UNIT-6PRICING DECISIONS

Concept of Price and Pricing:Price is an important mix in marketing mix. Price is taken to be such a standard on which the success of a marketing program depends. So, a marketing manager should pay attention to price mix while formulating a marketing program. Commonly, price means cost or monetary amount to be paid for receiving certain goods or services. In other words, price means the exchange of things with value among the parties involved in business.

In the economic context, price means the value of something expressed in money or any other monetary medium of exchange. Tuition fee for education, interest on principal amount, rent for building or room, fare for taxi, fee for doctor’s service, premium for insurance, wages for workers, commission for seller, etc are the example of price. In marketing, monetary amount paid for receiving goods or services or ideas is called price.

Pricing means the task of determining reasonable price of particular goods or services. Customers should pay certain amount to the producers or sellers for their goods or services they provide. For this, certain monetary value or exchanging capacity of goods or services should be determined on the basis of their importance. The same is called pricing. Pricing in marketing is to take an important strategic decision.

Thus, the meaning of price depends on perspective. The meaning of price may be different in the view point of customers and producers. Consumers pay money for goods or services according to their buying decision. So, in their view point price is the expense paid for receiving benefit. But in the producer’s viewpoint, price means the volume, cost and margin of the goods sold out.

Objectives of Pricing:-1. Profit-oriented objectives: Some firms adopt profit-oriented objective of pricing. They determine price of their products with the purpose of earning a profit. Profit-oriented price is determined in order to achieve the target from investment or net sales or to earn maximum profit. a) To achieve target return: Any business firm may determine the price of its goods or services so that certain percent of its investment or sales can be achieved. ctd………………………….

Producers determine the price of their products with the purpose that certain percent profit is earned from their investment. They may determine price so that 15% or 20% net profit can be earned. b) To maximize profit: Some companies determine the prices of their goods or services either to maximize profit or to earn a much profit or possible for a short or long term. The meaning of maximizing profit is not to take high prices forever. There are two motives for adopting the profit maximization objectives. The first is to maximize profit from each unit sold and the second is to maximize profit from total sales.

2. Sales-oriented objectives: Some companies especially big firms determine prices keeping in mind the high sales, volume rather than profit margin. The sales oriented objective is generally adopted in order to increase sales volume or to maintain an increase market share. a) To increase sales volume: Some firms determine the prices of their products with the purpose of increasing sales volume within a certain period.

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This does not mean to be careless towards profit. Increase in sales should be favorable to profit, because total profit increases automatically if sales value gradually increases every year. b) To maintain or increase market share: While determining the prices of their goods or services , under the sales oriented objective, some companies may be ready to enter into new markets or maintain the existing ones or expand. ctd……………………………

In this objective, there may be the motive of earning attractive profit in the long term. Some new companies start selling their products at the cast with the objective of earning more profit in the long run. 3. Status quo-oriented objectives: Besides profit oriented and sales oriented pricing objectives, there are also other objectives. The status quo-pricing objective is to maintain their reputation and market share and lessen the risk of loss. These objectives are related to stability in price and meeting competition. Ctd……………….

a. To stabilize price: Some firms, particularly leader industries, determine the prices of their products to achieve the objective of price stability. Keeping in mind the possible fluctuation in the demand for their goods or services, big companies make effort to maintain price stability to save markets from instability and uncertainty of prices. This objective helps increase goodwill and reputation of the company. b. To meet competition: Some companies determine the prices of their goods or services with the objective of meeting competition. Ctd……………..

They determine the prices of their products as much as the price of the products of other companies in market. No care is taken for the cost or profit. Since, this is a difficult task, only few competitive companies adopt this objective. In this way, while setting prices of the goods or services, the concerned companies may select any of the above-mentioned objectives. Doing so, the marketer should carefully consider the internal and external pricing factors.

Methods of Pricing:1. Cost-oriented pricing2. Demand-oriented pricing3. Competition-oriented pricing1. Cost-oriented pricing: This cost oriented method gives special care to cost of products. The cost oriented pricing method is also divided in three classes: a. Cost-plus pricing: This cost-plus pricing method is also called mark-up pricing. According to this method, price of any productctd……….

is determined adding certain percent of profit. Mostly small producer and retailers use this method. According to this method, no special qualification or experience is needed to fix price. So, this method can be used by any person. b. Target-return pricing: Every investor invests his capital to get return. The income expected from such investment is called target result. According to this method, expected result is added to total cost and is divided by sales units. Break even analysis can also be used for this.

c. Break-even pricing: The situation when income and total costs become equal is called break even pricing. In this break even situation, the firm neither earns profit nor suffers loss. If goods are produced in large quantity from breakeven point, the firm can earn more profit, but gets loss from the production if less quantity is produced from this point.2. Demand oriented pricing: Demand oriented pricing method is also called profitable pricing. This method gives emphasis only on customers value, perception rather than to the cost of production or services and market fees.Ctd……………….

Under demand oriented pricing, the following methods can be included:-a. Perceived value pricing: According to this method, business firm collects information about consumer’s views, perception, experiences, feelings etc. Then price is determined by calculating average on the basis of such information. In this method, at first, customer’s perceptions are collected and average is made out from them. b. Customer-value pricing: According to the Ctd……………

Customer-value pricing method, business company fixes very low price for high quality products. The company does so in order to occupy/control market share. This method of pricing is used by the companies having several product lines or products. Even such companies may this method only to some products but not to all products. 3. Competition-oriented pricing: The method of determining prices of products or services giving priority to market competition is called competition-oriented pricing. Ctd…………….

This method does not care demand & production cost. In this method, price may be fixed at going on rate, more or less than market price. Under market oriented or competition oriented pricing, the following methods can be used: a. Going rate pricing: If price of products or services is determined on the basis of market price, it is called going rate. In this method, price is determined on the basis of competitor’s price (equal to the price of the products of the competing companies).

b. Pricing below competition: The method of fixing prices lower than the competitor’s price is called pricing below competition. This method aims to attract price sensitive customers by sweeping market competitors aside. c. Pricing above competition: According to this method, price of products or services are fixed higher than the prices fixed by competitors. Generally, such pricing method may be applied for quality products or reputed brands.

d. Sealed bid pricing: Sealed bid pricing is also based on competition. In this method, price is determined on the basis of estimates of the price, the competitors may offer. So, in this method, production cost is not considered. Price should be fixed lower than the price offered by the bidders to get success in sealed bid. If the price becomes higher than competitor’s price, such sealed bid may be rejected. So the price should be fixed lower in competition than the price of the competing bidders who have registered sealed bid.

Pricing Strategies: 1. Market Entry Strategy2. Product Life Cycle3. Price Change Strategy4. Psychological Strategy 1. Market Entry Strategy: Producers produce various products. All the old and new products should be sent to market for sale. Specially, the marketing manager may adopt two strategies for sending new products to market for selling. They are as follows:-Ctd……………………………..

a. Market skimming pricing: Fixing more price of new product at the beginning is called market skimming pricing. According to such pricing strategy price of new products become a little more than estimated price of target market. b. Market penetration pricing: Determining very low price in the course of supplying new products to market is called market penetration pricing. According to such policy of pricing the price of new products is fixed much lower than the expectation of the target market.

2. Product life cycle strategy: Products/goods also have life cycle like living things. Different pricing strategies should be determined according to the lifecycle of the products. The given strategies is to be adopted in the following situations:a. Introduction stage of products: At this stage, market entrance strategy may be adopted. This strategy includes market hunting pricing and market penetration pricing from which large share of market can be occupied.

b. Growth stage of product: At this stage, sale of products mounts very high. Prices of the products should be cut down a little to encourage this tendency. c. Maturity stage of product: Competition of the products grows at this maturity stage. Sale and profit remain stable. In this stage, a strategy should be adopted to cut down price rate slightly in order to maintain market share.

d. Decline stage of products: Sale quantity declines very fast at this stage of product. Only some loyal customers may decide to buy the product. So, the strategy to decrease advertisement costs, cut price down and maintain existence of the firm should be adopted. 3. Price change strategy: Price should be changed according to the change of market environment.

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But, while changing price, study and analysis of customers, competitors, suppliers and government’s reactions should be thoroughly considered. There are two alternatives in price changing strategy:-a. Price increase strategy: Even a country has to face different problems. Due to inflation in the country, new taxes arrangement by government and lack of supply, prices need to be increased.

b. Price decrease strategy: The producer should face market competition at any cost. On the other hand, full capacity of the company should also be used. Besides, the company should not escape from price war. In such situation, any company or firm should cut down the price. 4. Psychological pricing strategy: Determining price considering the customer’s perception is called psychological pricing strategy. Ctd……………….

This type of strategy encourages sentimental customers to buy products. This pricing strategy includes the following strategies:-a. Odd-even pricing strategy: Odd price should be fixed to make the customers realize the price is low. For example, Rs. 99.95 instead of Rs. 100. Even price fixing make the customers realize that the product is of good quality. For e.g. Rs. 150, Rs. 200 etc.

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b. Customary pricing strategy: This pricing strategy is based on the traditional practices. Product prices are determined on the basis of customers expectation. For e.g. as a practice every body has known that the price of Nepalese match is Rs. 1. So, if the price of a match is fixed more or less than Rs. 1., then the customers may be psychologically affected. So, the producer should also fix price Rs. 1 for the new match. However, such pricing strategy may not be practical in view of cost.

c. Prestige pricing strategy: Prestige pricing strategy can also be adopted to establish prestige of any product. According to this strategy, price of the product is determined very high. This makes the customers think the product is of high quality and want to heighten their prestige by buying such products. Prestige price may be determined for ornaments, drinks, vehicles, other luxury goods etc because the customers of such products/goods may be economically strong.

d. Discount Strategy: Discount pricing strategy also may be adopted for any product. According to this strategy, price of product goes high. Then the seller can be offered heavy discount for the products. Such pricing techniques encourages the customers. e. Promotional pricing strategy: Reputed companies can be offered cash rebates, longer payment terms and low price of the established product. Such pricing techniques are called promotional pricing of the product. This strategy remains for short run term because the competitors may follow it. So the firm should improve product quality and services through advertisements.