Pricing
Junayet Hossain Khan
Senior Lecturer, NSU
Definition
• Price refers to the monetary value assigned to a product or service. Its
meaning encompasses both the cost to produce and the value
perceived by customers.
• The price is an important parameter for determination of demand,
revenue generation, and profitability.
• It is also important for maximizing profit, achieving market share,
sustaining competitive advantage, and reflecting the value offered to
customers.
Why pricing is important ?
Price plays a significant importance in various aspects of business and
economics:
❖ Demand and Revenue Generation: an optimal price is crucial for
maximizing revenue.
❖ Profitability: By appropriately pricing products or services, businesses
can ensure that their revenues exceed their costs, leading to sustainable
profitability.
❖ Competitive Advantage: Offering competitive prices relative to similar
products or services can attract customers and help businesses
differentiate themselves in the market.
Importance of pricing !
❖ Perceived Value: A higher price may convey a sense of quality or exclusivity,
while a lower price might imply affordability or value for money.
❖ Brand Image: Premium pricing can enhance the perception of luxury or
prestige associated with a brand, while discount pricing may position a brand
as accessible or budget-friendly.
❖ Market Positioning: Businesses can use pricing strategies to target specific
market segments based on their willingness to pay and perceived value.
❖ Market Dynamics: Prices can be influenced by various market factors such as
supply and demand, competition, and economic conditions. Businesses need
to monitor these factors closely to adjust prices effectively and remain
competitive.
Objectives
The objectives of pricing encompass a range of strategic goals aimed at maximizing
profitability, capturing market share, and delivering value to customers. Following are
objectives of pricing-
I. Profit maximization
II. Market share can be raised by offering competitive prices relative to competitors.
III. Sustaining Competitive Advantage
IV. Reflecting Value Proposition
V. Revenue Growth: Dynamic pricing strategies, such as discounts, promotions, and
bundling, can stimulate sales and encourage repeat purchases, leading to increased
revenue over time.
VI. Cost Recovery
VII. Market Positioning
VIII. Customer Segmentation
Determinants (Factors)of price
➔ Costs: The cost of producing, marketing, and distributing a product or
service forms the foundation for pricing decisions. Businesses need to
ensure that prices cover these costs to achieve profitability.
➔ Demand: Understanding consumer demand is essential for setting
prices. Factors such as consumer preferences, buying behavior, and
elasticity of demand influence how prices affect sales volume.
➔ Competitors: Competitive dynamics in the market significantly impact
pricing decisions. Businesses need to consider the prices charged by
competitors and position their offerings accordingly to maintain
competitiveness.
Determinants (Factors)of price
➔ Value Perception: The perceived value of a product or service to
customers is a key determinant of pricing. Businesses must assess the
benefits, features, and brand reputation relative to competitors to justify
the price charged.
➔ Market Conditions: Economic factors such as inflation, interest rates,
and market fluctuations influence pricing decisions. Businesses need to
adapt prices to reflect changes in the broader economic environment.
➔ Regulatory Environment: Government regulations, taxes, tariffs, and
industry standards can affect pricing strategies. Compliance with legal
requirements and industry norms is essential in pricing decisions.
Determinants (Factors)of price
➔ Product Lifecycle: Prices may vary at different stages to maximize revenue and
market share.
➔ Distribution Channels: Direct sales, retail distribution, e-commerce platforms,
and wholesale channels may require different pricing approaches.
➔ Brand Positioning: Premium brands may command higher prices based on
perceived quality and exclusivity, while discount brands may compete on price.
➔ Marketing Objectives: Pricing aligns with broader marketing objectives such
as market penetration, brand building, customer acquisition, and retention.
Pricing strategies should support these objectives to achieve desired
outcomes.
Methods of Pricing
1. Cost-Plus Pricing: This method involves adding a markup to the cost of
producing or acquiring a product or service to determine its selling price.
The markup typically covers both variable and fixed costs, along with a
desired profit margin. Furniture maker etc.
2. Competitive Pricing: This involves setting prices based on the prices
charged by competitors. Businesses may choose to price their offerings
at, above, or below the prices of competitors, depending on factors such
as product differentiation, market positioning, and competitive
advantage. Amazon, Daraz.
Methods of Pricing
3. Value-Based Pricing: This method focuses on setting prices based on the
perceived value of a product or service to customers. Businesses assess the
benefits, features, and unique selling points of their offerings and determine prices
that reflect the value delivered to customers. This method is often used for
premium or differentiated products. Rolex, Gucci, etc
4. Dynamic Pricing: This involves adjusting prices in real-time based on changes
in demand, market conditions, or other factors. This approach allows businesses
to optimize pricing for maximum revenue and profitability. Dynamic pricing is
commonly used in industries such as hospitality, transportation, and e-
commerce. Hotel, Airline, uber,
Methods of Pricing
5. Penetration Pricing: This involves setting low initial prices to penetrate a market quickly
and gain market share. This strategy is often used for new products or in competitive markets
to attract customers and stimulate demand. Over time, prices may be adjusted upward as
market share [Link], internet, cable, Grocery stores, Airline etc.
6. Skimming Pricing: This involves setting high initial prices to target early adopters or
customers willing to pay a premium for new or innovative products. This strategy allows
businesses to maximize profits before lowering prices to attract more price-sensitive
customers. Electronic products (DJI, Apple, Samsung).
7. Bundle Pricing: Bundle pricing involves offering multiple products or services together at a
discounted price compared to purchasing each item separately. This strategy encourages
customers to buy more and can increase overall revenue while providing value to customers.
Value-meal etc.
Methods of Pricing
8. Freemium Pricing: Freemium pricing offers a basic version of a product or service for free,
with premium features available for a fee. This approach allows businesses to attract a large
user base while monetizing through upselling premium features or subscriptions. Spotify,
canva, etc.
9. Cost-Based Pricing: In this method, prices based solely on the cost of producing or
acquiring a product or service, without considering market demand or competition. While
simple to implement, this method may not reflect the value perceived by customers.
10. Psychological Pricing: This involves setting prices based on psychological factors such
as perception, emotions, and behavioral economics principles. Common tactics include
setting prices just below round numbers (e.g., taka.999 instead of taka.1000).