By Rishabh Jain

17/2073
 Definition
 Pricing is the process whereby a business sets the price at
which it will sell its products and services, and may be part of
the business's marketing plan. In setting prices, the business
will take into account the price at which it could acquire the
goods, the manufacturing cost, the market place,
competition, market condition, brand, and quality of
product.
 It is a fundamental aspect of financial modeling and is one of
the four Ps of the marketing mix, the other three aspects
being product, promotion, and place. Price is the only
revenue generating element amongst the four Ps, the rest
being cost centers. However, the other Ps of marketing will
contribute to decreasing price elasticity and so enable price
increases to drive greater revenue and profits.
Factors Affecting Pricing
Product:

Internal Factors
External Factors
 1. Cost

 While fixing the prices of a product, the firm should

consider the cost involved in producing the product.
This cost includes both the variable and fixed costs.
Thus, while fixing the prices, the firm must be able to
recover both the variable and fixed costs.
2. The predetermined objectives

 While fixing the prices of the product, the marketer

should consider the objectives of the firm. For
instance, if the objective of a firm is to increase return
on investment, then it may charge a higher price, and
if the objective is to capture a large market share,
then it may charge a lower price.
 3. Image of the firm

 The price of the product may also be determined on

the basis of the image of the firm in the market. For
instance, HUL and Procter & Gamble(PnG) can
demand a higher price for their brands, as they enjoy
goodwill in the market.
 4. Marketing mix

 Price as a marketing technique is a big gun in the

armoury of marketing manager that can make,
maintain or mar the situation. However, price change
in either way will, not bring expected results unless
such price changes are combined well with other
components that make a total marketing strategy. In
many cases, mere price changes have brought in
disastrous doom.
 5. Promotional activity

 The promotional activity undertaken by the firm also

determines the price. If the firm incurs heavy
advertising and sales promotion costs, then the
pricing of the product shall be kept high in order to
recover the cost.
 1. Competition

 While fixing the price of the product, the firm needs

to study the degree of competition in the market. If
there is high competition, the prices may be kept low
to effectively face the competition, and if competition
is low, the prices may be kept high.
 2. Consumers

 The marketer should consider various consumer

factors while fixing the prices. The consumer factors
that must be considered includes the price sensitivity
of the buyer, purchasing power, and so on.
 3. Government control

 Government rules and regulation must be considered

while fixing the prices. In certain products,
government may announce administered prices, and
therefore the marketer has to consider such
regulation while fixing the prices.
 4. Economic conditions

 The marketer may also have to consider the economic

condition prevailing in the market while fixing the
prices. At the time of recession, the consumer may
have less money to spend, so the marketer may
reduce the prices in order to influence the buying
decision of the consumers.
5. Channel intermediaries

 The marketer must consider a number of channel

intermediaries and their expectations. The longer the
chain of intermediaries, the higher would be the
prices of the goods.
 Apple Pricing Chart
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Manufacturing Cost Market Price

Pricing Strategies for determining
the Price of a Product

 Pricing policies for determining the price of a

product are:

 1. Price Skimming
 2. Price Penetration Policy
 3. Price discrimination policy
 4. Re-sale Price Maintenance!
1. Price Skimming or Pricing for
Market Skimming:
 Under this strategy a high introductory price is charged
for an innovative product and later on the price is
reduced when more marketers enter the market with
same type of product for example, Sony, Philips etc.
when they introduce a new technology then a high price
is charged for the product.
 When the same technology is used by other electronic
companies in their product also then the price is
reduced. Generally innovators use price skimming
strategy to get reward for their research and
development.
 Conditions for Price Skimming

 Skimming pricing is attractive when following

conditions are satisfied:
 (a) The product must be highly distinctive and
demand for that product must be very inelastic
 (b) The company must be able to maintain its
uniqueness for some time
 (c) Presence of class market segment
 2. Penetrating Pricing

 This strategy means using lower initial price to capture a

large market. These forces the customers to buy the
product and company can capture a very big share and
leave very small share for competitors. The Reliance
Company followed penetration pricing strategy when it
introduced cheaper mobile data under the Reliance Jio.
It offered it at so low price that it captured big share of
mobile data customers.
Conditions for Penetrating
Pricing
 Penetration pricing is attractive when following conditions
are satisfied:
 (i) The price elasticity of demand is high and easy substitutes
of that product are available.
 (ii) The firm can increase its production capacity with
increase in demand.
 (iii) When customers are highly price sensitive which means
customers easily shift to another brand if it is available at low
price.
 (iv) When company has to face high competition while
launching the product.
 3. Price Discrimination Policy:
 Under this policy some firms charge different prices from
different customers for the same products, keeping in view the
capacity of the customers to pay. Usually market is divided in
various segments by keeping in view the ability of the customers
to pay. This policy can be successfully followed where the
elasticity of demand in one segment of the market is lower than
the other segment, it implies imperfect market conditions.
 This policy is usually followed in case of services like medicines
and law. For example, doctors sometimes charge their fees from
patients by keeping in mind their ability to pay. Similarly, a lawyer
can charge different fees from different clients. Certain firms may
offer quantity discounts or quote different list prices to bulk
buyers &’ institutional buyers as compared to other buyers. Some
firms sell same product, by differentiating the product in packing
and after sales services etc., under different brand names
charging different prices.
 4. Resale Price Maintenance
 Resale price maintenance is a policy under which a product is not sold
below a particular price to the distributors (wholesalers and retailers) and
in turn to consumers that minimum price is always maintained. A formal
agreement is entered into by the manufacturer with the distributors that
the product will not be resold below the minimum price to the customers.
 There may be informal understanding between the manufacturer and the
distributors. This policy is usually followed in case of consumable articles
like cigarettes, wine, medicines, electric goods and sports equipment etc.
The main aim of undertaking this policy is to protect the interest of
manufactures and to establish a product in the market and to create good
reputation of the concern in the market.
 A proper checking from time to time of the prices charged by the
distributors must be done by the manufacturers. If any trader violates the
agreement and charges higher or lower price of the product, he should be
checked, penalized and stopped from doing so.
 Methods of Pricing
Cost-Based Pricing
o Cost-plus Pricing
o Markup Pricing
Demand-based Pricing
Competition Based Pricing
Other Pricing Methods
o Value Pricing
o Target Return Pricing
o Going Rate Pricing
o Transfer Pricing
 Cost-based Pricing

 Cost-based pricing refers to a pricing method in which

some percentage of desired profit margins is added
to the cost of the product to obtain the final price. In
other words, cost-based pricing can be defined as a
pricing method in which a certain percentage of the
total cost of production is added to the cost of the
product to determine its selling price. Cost-based
pricing can be of two types, namely, cost-plus pricing
and markup pricing.
 i. Cost-plus Pricing

 Cost-plus pricing is also known as average cost

pricing, it is the simplest method of determining the
price of a product. In cost-plus pricing method, a fixed
percentage, also called mark-up percentage, of the
total cost (as a profit) is added to the total cost to set
the price. For example, XYZ organization bears the
total cost of Rs. 100 per unit for producing a product.
It adds Rs. 10 per unit to the price of product as’
profit. In such a case, the final price of a product of
the organization would be Rs. 110. This is the most
commonly used method in manufacturing
organizations.
 ii. Markup Pricing

 Refers to a pricing method in which the fixed amount

or the percentage of cost of the product is added to
product’s price to get the selling price of the product.
Markup pricing is more common in retailing in which a
retailer sells the product to earn profit. For example,
if a retailer has taken a product from the wholesaler
for Rs. 100, then he/she might add up a markup of Rs.
20 to gain profit.
 Demand-based Pricing:
 Demand-based pricing refers to a pricing method in which
the price of a product is finalized according to its demand. If
the demand of a product is more, an organization prefers to
set high prices for products to gain profit; whereas, if the
demand of a product is less, the low prices are charged to
attract the customers. Success of demand-based pricing
depends on the ability of marketers to analyze the demand.
This type of pricing can be seen in the hospitality and travel
industries. For instance, airlines during the period of low
demand charge less rates as compared to the period of high
demand. Demand-based pricing helps the organization to
earn more profit if the customers accept the product at the
price more than its cost.
 Competition-based Pricing
 Competition-based pricing refers to a method in
which an organization considers the prices of
competitors’ products to set the prices of its own
products. The organization may charge higher, lower,
or equal prices as compared to the prices of its
competitors.
 The aviation industry is the best example of
competition-based pricing where airlines charge the
same or fewer prices for same routes as charged by
their competitors. In addition, the introductory prices
charged by publishing organizations for textbooks are
determined according to the competitors’ prices.
 i. Value Pricing:

 Implies a method in which an organization tries to win

loyal customers by charging low prices for their high-
quality products. The organization aims to become a
low cost producer without sacrificing the quality. It
can deliver high- quality products at low prices by
improving its research and development process.
Value pricing is also called value-optimized pricing.
 ii. Target Return Pricing:

 Helps in achieving the required rate of return on

investment done for a product. In other words, the
price of a product is fixed on the basis of expected
profit.
 iii. Going Rate Pricing:

 Implies a method in which an organization sets the

price of a product according to the prevailing price
trends in the market. Thus, the pricing strategy
adopted by the organization can be same or similar to
other organizations. However, in this type of pricing,
the prices set by the market leaders are followed by
all the organizations in the industry.
 iv. Transfer Pricing:

 Involves selling of goods and services within the

departments of the organization. It is done to
manage the profit and loss ratios of different
departments within the organization. One
department of an organization can sell its products to
other departments at low prices. Sometimes, transfer
pricing is used to show higher profits in the
organization by showing fake sales of products within
departments.