INTRODUCTION: Price is what you give/pay in return for goods or services.

It is the most flexible marketing mix element that produces revenue. It is easy to change the price of the product, but very difficult to make changes in the product it-self like packaging, advertising or distribution channels. Price competition is the number one problem faced by companies yet many companies do not handle it well. In setting the price of a product or offering, one has to ensure that the price is not higher than the perceived value of the offering by the consumer. PRICING QUALITY STRATEGIES. There are 9 pricing strategies that accompany follow depending on whether the company is charging a high, medium or low price for a high, medium or low quality product. Nine Price-Qualities Strategies Price High 1. Premium strategy 4. Overcharging strategy 7. Rip-off strategy Medium 2. High-value strategy 5. Medium-value strategy 8. False economy strategy Low 3. Super- value strategy 6. Good- value strategy 9. Economy strategy

Product Quality

High Medium Low

In the fig. Companies following 1st,5th and 9th strategy can all co-exist in the same market as long as there are 3 groups of buyers:Those seeking high quality and willing to pay a premium price for it. Those who are price sensitive and willing to compromise on quality AND Those seeking a balance between the Two. Companies following 2nd, 3rd and 6th are the ones who pose a tough competition to the companies in the diagonal position. These are all companies which offer value for money. Companies following strategies 4th,7th and 8th generally have a short life. They either believe in making quick money and getting out, or they have to finally change their pricing strategy if they want to stick around for a longer period of time. SETTING THE PRICING POLICY OF A FIRM Many factors are to be taken into consideration while setting the pricing policy of a firm. A six- step procedure in setting the pricing policy is as follows :-

1. 2. 3. 4. 5. 6.

Selecting the pricing objective. Determining demand. Estimating costs. Analyzing competitors costs, price and offers Selecting a pricing method. Selecting the final price

1. Selecting the pricing objective Company decides the strategy it wants to follow whether it is survival, max. current profit, max.market share, max. market skimmimg or product-quality leadership. Survival is when a company has excess capacity is faced with intense competition and changing consumer wants. In this case, profits are secondary,covering costs is more important. Though if the company wants to stay in business for a long time, it has to change the objective and learn how to add value. Maximum current profit is again a short sighted objective. It will definitely give current profits, but in the long run it might affect performance. Maximum market share or market penetration is the objective that is generally followed by companies which operate in a highly price sensitive market and where economies of scale result in lower production costs with increased production. Also they seek to deter potential competition because of low prices. Maximum market skimming is the strategy followed by the companies who generally introduce new to the market products. They charge a high price on the assumptions that a sufficient number of buyers have a high current demand, unit costs of producing a small volume are not so high that they cancel the advantage of charging high price, the high initial price detracts competitors and the high price communicates the image of a superior product. This strategy is followed by Intel which introduces a new microprocessor every 12 months. Product-quality leadership is the strategy followed by companies who harp on quality. They charge a higher price, but give superior quality. This strategy is followed by Sony.

2. Determining demand: Each price will lead to different levels of demand and therefore have a different impact on the companys marketing objectives. The relation between alternative prices and the corresponding demand can be represented by a demand curve. An increase in price would normally result in a decrease in demand except in the case of some products which have a prestige value attached to them.

Price Elasticity of demand : The demand for a product is said to be price elastic if a small change in price leads to a significant change in demand. Similarly, demand for a product is said to be price inelastic if a small change in price does not lead to a significant change in demand. 3. Estimating costs: Cost is the minimum price that a company can charge for its products. The price has to at least cover all the different costs associated with the product. Costs take two forms variable costs and fixed costs. 4. Analyzing competitors costs, prices and offers: The company has to keep a track of what the competition is offering and at what rate. The e value of the offering has to be equal to or more than the competitive offering, otherwise it would become difficult to survive in the market. 5. Selecting a pricing method: Based on the information the company has about the customers demand schedule, the cost function, and the competitors prices, the company has to set its own price. The cost sets the floor of the price, the competitors prices and the price of substitutes gives an orientation point, and the customers assessment of unique product features, their perceived value establishes the ceiling price. The company can base its price on different pricing method. 6. Selecting the Final Price: Once the company goes through all the above steps, it is ready to select its final price. In doing so, it has to consider certain additional factors like psychological pricing, the influence of other marketing-mix elements, company pricing policies and impact of price on other parties like distributors, dealers and government. DIFFERENT(OPERATIONAL) PRICING METHODS: 1. MARKUP PRICING: It is the most elementary pricing method in which standard mark-up is added to the products cost.

Markup Price

unit cost (1- desired return on sales)

For example:Variable cost per unit = Rs.10/Fixed cost = Rs.3,00,000/-

Expected unit sales = Rs.50,000/Hence,

Unit cost

Variable cost

+ +

= 10

Fixed cost Unit Sales 300000 50000 6

= =

10 Rs.16/-

Say mark up is 20 % on sales required then, Markup Price = unit cost (1- desired return on sales)

Markup Price

16 (1-0.2)

Rs.20/-

Markups are generally higher on seasonal items, specialty items, slower moving items, items with higher storage and handling costs and demand inelastic items. Mark up pricing ignores current demand, perceived value and competition. 2. TARGET-RETURN PRICING: The firm determines the price that would yield its target rate of return on investment (ROI). Example: Say Investment = Rs.10,00,000/Target Return Price = Unit cost + Desired Return*Invested Captial Unit Sales = 16 + 0.30 * 10,00,000 50,000

= Rs. 22/-