PRICING CONSIDERATION AND APPROACHES CHAPTER-7 PRICING CONSIDERATION AND APPROACHES

What is a price? Price is the amount of money charged for a product or service. More broadly speaking, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Historically price is the major factor affecting buyer choice.

However, in recent times, non price factors have become more important in buyer choice behavior. What factors to be considered when setting prices? Internal factors: Internal factors affecting pricing include the company’s marketing objectives, marketing mix strategy, costs and organizational considerations.

External factors: external factors that affect pricing decisions include the nature of the market and demand, competition and other environmental elements.

PRICING OBJECTIVES OF COMPANIES The diverse pricing objectives of companies are as follows: Profit maximization Sales growth and Survival

PROFIT MAXIMISATION: Economists model of perfect competition assumes that firms in a market act rationally in order to maximize their profits in long-term than the short-term.

SALES GROWTH: Sales growth may be an important objective, influencing pricing, because managers may have practical difficulties in establishing relationship between marketing strategy decisions and the resulting change in profitability. Going for growth may be their safest options.

SURVIVAL: For many struggling companies, the objective of maximizing profits or sales volume is quite unrealistic when they are fighting for their survival. In these conditions prices may be set at very low levels, simply to get enough cash into the organization to enable it to survive.

PRICING MODELS There are four types of pricing models adopted to fix the price for different products which are as follows: Cost based pricing Marginal cost pricing Competitor based pricing Demand based pricing

COST BASED PRICING: Cost based pricing is widely used in many sectors COST BASED PRICING: Cost based pricing is widely used in many sectors. In this method a company calculates its total cost and divides these by the total volume of resources used, in order to determine the average cost of each unit resources used. It then calculates the selling price by estimating the number of resources to be used, multiplying this by the unit cost and adding a profit margin.

MARGINAL COST PRICING: Here the company calculates the marginal cost of producing one additional unit of a product that is the addition to the company’s total costs of selling one extra item. Travel companies have for a long time used marginal cost pricing, mindful that some revenue is better than an empty plane seat or hotel room.

COMPETITOR BASED PRICING: Very often a marketing manager may go about setting prices by examining what competitors are charging. Once it has established what market it is in and who its competitors are, a company can go about setting comparative prices.

DEMAND BASED PRICING: In this type of pricing it is calculated based on what customers are prepared to pay and that is considered upper limit to a company’s pricing possibilities. In fact, different customers often put different ceilings on the price they are prepared to pay for a product. Successful demand oriented pricing is therefore based on effective segmentation of markets and price discrimination which achieves the maximum price from each segment.

PRICING STRATEGIES Pricing strategies usually change as the product passes through its life cycle. The introductory stage is specially challenging. Market skimming pricing Market penetrating pricing

PRICE ADJUSTMENT STRATEGIES Discount and Allowance Pricing Companies usually adjust basic prices to account for various customer differences and changing situations. DISCOUNT is a straight reduction in price on purchase during a stated period of time. ALLOWANCE is the promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s product.

SEGMENTED PRICING PSYCHOLOGICAL PRICING PROMOTIONAL PRICING GEOGRAPHICAL PRICING INTERNATIONAL PRICING

Test your learning What is a price? What are the factors to be considered when setting price? Explain What are pricing objectives of Companies? Explain Cost based pricing Model? Explain Competitor based Pricing model? Explain Demand based pricing model? What are the two strategies of pricing? Explain Explain Psychological pricing? Define Discount? Define Allowance? Explain promotional pricing?