Principles of Marketing

Quarter 2 – Module 2:
The Price
GROUP 2
 Price is the amount of money that your
customers must pay in exchange for your
product or service.

Price is the value measured in money term in

WHAT IS PRICE ? the part of the transaction between two
parties where the buyer must give something
up (the price) to gain something offered by
the other party or the seller.
 Buyers’ concern about price is related to their expectations about the
satisfaction or utility associated with a product. Buyers must decide whether
the utility gained in an exchange is worth the purchasing power sacrificed.
Different terms can be used to describe price for different forms of exchange,
(rent, premium, toll, retainer, fee, interest, etc.).

Price is also one of the most flexible elements of the marketing mix.
Unlike product features and channel commitments, price can be
changed very quickly. At the same time, pricing and price competition
is the number-one problem facing many marketers.
 Setting price for the first time is a
real challenge to a firm, and it faces
this situation when it plans to launch
a new product or introduce an
existing one into a new distribution
SETTING THE PRICE channel or area or participates in a
bid.

involves making several guesses

about the future.
1. Identify the target market segment for the product or service and decide what share of it is
desired and how quickly.
2. Establish the price range that would be acceptable to occupants of this segment. If this
looks unpromising, it is still possible that consumers might be educated to accept higher
price levels, though this may take time.
3. Examine the prices (and costs if possible) of potential or actual competitors.
4. Examine the range of possible prices within different combinations of the marketing mix
(e.g. different levels of product quality or distribution methods).
5. Determine whether the product can be sold profitably at each price based upon anticipated
sales levels (i.e. by calculating break-even point) and if so, whether these profits will meet
strategic objectives for profitability.
6. If only a modest profit is expected it may be below the threshold figure demanded by an
organization for all its activities. In these circumstances, it may be necessary to modify
product specifications downwards until costs are reduced sufficiently to produce the
desired profit.
PRICING POLICY
1. Selecting the pricing Objective

Refers to set the goals of the pricing policy. An organization can have
multiple pricing objectives.

Selecting the pricing objective means deciding in advance what the

company wants to achieve through offering its product. The marketing
mix strategy, including price, becomes easier if the company can select
its target market and correctly position it.
The objectives must be consistent with the organization’s overall objectives. Because of
the many areas involved, a marketer often uses multiple pricing objectives.

One of the six major objectives can be pursued by a firm through its pricing, such as
survival, maximum current profit, maximum sales growth, product quality leadership,
maximize current revenue, or maximum market skimming.
 Survival Maximum Current Profit

A fundamental pricing objective is to This objective does not always guarantee a

survive. Most organizations will not maximum profit, particularly in the long
tolerate short-run losses, internal upheaval, run, because it overlooks the effects of
and almost any other difficulties necessary other marketing mix variables, legal
for survival. restraints on price, and competitors’
reactions.
If a company is plagued with overcapacity,
intense competition, or changing consumer
wants, it can pursue the survival objective.
It is a short-run objective pursued by
different companies to ensure survival.
Maximum Sales Growth
Pursuing this objective means setting prices at the lowest level to ensure maximum sales
to lower unit costs, thus maximizing long-run profit.

This can also be termed as market-penetration pricing, and consumers are here thought
of as highly sensitive to prices.

Product-Quality Leadership
Here the company sets prices at a higher level (compared to competitors) to give the
market an idea that its product is superior in quality, durability, functional performance,
etc. (it obviously produces a high-quality product).

The price is also charged high here to cover high product quality and high research and
development costs.
 Maximum Market Skimming

In this objective, the price is set at a high level. This objective is pursued,
particularly in new or innovative products hoping that some segments will
buy the product because of the newness, even paying a higher price.

When these segments become sour, the company will lower prices to attract
new segments and follow the same method as long as it is sold and thus
skims the market.
 2. Determining the demand

Each price will lead to a different level of demand and therefore have a
different impact on a company’s marketing objectives. In the normal
case, demand and price are inversely related: the higher the price, the
lower the demand .In the case of prestige goods, the demand curve
sometimes slopes upward.
E.g. Perfume Company raised its price and sold more perfume rather
than less! Some consumers take the higher price to signify a better
product. However if the price is too high, the level of demand may fall.
 3. Estimating Costs

Costs set the floor. The company wants to charge a price that covers its
cost of producing, distribution and selling the product, including a fair
return for its effort and risk.

A company’s cost take two forms, fixed and variable.

 Fixed costs

(also known as overhead) are

costs that do not vary with
production or sales revenue. A
company must pay bills each
Variable costs month for rent heat, interest,
salaries and so on. , Regardless of
output.
Variable costs vary directly with the level of
production. These costs tend to be constant
per unit produced. They are called variable
because their total varies with the number
of units produced.
4. Analyzing competitor’s costs, prices and
offers

While demand sets a ceiling and costs set a floor to pricing,

competitors’ prices provide an in between point you must
consider in setting prices. Learn the price and quality of each
competitor’s product or service by sending out comparison
shoppers to price and compare.
5. Selecting a pricing method

Pricing Methods are the ways in which the price of goods and
services can be calculated by considering all the factors such as
the product/service, competition, target audience, product’s life
cycle, firm’s vision of expansion, etc. influencing the pricing
strategy.
There are two pricing methods that can be employed by a firm:

 Cost Oriented Pricing

Many firms consider the Cost of Production as a base for calculating the price
of the finished goods. Cost-oriented pricing method covers the following ways
of pricing:
 - Cost-Plus Pricing
It is one of the simplest pricing method wherein the manufacturer
calculates the cost of production incurred and add a certain
percentage of markup to it to realize the selling price. The markup is
the percentage of profit calculated on total cost i.e. fixed and variable
cost.

If the Cost of Production of product-A is Rs 500 with a markup of 25%

on total cost, the selling price will be calculated as Selling Price= cost of
production + Cost of Production x Markup Percentage/100
Selling Price=500+500 x 0.25= 625
Thus, a firm earns a profit of Rs 125 (Profit=Selling price- Cost price
 - Markup pricing

This pricing method is the variation of cost-plus pricing wherein the percentage of markup
is calculated on the selling price.

E.g., If the unit cost of a chocolate is Rs 16 and producer wants to earn the markup of 20%
on sales then mark up price will be:
Markup Price= Unit Cost/ 1-desired return on sales
Markup Price= 16/1-0.20 = 20
Thus, the producer will charge Rs 20 for one chocolate and will earn a profit of Rs 4 per
unit.
 - Target-Return pricing

In this kind of pricing method the firm set the price to yield a required Rate of Return on
Investment (ROI) from the sale of goods and services.

E.g. If soap manufacturer invested Rs 1,00,000 in the business and expects 20% ROI i.e.
Rs 20,000, the target return price is given by:
Target return price= Unit Cost + (Desired Return x capital invested)/ unit sales Target
Return Price=16 + (0.20 x 100000)/5000Target Return Price= Rs 20
Thus, Manufacturer will earn 20% ROI provided that unit cost and sale unit is accurate.
 Market-Oriented Pricing Method

Under this method price is calculated on the basis of market

conditions. Following are the methods under this group:
 - Perceived-Value Pricing

The manufacturer decides the price on the basis of customer’s perception of

the goods and services taking into consideration all the elements such as
advertising, promotional tools, additional benefits, product quality, the channel
of distribution, etc. that influence the customer’s perception.

E.g. Customer buy Sony products despite less price products available in the
market, this is because Sony company follows the perceived pricing policy
wherein the customer is willing to pay extra for better quality and durability of
the product.
 - Value Pricing

companies design the low priced products and maintain the high-quality
offering. Here the prices are not kept low, but the product is re-engineered to
reduce the cost of production and maintain the quality simultaneously.

E.g. Tata Nano is the best example of value pricing, despite several Tata cars,
the company designed a car with necessary features at a low price and lived up
to its quality.
 - Going-Rate Pricing

The firms consider the competitor’s price as a base in determining the price of
its own offerings. Generally, the prices are more or less same as that of the
competitor and the price war gets over among the firms.

E.g. In Oligopolistic Industry such as steel, paper, fertilizer, etc. the price
charged is same.
 - Auction Type pricing

There is one seller and many buyers. The seller puts the item on sites such as
Yahoo and bidders raise the price until the top best price is reached.

One buyer and many sellers. The buyer announces the product he wants to buy
then potential sellers competes by offering the lowest price.
- Differential Pricing

This pricing method is adopted when different prices have to be charged from
the different group of customers. The prices can also vary with respect to time,
area, and product form.

E.g. The best example of differential pricing is Mineral Water. The price of
Mineral Water varies in hotels, railway stations, retail stores.
 6. Selecting the final Price

In selecting that price, the company must consider additional factors,

including psychological pricing, gain and risk pricing, the influence of
other marketing -mix elements on price, company -pricing policies, and
the impact of price on other parties.
 A pricing strategy is a
model or method used to
establish the best price
Pricing for a product or service. It
helps you choose prices to
Strategy maximize profits and
shareholder value while
considering consumer and
market demand.
TYPES OF PRICING
STRATEGIES
1. Penetration Pricing Strategy
penetration pricing strategy is when companies enter the market with an
extremely low price, effectively drawing attention (and revenue) away from higher-
priced competitors. Penetration pricing isn’t sustainable in the long run, however,
and is typically applied for a short time.

This pricing method works best for brand new businesses looking for customers
or for businesses that are breaking into an existing, competitive market. The
strategy is all about disruption and temporary loss … and hoping that your initial
customers stick around as you eventually raise prices.
2. Skimming Pricing Strategy
A skimming pricing strategy is when companies charge the highest possible
price for a new product and then lower the price over time as the product becomes
less and less popular.

Technology products, such as DVD players, video game consoles, and

smartphones, are typically priced using this strategy as they become less relevant
over time.
3. Competition-Based Pricing Strategy
a competition-based pricing strategy uses the competitors’ prices as a
benchmark. Businesses who compete in a highly saturated space may choose this
strategy since a slight price difference may be the deciding factor for customers.

With competition-based pricing, you can price your products slightly below your
competition, the same as your competition, or slightly above your competition.
4. Product Line Pricing

Here, different products in the same range may be set at different prices.
Television sets are priced differently depending on whether they are HD or not,
whether they have Wi-Fi features of not and whether they are 3D or not.
5. Bundle Pricing Strategy

A bundle pricing strategy is when you offer (or "bundle") two or more
complementary products or services together and sell them for a single price. You
may choose to sell your bundled products or services only as part of a bundle or sell
them as both components of bundles and individual products.

This is a great way to add value through your offerings to customers who are
willing to pay extra upfront for more than one product. It can also help you get your
customers hooked on more than one of your products faster.
6. Psychological Pricing Strategy

Psychological pricing is what it sounds like — it targets human psychology to boost your sales.

For example, according to the "9-digit effect", even though a product that costs $99.99 is
essentially $100, customers may see this as a good deal simply because of the "9" in the price.

Another way to use psychological pricing would be to place a more expensive item directly next
to (either, in-store or online) the one you're most focused on selling. Or offer a "buy one, get one
50% off (or free)" deal that makes customers feel as though the circumstances are too good to pass
up on.

And lastly, changing the font, size, and color of your pricing information on and around your
products has also been proven, in various instances, to boost sales.
7. Premium Pricing Strategy

Also known as prestige pricing and luxury pricing, a premium pricing strategy is
when companies price their products high to present the image that their products
are high-value, luxury, or premium. Prestige pricing focuses on the perceived value
of a product rather than the actual value or production cost.

Prestige pricing is a direct function of brand awareness and brand perception.

Fashion and technology are often priced using this strategy because they can be
marketed as luxurious, exclusive, and rare.
8. Optional Pricing

A company may add optional extra items within the price to increase a product’s
attractiveness. For example, car sellers may offer car insurance for the first year.
9. Cost Based Pricing

Simply, a company may determine the exact cost of producing and selling an
objective, add a markup that may be desirable for profits and price accordingly. This
method may be used in a changing industry where even costs of production are
unpredictable.
10. Cost-Plus Pricing Strategy

A cost-plus pricing strategy focuses solely on the cost of producing your product
or service, or your COGS. It’s also known as markup pricing since businesses who
use this strategy “markup” their products based on how much they’d like to profit.

To apply the cost-plus method, add a fixed percentage to your product

production cost. For example, let’s say you sold shoes. The shoes cost $25 to make,
and you want to make a $25 profit on each sale. You’d set a price of $50, which is a
markup of 100%.