MODULE 4: PRICE

Price is the only element of marketing mix that generates revenue, the other elements
producecosts. It is also the most important determinant of the profitability of business by
way of sales volume. Prices are perhaps the easiest element of the marketing program to
adjust.

PRICING OBJECTIVES:
1. Maximum Current Profits: One of the objectives of pricing is to maximize current
profits. This objective is aimed at making as much money as possible. Company tries
to set its price in a way that more current profits can be earned. However, company
cannot set its price beyond the limit. But, it concentrates on maximum profits.
2. Maximum Market Share: This objective concerns with entering the deep into the
market to attract maximum number of customers. This objective calls for charging
the lowest possible price to win price-sensitive buyers.
3. Maximum Market Skimming: This objective concerns with skimming maximum
profit in initial stage of product life cycle. Because a product is new, offering new
and superior advantages, the company can charge relatively high price. Some
segments will buy product even at a premium price.
4. Companies Survival: in case companies are facing over capacity, lower sales, intense
competition or changing customer needs. As long as the prices cover variable and
fixed costs, the company stays in business. Survival is a short run objective.
5. Product- Quality leadership: a company might aim to be the quality leader in the
market. Their products are characterised by high quality, taste, status and luxury
witha price just high enough not be out of consumer’s reach.
6. Keeping parity with competition: Pricing is primarily concerns with facing
competition. Today’s market is characterized by the severe competition. Company
sets and modifies its pricing policies so as to respond the competitors strongly. Many
companies use price as a powerful means to react to level and intensity of competition

CONSUMER PSYCHOLOGY AND PRICING

The cost of a product or service is relative to what the buyer thinks that cost should be. Based
on his or her previous experiences, the customer will judge whether prices are too high, too
low, or on target. In times of recession or high inflation consumers try to economize, during
good times and for special occasions they do not mind spending more. Understanding how
consumers arrive at their perceptions of prices is an important marketing priority. For this
we consider the following three topics

1. Reference price: People often compare a product’s price to a “reference price” that
they maintain in their minds for the product or product category in question. A
“reference price” is the price that people expect or deem to be reasonable for a certain
type of product. Several factors affect reference prices:-
Memory of past price; Frame of reference (compared to competitive prices, pre-sale prices,
manufacturer’s suggested prices, channel-specific prices, marked prices before discounts,
substitute product prices, etc.)

2. Price Quality Inferences: Many consumers use price as an indicator of quality.

Consumers often rely heavily on price as a predictor of quality and typically
 overestimate the strength of this relation. Image pricing is especially effective with
ego sensitive products such as perfume, expensive cars and designer clothing.
When information about true quality is available, prices become a less significant indicator
of quality. When this information is not available, price acts as a signal of quality. A 4000
bottle of perfume might contain 400 worth of scent, but gift givers pay 4000 to communicate
their high regard for the [Link] brands adopt exclusivity and scarcity
to signify uniqueness and justify premium pricing. Luxury goods of watches, jewellery,
perfume and other products often emphasise exclusivity in their communication messages
and channel strategies.

3. Price Endings: Many sellers believe prices should end in an odd number. Customers
see an item priced at 299 as being in the 200 range rather than the 300 range, they
tend to process prices left to right rather than by rounding.

STEPS IN SETTING THE PRICE

Step 1: selecting the pricing objective

The company first decides where it wants to position its market offering. The clearer a firm’s
objectives, the easier it is to set a price. Five major objectives are survival, maximum current
profit, maximum market share, max market skimming and product quality leadership.

Step 2: determine demand:

Each price will lead to a different level of demand and have different impact on a company’s
 marketing objectives. The normally inverse relationship between price and demand is
captured in a demand curve. The higher the price, the lower is the demand.
Step 3: estimating costs:
Demand sets a ceiling on the price the company can charge for its product. Costs set
the floor. The company wants to charge a price that covers its costs of producing,
distributingand selling the product including the fair return for its risks and efforts.
Step 4: Analysing competitors costs prices and offers:
Within the range of possible prices determined by market determined by market demand and
company costs, the firm must take competitors costs, prices and possible price reactions into
accounts.
Step 5: selecting a pricing method
Given the customers demand schedule, cost function and competitors prices the company is
now ready to select the price. The different price setting methods can be mark up pricing,
target return pricing, value pricing, going rate [Link]
Step 6: selecting the final price
Pricing methods narrow the range from which the company must select its final price. In
selecting that price, the company must consider additional factors, including the impact of
other marketing activities. Company pricing policies, gain And risk sharing pricing and the
impact of price on other parties.
PRICING STRATEGIES
COST BASED PRICING METHOD
 Mark up pricing: it refers to the pricing methods in which the selling price of the
product is fixed by adding a margin to its cost price. The mark ups may vary
depending on the nature of the product and the market.
Unit cost = variable cost + fixed cost/unit sales
Mark up price= unit cost/ (1-desired return on
sales)
 Target rate of return pricing: the rate of return pricing uses a rational approach to
arrive at the mark up. It is arrived in such a way that the return on investment criteria
of the firm is met in the process.

DEMAND BASED PRICING METHOD

 Skimming pricing: this method aims at high price and high profits in the early stage
ofmarketing the product. This method is very useful in the pricing of new products,
especially those that have a luxury or speciality elements.
 Penetration pricing: penetration pricing seeks to achieve greater market penetration
through relatively low price. This method is also useful in pricing of new products
under certain circumstances. For eg when the new product is capable of bringing in
large volume of sales but it is not a luxury item and there is no affluent/ price
insensitive segment. The firm can choose the penetration pricing and make large size
sales at a reasonable price before competitors enter the market with a similar product.

COMPETITION ORIENTED PRICING

In a competitive economy, competitive oriented pricing methods are common. The methods
in this category rest on the principles of competitive parity in the matter ofpricing. Three
policy options are available to the firm under this pricing method Premium pricing (pricing
above the level adopted by competitors)
Discount pricing (pricing below such level) Parity
pricing (matching competitors pricing)

VALUE PRICING
An increasing number of companies now base their price on the customer’s perceived value.
Value pricing rests on the premise that the purpose of pricing is not to recover costs, but to
capture value of the product perceived by the customer.

PSYCHOLOGYCAL PRICING
Many sellers believe prices should end in an odd number. Customers see an item priced at
299 as being in the 200 range rather than the 300 range; they tend to process prices left to
right rather than by rounding.

ADAPTING THE PRICE

Companies usually do not set a single price but rather develop a pricing structure that reflects
variations in geographical demand and costs, market segment requirements, purchase
timing, order levels, delivery frequency, guarantees, service contracts and other factors.

1. Geographical Pricing: the company decides how to price its products to different
customers in different locations and countries.
2. Price discounts and allowances: most companies will adjust their list price and give
discounts and allowances for early payments, volume purchases and off season buying.
These can be
Discount: a price reduction to buyers who pay bills promptly. Quantity
discount: a price reduction to those who buy large volumes.
Seasonal discount: a price reduction to those who buy merchandise or services out ofseason.
Allowance: an extra payment designed to gain reseller participation in special program. Trade
in allowances are granted for turning in an old item when buying a new one.
3. Promotional Pricing: companies can use several pricing techniques to stimulate early
purchase
Loss leader pricing: supermarkets and department stores often drop the price on well known
brands to stimulate additional store traffic. This pays if the revenue on the additional sales
compensates for the lower margins on the loss leader items.
Special event pricing: sellers will establish special prices in certain seasons to draw in more
customers.
Special customer pricing: sellers will offer special prices exclusively to certain customers.
Low interest financing: instead of cutting its price, the company can offer customers low
interest financing. Automakers have used no interest financing to attract more customers.
Psychological discounting: this strategy sets an artificially high price and then offers the
product at substantial savings
Warranties and service contracts: companies can promote sales by adding a free or low cost
warranty or service contract.

4. Differentiated Pricing: companies often adjust their basic price to accomplish

differences in customers, products, locations and so on.
Customer segment pricing: different customer groups pay different prices for the same
product or service.
Product form pricing: different versions of the product are priced differently.
Image pricing: some companies price the same product at two different levels basedon
image differences.
Channel pricing: coca cola carries a different price depending on whether theconsumer
purchases it in a fine restaurant a fast food or an airport.
Time pricing: prices are varied by season, day or hour.