o Understanding price
o Factors affecting in pricing decisions
o Setting the price
o Methods of pricing
o Adapting the price
o Initiating & responding to price
3. What is price
The amount of money charged for a product or
Service, or the sum of the values that consumers
Exchange for the benefits of having or using the
Product or service.
Price is not just a number on a tag. Price comes in
Many forms and performs many functions.
Rent, tuition, fares, fees, rates, tolls, wages, and
Commissions all may in some way be the price
You pay for some goods and services.
5. INTERNAL FACTORS
Marketing objectives: the company must be clear about its
• Current profit maximization
• Market share leadership
• Product quality leadership
Marketing mix strategies: A company achieves the objective by
price and the price which is selected must be related with product
design, distribution and promotion decision.
6. INTERNAL FACTORS
Cost – Cost and price of a product are closely related . In deciding to market a
product, a firm may try to decide what prices are realistic, considering current
demand and competition in the market.
Organizational considerations – It is the duty of the management who
sets the price.
Small companies : CEO or top management
Large companies : Divisional or product line managers
7. EXTERNAL FACTORS
External challenges can literally be as simple as the weather.
Example: An outdoor concert is provided by the town. However, the weather is forecast
to be horrible. This can adversely effect the demand on everything from attendance and
ticket sales to sponsorship and advertising. The weather can negatively or positively
effect the bottom line of your nonprofit's profits.
Government Regulation- Your product or service may have an existing set
price cap that would affect how much you can charge.
The government’s tax exempt status as well as other grant moneys may also
allow the nonprofit to spend more on products and pass the savings along to
8. EXTERNAL FACTORS
Competition's pricing- This is actually one of the strategies in our book
(Competition-Oriented Pricing). When an organization bases their price off a
competitor's similar product or service, the price can increase or decrease
based on the competitors changes and not on its own costs or demands.
Target Audience- This goes along with the ethical challenges somewhat. If
your target audience for a good or service is less affluent, on a fixed budget,
or using government funded welfare, an organization would want to create a
price to match the consumer’s ability.
9. STEPS IN SETTING PRICE
1. Selecting the pricing objectives
2. Determining demand
3. Estimating cost
4. Analyzing competitors’ costs, prices, & offers
5. Selecting a pricing method
6. Selecting the final price
10. Selecting The Pricing Objectives
The company first decided where it wants to position its market offering.
The clearer a firm’s objectives, the easier it is to set prices.
5 major objectives are:-
o Survival- companies pursue survival as their major objective if they are plagued with
over-capacity, intense competition, or changing consumer wants.
o Maximum current profit- many companies try to set a price that will Maximize current
o Maximum market share- some companies want to maximize their market share. They
believe that a higher sales volume will lead to lower unit costs and higher long run profit.
o Maximum market skimming- companies unveiling a new technology favor setting high
prices to maximize market skimming.
o Product quality leadership- brands such as Starbucks coffee, Mercedes and BMW cars,
and Taj luxury hotels have positioned themselves as leaders in quality, with premium
pricing and a very loyal customer base.
11. Determining Demand
Each price will lead to a different level of demand and will therefore
have a different impact on a company’s marketing objectives. The
relationship between price and demand is captured in a demand
curve. In a normal case, the two are inversely related: the higher the
price, the lower the demand.
12. Estimating Cost
Costs set the floor. The company wants to charge a price that
covers its cost of producing, distributing, and selling the product,
including a fair return for its effort and risk. Yet, when companies
price products to cover their full costs, profitability isn’t always the
13. Analyzing Competitors’ Costs, Prices, &
Analyze competitor costs, prices, offers and possible reactions. You
should consider your nearest competitor’s price, product features
and evaluate them to check their worth to the customers. You can
then decide to charge more, same as competitor or less.
14. Selecting a Pricing Method
Select a pricing method. When selecting, consider the cost
of the product or service, competitor prices and the
customer’s assessment of the unique features.
15. Selecting The Final Price
Finally, select the price. Here, you must consider the Impact
of other marketing activities like brand quality and advertising
in relation to competition, companies pricing policy, Impact of
the price on other parties like the distributors and dealers.
16. Pricing Method or Strategies
1. Mark Up Pricing
2. Absorption cost
3. Target- Return Pricing
4. Perceived Value Pricing
5. Going Rate Pricing
6. Auction- Type Pricing
17. Mark Up Pricing
o The selling price is fixed by adding Mark-up or Margin to its cost.
o Usually used by:
Distributers, Marketing firms etc..
o Slower the turnaround of the product larger the margin and vice
o Mark Ups are high on seasonal items, speciality items, demand
inelastic items etc.
o Mark up price = unit cost /( 1- Desired return on sales )
18. How to Calculate
o A FMCG company sells a bar of soap to retailer .
o Unit Cost= VC+FC
o VC per unit = Rs.10, Total FC= Rs. 300000
o Number of units produced= 50000
o Unit cost= 10+ (300000/50000)= Rs 16
o Now manufacturer wants to earn 20% mark up on sales
o Mark up price = unit cost/(1- desired return on sales)= 16/(1-
21. Absorption Cost Pricing
Mainly used by manufacturing firms.
It uses standard costing techniques.
It includes :
Selling and administering cost
It is also known as full cost pricing.
23. Target –Return Pricing
o Similar to Absorption cost pricing.
o The difference is in fixing the profit margin.
o The profit margin/ mark up is fixed by considering the ROI.
o Firm will have return objectives, like 5% of invested capital, or 10%
of sales revenue.
o Then you arrange your price structure so as to achieve these target
rates of return.
o Market leaders or monopolists uses this pricing strategy.
24. How To Calculate
o Investment of a pen manufacturer = Rs1million
o Total sales 50000
o Expected ROI= 20%, Unit cost of a pen =Rs 16
o Target return price= Unit Cost +( Desired return * Invested capital)/ Unit
o TRP= 16+(0.2* 1000000)/50000 = Rs 20
30. Auction Type Pricing
o electronic market places are selling a diverse range of products to dispose of
inventories and goods.
o Three major types of auctions-
English Auctions (one seller many buyers).
Dutch auctions (one seller many buyers and vice versa).
Sealed bid Auctions (supplier submit only 1 bid) Example- Government
32. Examples Of Dutch Auctions
1 buyer many sellers
1 seller many
33. Adapting The Price
1. Geographical pricing
2. Price discount and allowances
3. Promotional pricing
4. Differentiated pricing
34. Geographical pricing
o Company decides how to price its product to different customer in
different location and countries.
o In selecting its product prices for different regions, a business also
adapts its marketing strategies to fit those pricing models. For
example, a company may increase its product prices in areas
where median income among consumers is high, and reduce its
prices in areas where median income is low.
35. Price Discount And Allowances
Company adjust their list price and early discounts for early payment,
volume, purchase and off season buying.
36. Promotional Pricing
Companies can use several pricing techniques to stimulate early purchase:
o Loss leader pricing – supermarkets and department stores often drop the prices
on well-known brands to stimulate additional store traffic.
o Special event pricing – sellers will stablish special prices in certain seasons to
draw in more customers.
o Low interest financing – instead of cutting its price, the company can offer
customers low-interest financing. Automakers have used no-interest financing
to try to attract more customers.
o Warranties and service contracts – companies can promote sales by adding a
free or low cost warranty or service contract.
37. Discriminatory Pricing
Though the term itself sounds negative, discriminatory pricing is a fairly
common adaptation strategy. With this strategy, you charge different prices to
customers based on certain factors. Student discounts and senior citizen
discounts are often used by companies to attract or cater to these particular
customer types. Sports and entertainment venues routinely apply discriminatory
pricing by charging different prices for seating for events. Airlines adjust ticket
prices based on the timing of your purchase. Some companies also offer
discounts if you buy goods or services in advance.
38. Initiating & Responding To
Companies often need to cut or raise prices:-
1. Initiating price cuts
2. Initiating price increases
39. Initiating Price Cuts
Here, either the company starts with lower costs than its competitors or it
initiates price cuts in the hope of gaining the market share and lower costs to
price cutting policy involves the following possible traps:
1. Low-quality trap: Consumers will assume that quality is low.
2. Fragile-market share trap: A low price buys market share but not market
loyalty. The same customers will shift to any lower- priced firm that comes
3. Shallow-pockets trap: The higher priced competitors may cut their prices
and may have longer staying power because of deeper cash resources.
40. Initiating Price Increases
Price increase is a source of maximizing the profit or maintaining it if done carefully. Say a company
earns 3 percent profit on sales, and one percent price increase will increase profits by 33 per cent if
sales volume is not affected.
The price can be increased by at least four ways:
1. Delayed quotation pricing: Here, the company does not set final price until product is finished
or delivered. This pricing is prevalent in industries with long production lead times like
construction and heavy industrial equipments.
2. Unbundling: The company under this plan maintains its price but removes or prices separately
one or more elements that were part of the former offer, such as free delivery or installation.
3. Escalator clauses: Under this, the company asks the customer to pay today’s price and all or
part of any inflation increase that takes place before delivery. This hike based on specified price
index. These escalation clauses are quite common in construction line whether it is a house or
industrial project or air-craft and ship building.
4. Reduction of discounts: the company asks the sales force to offer its normal cash and
quantity discounts at reduced rate. To gain four such attempts, the company must avoid looking
like a price gouger. Companies also think of who will bear the brunt of the increased prices.