PRICING METHODS

At the end of this module the learning outcomes are

1. What is the concept of pricing?
2. What steps need to be followed in fixing prices?
3. What are the various types of pricing methods?

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 PRICING METHODS

Suggested Readings
1. Marketing Management by Philip Kotler,
Millenium edition, Chapter – 15

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 PRICING METHODS

Have a look at these

Spice Jet
• 20000 tickets available at a price of Rs
1000/-(excluding taxes)
Economic Times
• Priced at Rs 2/ on Monday to Friday and Rs
10/ on Saturday/Sunday
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What is pricing?

Pricing is customer‘s perception of the value of the

product.

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Pricing
• Significant changes in practices
• Organizations cutting and hiking prices
• Role of internet

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Internet
• To buyers
• Get instant price comparisons
• Name the price and have it met
• Get products free

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 PRICING METHODS

Sellers
• Monitor customer behavior
• Give certain customers access to special
prices
• Negotiate prices

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How companies price

• Decisions taken depending on size and level
of centralization

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 Common Pricing Mistakes
• Determine costs and take traditional industry
margins
• Failure to revise price to capitalize on market
changes
• Setting price independently of the rest of the
marketing mix
• Failure to vary price by product item, market
segment, distribution channels, and purchase
occasion
Consumer Psychology
and Pricing
Reference Prices

Price-quality inferences

Price endings

Price cues
 Consumer Psychology
and Pricing
Reference Prices
• Consumers have their own reference prices

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 Consumer Psychology
and Pricing
Price-quality inferences
• Products exclusivity
• Create scarcity
• Stimulate demand

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 Consumer Psychology
and Pricing
Price cues
• Rs 1999/
• Indication of discount
• Digit ‘9’

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 PRICING METHODS

PRICE
– One of the element of Marketing Mix
– Produces revenue
– Other elements result in costs
– Very flexible
- Changed quickly
– Other elements relatively more difficult to
change
Needs to be handled well?
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 PRICING METHODS

Pricing policy – six step procedure

1. Selecting the pricing objective
2. Determining demand
3. Estimating costs
4. Analyzing competitor’s cost, prices and offers
5. Selecting a price method
6. Selecting final price

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Setting the price objective

Can be many
- Survival
- Maximum current profit
- Maximum market share
- Maximum market skimming

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Survival
• Used when organizations experience
• Overcapacity
• Intense competition
• Cover variable and partial fixed costs

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Maximum current profit

• Combination of prices and costs
• Which yields the maximum profit

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 PRICING METHODS

Maximum market share

• Higher sales volume
• Lower costs
• Higher long-term profits
• Useful
• Market is highly price sensitive
• Production and distribution costs fall with
experience
• Low price discourages potential competitors 19
 PRICING METHODS
Maximum market share
Tata Nano
– Priced very low
– How?
– Components created at low-price points

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Maximum market skimming

Used when
• Sufficient buyers have high current demand
• Unit costs are not high for small volume
• High initial price does not attracts more
competitors
• High price communicates image
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 PRICING METHODS
Example-Apple Ipad
Market Skimming strategy:
– Ipad retina
– Artificially high priced 800 $
– High margin
– Who pays 800 $
– People who can’t wait
– Gradually reduce price
– Increases volume
– Prices drop down to may be50% after 2 yrs.
Apple skims the market.

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Price-quality leadership
• Prices are premium
• Leaders in quality
Starbucks
Mercedes

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2. Determining demand
– Price is related to demand
– How sensitive is demand to price
– Price elasticity of demand critical
– Suppose price is increased by 1 lac of two cars
• Maruti 800
• Mercedes.
– Where will be more affect on demand
– Maruti – 800
Price is highly elastic to demand in Maruti – 800
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 PRICING METHODS

Price is highly inelastic to demand in case of

Mercedes
– Estimating price elasticity of demand is
critical.
– This depends on
• No of substitutes
• Habits of consumers
• Quality difference
• Do buyers realty notice?
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3. Estimating costs.
– Price = costs + profit
– Costs are of two types
• Fixed cost
• Variable cost
Fixed cost
- Do not change with volume sales
Examples
– Salaries of sales personnel
– Cost of building
– Cost of trucks. 26
 PRICING METHODS
Variable costs
• Vary with sales volume.
• Cost of raw material
Maruti – 800
- Cost of wheel
- Cost of engine
- Cost of carburetor
Pricing has to be such that it recovers all costs in the
long run

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4. Analyzing competitor’s costs prices and

offers
Pricing has to consider
– Competitor’s costs and prices
– Image of competitors products
– In a price war-
• Winner is the one who has the lowest cost
– Do not try to fight on prices if your costs
are higher then your competitors
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5. Selecting a pricing method.
Six methods of pricing
– Mark up pricing
– Target – return pricing
– Perceived- value pricing
– Value- pricing
– Going- rate pricing
– Sealed- bid pricing

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1. Mark – up pricing
– Estimate costs
– Add profit margin
– Arrive at prices

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 PRICING METHODS

Mark – up pricing
• Assumption that demand exists at that price
• Used in many industries
• Price is related to costs

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 PRICING METHODS
2. TARGET – RETURN PRICING
- You investment in a business
- You expect a return
- Return varies from individual to individual
EXAMPLE
- Suppose you invest 10 Lac Rs to make mixers
- You want 20% return on investment
= 0.2 x 10 Lacs = 2 Lacs
- Your costs are Rs 16/ mixer
No .of mixers to be sold = 50,000
Target – return price
= Unit Cost + (desired return x invested capital) 32
Unit Sales
 PRICING METHODS

= Rs 16 + 0.20 x 1000000
50,000
= Rs 20

If you sell 50000 mixers at a price of Rs 20, you well

earn a return on investment of 20%

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 PRICING METHODS

TARGET – RETURN PRICING

• Ignores price elasticity and competitor
prices

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3. Perceived-value pricing
– Base price on perceived value
– Buyer’s perception of value and not seller’s cost, as
the key to pricing.
Made up of
– Buyer’s image of the product performance
– Channel deliverables
– The warranty
– Customer support
– Supplier reputation
– trustworthiness
– Use promotional methods to communicate value 35
 PRICING METHODS

Perceived-value pricing
Sony Television
Why one has to pay a higher price for Sony
Why Rs 38000/
• Rs 30000 is the equivalent price of competitors
• Rs 2000 for superior durability
• Rs 3000 for superior reliability
• Rs 1000 for superior service
• Rs 2000 for Sony’s longer warranty on parts
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4. Value pricing
– Low value pricing for a high offering
– How to offer low price without sacrificing
quality
– May require reengineering
– Wal-Mart, Big Bazaar

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Value pricing
Southwest Airlines
• Created a new price point
• Lower prices
• Reducing benefits which customer would not value

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5. Going rate pricing

– Basis of price largely on competitor prices
– Prices almost identical
– Typically in oligopolistic markets
– Similar offerings

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Going rate pricing

Mobile service operators
– Prices almost identical
– When one changes prices
– Other follows
– Launch of Dolphin – MTNL
– Lower monthly charges
– Lower airtime changes
– Airtel, Reliance also lower
– Reflects industry’s collective wisdom 40
 PRICING METHODS

6. Auction-type pricing
– Use of internet
– Auctions are popular
– Different types
– English auction
– Dutch auctions
– Sealed-bid auctions

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Auction-type pricing
– Sealed-bid auctions
– Popular as tenders
– Each bidder puts a confidential bid
– How important is customer
– Competitive situation
– Used by governments for standard products
– However for one-time projects
– Two stage
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Auction-type pricing
Technical bids
• Only bids which qualify
Commercial bids
• Price, delivery aspects

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Sealed bid – Example
DTC
– Runs buses
– Requires tyres
– Invites bids
– Tyre manufacturer bid
– CEAT, MRF, Goodyear, Apollo
– Each has to put the “Right Price”
– To be the lowest
– Not very low
– Sometimes MRF Wins
– Sometimes Goodyear wins
– Understanding each other’s strategy in the past 44
situation critical
 Step 6: Selecting the Final Price

• Impact of other marketing activities

• Company pricing policies
• Gain-and-risk sharing pricing
• Impact of price on other parties
 PRICING METHODS

Company pricing policies

• Create policies
• Airlines charging for cancellations
• Banks for not maintaining a minimum
balance
 PRICING METHODS

Gain-and-risk sharing pricing

Power projects
• Supply of equipment
• Certain performance guarantee
• Penalty for reduced performance

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Impact of price on other parties

• Laws
• Regarding pricing
• Cartels are illegal
• Government controls

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7. Selecting the Final Price

– Discussed various pricing methods
– Which one will suit the company
– Other factors

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 Price-Adaptation Strategies
Discounts/ Allowances
Countertrade • Cash discount
• Barter • Quantity discount
• Compensation deal • Functional discount
• Buyback arrangement • Seasonal discount
• Offset • Allowance
 PRICING METHODS

Geographical pricing
• Cadbury’s Dairy Milk versus Cummin’s
diesel generators

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Countertrade
• Accept payments other than cash
Why counter trade
•Lack of money
•Lack of value
•Lack of faith in money
•Ease of transactions
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Promotional Pricing Tactics
• Loss-leader pricing
• Special-event pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties and service
contracts
• Psychological discounting

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 PRICING METHODS

Promotional pricing
Loss-leader pricing
• Lower prices
• Generate traffic

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Special-event pricing
• Special events
• Draw customers

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 PRICING METHODS

Low-interest financing
• Zero/low interest financing
• Instead of cutting prices

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 PRICING METHODS

Cash-rebates
• Clear inventories

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Longer payment terms

HDFC
• Lower EMI
• Stretch period
• affordable

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Warranties and service contracts

• Concern on service
• Commit warranties
• Not lower price

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Psychological discounting
• Setting artificially high price
• Lower prices
• Rs 3999/ to 3299/

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Differentiated pricing
• Adjust their basic price
• Differences in customers, products
Differentiated Pricing
• Customer-segment
pricing
• Product-form pricing
• Image pricing
• Channel pricing
• Location pricing
• Time pricing
• Yield pricing
 PRICING METHODS

Price discrimination
First-degree
• Different price to each customer
• Intensity of demand
 PRICING METHODS

Second-degree
• Seller charges less to buyers
• Who buy a large volume

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Third-degree
• The seller charges different amounts to
different class of buyers

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Customer-segment pricing
Railways
• Different prices for normal citizens and
senior citizens

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Product-form pricing
Big Bazaar
• Different types of shirts
• Styles, fabrics

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Image pricing
• Same product
• Two different prices
• Based on image

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Channel pricing
Coca-Cola
• Different prices
• Consumer purchases
• Vending machine
• Different restaurants
• Fast-food joint
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Location pricing
• Cost is same
• Price varies
• Cricket match

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Time pricing
Airtel
• Peak versus off-peak pricing
• Varies according to time

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 Pricing for Rural markets
Rural retailers
• Credit
• Sell in loose form
• Problem of spurious
• Low-unit packing(LUP)
• sachets

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 Pricing for Rural markets
Brittania
• Rs 2/ target price
• Tiger biscuits
• Attract customers from the unorganized
sector

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When does price discrimination work

• Markets must have different segments
• Different intensities of demand
• Practice must not breed consumer
resentment

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 Increasing Prices
Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts
 PRICING METHODS

Delayed quotation pricing

• Final price based on delivery
• Projects with long gestation period
• DMRC

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Escalator clauses
• Price linked to inflation
• Long gestation period
• Before delivery

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Unbundling
• Maintains price
• Removes accessories

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Reduction of discounts
• Withdraw cash and quantity discounts

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When consumers resist price hikes

• Decrease quantity
• Substitute less expensive material
• Reduce product features
• Removing free delivery
• Using less expensive material
• Reduce number of models
• Creating new economy brands 80