MarketingManagement

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Unit10
Structure
10.1. Introduction 10.2. Factorsaffectingpricedetermination 10.3. Costbasedpricing 10.4. Valuebasedandcompetitionbasedpricing 10.5. Productmixpricingstrategies 10.6. Adjustingthepriceoftheproduct 10.7. Initiatingandrespondingtothepricechange 10.8. Summary Terminalquestions AnswerstoSAQsandTQs

Pricing

10.1.Introduction Price determination is very important aspect of strategic planning. Marketers fix the price of the productonthebasisofcost,demandorcompetition.Dell,whichallowscustomerstocustomizethe productadoptedflexiblepricingmethods.Incontrast,Indianoilcompaniesproductpricesarefixed bythegovernmentwherecompanydoesnothaveanycontrol.RetailerlikebigbazaarFairpriceand Subhiksha targeted price conscious consumer. Manufacturers and service providers all over the worldoutsourcedsomeoftheirfunctionstodevelopingcountriestogetcostadvantagewhichhelp theminreducingtheirfinalprice.Internethasbecomealternativetoolforshoppingtotheconsumer. Itofferswiderangeofproductsandlesserprice. LearningObjectives Afterstudyingthisunit,youwillbeableto 1. Findoutthefactorsthatinfluencethepricingstrategies. 2. Understandvariousapproachestopricing 3. Analyzethepricingstrategiesadoptedbymarketers 4. Knowthesituationswhenmarketershouldinitiatethepricecuts.
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10.2.FactorsAffectingPriceDecisions 1.Marketingobjectives:Therearefourmajorobjectivesonwhichpricesaredetermined.Theyare survival, current profit maximization, Market share leadership and product Quality leadership. Survivalstrategyadoptedwhencompanyisfacingstiffcompetitionfromthecompetitorsanditwants quick reaction and recovery. Current profit maximization strategy is used to defend the market position.Toexplain,assumeacompanyisoperatinginthelubricantsbusiness.Itssalesandmarket shareareveryhigh.Italwaystriestoholdtheircurrentposition.Todothisitincreasesthepriceof the product. The next objective is market share leadership. Here, company strives to achieve the leadership position in the market. It reduces the price of the product so that more number of customers buys the product. Through volume generation company gets the market leadership position. Product quality leadership objective is used when company decides to come with high qualityproductandpremiumprice.Theintentionofthecompanyistocatertotheneedsoftheniche segment. 2.Costs:Thecostofmarketingandpromotingtheproductwillhavedirectimpactontheprice.For example, Airline fuel cost went up recently. All airline companies increased the price of the ticket. Companywillbeincurringfixedcost(plant,Machineryetc...)aswellasvariablecost(Rawmaterial, laboretc)Thefixedcostwillgodownifthenumberofproductsproducedincreases.Thevariable costoftheproductdecreasesiftheproductisproduceduptooptimallevelandthenonceagainit goes up. Hence the total cost (fixed cost plus variable cost) vary according to bothfixed cost and variable cost. Marketer is interested in knowing the break even analysis when he introduces the productinthemarket.Thebreakevenpointforaproductisthepointwheretotalrevenuereceived equalsthetotalcostsassociatedwiththesaleoftheproduct(TR=TC).Abreakevenpointistypically calculatedforbusinessestodeterminewhetheritwouldbeprofitabletosellaproposedproduct,as opposedtoattemptingtomodifyanexistingproductinsteadsoitcanbemadelucrative.BreakEven Analysis can also be used to analyze the potential profitability of an expenditure in a salesbased business. 3.4Ps of marketing: The price of theproduct is determinedby the other marketing mixelements also.Productinfluencesthepriceleveli.e.iftheproductqualityisveryhighcompanywouldliketo price it high and vice versa. The new product requires aggressive promotion and results in higher promotioncostandhigherprice.Supplychainmanagementalsoplaysanimportantroleintheprice
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determination. If the organization able to integrate their supply chain well then it will be having distribution advantage than others. Let me explain these concepts with examples. Nokia when it introduced 1100 handset in Indian market priced at Rs 5200. It did so to get back its R&D and promotioncost.Whenthesalespickedup,thepriceoftheproducthascomedowntoRs3800.Cavin care introduced sachets and priced at 50 paisa. HUL was forced to come out with sachets at the sameprice. 4.Natureofthemarketanddemand:Thepricedeterminationdependsonthenatureofthemarket also.Thenatureofthemarketisclassifiedintofollowingcategories. a.Perfectcompetition b.Monopolisticcompetition c.oligopolisticcompetition d.Monopoly a.Perfectcompetition: Thenatureofthemarketwheremanybuyersandsellersexists.Boththe buyersandsellersexhibittheswitchinghabit.Ifthesellerchargesmorefortheproductthenbuyer will shift to another seller. Usually in these type of market companies should set their prices accordingtothecompetition. b.Monopolisticcompetition:Thenatureofthemarketwheremanybuyersandsellersexists.The differencebetweenPerfectcompetitionandmonopolisticcompetitionisincaseoflatterpricesforthe products vary according to the differentiation where as in case of former there is only one price exists. In case of Monopolistic competition prices are fixed by the gap in the product line of all competitorsandlevelofdifferentiationthecompanyisabletodo. c.Oligopolisticcompetition:Themarketconsistfewplayersanddominantinthemarket.Theydo notallownewplayerstoenterthemarket.Theyarepricesensitivetoeachother d.Monopoly:Heremarketconsistsofoneseller.AnIndianrailwayhasmonopolyovertherailway industryinIndia.Itisabletosellitsproductsandservicesatthedeterminedrates.Inthemonopoly marketsusuallycontrolledbythegovernmentpricesareeconomical.

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Demandsfortheproductvaryaccordingtothepriceset.Generallycustomersthinkthathigherthe prices better the qualityof the product and lower the price lower thequality of the price. Marketer should understand this perception. This perception will determine the demand for the product. For example,customerthinksthatMercedesashighqualityproductandchikshampoowhichcostsless than other shampoo as low quality. After analyzing the perception about the price, marketer is interestedinfindingoutthepriceelasticityofdemand. The price elasticity of demand is defined as percentage change in quantity demanded to the percentage change in the price. To explain, assume that the price of the product is Rs 12 and marketisperfect.Companyisabletosell1000unitspermonth.IfthepriceisrevisedtoRs13and companyexpects900unitstobesoldintheparticularmonth.Thepriceelasticityofdemandforthe productis Priceelasticityofdemand=%changeinquantitydemanded/%changeinprice. =10%/8.33% =1.2 ThismeanscompanyishavingnegativePriceelasticityofdemand. Themarketingimplicationislessisthepriceselasticityofdemanditisveryeasyforthemarketerto changetheprice.Marketerswhoareinterestedinsalesandproducthaveinelasticityofdemandwill gofortheloweringoftheprices. 5.Competition:Priceisalsodeterminedbyhowintensethecompetitionisintheindustry.Cellular industryandairlineindustryinIndiaareinvolvedinsuchtypeofpricewars.Thepricewarbetween Hutch(NowVodafone)andAirtelisexemplary.AirDeccanwhichstartednofrillairlinemadeother airlinerslikegoair,spicejetandparamounttoreducethepriceoftheirairlines. 6.Environmentalfactors.Theseexternalfactorsareverycrucialforthecompanyspricedecisions. We discussed the impact of Macro and micro environment on the companys strategies. For example, in the union budget tax on cigarette is increased. Hence company that manufactures cigarette should increase the price. The increase in the price is determined by the government environmentwhichisexternaltothecompany.
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10.3.Costbasedpricing I.Costpluspricing:Themethodofaddingmarkuptothetotalcostoftheproduct Procedureforcalculatingcostpluspricing: a. Findoutthevariablecostperunitandfixedcost. b. Estimatethenumberofunitsthecompanyisintendedtosell. c. CalculatetheUnitcostbythefollowingformula Fixedcosts Unitcost=Variablecost+ Unitsales d. Findouttherequiredmarkup(desiredreturnonsales) e. Calculatethepricebythefollowingformula. Unitcost Price= (1 Desiredreturnonsales) Problem:CompanyXwouldliketosell75,000unitsintheyear2008.Thefixedcostofthecompany isRs2LakhandvariablecostisRs5perunit.Companywants30%profitaftersales.Calculatethe Priceoftheproducttoachievedesiredsalesandprofit. Solution: Unitcost=VC+(FC/unitsales) =5+(200,000/75000) =7.67 Price=Unitcost/(1desiredreturnonsale) =7.67/(10.3) =10.85 ApproxRs11/unit.
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Advantagesofcostpluspricing: 1. Sellersaremorecertainaboutthecostthanthedemand. 2. Ifallthecompaniesintheindustryusethismethodpricebecomestandard. 3. Itisfairertobothbuyersandsellers. Disadvantagesofcostpluspricing: 1. Itignoresthedemandandcompetition 2. Iffewerunits are sold thenfixed cost will be spread to less number ofunits. This lead s to higherunitcostandhigherfinalprice. II.Breakevenpricing: Thefirmdeterminesthepriceatwhichitwillmakethetargetprofit. Proceduretocalculatethebreakevenvolume: 1. Findoutthetotalfixedcostofthecompany. 2. Determinethepriceonwhichcompanywouldliketosell 3. Calculatethevariablecostperunit. 4. Determinethebreakevenvolumebythefollowingformula Breakevenvolume=Fixedcost/(Pricevariablecost) Proceduretoidentifybreakevenprice 1. Determinetheunitdemandneededtobreakevenatagivenprice. 2. Findouttheexpectedunitdemandatgivenprice. 3. Findoutthetotalrevenueatagivenprice. 4. Calculatethetotalcost(assumingfixedcostandtotalofvariablecost) 5. Determinetheprofitfromthefollowingformula Profit=Totalrevenuetotalcost. Assume: Fixedcost:Rs1,000,000
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Price:Rs20 Variablecost:Rs12 BEV=1,000,000/(2012) =125,000. Price Unit demand Expected price(ii) unit Total revenue Total cost iv( Profitviiiiv assumed fixed cost Rs 10 Lakh and constant variable cost Rs12) Rs16 Rs18 Rs20 Rs22 Rs24 250,000 166,667 125,000 100,000 83,333 340,000 180,000 140,000 90,000 60,000 4,800,000 3,240,000 2,800,000 1,980,000 1,440,000 5,080,000 3,160,000 2,680,000 2,080,000 1,720,000 280,000 80,000 120,000 100,000 280,000

needed breakeven(i)

to demand at given iii=(Price*ii)

Rs20aretheidealpricetobreakeven. 10.4.ValueBasedandCompetitionBasedpricing I. Value basedpricing: Settingthe price of a product on thebasis of consumers value rather than manufacturerscost. Differencebetweenvaluebasedandcompetitionbasedpricing COSTBASEDPRICING

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Product

Cost

Price

Value

Customers

VALUEBASEDPRICING

Customers

Value

Price

Cost

Product

Costbasedpricingstartswithdevelopmentofproductandpriceswerefixedlater.Incaseofvalue basedpricingcustomersaregivenutmostimportance.Theproductisdevelopedonlyaftertheprice andcostestimationinvaluebasedpricingmethod.Toexplainboththeoriesletmetakeexamples, companyXthatmanufactureselectricswitchesdevelopstheproductandsetsthepriceonthebasis oftotalcostandtargetreturnrequired.CompanyYthatmanufacturesfoodproductsresearchesthe consumerneedandpreparescustomervalues.Onthebasisofvaluescompanysetstheprice Everydaylowpricing: Inthisstrategyorganizationchargesconstantlowpricesandnotemporarydiscounts.Thismethodis popularizedbyWalMart. HighLowpricing: Charging higher prices everydaybut runningfrequentpromotions to lowerthepriceson temporary prices. 2. CompetitionBasedpricing:Methodinwhichasellerusespricesofcompetingproductsasa

benchmarkinsteadofconsideringowncostsorthecustomerdemand a) DestroyerPricing This strategy is used as an attempt to eliminate competition. It involves lowering companies prices to an extent where competition cannot compete and consequently, they go out of
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business.Itisthereforeimportantthatonehastorecognizehowthreateningthecompetitionis and research how competitive they can be with their prices:they may beable to compete with organizationspricecutsandconsequentlyboth,orevenjustcompetitormaygooutofbusiness.

b)PriceMatchingorGoingRatePricing Many businesses feel that lowering prices to become more competitive can be disastrous for them(andoftenverytrue!)andsoinstead,theysettleforapricethatisclosetotheircompetitors. Anypricemovementsmadebycompetitionisthenmirroredbytheorganizationsolongthatone can compensate for any reductions if they lower their price.

c)PriceBiddingorCloseBidPricing Pricebiddingisastrategymostcommonwithmanufacturing,buildingandconstructionservices. Inthisstrategy,companiessubmitthequotationaccordingtothetenderstipulations SelfAssessmentquestions1 1. Currentprofitmaximizationstrategyisusedtodefendthe 2. Breakevenpointoccurswhen a. Totalcostequalsfixedcost b. Totalcostequalstotalrevenue c. Totalcostequalsvariablecost d. Alltheabove 3. marketconsistsfewnumberofsellers a. Perfectmarket b. Monopolistic c. Oligopolistic d. Monopoly 4. Unitcostequalsto a. Variablecost+(fixedcost/unitsales) b. Fixedcost+(variablecost/unitsales) c. (Variablecost+fixedcost)/unitsales d. Alltheabove.
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5. Everydaylowpricingis a. Valuebasedpricing b. Competitionbasedpricing c. Costbasedpricing d. Alltheabove.

10.5.ProductMixPricingStrategies 1.ProductLinepricing:strategyofsettingthepriceforentireproductline.Marketerdifferentiatethe priceaccordingtotherangeofproductsi.e.supposethecompanyishavingthreeproductsinlow, middleandhighendsegmentandpricesthethreeproductssayRs10Rs20andRs30respectively. Figure10.1

NOKIA1110 Price:Rs1349

NOKIA7610 PriceRs6249

NOKIAE90 PriceRs34599

IntheaboveexampleofNokiamobilephonesNokia1110ispriced@Rs1349,Nokia7610priced@ Rs6249andNokiaE90priced@Rs34599.Allthethreeproductscatertothedifferentsegments Low,middleandhighincomegrouprespectively.Thethreelevelsofdifferentiationcreatethreeprice pointsinthemindofconsumer.Thetaskofmarketeristoestablishtheperceivedqualityamongthe threesegments.Ifthecustomersdonotfindmuchdifferencebetweenthethreebrands,he/shemay optforlowendproducts. 2OptionalProductpricingstrategyisusedtosetthepriceofoptionaloraccessoryproductsalong withamainproduct.

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Figure10.2

Rare underbody Rs BodycoverRs1521 Slide 1123 MarutiSuzukiwillnotaddaboveaccessoriestoitsproductSwiftbutalltheseareoptionalcustomer hastopaydifferentpricesasmentionedinthepicturefordifferentproducts.Organizationsseparate these productsfrom main product sothat customer should notperceive products are costly. Once the customer comes to the show room, organization explains the advantages of buying these products. 3. Captive product pricing: Setting a price for a product that must be used along with a main Molding Rs 8883 RoofEndRs6396

product.Forexample,Gillettesellslowpricedrazorsbutmakemoneyonthereplacementcartridges. 4. By product pricing is determining the price for by products in order to make the main products pricemoreattractive.Forexample,L.T.OverseasmanufacturersofDawaatbasmatirice,foundthat processingofriceresultsintwobyproductsi.e.ricehuskandricebrainoil.Ifthecompanysellshusk andbrainoiltootherconsumers,thencompany 5.Productbundlepricingisofferingcompaniesseveralproductstogetheratthereducedprice.This strategyhelps companies togenerate more volume,get ridof theunusedproductsandattract the priceconsciousconsumer.Thisalsohelpsinlockingthecustomerfrompurchasingthecompetitors products.Forexample,Anchortoothpasteandbrushareofferedtogetheratlowerprices. 10.6Adjustingthepriceoftheproduct. Competitionhasforcedcompaniestoadjusttheirbasepricesaccordingtothesituations.Thereare sixdifferenttypesofstrategiescompaniesareadopting.Theyare

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1. Discountsandallowances 2. Locationpricing 3. Psychologicalpricing 4. Promotionalpricing 5. Geographicalpricingand 6. Internationalpricing. Discountsandallowances.Companiesofferreductioninthepriceforthecustomersonthebasis offourdifferentconditions. a. Cashdiscountisgivenwhenthecustomermakesearlypaymentbeforetheduedate.Toexplain amanufacturegave21dayscredittoagrocerystoreperson.Ifthecustomerpaysthebillwithin7 dayscompanymayaskhimtopay2%lessthantheactualamount. b. Quantity discount is a price reduction to buyers who buy the products in large quantities. Suppose a manufacture sells submersible pumps for Rs 20,000, and if customer buys three motorsatonegothenhewillreducethepriceoftheproducttoRs18,000. c. Functional discount is offered when customer carries the promotion or other marketing activities.Toillustrateachemistwillbepaidnominalamountfordisplayingthecompanyproducts orpromotingthecompanyproducts. d. Seasonaldiscount is usually offered when customer purchases the product in theoff season. Forexample,ifcustomerspurchasethewinterclothinrainyseasonthenhe/shewillgetdiscount onthetotalproductsproduced. Allowancesareusuallypaidtothemiddlemenwhoactivelyinvolvedinpromotingtheproducts.

1. Locationpricingisthemethodofsettingthepriceoftheproductaccordingtothelocations.Here
companychangesthepricefromonelocationtoanotherlocationthoughothercostremainsthe same. To make it more clearer, company X is having two stores, one in a market area and anotherinsuburbanarea.Itchargesmoreinthemarketareaandlessinthesuburbanarea.

2. Psychological pricing: According to Kotler Psychological pricing is a pricing approach that

considers the psychology of prices and not simply the economics the price is used to say
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somethingabouttheproduct.Forexample,V.K.exportsetsRs299andRs399foritsleather products.

3. Promotional pricing: Organizations sets the price of their product below the list price and
sometimesevenbelowcost.Theobjectiveofsuchpricingistoachieveimmediatesale,increase the customer footfall, avoid the competition and introduce the product. Big bazaar annual clearancesaleetcistheexampleofthistypeofpricing.

4. Geographical pricing: setting thepriceon thebasis ofgeographies theyareselling the product

andfreightcharges.Inthisstrategydifferentoptionsexistforthecompany.Theyare a. Freightchargestobepaidbythecustomer(FOBpricing) b. Differentzoneshavedifferentpricesi.e.companymaychargedifferentpricesinsouthandnorth zone.(Zonepricing) c. Samepriceplusfreightchargesforallthecustomers(Uniformdeliveredpricing) 5 International pricing: organizations should consider the different external factors and customer profileindifferentcountries.Itshouldadopttheirproductsandtheirpricesaccordingtothat.For example,CIPLAsellsitsAIDSmedicinesinAfricaandAmericawithdifferentprices. 10.7 Initiatingandrespondingtothepricechanges 1. INITIATINGTHEPRICECHANGES Initiatingthepricecuts:Belowwearediscussingthesituationswhenorganizationsthink ofinitiatingthepricecuts a. Companiesreducetheirpricewhentheyhaveexcesscapacity. b. Fallingmarketshareinthefaceofstrongmarketcompetition c. Dominatethemarketthroughlowercosts. Initiatingpriceincreases a. Risingcostofrawmaterials. b. Demandfortheproductexceedsthesupply. Buyerreactionstopricechanges a. Reducepricemeansreducedquality
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b. Reducedpricemeanscompanyisnotsellingtheproductasexpected. c. Pricesmaygodownfurther. d. Mayavoidbuyingtheproductforsometime 2.Respondingtopricechanges Inthecompetitiveworldothermanufacturersometimesinitiatesthepricechanges.Insuch situationscompanyshouldanalyzetwosituations Ifthepricecutofothercompanyisnotaffectingourcompany,thenholdcurrentpriceand monitorthemarket.Thissituationhelpstokeeptheprofitabilityofthecompany. Ifthepricechangeofothercompanyaffectsthecompanythenitshouldtakeanyoneof thefollowingsteps a. Reducethepriceoftheproductonparwithcompetitionorbelowthecompetition. b. Increasetheperceivedqualityofcompanyandproduct. c. Improvethequalityoftheproductandthenincreasetheprice. d. Launchdifferentbrandwhichcanfightinthelowerend.

SelfAssessmentQuestions2: 1. Strategyusedtosetapriceforaproductthatmustbeusedalongwithamainproduct. 2. Thepricingstrategyinwhichcompanysellsitsseveralproductsatreducedprice a. Bundlepricing b. Byproductpricing c. Captivepricing d. Optionspricing 3. Razorandcartridgeexampleisusedfor a. Bundlepricing b. Byproductpricing c. Captivepricing d. Optionspricing 4. FOBpricingisanexampleof a. Promotionpricing
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b. Internationalpricing c. Discountsandallowances d. Noneofthese 5. isgivenwhenthecustomermakesearlypaymentbeforetheduedate.

10.8.Summary

1. Therearefourmajorobjectivesonwhichpricesaredetermined.Theyaresurvival,currentprofit
maximization

2. The break even point for a product is the point where total revenue received equals the total
costsassociatedwiththesaleoftheproduct(TR=TC).

3. The price elasticity of demand is defined as percentage change in quantity demanded to the
percentagechangeintheprice.

4. OptionalProductpricingstrategyisusedtosetthepriceofoptionaloraccessoryproductsalong
withamainproduct.

5. By product pricing is determining the pricefor by products inorder to make the mainproducts
pricemoreattractive

6. Productbundlepricingisofferingcompaniesseveralproductstogetheratthereducedprice.

TerminalQuestions: 1.Discussthefactorsthoseinfluencepricedecisions 2.Writeanoteoncostbasedpricing. 3.Explainvaluebasedandcompetitionbasedpricing. 4.Howorganizationsshouldadjusttheirpricesoftheproduct? 5.Writeanoteonproductmixpricingstrategies.

AnswerstoSelfAssessmentQuestions SelfAssessmentQuestions1 1. Marketposition.

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2. Totalcostequalstotalrevenue. 3. Oligopolistic 4. Variablecost+(fixedcost/unitsales) 5. Valuebasedpricing SelfAssessmentQuestions2 1. Optionalproductpricing 2. Bundlepricing 3. Captivepricing 4. Noneofthese 5. Cashdiscount AnswertoTerminalQuestions 1. Refer10.2 2. Refer10.3 3. Refer10.4 4. Refer10.6 5. Refer10.5

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