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PRICING
Price has got various names like rent, fee, tuition, fare, rate, charge, interest, toll,
tax, premium, honorarium, dues, salary, wages, commission, etc
Price is the amount of money charged for a product or a service. It is the sum of
all the values that consumers exchange for all the benefits of having or using the
product or service
Price is the only element in the marketing mix that produces revenue. All others
are elements of cost
iii) Pricing that does not match with the other elements of the marketing mix
iv) Pricing that is not differentiated for different products, marketing segments,
etc.
Internal Factors :
External Factors :
INTERNAL FACTORS :
1) Survival : Applicable if
- Heavy competition
- Profits are less important, more important to keep the plant going
- Short-term strategy
- It estimates demand & cost at different levels of price & fixes price
at that level which yields max. Current profit or max. Cash flow or
max. ROI
- Company believes that the player with the largest market share will
enjoy lowest costs & highest long-run profits
- High price is charged to cover the high cost of quality & high cost of
R & D.
Decisions in the areas of product, promotion & distribution will affect pricing
Sometimes, companies use price as the pivotal product positioning tool. Other
marketing mix elements are built up to support that positioning
Target Costing (TC) turns the pricing approach inside out. Traditionally, products
have been designed, costing determined, positioning planned & prices asked.
ii) Then the price is determined at which the product will sell given its appeal
& competition
iii) Then the desired profit margin is deducted from this to arrive at the target
cost
iv) Then, each of the component activities like design, engg., mfg., sales are
reviewed in order to eliminate functions, substitute parts, reduce supply
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vi) If projected cost cannot be reduced to target cost, the product will be
dropped
Costs :
Costs set the floor for the price that the company can charge for its
product/service
The company needs to charge a price that covers its costs & earns a fair return for
its effort & risk – taking
Costs can be fixed costs or overheads – that do not vary with production or sales.
For e.g. rent, electricity, interest, executive salaries, etc.
Costs can be variable, which vary directly, with the level of production, e.g. raw
materials, semi-finished inputs, packaging, etc. Variable costs tend to be the same
for each unit produced
Total Costs (TC ) are the sum of FC & VC for a given level of production
Management needs to charge a price that will at least cover the TC at a certain
level of production
Management needs to know how costs vary with different levels of production
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But after further increases in the daily production capacity, the average cost /unit
will go up at a point because of increasing diseconomies of scale – too many
workers to manage, too much paperwork, too many schedules & so on
This should decide the optimum capacity of the plant to take advantage of the
LRAC Curve
To take advantage of falling AC per unit, the company must try to grab max market
share early in the PLC by offering very low prices to increase sales. As its unit cost
falls through gaining experience, it can cut prices further
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This strategy of cutting costs entails risks. Price cutting gives the product a cheap
image
It assumes that competition is weak & won’t be able to match price cuts
Organizational Considerations :
Generally, top management sets the pricing objectives & often approves prices
proposed by lower level management
In large companies, where prices are relatively stable (e.g. oil companies), there
is a pricing department which reports to top management
EXTERNAL FACTORS :
While costs set the floor for pricing, the market & demand set the ceiling
In pure or perfect competition, there are several sellers & buyers who are
trading in commodity type products. Prices are determined solely on the basis
of the market forces : demand & supply
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In such a market the seller has to accept the going price. No seller can charge
a higher price because he will lose out to the other sellers. He cannot charge a
lower price because it will be matched by the others, thus neutralizing the
advantage. In such markets, MR, Advertising, Pricing, Sales Promotion play
insignificant roles
In a pure monopoly, there is one seller & many buyers. The monopolist could
be a govt. company, a private regulated company or a Pvt unregulated
company
A govt. monopolist might let a price below cost if the product is important &
the consumers cannot pay for the full cost (e.g. transport, education). The
price may even be set quite high to discourage consumption (Indian Railways,
Indian Airlines, long distance telephony)
In case of a Pvt. regulated monopolist, the govt. permits the setting of a price
that yields a “fair rate of return” (e.g. Hind Motors)
Non- regulated Pvt. monopolists are free to charge what the market will
bear(e.g. Coke)
In oligopoly, there are a few sellers & many buyers. Each seller is alert &
sensitive to the others’ pricing & others’ strategies (e.g. Steel, Oil, Cement,
etc)
A price cut by an oligopoly & will normally be matched by the other sellers
resulting in less revenues for all. A price increase may not be followed by the
others leading to quick erosion of market share. This leads to formation of
cartels (e.g. Pvt telecom network operators, Pvt. airlines)
In monopolistic competition, there are many sellers. Sellers seek out different
market segments within which they compete by differentiating their offers by
using branding, advertising, personal selling, pricing, etc. Buyers perceive
offers as different & pay different prices. So, price becomes one of the many
strategic tools rather than the defining one.
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Price-Demand Relationship :
The relationship between price charged & the resulting demand is shown by
the Demand Curve (DC)
Normally, price & demand are inversely related. But in case of prestige goods,
the DC slopes upward (e.g. perfumes, expensive cars, etc.)
If demand in elastic, marketers will consider lowering price to increase sales but
this can turn products into commodities
The less elastic the demand, the more it pays for the marketer to raise price
i. Cost a lot or
ii. Are bought frequently
They are less price-sensitive when the price is only a small part of the total cost
of procuring, operating & servicing the product over its lifetime, i.e. if the total
cost of ownership (TCO) is lower – Cost Benefit Analysis
The company needs to benchmark its costs against those of competitors to learn
whether it is operating at a cost advantage or disadvantage
It needs to learn the prices & qualities of competitors’ offers & use them as a
starting point for its own pricing
Environmental Factors :
Distributors’ perceptions
Government intervention
Social concerns
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PRICING APPROACHES
Now, if dealers want a mark-up of 50%, their MU Price = 20/ (1-0.5) =20/0.5
= Rs. 40 per unit.
Sellers feel more confident as they are more certain about costs
Break-Even Pricing :
At BEP, TR = TC
It begins with analyzing customer needs & value perceptions to set a price
The Company will ask consumers how much they will pay for a basic product &
& for each benefit added
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Companies adopting this approach seldom cut prices. Instead, they add value to
differentiate their offer to support higher prices, thereby trying to shift customer
focus from price to value
This is difficult for companies selling commodity type products. They still
differentiate their offers by charging EDLP (Every Day Low Prices) or High Low
Pricing
PRICING STRATEGIES :
Product Line Pricing : Setting price steps between product line items
Optional Product Pricing : Starts with a low price for the basic stripped – down
product to build consumer traffic & often add-on features at additional prices
Two-Part Pricing : A fixed fee + a variable usage rate (e.g. tel.bills, amusement
park tickets)