Unit 3

The Marketing Mix Element

PRICE
 Price

The amount of money, goods or services

that must be given to acquire ownership or use of a
product.
 Introduction on price
• Price is the one element of the marketing mix that
produces revenue; the other elements produce costs.
• Prices are perhaps the easiest element of the
marketing program to adjust; product features,
channels, and even communications take more time.
• Price also communicates to the market the
company’s intended value positioning of its
product or brand.
• A well-designed and marketed product can command
a price premium and reap big profits.
 Introduction on price
• Pricing decisions are clearly complex and difficult
• Marketers must take into account many factors in
making pricing decisions—the company, the
customers, the competition, and the marketing
environment.
• Pricing decisions must be consistent with the firm’s
marketing strategy and its target markets and
brand positioning.
 Introduction on price

• Price comes in many forms Rent, tuition, fares,

fees, rates, tolls, retainers, wages, and commissions
are all the price you pay for some good or service.
• Traditionally, price has operated as a major
determinant of buyer choice.
Bartering:
•One of the oldest way of acquiring goods.
•barter is a system of exchange where participants in a
transaction directly exchange goods or services for
other goods or services without using a medium of
exchange, such as money.
Renting:
•Renting, also known as hiring, is an agreement where a
payment is made for the temporary use of a good,
service or property owned by another.
 How Companies Price?
• In small companies, the boss often sets prices.
• In large companies, division and product line managers do.
Even here, top management sets general pricing objectives
and policies and approves lower management’s proposals.
• Where pricing is a key factor (aerospace, railroads, oil
companies), companies often establish a pricing department
to set or assist others in setting appropriate prices.
• For any organization, effectively designing and implementing
pricing strategies requires a thorough understanding of
consumer pricing psychology and a systematic approach to
setting, adapting, and changing prices.
 Consumer pricing psychology
• Many economists traditionally assumed that consumers
were “price takers” who accepted prices at face value or
as a given.
• consumers often actively process price information from
– prior purchasing experience,
– formal communications (advertising, sales calls, and
brochures),
– informal communications (friends, colleagues, or
family members),
– point-of-purchase or online resources, and other
factors.
 Consumer pricing psychology
• Different people interpret prices in different ways
– Customers may have a lower price threshold, below
which prices signal inferior or unacceptable quality,
– and an upper price threshold, above which prices are
prohibitive and the product appears not worth the
money.
• Understanding how consumers arrive at their
perceptions of prices is an important marketing
priority.
 Consumer pricing psychology
• Reference Price:
– When examining products, consumers often employ reference
prices, comparing an observed price to an internal reference price
they remember.
• Price Quality Inference:
– Many consumers use price as an indicator of quality.
– Image Pricing - Especially effective with products such as
perfumes, expensive cars, and clothing.
• Price Cues / Price Endings :
– Many sellers believe prices should end in an odd number.
– Customers see an item priced at Rs. 199 as being in the Rs. 100
rather than the Rs. 200 range.
– Price cues are marketing tactics that persuade the customers that the
price offers good value than the competitor’s price
 Pricing objectives
1. Survival
•Companies pursue survival as their major objective if they are
plagued with overcapacity, intense competition, or changing
consumer wants.
•As long as prices cover variable costs and some fixed costs, the
company stays in business.
•Survival is a short-run objective; in the long run, the firm must
learn how to add value or face extinction.
2. Maximum Current Profit
•Many companies try to set a price that will maximize current
profits.
•In emphasizing current performance, the company may sacrifice
long-run performance by ignoring the effects of other marketing
variables, competitors’ reactions, and legal restraints on price.
 Pricing objectives
3. Maximum Market Share
•Some companies want to maximize their market share.
•They believe a higher sales volume will lead to lower unit costs and
higher long-run profit, so they set the lowest price, assuming the
market is price sensitive.
•Uses - market-penetration pricing.
4. Maximum Market Skimming
•Companies unveiling a new technology favor setting high prices to
maximize market skimming.
•Sony has been a frequent practitioner of market-skimming pricing,
in which prices start high and slowly drop over time.
•Ex - Sony introduced the world’s first high-definition television
(HDTV) to the Japanese market in 1990, it was priced at $43,000. 28-
inch Sony HDTV$6,000 in 1993, but a 42-inch Sony LED HDTV cost
only $579 20 years later in 2013.
 Pricing objectives
5. Product-Quality Leadership
•A company might aim to be the product-quality leader in the
market.
•Many brands strive to be “affordable luxuries”—products or
services characterized by high levels of perceived quality, taste,
and status with a price just high enough not to be out of
consumers’ reach.
•Brands such as Starbucks, BMW have positioned themselves
as quality leaders in their categories, combining quality,
luxury, and premium prices with an intensely loyal customer
base.
 Factors affecting pricing decisions
Internal factors
•Overall Marketing Strategy
•Objectives
•Marketing Mix
•Organizational considerations
External factors
•Nature of the market and demand
•Economy
•Other environmental factors
 Factors affecting pricing decisions
1) Overall Marketing Strategy:
•Price is only one element of the company’s broader marketing
strategy.
•Thus, before setting price, the company must decide on its
overall marketing strategy for the P or S.
•If the company has selected its target market and positioning
carefully, then its marketing mix strategy, including price, will
be fairly straightforward.
 Factors affecting pricing decisions
1) Overall Marketing Strategy:
•E - Amazon positions its Kindle Fire tablet as offering the same and
prices it at 40 percent less than Apple’s iPads and Samsung’s Galaxy
tablets.
•It recently began targeting families with young children, positioning the
Kindle Fire as the “perfect family tablet,” with models priced as low as
$99, bundled with Kindle FreeTime, an all-in-one subscription service
starting at $2.99 per month that brings together books, games, educational
apps, movies, and TV shows for kids ages 3 through 8.
•Thus, pricing strategy is largely determined by decisions on market
positioning.
 Factors affecting pricing decisions
2) Company’s Objective:
•Pricing may play an important role in helping to accomplish
company objectives at many levels.
•A firm can set prices to attract new customers or profitably
retain existing ones.
•It can set prices low to prevent competition from entering the
market or set prices at competitors’ levels to stabilize the
market.
•It can price to keep the loyalty and support of resellers or
avoid government intervention.
•Prices can be reduced temporarily to create excitement for a
brand Or one product may be priced to help the sales of
other products in the company’s line.
 Factors affecting pricing decisions
3) Marketing Mix:
•Price decisions must be coordinated with product design,
distribution, and promotion decisions to form a consistent and
effective integrated marketing mix program.
•Decisions made for other marketing mix variables may
affect pricing decisions.
•Companies often position their products on price and then tailor
other marketing mix decisions to the prices they want to charge.
•Here, price is a crucial product-positioning factor that defines
the product’s market, competition, and design. Many firms
support such price-positioning strategies with a technique called
target costing.
 Factors affecting pricing decisions
3) Marketing Mix:
•Target costing reverses the usual process of first designing a
new product, determining its cost, and then asking, “Can we sell
it for that?”
•Target costing starts with an ideal selling price based on
customer value considerations and then targets costs that will
ensure that the price is met.
 Factors affecting pricing decisions
4) Organizational Considerations:
•Management must decide who within the organization should set
prices.
•In small companies, prices are often set by top management.
•In large companies, pricing is typically handled by divisional or
product managers.
•In industrial markets, salespeople may be allowed to negotiate with
customers within certain price ranges. Even so, top management sets the
pricing objectives and policies, and they approve the prices proposed
by lower-level management or salespeople.
•In industries in which pricing is a key factor (airlines, aerospace,
steel, railroads, oil companies), companies often have pricing
departments to set the best prices or help others set them. These
departments report to the marketing department or top management.
 Factors affecting pricing decisions
5) The Market and Demand:
Pricing in Different Types of Markets:
Types of Markets Characteristics Examples
pure competition many buyers and sellers wheat, copper,
trading over a single market vegetables or financial
price (un-differentiated securities etc.,
products)
monopolistic market consists of many Ex – Soap industry
competition buyers and sellers trading
over a range of prices rather
than a single market price
( differentiated products)
oligopolistic market consists Ex – petroleum & gas,
competition of only a few large sellers. cement, aluminium etc.,
pure monopoly market is dominated by Ex – Indian Railways,
one seller Indian postal service
 Factors affecting pricing decisions
5) The Market and Demand:

•Demand is directly proportional to Price

Whenever Demand increases - prices will increase

Whenever Demand decreases - prices will decrease
 Factors affecting pricing decisions
6) The Economy:
•Economic conditions can have a strong impact on the firm’s pricing
strategies.
•Economic factors such as a boom or recession, inflation, and interest
rates affect pricing decisions.
•because they affect consumer spending, consumer perceptions of the
product’s price and value, and the company’s costs of producing and
selling a product.
 Factors affecting pricing decisions
7) Other External Factors:
•Resellers (distributor/wholesaler/retailer) reaction to various prices.

•Government Policies

•Social concerns - Environment

 Setting the Price
 A firm must set a price for the first time
 when it develops a new product,
 when it introduces its regular product into a new distribution
channel or geographical area.
 Having a range of price points allows a firm to cover more of
the market and to give any one consumer more choices.
 Most markets have three to five price points or tiers.
 Marriott Hotels (in 131 countries and territories)
– Marriott Vacation Club—Vacation Villas (highest price)
– Marriott Marquis (high price)
– Marriott (high-medium price)
– Renaissance (medium-high price)
– Courtyard (medium price)
– Towne Place Suites (medium-low price) and
– Fairfield Inn (low price)
Marriott Vacation Club—Vacation Villas
(highest price),
Marriott Marquis (high price)
Marriott (high-medium price)
Renaissance (medium-high price)
Courtyard (medium price)
Towne Place Suites (medium-low price)
Fairfield Inn (low price)
 CavinKare – Shampoo brands
• Chik – Re 1 –
Basic shampoo
• Karthika – Re1 –
Traditional
Shampoo
• Nyle – Re 2 –
Natural
Shampoo
• Meera – Rs 3 –
Traditional
Shampoo
Setting the Price
 1. Selecting the Pricing Objective
• The company first decides where it wants to position its
market offering.
• The clearer a firm’s objectives, the easier it is to set price.

• Five major objectives are:

– survival

– maximum current profit

– maximum market share

– Maximum market skimming

– product-quality leadership
 2. Determining Demand
• Each price will lead to a different level of demand and have
a different impact on a company’s marketing objectives.
• The normally inverse relationship between price and demand
is captured in a demand curve: The higher the price, the
lower the demand.
 3. Estimating Costs
• Costs set the floor.

• Demand sets a ceiling on the price the company can charge

for its product.
• 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.
 3. Estimating Costs
Types of Costs:
•Fixed costs, also known as overhead, are costs
that do not vary with production level or sales
revenue.
•A company must pay bills each month for rent,
interest, salaries, and so on, regardless of output.
 3. Estimating Costs
Types of Costs:
•Variable costs vary directly with the level of production.

•For example, each tablet computer produced by Samsung incurs the

cost of plastic and glass, microprocessor chips and other electronics,
and packaging.
•These costs tend to be constant per unit produced, but they’re called
variable because their total varies with the number of units
produced.
•Total costs = Fixed Cost + Variable Cost

•Average cost is the cost per unit at that level of production; it

equals total costs divided by production.
 4. Analyzing Competitors’ Costs, Prices, and Offers
• The firm must take competitors’ costs, prices, and possible
reactions into account.

• If the firm’s offer contains features not offered by the nearest

competitor, it should evaluate their worth to the customer and
add that value to the competitor’s price.

• If the competitor’s offer contains some features not offered by

the firm, the firm should subtract their value from its own
price.

• Now the firm can decide whether it can charge more, the same,
or less than the competitor.
 5. Selecting a Pricing Method
Markup Pricing:

• The most elementary pricing method is to add a

standard markup to the product’s cost.

• Construction companies submit job bids by estimating

the total project cost and adding a standard markup for
profit.

• Lawyers and accountants typically price by adding a

standard markup on their time and costs.
Pricing Strategies
 Pricing Strategies
Value Added Pricing:
• Attaching value-added features and services to
differentiate a company’s offers and charging higher
prices.
• Rather than cutting prices to match competitors, they
add quality, services, and value-added features to
differentiate their offers and thus support their higher
prices.
 Pricing Strategies
• Cost-based pricing:
• Setting prices based on the costs of producing, distributing, and
selling the product plus a fair rate of return for effort and risk.
• Fixed costs (overhead)
• Costs that do not vary with production or sales level.
• Variable costs
• Costs that vary directly with the level of production.
• Total costs
• The sum of the fixed and variable costs for any given level of
production.
 Pricing Strategies

• Markup Pricing or Cost-plus pricing :

• The most elementary pricing method is to add a standard

markup to the product’s cost.
• Construction companies submit job bids by estimating the
total project cost and adding a standard markup for profit.
• Lawyers and accountants typically price by adding a standard
markup on their time and costs.
 Pricing Strategies

Target-Return Pricing or Break-even pricing:

• Setting price to break even on the costs of making and
marketing a product or setting price to make a target return.
• In target-return pricing, the firm determines the price that
yields its target rate of return on investment.
• Public utilities, which need to make a fair return on
investment, often use this method.
 Pricing Strategies

Competition-based pricing:
• Setting prices based on competitors’ strategies, prices, costs,
and market offerings.
 Pricing Strategies

Going-Rate Pricing:
• In going-rate pricing, the firm bases its price largely on
competitors’ prices.
• In oligopolistic industries that sell a commodity such as steel,
paper, or fertilizer, all firms normally charge the same price.
• Smaller firms “follow the leader,” changing their prices
when the market leader’s prices change rather than when their
own demand or costs change.
 Pricing Strategies
Auction-Type Pricing:
•English auctions (ascending bids) have one seller and many
buyers. On sites such as eBay , the seller puts up an item and
bidders raise their offer prices until the top price is reached. The
highest bidder gets the item.
•Dutch auctions (descending bids) feature one seller and many
buyers or one buyer and many sellers. In the first kind, an
auctioneer announces a high price for a product and then slowly
decreases the price until a bidder accepts. In the other, the buyer
announces something he or she wants to buy, and potential
sellers compete to offer the lowest price.
•Sealed-bid auctions let would-be suppliers submit only one bid;
they cannot know the other bids. Governments often use this
method to procure supplies or to grant licenses.
 Pricing Strategies
Auction-Type Pricing:
•Dutch auctions (descending bids) feature one seller and many
buyers or one buyer and many sellers. In the first kind, an
auctioneer announces a high price for a product and then slowly
decreases the price until a bidder accepts. In the other, the buyer
announces something he or she wants to buy, and potential
sellers compete to offer the lowest price.
•Sealed-bid auctions let would-be suppliers submit only one
bid; they cannot know the other bids. Governments often use this
method to procure supplies or to grant licenses.
 New-Product Pricing Strategies
• Pricing strategies usually change as the product passes through
its life cycle.
• The introductory stage is especially challenging.
• Companies bringing out a new product face the challenge of
setting prices for the first time.
• They can choose between two broad strategies: market-
skimming pricing and market-penetration pricing.
 Market-Skimming Pricing
• Market-skimming pricing (or price skimming) set a high
price for a new product to skim maximum revenues layer by
layer from the segments willing to pay the high price; the
company makes fewer but more profitable sales.
 Market-Penetration Pricing
• Market-penetration pricing sets a low price for a new product
in order to attract a large number of buyers and a large
market share.
 Product Mix Pricing Strategies
• The strategy for setting a product’s price often has to be
changed when the product is part of a product mix.
• In this case, the firm looks for a set of prices that maximizes
its profits on the total product mix.
• Pricing is difficult because the various products have related
demand and costs and face different degrees of competition.
 Product Line Pricing
• Product line pricing sets the price steps between various products
in a product line based on cost differences between the products,
customer evaluations of different features, and competitors’ prices.
• In product line pricing, management must determine the price steps
to set between the various products in a line.
• The price steps should take into account cost differences between
products in the line.
• More importantly, they should account for differences in customer
perceptions of the value of different features.
 Optional Product Pricing

• Many companies use optional product pricing ─ offering to

sell optional or accessory products along with the main
product.
• And when you order a new computer, you can select from a
bewildering array of processors, hard drives, docking systems,
software options, and service plans.
 Captive Product Pricing

• Captive-product pricing sets a price for products that must

be used along with a main product, such as blades for razor
and games for a video-games console.
 By-Product Pricing
• Using by-product pricing, the company seeks a market for
these by-products to help offset the costs of disposing of them
and help make the price of the main product more competitive.
• The by-products themselves can even turn to be profitable ─
turning trash into cash.
 Product Bundle Pricing
• Using product bundle pricing, sellers often several products
and offer the bundle at a reduced price.
 Price Adjustment Strategies
• Companies usually adjust their basic prices to account for
various customer differences and changing situations.
 Discount and Allowance Pricing
Functional Discount
Cash Discount (Trade Discount)
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• Discount has many forms.
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Quantity Discount

A price reduction to buyers who buy

large volumes. Seasonal Discount

A price reduction to buyers who

buy merchandise or services out
of season.
 Discount and Allowance Pricing
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 Customer-segment
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 Psychological Pricing
• In using psychological pricing, sellers consider the
psychology of prices, not simply the economics.
• Another aspect of psychological pricing is reference prices ─
prices that buyers carry in their minds and refer to when
looking at a given product.
• The reference price might be formed by noting current prices,
remembering past prices, or assessing the buying situation.
 Promotional Pricing
• With promotional pricing, companies will temporarily price their
products below list price ─ and sometimes even below cost ─ to
create buying excitement and urgency.

• Promotional pricing takes several forms.

• A seller may simply offer discounts from normal prices to
increase sales and reduce inventories.
• Sellers also use special-event pricing in certain seasons to draw
more customers.
• Manufacturers sometimes offer cash rebates to consumers who
buy the product from dealers within a specified time; the
manufacturer sends the rebate directly to the customer.
• Some manufacturers offer low-interest financing, longer
warranties, or free maintenance to reduce the consumer’s
“price.”
 Geographical Pricing
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 Dynamic and Internet Pricing
• They are using dynamic pricing ─ adjusting prices
continually to meet the characteristics and needs of individual
customers and situations.
• For example, Amazon.com can mine their databases to gauge
a specific shopper’s behavior, and price products accordingly.
 International Pricing
• Companies that market their products internationally must
decide what prices to charge in different countries.
• The price that a company should charge in a specific country
depends on many factors, including economic conditions,
competitive situations, laws and regulations, and the nature of
the wholesaling and retailing system.
 Initiating Price Changes
• In some cases, the company may find it desirable to initiate
either a price cut or a price increase.
• In both cases, it must anticipate possible buyer and competitor
reactions.
 Initiating Price Cuts

• Several situations may lead a firm to consider cutting its price.

• One such circumstance is excess capacity.

• Another is falling demand in the face of strong price

competition or a weakened economy.
 6. Selecting the Final Price
• Pricing methods narrow the range from which the
company must select its final price.
• In selecting that price, the company must consider
additional factors, including
– the impact of other marketing activities

– company pricing policies

– gain-and-risk-sharing pricing

– the impact of price on other parties

 Initiating Price Increases
• A successful price increase can greatly improve profits.
• There are two factors that influences price increases.

Reason 12

• Another factor leading to price increases is over-demand.

• A major factor in price increases is cost inflation.
• When a company cannot supply all that its customers need, it
• Rising costs squeeze profit margins and lead companies to pass
may raise its prices, ration products to customers, or both.
cost increases along to customers.
• Consider today’s worldwide oil and gas industry.
 Price Changes
• After developing their pricing structures and strategies,
companies often face situations in which they must initiate
price changes or respond to price changes by competitors.
 Buyer Reactions to Price Changes
• A price increase, which would normally lower sales, may have
some positive meanings for buyers.
• A brand’s price and image are often closely linked.

• A price change, especially a drop in price, can adversely affect

how consumers view the brand.
Competitor Reactions to Price Changes

• The competitor can interpret a company price cut in many

ways.
– It might think the company is trying to grab a larger
market share or that it’s doing poorly and trying to boost
its sales.
– Or it might think that the company wants the whole
industry to cut prices to increase total demand.
Responding to Price Changes
 Responding to Price Changes
• If the company decides that effective action can and should be
taken, it might make any of four responses.
Public Policy and Pricing
 Pricing within Channel Levels
• Price-fixing states that sellers must set prices without talking
to competitors.
• Sellers are also prohibited from using predatory pricing ─
selling below cost with the intention of punishing a competitor
or gaining higher long-run profits by putting competitors out
of business.
 Pricing across Channel Levels
• Robinson-Patman Act seeks to prevents unfair price
discrimination by ensuring that sellers offer the same price
terms to customers at a given level of trade.
• Price discrimination is allowed:
– If the seller can prove that costs differ when selling to
different retailers
– If the seller manufactures different qualities of the same
product for different retailers
 Pricing across Channel Levels
• Laws also prohibit retail (or resale) price maintenance ─ a
manufacturer cannot require dealers to charge a specified
retail price for its product.
• Deceptive pricing occurs when a seller states prices or price
savings that mislead consumers or are not actually available to
consumers.
 Pricing Industrial Products
• When the members of buying committee of a buying firm,
purchase a particular industrial product, they are buying a
• given level of technical service,

• product quality, and

• delivery reliability.
 Pricing Industrial Products
• The other elements such as the

• reputation of the supplier,

• friendship,

• a feeling of security and

• other personal benefits flowing from the buyer-seller

relationship are also important.
 Pricing Industrial Products
• The bundle of attributes expecting by the buying committee
are fall under three categories.

(1) Product specific attributes

(2) Company related attributes and

(3) Sales personal related attributes.

• Therefore, the total product includes much more than its
physical attributes.
 Pricing Industrial Products
Characteristics of Industrial Prices
•Price is not an independent variable. It is intertwined with
product promotion and distribution strategies.
•The real price an industrial customer pays is quite different
from the list price; (factors like delivery and installation cost,
training cost, discounts, financing cost, trade in allowances etc.)
 Pricing Industrial Products
Characteristics of Industrial Prices
•By changing the quantity of goods & services provided by
the seller
•Changing the premiums and discounts that are offered,

•changing the time and place of payment and also in

numerous other ways prices can be changed
 Pricing Industrial Products
Characteristics of Industrial Prices
•The complimentary and substitute product sold by the same
company should be considered at the time of deciding price for
industrial goods.
•Prices can be resolved through negotiation in many a cases. In
most of the cases the industrial prices are established by
competitive bidding on a project by project basis.
 Pricing Industrial Products
Characteristics of Industrial Prices
•Industrial buyers who are experienced and able to estimate the
vendors approximate production costs expect the increasing price to
be justifiable on the basis of either increasing cost or improvement
in product.
• Industrial prices are affected by several economic factors such as
inflation, change in interest rates, fluctuation in exchange rates
etc.
 The End
• https://www.trifacta.com/blog/pricing-optimization-with-
data-preparation/
• https://www.pricingsolutions.com/pricing-analytics/
• https://www.youtube.com/watch?v=sBjMmtKSgDs