Among the different components of the marketing-mix, price plays an important role to bring about product-market integration. Price is the only element in the marketing-mix that products revenue.
In the narrowest sense, price is the amount of money charges for a product or service. More broadly, price is the sum of all the values that customer exchange for the benefits of having or using the product or service. Price may be defined as the value of product attributes expressed in monetary terms which a customer pays or is expected to pay in exchange and anticipation of the expected or offered utility.
Pricing helps to establish mutually advantageous economic relationship and facilities the transfer of ownership of goods and services from the company to buyers. The managerial tasks involved in product pricing include establishing the pricing objectives, identifying the price governing factors, ascertaining their relevance and relative importance, determining product value in monetary terms and formulation of price policies and strategies. Thus, pricing play a far greater role in the marketing-mix of a company and significantly contributes to the effectiveness and success of the marketing strategy and success of the firm.
FACTORS INFLUENCING PRICING
Price is influenced by both internal and external factors. In each of these categories some may be econo0mic factors and some psychological factors; again, some factors may be quantitative and yet others qualitative.
Internal Factors influencing pricing.
Ø Corporate and marketing objectives of the firm. The common ob jectives are survival, current profit maximizaitn, market-share leadership and product-quality leadership.
Ø The image sough by the firm through pricing.
Ø The desirable market positioning of the firm.
Ø The characteristics of the product.
Ø Price elasticity of demand of the product.
Ø The satge of the product on the product life cycle.
Ø Turn around rate of the product.
Ø Costs of manufacturing and marketing.
Ø Product differentiation practiced by the firm.
Ø Other elements of marketing mix of the firm and their interaction with pricing.
Ø Consumption of the product line of the firm.
External Factors Influences Pricing
· Market characteristics
· Buyers behaviors in respect to the given product.
· Bargaining power of the customer.
· Bargaining power of the major suppliers.
· Competitor’s pricing policy.
· Government controls/ regulation on pricing.
· Other relevant legal aspects
· Social considerations.
· Understanding, if any, reached with price cartels.
PRICING PROCEDURE
The pricing procedure usually involves the following steps:
1. Development of Information Base
The first step in determining the basic price of a company’s product(s) is to develop an adequate and up-to-date information base on which price decisions can be based. It is composed of decision-inputs such as cost of production, consumer demand, industry, prices and practices, government regulations.
2. Estimating Sales and Profits
Having developed the information base, management should develop a profile of sales and profit at different price levels in order to ascertain the level assuring maximum sales and profits in a given set of situation. When this information is matched against pricing objectives, management gets the preview of the possible range of the achievement of objectives through price component in the marketing-mix.
3. Anticipation of Competitive Reaction
Pricing in the competitive environment necessitates anticipation of competitive reaction to the price being set. The co0mpetition for company’s product(s) may arise from similar products, close substitutes. The competitor’s reaction may be violent or subdued or even none. Similarly, the reaction may be instant or delay. In order to anticipate such a variety of reactions, it is necessary to collect information about competitors in respect of their production capacity, cost structure, market share and target consumers.
4. Scanning The Internal Environment
Before determining the product price it is also necessary to scan and understand the internal environment of the company. In relation to price the important factors to be considered relate to the production capacity sanctioned, installed and used, the ease of expansion, contracting facilities, input supplies, and the state of labour relations. All these factors influence pricing decisions.
5. Consideration of Marketing-mix Components
Another step in the pricing procedure is to consider the role of other components of the marketing-mix and weigh them in relation to price. In respect of product the degree of perishability and shelf-life, shape the price and its structure; faster the perishability lower is likely to be the price.
6. Selections of Price Policies and Strategies
The next important step in the pricing procedure is the selection of relevant pricing policies and strategies. These policies and strategies provide consistent guidelines and framework for setting as well as varying prices to suit specific market and customer needs.
7. Price Determination
Having taken the above referred steps, management may now be poised for the task of price determination. For determination of price, the management should consider the decisions inputs provided by the information base and develop minimum and maximum price levels. These prices should be matched against the pricing objectives, competitive reactions, government regulations, marketing-mix requirements and the pricing policing and strategies to arrive at a price. However, it is always advisable to test the market validity of its price during test marketing to ascertain its match with consumer expectations.
GENERAL PRICING APPROACHES
Companies set prices by selecting a general pricing approach that includes one or more of the following three approaches:
(1) The cost-based approach
· Cost-Plus Pricing
· Break-Even Analysis and Target-Profit Pricing
(2) The Buyer-based approach
· Perceive-Value Pricing
(3) The Competition based approach
· Going-Rate Pricing
· Sealed-Bid Pricing
1. Cost-Plus Pricing
This is the easiest and the most common method of price setting. In this method, a standard mark up is added to the cost of a product to arrive at its price. For example, the cost of manufacturing a fan is Rs. 1000/- adds 25 per cent mark up and sets the price to the retailer at Rs. 1250/-. The retailer in turn, may mark it up to sell at Rs. 1350/- which is 35 per cent market up on cost. The retailer’s gross margin in Rs. 1500/-.
But this method is not logical as it ignores current demand and competition and is not likely to lead to the optimum price. Still mark up price is quite popular for three reasons:
i) Seller have more certainty about costs than about demand and by tying the price to cost, they simplify their pricing task and need not frequently adjust price with change in demand.
ii) Where all firms in the industry use this pricing method, their prices will similar and price competition will be minimized to the benefit of al of them;
iii) It is usually felt by many people that cost plus pricing is fairer to buyers as well as to seller.
2. Break-Even Pricing and Target-Profit Pricing
An important cost-oriented pricing method is what is called target-profit pricing under which the company tries to determine the price that would product the profit it wants to earn. This pricing method uses the popular ‘break-even analysis’. According to it, price is determined with the help of a break-even chart. The break-even charge depicts the total cost and total revenue expected at different sales volume. The break-even point on the chart if that when the total revenue equals total cost and the seller neither makes a profit nor incurs any loss. With the help of the break-even chart, a marketer can find out the sales volume that he has to achieve. In order to earn the targeted profit, as also the price that he has to charge for his product.
Buyer-based Approach
Perceive-Value Pricing
Many companies base their price on the products perceived value. They take buyer’s perception of value of a product, and not the seller’s cost, as the key to pricing. As a result, pricing begins with analyzing consumer needs and value perceptions, and price is set to match consumers’ perceived value.
Such companies use the non-price variables in their marketing mix to build up perceived value in the buyer’s minds, e.g. heavy advertising and promotion to enhance the value of a product in the minds of the buyers. Then they set a high price to capture the perceived value. The success of this pricing method depends on and determination of the market’s perception of the product’s value.
Competition-based Approach
1. Going Rate Pricing
Under this method, the company bases its prices largely on competitor’s prices paying less attention to its own costs or demand. The company might charge the same prices as charged by its main competitors, or a slightly higher or lower price than that. The smaller firms in an industry follow the leading firm in the industry and change their prices when the market leader’s prices changes. The marketer thinks that the going price reflects the collective wisdom of the industry.
2. Sealed-Bid Pricing
This is a competitive oriented pricing, very common in contract businesses where firms bid for jobs. Under it, a contractor bases his price on expectations of how competitors will price rather than on a strict relation to his cost or demand. As the contractor wants to win the contract, he has to price the contract lower than the other contractors. But a bidding firm cannot set its price below costs. If it sets the price much higher than the cost, its chance of getting the contract will be lesser.
PRICING OBJECTIVES
A businesses firm will have a number of pricing objectives. Some of them are primary; some of them are secondary; some of them are long-term while others are short-term. However, all pricing objectives emanate from the corporate and marketing objectives of the firm.
Some of the pricing objectives are discussed below:
1. Pricing for a target return.
2. Pricing for market penetration.
3. Pricing for market skimming.
4. Discriminatory pricing
5. Stabilizing pricing.
1. Pricing for a target return.
This is a common objectives found with most of the established business firms. Here, the objective is to earn a certain rate of Return On Investment (ROI) and the actual price policy is worked out to earn that rate of return. The target is in terms of ‘return on investment’. There are companies which set the target at, for example, 20% return on investment after taxes. The target may be for a short-term or a long-term. A firm also may have different targets for its different products but such targets are related to a single overall rate of return target.
2. Pricing for market penetration.
When companies set a relatively ‘low price’ on their new product in initial stages hoping to attract a large number of buyers and win a large market-share it is called penetration pricing policy. They are more concerned about growth in sales than in profits. Their main aim is capturing and to gain a strong foothold in the market. This object can work in a highly price sensitive market. It is also done with the presumption that unit cost will decrease when the level of sales reach a certain target. Besides, the lower price may make competitors to stay our. When market share increases considerably, the firm may gradually increase the price.
3. Pricing for market skimming.
Many companies that launch a new product set ‘high prices’ initially to skim the market. They set the highest price they can charge given the comparative benefits of their product and the available substitutes. After the initial sales slow down, they lower the price to attract the next price-sensitive layer of customer.
4. Discriminatory pricing
Some companies may follow a differential or a discriminatory pricing policy-charging different prices for different customers or allowing different discounts to different buyers.
Discrimination may be practices on the basis or product or place or time. For example, doctors may charge different fees for different patients; railways charge different fares for usual passengers and regular passengers/ students. Manufacturers may offer quantity discounts or quote different list prices to bulk-buyers, institutional buyers and small buyers.
5. Stabilizing pricing.
The objective of this pricing policy is to prevent frequent fluctuations in pricing and to fix uniform or stable price for a reasonable period. When price is revised, the new price will be allowed to remain for sufficiently a long period. This pricing policy is adopted, for example, by newspapers and magazines.
NEW PRODUCT PRICING
Pricing a new product is an art. It is one of the most important and dazzling marketing problems faced by a firm. The introduction of a new product may involve some problems in as much as there neither an established market for the product nor a demonstrated demand for it. The firm may expect a substantial demand for the product though it is yet to be established. Even if there are some near substitutes the actual degree of substitution has to be estimated. Again, there may be no reliable estimate of the direct costs of marketing and manufacturing the product.
Moreover, the cost patterns are likely to change with greater knowledge and increasing volume of production. Yet the basic pricing policy for a new product is the same as for established product – it must cover full in the long run and direct costs in the short run. Of course, there is greater uncertainty aobut both the demand and costs of the product.
Apart from the problem of estimating the demand for an entirely new product, certain other initial problems likely to be faced are:
1) Discovering a competitive range of price.
2) Investigating probable sales at several possible prices, and
3) Considering the possibility of relation from products substituted by it/
In addition, decisions have to be taken on market targets, design, the promotional strategy and the channels of distribution.
Test marketing can be helpful in deciding the suitable pricing policy. Under test marketing, the product is introduced in selected areas, often at different prices in deferent areas. These tests will provide the management an idea of he amount and elasticity of the demand for the product, the competition it is likely to face, and the expected sales volume and profits simulation of full-scale production and distribution. Yet it may provide very useful information for better planning of the full-scale effort. It also permits initial pricing mistakes to be made on small rather than on a large scale.
The next important question is “whether to charge high initial price or a low penetration price”.
A high Initial Price (Skimming Price)
A high initial price, together with heavy promotional expenditure, may be used to launch a new product if conditions are appropriate. For example:
(a) Demand is likely to be less price elastic in the early stages than later, since high prices are unlikely to deter pioneering consumers. A new product being a novelty commands a better price.
(b) Is the life of the products promises to be a short one, a high initial price helps in getting as much of it and as fast as possible.
(c) Such a policy can provide the basis for dividing the market into segments to differing elasticities. Bound edition of a book is usually followed by a paper back.
(d) A high initial price may be use4ful if a high degree of production skill is needed to make the product so that it is difficult and time consuming for competitors to enter on an economical basis.
(e) It is a safe policy where elasticity is not knows and the product not yet accepted. High initial price may finance the heavy costs of introducing a new product when uncertainties block the usual sources of capital.
A Low Penetration Price
In certain conditions, it can be successful in expanding market rapidly thereby obtaining larger sales volume and lower unit costs. It is appropriate where:
(a) there is high short-run price elasticity;
(b) there are substantial cost savings from volume production;
(c) the product is acceptable to the mass of consumers;
(d) there is no strong patent protection; and
(e) there is a threat of potential competition so that a big share of the market must be captured quickly.
The obvjective of low penetratiojn price is to raise barriers against the entry of prospective competitors. Stay-out pricing is appropriate:
i) where are total demand is expected to be small. If the most efficient size of the plant is big enough to supply a major portion of the demand, a low-price policy can capture the bulk of the market and successfully hold back low-cost competition.
ii) When potential of sales appears to be great, prices must be set as their long-run level. In such cases, the important potential competitor in a large multi-product firm for whom the product in question is probably marginal. They are normally confident that they can get their costs down to competitor’s level if the volume of product is large.
PRODUCT-MIX PRICING STRATEGIES
The strategy for setting a project’s price often has to be changed when the product is apart of a product mix. In this case, the firm looks for a set of prices that maximizes the profits on the total product mix. Pricing is difficult because the various products have related demand and costs and face different degrees of completion.
Product-mix Pricing Situations
Product Line Pricing
Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to be set between the various products in a line.
The price steps should take into account cost differences between the products in the line, customer evaluations of their different features, and competitor’s prices. if the price difference between two successive products is small, buyers usually will buy the more advanced product. This will increase company profits if the cost difference is smaller that the price difference. If the price difference is large, however, customers will generally buy the less advanced products.
Optional-Product Pricing
Many companies use optional-product pricing – offering to sell optional or accessory products along with their main product. For example, a car buyer may choose to order power widows, central locking system, and with a CD player. Pricing these options is a sticky problem. Automobile companies have to decide which items to include in the base price and which to offer as options. The economy model was stripped of so many comforts and conveniences that most buyers rejected it. More recently, however, General Motors has followed the example of he Japanese auto makers and included in the sticker price many useful items previously sold only as options. The advertised price now often represents a well-equipped car.
Captive-Product Pricing:
Companies that make products that must be used along with a man product are using captive-product pricing. Examples of captive products are razor blades, camera film, and computer software. Producers of the main products (razors, cameras, and computers) often price them low and set high markups on the supplies. Thus, Kodak prices its cameras low because it makes its money on the film it sells.
In the case of services, this strategy is called two-part pricing. The price of the service is broken into a fixed fee plus a variable usage rate. Thus, a telephone company charges a monthly rate – the fixed fee – plus charges for calls beyond some minimum number – the variable usage rate. The service firm must decide how much to charge for the basic service and how much for the variable usage. The fixed amount should be low enough to induce usage of the service, and profit can be made on the variable fees.
By-Product Pricing:
In producing petroleum products, chemicals and other products, there are often by-products. If the by-products have not value and if getting rid of them is costly, this will affect the pricing of the main product. Using by-product pricing, the manufacturer will seek a market for these by-products and should accept any price that covers more than the cost of storing and delivering them. This practice allows the seller to reduce the main product’s price to make it more competitive. By products can even turn out to be profitable.
Product-Bundle Pricing:
Using product-bundle pricing, sellers often combine several of their products and offer the bundle at a reduced price. Thus computer makers include attractive software packages with their personal computers. Price bundling can promote the sales of products consumers might not otherwise buy, but the combined price must be low enough to get them to buy the bundle.
PRICE-ADJUSTMENT STRATEGIES
Companies usually adjust their basic price for various customer differences and changing situations.
Types of Price-Adjustment Strategies
(1) Discount and Allowance Pricing: Reducing prices to reward customer response such as paying early or promoting the product.
(2) Segment Pricing: Adjustment prices to allow for differnecs in customers, product, or locating.
(3) Psychological Pricing: Adjusting prices for psychological effort.
(4) Promotional Pricing: Temporarily reducing prices to increase short-run sales.
(5) Value Pricing: Adjusting prices to offer the right combination of quality and service at a fair price.
(6) Geographical Pricing: Adjusting prices to account for the geographic location of customers.
(7) International Pricing: Adjustment prices for international markets.
Discount and Allowance Pricing:
Most companies adjust their basic price to reward customers for certain responses, such as early payment of bills, volume purchases and off-season buying. These price adjustments – called discounts and allowances – can take many forms.
A cash discount is a price reduction to buyers who pay their bills promptly. A quantity discount is a price reductions to buyers who buy large volumes. A seasonal discount is a price reduction to buyers who buy merchandise or services out of season.
A trade discount is offered byt eh seller to trade channel members who perform certain functions, such as selling, storing and record-keeping. Manufacturers may offer different functional discounts to different trade channels because of the varying services they perform.
Allowances are another type of reduction from the list price. Trade allowance is given, for example, or exchange offers. Promotional allowances are payment or price reductions to reward dealers for participating in advertising and sales-support programs.
Segmented Pricing
Companies often adjust their basic prices to allow for differences in customers, products and locations. In segmented pricing, the company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs. Segmented pricing takes several forms.
Customer-segment pricing : Different customers pay different prices for the same product or service. Railways, for example, charge a concessional fare to children and senior citizens.
Product-form pricing: Different version of the product are period differently, but not according to differences in their costs.
Location pricing: Different locations are priced differently, even though the cost of offering each location is the same. For instance, theaters vary their seat prices because of audience preferences for certain locations, and state universities charge high tuition fee for foreign students.
Time pricing: Prices vary by the season, the month, the day, and even the hour. Public utilities vary their prices to commercial users by time of day and weekend versus weekday. The telephone company offers lower “off-peak” charges.
Psychological Pricing:
Price says something about the product. For example, many consumers use price to judge quality. In using psychological pricing, sellers consider the psychology of prices and not simply the economics. For example, one study of the relationship between price and quality perceptions of cards found that consumers perceive higher-priced card as having higher quality. By the same token, higher quality cars are perceived to be even higher priced than they actually are.
Another aspect of psychological pricing is reference prices – prices that buyers carry in their minds and refer to when looking at a given product. The reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation. Sellers can influence of use these consumers’ reference prices when setting price. For example, a company could display its product next to more expensive ones in order to imply that it belongs in the same class.
Promotional Pricing:
With promotional pricing, companies will temporarily price their products below list price and sometimes even below cost. Promotional pricing takes several forms. Supermarkets and departments stores will price a few products as loss leaders to attach customers to the store in the hope that they will buy other items at normal markups. Sellers will also use special event pricing in certain seasons to draw more customers.
Value Pricing
Marketers adopt value pricing strategies – offering just the right combination to quality and good service at a fair price. In many cases, this has involved the introduction of less expensive versions of established, brand name products.
Geographical Pricing
A company must also decide how to price its products to customers locate in different parts of the country or world. There are five geographical pricing strategies.
1) FOB Pricing: This means the goods are placed free on board a carrier.
2) Uniform Delivered Pricing: The Company charges the same price plus freight to all customers, regardless of their location.
3) Zone Pricing: All customers within a given zone pay a single total price; the more distant the zone, the higher the price.
4) Basing-point pricing: The seller selects a given city as a “basing point” and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods actually are shipped.
5) Freight-absorption Pricing: The sellers absorbs all or part of the actual freight charges in order to get the desired business.
International Pricing:
Companies that market their products internationally must decide what prices to charge in the different countries in which they operate. In some cases, a company can set a uniform worldwide price.
ADMINISTERED PRICE
In real live business situations, product price is nto determined as envisaged in the price theory, but is administered by the company’s management. An administered or administrative price is set by a company official in contrast to the competitive market prices described in theory. Administered price may, therefore, be defined as the price resulting from managerial decisions of the company. From this, the following characteristics of the administrated price emerge:
(1) Price determination is a conscious and deliberate administrative action rather than a result of the demand and supply interaction.
(2) Administered price is fixed for a period of time or for a series of sale transactions; it does not frequently change.
(3) This price is usually not subject to negotiation; price structure incorporating differentiation; price structure incorporating different variations may, however, be developed to meet specific consumer needs.
The administrative price is set by management after considering all relevant factors impinging on it, viz, cost, demand and competitors’ reactions. Since all companies set administrative prices on more or less identical considerations, the prices in respect of similar products available in the market tend to be uniform. The competition, therefore, is based on non-price differentiation through branding, packaging and advertising, etc. It is with this administrative price that marketers are concerned with and, as natural corollary, our won concern throughout the subsequent pages will be with the administrative price.
REGULATED PRICE
The concept of administrative price may possibly impart a notion that a company is free to fix whatever price if deems fit and buyer have but one choice – either to buy or not to buy. But in real life situation it is not like this. For fear of damages to consumer and national interests, administered prices are subject to state regulation. Therefore, whenever the administered price is et and managed within the state regulation it is termed as regulated price. It may assume two forms. First, the price may be set by some State agency, say, the Bureau of Industrial Cost a and Prices or the Tariff Commission and the company just accepts it as given. Second, the price may be set by a company within the framework or on the basis of the formula given by the State. In India companies, for example, the fertilizer, aluminium and steel industries sell their products at prices fixed
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