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04/11/23 20:10 Prof. U.M. Amin, CMS, JMI University, New Delhi

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Marketing ManagementMBA CP 205


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Developing Pricing Strategy


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Learning Objectives:

• Know how consumers process and evaluate prices.• Know how a company should set prices initially for products or services.• Know how a company should adapt prices to meet varying circumstances and opportunities.• Know when a company should initiate a price change.• Know how a company should respond to a competitor’s price change.


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Significance of pricing

• Price is the only element in the marketing mix that generates revenue, rest generate only cost.

• Price is an important determinant of sales and profitability.

• Competition contributes the maximum to the importance of pricing and makes it a highly dynamic function.

• Pricing is a highly risky decision area and mistakes in pricing seriously affect the firm, its profits, growth and future.



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Rent Fee Fare Rate Toll Premium

Honorarium Dues Salary Commission Wage Tax

Synonyms for Price


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Common Pricing Mistakes

• Determine costs and take traditional industry margins.

• Failure to revise price to capitalize on market changes.

• Setting price independently of the rest of the marketing mix elements.

• Failure to vary price by product item, market segment, distribution channels, and purchase occasion.


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Consumer Psychology and Pricing

Price-quality inferences

Price cues

Reference Prices


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• When examining products, consumers employ reference prices.

• Observed price may be compared to an internal reference price or an external frame of reference.

• Sellers often attempt to manipulate reference prices. They may place product among expensive products to imply that it belongs to the class.

• The firm may also state a high manufacturer’s suggested price or by pointing to a competitor’s high price.



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Possible Consumer Reference Prices

• “Fair Price” (what the product should cost).

• Typical Price.

• Last Price paid.

• Upper-bound price (the most consumers would pay).

• Lower-bound Price (the least the consumers would pay).

• Competitors’ prices.

• Expected Future Price.

• Usual Discounted Price.


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• Many consumers use price as indicator of quality.

• Some brands adopt scarcity a means to signify quality and justify premium pricing.

• Many Sellers believe that prices should end in an odd number. A price of Rs. 3,999 instead of Rs. 4,000 is seen in the Rs. 3000 range rather than Rs. 4000 range.

• Prices ending with ‘0’ and ‘5’ are common in the market place as these are thought to be easier for consumers to process. ‘Sale’ sign next to the price tends to spur demand.



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Factors influencing pricing

Internal factors:

Corporate and Marketing objectives of the firm.

The characteristics of the product.

Price elasticity of demand.

The stage of the product in its lifecycle.

Costs of manufacturing and marketing.



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Extent of distinctiveness of the product and extent of differentiation practiced. Other elements of the marketing mix and their interaction with

pricing. Composition of the product line of the firm.

External factors:

Market characteristics (demand, customer and competition). Buyer behavior towards the product. Bargaining power of major customers.



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Bargaining power of major suppliers.

Competitor’s pricing policy.

Government controls/regulation.

Understanding reached with price cartels.

Keeping competition out.

Keeping parity with competition.

Fast turnaround and early recovery.

Stabilizing prices and margins in the market.



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Select the price objective

Determine Demand

Estimate costs

Analyze competitors’ Prices

Select pricing method

Select final price

Steps in Setting Price:



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1. Selecting Price objective • A company can pursue any of the following objectives:

Survival: Pursued if the firm is having over capacity, intense competition or faces changing consumer wants. Maximum current profit: The strategy assumes that firm has knowledge of its demand and cost functions. Maximum market share: Firm practices market penetration strategy. Three conditions that favor low price: Market highly price sensitive. Manufacturing and distribution cost fall due to leaning curve effect. Low price discourages competition.



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Maximum market skimming: Favored by cos. dealing in high technology products. Product quality leadership: Relevant for products having high levels of perceived quality, taste or status. Profit maximization in the short term and profit optimization in the long term. A minimum return on investment. A minimum return on sales turnover. Achieving a target sales value. Entering new markets. Target profit on entire product line irrespective of profit level in individual products.



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2. Determining demand • Estimating demand involves understanding as to what affects price sensitivity.

• Consumers are price sensitive to those products that are priced higher or are bought frequently.

• Consumers are less price sensitive when total cost of ownership (TCO) is low.

• Marketers need to know price elasticity of demand of their products.



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Factors leading to less Price sensitivity

• The product is more distinctive.

• Buyers are less aware of substitutes.

• Buyers cannot easily compare the quality of substitutes.

• The expenditure is a small part of the buyer’s total income.

• The expenditure is small compared to cost of end product.

• Part of the cost is borne by another party.

• The product is used in assets previously bought.

• The product is assumed to have more quality or exclusiveness.

• Buyers cannot store the product.


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• Prices are likely to be less elastic also when:

There are few or no substitutes or competitors. Buyers do not readily notice higher price. Buyers are slow to change their buying habits. Buyers think that the higher prices are justified.

• There may be a price indifference band within which price changes have little or no effect.

• Long run price elasticity may differ from short run elasticity.



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3. Estimating costs


Fixed costs Variable costs Total costs Average cost Cost at different levels of

production

Cost per unit at Different levels of Production per period


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4. Analyzing competitors’ costs, prices and offers • With in the range of prices determined by market demand and company costs, the firm must take into account competitors’ prices, costs and offers.

• Firm’s product features should be compared with rival offerings.

5. Selecting a Pricing method

• Broad categories of pricing methods are:

Cost based pricing. Demand based pricing.



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Competition oriented pricing. Value pricing. Product line oriented pricing. Tender pricing. Affordability based pricing. Differentiated pricing.

• Under cost based pricing following methods are commonly used:

Mark up pricing. Absorption cost pricing. Target rate of return pricing. Marginal cost pricing.



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Mark up pricing involves keeping the selling price fixed by adding a margin to its cost price. It is based on the assumption that demand can not be known accurately but costs are known.

Absorption cost pricing rests on the estimated unit cost of the product at the normal level of production & sales and includes variable & fixed costs involved in manufacturing, selling and administering the product.

In Target rate of return pricing the rate of return is used as a mark up. In case of absorption pricing, the mark up is decided on an arbitrary basis where as, here it is the based on ROI.



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Marginal cost pricing aims at maximizing the contribution towards fixed costs. Marginal costs include all the direct variable costs of the product. These are fully realized in marginal costing and in addition, some portion of the fixed costs is also realized.

Demand based pricing includes following methods:

‘What the traffic can bear’ pricing. Skimming pricing. Penetration pricing.

What the traffic can bear pricing is one where the seller takes the maximum price that the customer is willing to pay for the product under the circumstances.



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As the name suggests, Skimming pricing method skims the market in the first instance through high price and subsequently settles down for a lower price.

It aims at high price and high profits in the early stage of marketing the product to buyers that are not price sensitive.

It is very useful in the pricing of new products especially those that have luxury or speciality element.

Penetration pricing that is opposite of skimming pricing seeks to achieve greater market penetration through relatively low prices.



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It brings large sales volumes in a market where consumers are price sensitive and where there is stiff competition.

In all demand based pricing methods Price Elasticity of demand is taken into account.

It refers to relative sensitivity of demand of a product to changes in its price.

Three policy Options are available in case of competition based pricing:

Premium pricing. Discount pricing.



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Parity pricing/Going rate pricing.

For all these, a competitor’s price serves as a reference point.

Premium pricing means pricing above the competitor’s price while discount pricing is below that of the competitor.

Parity pricing involves matching the prices to competition. It is appropriate where supply is more than demand and where channels and consumers are well aware of their choices.

Product line pricing involves fixing prices of various products in a manner that the product line as a whole is priced optimally.



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Tender pricing is applicable in the case of business firms and is applicable to industrial products.

Affordability based pricing is relevant in case of essential commodities. The idea is to set price in a manner so that all sections of population is able to buy the products as required.

The price set may be independent of costs in which case it may involve an element of state subsidy.

In differentiated pricing, some firms charge different prices for the same product in different areas/zones or to customer class. It may be on the basis of volume of purchase.



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6. Selecting the Final Price

• Final price is selected after considering various pricing methods.

• The firm should consider other factors such as:

Impact of other marketing activities like quality and advertising relative to competition. Company pricing policies. Gain and risk sharing pricing. Impact of pricing on other stakeholders.



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Steps involved in Pricing Procedure

Identify the target customer and draw up their profiles. Decide the market position and price image that the firm desires for the brand. Determine the extent of price elasticity of demand of the product and the price sensitivity of the target customer groups. Take into account the life cycle stage of the product. Analyze competitor’s prices. Analyze other environmental factors. Chose the appropriate pricing method considering above factors. Conduct periodic review of the pricing method selected.



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• Some firms have proactive approach to pricing and desire to tap market opportunities, increase market share and aim at retaining customers under different market conditions.

• Some firms adopt reactive pricing policies and are satisfied with certain simple criteria like recovering costs and matching the competition etc. Terms of sale:

• Price and terms of sale go as a package. Terms of sale include Ex works/FOB/CIF/FOR/Destination/Cash sale/Credit sale prices etc.



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• Terms of payment, delivery schedule, taxes & duties applicable and installation & commissioning charges are also indicated.

Other related dimensions:

• Price plays a communicative role: Many firms use price as an index of quality, luxury, status or technical excellence of their products. Such products are sold on the exclusiveness idea.

• Marketers try to get around consumer’s psychological barrier in respect of price through Psychological pricing. Examples include Bata pricing.



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Price-reaction Program for meeting competitor’s price cut


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Brand leader's response to competitive price-cuts

• Maintain price.

• Maintain price and add value.

• Reduce price.

• Increase price and improve quality.

• Launch a low-price fighter line.


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Recap:

• How consumers process and evaluate prices.• How a company should set prices initially for products or services.• How a company should adapt prices to meet varying circumstances and opportunities.• When a company should initiate a price change.• How a company should respond to a competitor’s price change.

Mm.12.10

Business

significance of pricing

price of rs

pricing strategy fair

price sensitive

setting price

price objective

low price

future price