Pricing is the marketing function that involves determination of value of a product or service in monetary terms before it is offered in the market for sale.
Price is the marketing mix element that produces revenue. Price refers to the exchange value in terms of money of products and services which provide a bundle of satisfaction to the consumer. The price of a product increases with increase in sales revenue.
According to Prof. K.C. Kite, “It is a managerial task that involves establishing pricing objectives, identifying the factors governing the price, ascertaining their relevance and significance, determining the product value in monetary terms and formulation of price policies and the strategies, implementing them and controlling them for the best results.”
It refers to the task of translating into quantitative terms (monetary terms) the value of a product or a unit of service to customers. It involves –
- Establishing pricing objectives
- Identifying factors affecting price
- Determining the product value in monetary terms
- Formulating pricing policies
- Developing pricing strategies
- Setting prices and engaging in implementation and control of prices for maximum revenue
Objectives
- Maximize profits & return on investment
- Exploit competitive positioning
- Increase market share and market demand
- Face the competition
- Achieve price stability
- Resource mobilization
- Long run welfare of the firm
Factors influencing price:
| Internal | External |
| Objectives of the firm | Competition |
| Marketing mix | Government |
| Product differentiation | Middlemen |
| Cost of product | Buyers |
| Organisational factors | Demand |
| Economic conditions | |
| Product life cycle stage | |
| Market position of the firm |
Methods/Approaches to Pricing
(1) Cost based – Based on cost of production
♦ Mark-up / Cost plus pricing – Selling price includes total cost plus mark-up /margin that the firm desires.
Mark up Price = Unit cost (VC + FC)/(1 – desired return on sale)
♦ Full cost or Absorption cost pricing – Selling Price includes full cost of production and sales plus a mark-up required (desired) by the firm. It makes use of standard costing techniques. The cost includes –
Fixed Cost + Variable Cost + Selling and administrative cost + Advertisement cost
♦ Break even or Target return pricing – Firm determines the breakeven point i.e. the volume of sales required to reach a no profit, no loss situation then sets prices in order to achieve a certain level of return on investment.
T.R.P = Unit Cost + (Desired return X Invested Capital)/Unit Sales
(2) Market / Customer / Demand based
♦ What the traffic can bear – The seller sets the maximum price that the buyers are willing to pay under given circumstances.
♦ Skimming Pricing – The seller sets a relatively high price when the product is introduced and then lowers the price over time.
♦ Penetration Pricing – The product is introduced at low prices initially and the price is increased subsequently with increase in demand and market share.
(3) Competition based
♦ Going rate or parity pricing – Price is determined on the basis of price of competitor’s product price is set similar to the price of competitor’s product.
♦ Discount Pricing – Price of the product is set below the price of competitor’s product.
♦ Premium Pricing – Price is set above the price charged by the competitors for similar product.
♦ Tender / Sealed bid pricing – A contract or tender for the production of the product is floated in the market and many parties submit their proposals. The party with the lowest bid or quote gets the tender and the quoted amount is the price.
(4) Other methods
♦ Differentiated pricing – Different prices are charged from different customers on the basis of –
- Customer segments
- Time
- Location/Area
- Product Quantity
- Product attributes
♦ Affordability / Social welfare – In case of essential commodities, prices are set in such a way that all sections of people in the society can afford it. Price may also be below the cost of product due to subsidies provided by the government.
Pricing strategies
♦ Product line pricing – Prices are set on the basis of well-established price points of other products in the product line.
♦ Optional Pricing – A base price is set for the basic product and prices are set for optional features, services along with the main product.
♦ Bundle pricing – Sellers offer a bundle or package of different products or services for a lower price than they would charge if the customer bought all of them separately.
♦ Penetration Pricing – The seller tries to penetrate the market with a low price and increases the price subsequently with increase in demand.
♦ Skimming Pricing – The seller tries to skim the profit from the market by charging a high price in the initial stages and lowers the price in the long run.
♦ Value based pricing – Seller sets the prices according to the value perceived by the customer of the product/service.
♦ Loss leader Pricing – Prices are set very low, sometimes below cost to encourage sales of other products or a retail outlet.
♦ Captive pricing – A special price is offered to loyal customers.
♦ Psychological pricing – Prices are set according to emotional appeals that influence buying decisions. E.g. Prestige pricing, Odd/even pricing, Bata pricing, Leader pricing
♦ Promotional pricing – Prices are set below MRP to stimulate purchases and increase awareness. It includes – Pricing for Special events, Low Interest Financing, Cash rebates, Warranties & Discounts
♦ Discount Pricing – It involves reduction of price from MRP for performing certain activities. It includes cash discounts, quantity discounts and seasonal discounts.
♦ Discriminatory Pricing – Seller sells a product at two or more prices based on Customer segments, Location, Time and availability of product, Product or brand image.
♦ Going Rate Pricing – Price is set on the basis of prevailing market rate.
♦ EDLP (Every Day Low Prices) – Retail stores offer low prices to customers every day in comparison with competitors to promote sales and increase footfall without any special occasion, event or discount.
Importance of Pricing
- It is an effective tool for product differentiation & sales volume
- It helps to deal with market competition, inter-firm rivalry, inflation in the economy etc.
- It acts as a tool to measure and compare products easily and qualitatively.
- It governs the type and quality of customers.
- It affects –
- The marketing programme
- Alteration of resources
- Consumer’s perception of product
- It regulates –
- Promotional activities
- Extent of advertising
- New product development
- Improvement of product in terms of Quality, Sales volume / Revenue