourages customers to purchase
more products instead of a single product.
Example
Dove is also the best product mix pricing example. It has its primary
focus on providing quality. Dove even sells two packs of Dove Beauty
Moisture Body Wash at less than the actual price. This is called the
bundle pricing strategy.

3. Price Adjustment Strategies

a. Discount & Allowance pricing: Discount is a
direct cut-off price on purchases within a specific time
period or a specific number of quantities. Discount may
be-

 Cash discount (reduction of price to buyers who

pay the bills instantly)
 Quantity discount (discount on purchasing a
large number of products)
 Functional discount (its give trade channel
members who perform a certain function)
 Seasonal discount (price reduction for those who
purchase products out of season)

Allowances are other types of reduction of price.

It‘s in two forms.

 Trade-in allowances (price reductions for old

items when buying a new one)
 Promotional allowances (price reductions for
participating in advertising & sales support
programs)

b. Segmented pricing: Segmented pricing defines

selling a product at two or more prices based on
differences in cost.

It has several forms.

 Customer segment pricing: Different customer

pays a different price for the same product or
service. In movie theaters & museums, students &
senior citizens pay the low entry fee. In public bus
services, students always pay half for their seats &
the general people have to pay the full price.
 Product-based pricing: Different types of
product charges different price based on their cost
differences. For example: In air traveling, the
economic seat is always lower than the business
seat. Business class customers also get some extra
 benefits with a more comfortable seat, high-quality
food & service.
 Location-based pricing: Company charges the
different prices in different locations. In theaters,
seat prices vary from their location, distance seat
charges are lower but front seat charges are higher
in Movie theaters. We can also see the opposite
situation in cinema halls. The distant seat charges
higher but in front seat charges lower.
 Time-based pricing: In a different season, price
charges are also different, the day, the night, daily,
weekly, monthly even hourly. The seasonal product
is less than the price of the season’s winter
clothes.

c. Psychological pricing: Psychological pricing is that pricing is

considered the psychology of the price of customers. It is not
economic pricing. This is mainly used to say something about the
product. There’re many customers who judge product quality based
on its price. At the time of buying any perfumed, low price product
consider as low quality. Some customers believe the high price
indicated something in special.

d. Promotional pricing: Promotional pricing is a process in which

producer temporarily price their product less than the list price & even
less than the cost to increase their short-run sales.

It has several forms.

 Discount (simply offers discounts from the list price)

 Special event pricing (seasonally reduce price)
 Limited time offers (online flash sales, buying urgency, making
buyer feels lucky)
 Cash rebates (directly cash discount within a specific time
period)

e. Geographical pricing: Geographical pricing is a process in which

producer set their price for customers located in different parts of the
world. A company must carefully set its pricing for customers who
live in different parts of the world.
Five different geographical pricing strategies.

FOB –origin pricing: It is a geographical pricing strategy in

which products are placed free on board. Then the customer pays
the freight from the factory to the destination. For example, ford
places their car in their showroom. The customer often comes &
chooses their desirable one. Then the customer pays the freight
from the factory to the destination.

Uniform–delivered pricing: It is a geographical pricing strategy

in which the company charges the same price for all customers
regardless of their location. The charges freight cost is the average
cost for all customers. For example, ford places their car at their
respective point & charges the same price for all customers
regardless of their location.

Zone pricing: It is a geographical pricing strategy in which the

company set up two or more zones for customers. All the
customers within the zone pay the same freight cost for any
product. If any customer‘s destination is more distant from the
zone then a higher price has to pay for him\her. So, gathering
knowledge on – Price is a part of the marketing mix.

Basing-point pricing: It is a geographical pricing strategy in

which the seller set some city as the main point or basing point.
From this point, they charge all customers the same freight cost
from that city to the customer’s destination.

Freight absorption pricing: It is a geographical pricing strategy

in which the seller absorbs all or some part of the freight charges so
that seller can get the desired business. Sometimes, the seller might
anxious about doing business with a customer or a particular area.
That’s why the seller pays all the cost or part of the cost of freight
to get the desired business. If the seller can get more business the
average costs will decrease more than compensate for the extra
freight cost. This pricing helps to penetrate into the market & hold
on to competitive markets.

f. Dynamic pricing: Dynamic pricing is a process in which producer

adjust their pricing to meet the characteristics & needs of individual
customers & situations. History says that most of the price is set by
the negotiation between buyers & sellers. There‘re fixed pricing
policies that set one price for all types of customers. Today most
business organization follows these ideas. But there also exist some
companies that are using dynamic pricing. Learn more about – price-
quality relationships.

g. International pricing: Some company produces their product to

sell in the international market. They also decide what prices to
charge in different countries. For that companies set a uniform
worldwide price.