INTRODUCTION:

Narrowly, price is the amount of money charged for a product or service.

Broadly, price is the sum of all the values that consumers exchange for the
benefits of having or using the product or service.
Dynamic Pricing: charging different prices depending on individual
customers and situations.

Price is the one element of the marketing mix that produce revenue ; the
other element produce cost, prices are the easiest marketing mix element to
adjust ; product features, channels and even promotion take more time .price
also communicating to the market the company’s intended value positioning
of its product or brand.

Today companies are wrestling with a number of difficult pricing tasks

• How to respect to aggressive price cutters

• How to price the same product when it goes through different channels
• How to price the same product in different countries
• How to price on improved product while still selling the previous
version

Many companies do not handle pricing well. They make these common
mistakes; price is to cost-oriented ; price is not revised often enough to
capitalize on market changes; price is set independent of the rest of the
marketing mix rather than as an intrinsic element of marketing positioning
strategy; and price is not varied enough for different product item ,market
segmentation , distribution channels, and purchase occasions.

Companies do their pricing in a variety of ways. In small companies, price is

often set by the boss. In larger companies, pricing is handling by division and
product line managers. Even here, top management sets general objectives
and policies and often approve the prices proposed by lower level of
management.
PRICING-INTRODUCTION:
Setting the right price is an important part of effective marketing. It is the
only part of the marketing mix that generates revenue (product, promotion
and place are all about marketing costs).

Price is also the marketing variable that can be changed most quickly,
perhaps in response to a competitor price change.

Put simply, price is the amount of money or goods for which a thing
is bought or sold.

The price of a product may be seen as a financial expression of the value of

that product.

For a consumer, price is the monetary expression of the value to be

enjoyed/benefits of purchasing a product, as compared with other available
items.

The concept of value can therefore be expressed as:

(Perceived) VALUE = (perceived) BENEFITS – (perceived) COSTS

A customer’s motivation to purchase a product comes firstly from a need and

a want.

The perception of the value of a product varies from customer to customer,

because perceptions of benefits and costs vary.

Perceived benefits are often largely dependent on personal taste (e.g. spicy
versus sweet, or green versus blue). In order to obtain the maximum possible
value from the available market, businesses try to ‘segment’ the market –
that is to divide up the market into groups of consumers whose preferences
are broadly similar – and to adapt their products to attract these customers.

In general, a products perceived value may be increased in one of two ways –

either by:

(1) Increasing the benefits that the product will deliver, or,

(2) Reducing the cost.

For consumers, the PRICE of a product is the most obvious indicator of cost -
hence the need to get product pricing right.
IMPORTANCE OF PRICING:
When marketers talk about what they do as part of their responsibilities for
marketing products, the tasks associated with setting price are often not at
the top of the list. Marketers are much more likely to discuss their activities
related to promotion, product development, market research and other tasks
that are viewed as the more interesting and exciting parts of the job.

Yet pricing decisions can have important consequences for the marketing
organization and the attention given by the marketer to pricing is just as
important as the attention given to more recognizable marketing activities.
Some reasons pricing is important include:

• Most Flexible Marketing Mix Variable – For marketers price is the most
adjustable of all marketing decisions. Unlike product and distribution
decisions, which can take months or years to change, or some forms of
promotion which can be time consuming to alter, price can be changed
very rapidly. The flexibility of pricing decisions is particularly important
in times when the marketer seeks to quickly stimulate demand or
respond to competitor price actions. For instance, a marketer can agree
to a field salesperson’s request to lower price for a potential prospect
during a phone conversation. Likewise a marketer in charge of online
operations can raise prices on hot selling products with the click of a few
website buttons.
• Setting the Right Price – Pricing decisions made hastily without
sufficient research, analysis, and strategic evaluation can lead to the
marketing organization losing revenue. Prices set too low may mean the
company is missing out on additional profits that could be earned if the
target market is willing to spend more to acquire the product.
Additionally, attempts to raise an initially low priced product to a higher
price may be met by customer resistance as they may feel the marketer
is attempting to take advantage of their customers. Prices set too high
can also impact revenue as it prevents interested customers from
purchasing the product. Setting the right price level often takes
considerable market knowledge and, especially with new products,
testing of different pricing options.
• Trigger of First Impressions - Often times customers’ perception of a
product is formed as soon as they learn the price, such as when a
product is first seen when walking down the aisle of a store. While the
final decision to make a purchase may be based on the value offered by
the entire marketing offering (i.e., entire product), it is possible the
customer will not evaluate a marketer’s product at all based on price
alone. It is important for marketers to know if customers are more likely
to dismiss a product when all they know is its price. If so, pricing may
 become the most important of all marketing decisions if it can be shown
that customers are avoiding learning more about the product because of
the price.
• Important Part of Sales Promotion – Many times price adjustments is
part of sales promotions that lower price for a short term to stimulate
interest in the product.

FACTORS EFFECTING DEMAND:

Consider the factors affecting the demand for a product that are

(1) Within the control of a business and

(2) Outside the control of a business:

Factors within a businesses’ control include:

• Price (assuming an imperfect market – i.e. not perfect competition)

• Product research and development

• Advertising & sales promotion

• Training and organization of the sales force

• Effectiveness of distribution (e.g. access to retail outlets; trained distributor

agents)

• Quality of after-sales service (e.g. which affects demand from repeat-

business)

Factors outside the control of business include:

• The price of substitute goods and services

• The price of complementary goods and services

• Consumers’ disposable income

• Consumer tastes and fashions

Price is, therefore, a critically important element of the choices available to
businesses in trying to attract demand for their products

SETTING PRICING POLICY:

STEP 1: SELECTING THE PRICING OBJECTIVES:

The company first decides where it wants to position it market offering. The
clearer a firm’s objectives, the easer is to set price. A company can pursue
any of five major objectives through pricing: survival, maximum current
profit, maximum market share, maximum market skimming, or product
quality leadership.

Many companies try to set prices that will maximize current profits. They
estimate the demand and costs associated with alternative prices and choose
the price that produces maximum current profit, cash flow, or Rate of return
on investment. This strategy assumes that the firm has knowledge of its
demand and cost functions; in reality, these are difficult to estimate. In
emphasizing current performance, a company may sacrifice long run
performance by ignoring the effects of other marketing mix variables,
competitors’ reactions, and legal restraints on price.

Some companies want to maximize their market share. They believe that a
higher sales volume will lead to lower cost and higher long run profit they set
the lowest price assuming the market is price sensitive.

STEP 2: DETERMING DEMAND:

Each price will lead to different level of demand and therefore have a differ
impact on a company’s marketing objectives. The relation between
alternative prices and the resulting current demand is captured in demand
curve. In the normal case, demand and price are inversely related; the higher
the price, the lower the demand. In this case of prestige goods the demand
curve sometimes slopes upward. Perfume Company raised its price and sold
more perfumes rather than less! Some customer takes the higher price to
signify a better product. However if the price is too high, the level of demand
may fall.
Companies need to understand the price sensitivity of their customers and
prospects and their trade-offs peoples are willing to make between price and
product’s characteristics.

STEP 3: ESTIMATING COSTS:

Demand sets a ceiling of a price on the price the company can charge for its
product. Costs set the floor. The company wants to charge a price that covers
its cost of production, distributing, and selling the product, including a fair
return for its efforts and risks.

STEP 4: ANALYZING COMPETITORS COSTS, PRICES,

&OFFERS:
Within the range of possible prices determined by market demand and
company’s costs, a firm must take the competitor’s costs, prices, and
possible price reactions into account. The firm should first consider the
nearest competitor’s price. If the firm offers contains positive differentiation
features not offered by the nearest competitors, their worth to the customer
should be evaluated and added to the competitor’s price. If the competitor’s
offers contains some features not offered by the firm, their worth o the
customer should be evaluated and subtracted from the firm’s price. Now the
firm can decide whether it can charge more, the same, unless than the
competitor. A firm must be aware, however, that competitors can change
their prices in reaction to the price set by the firm.

STEP 5: SELECTING THE PRICING METHOD:

Given the three cs- the customers’ demand schedule, the cost function, the
competitors’ prices- a company is now ready to select a price.

Companies select a pricing method that includes one or more of various

considerations. We will examine seven price setting methods: mark-up
pricing, target return pricing, perceive value pricing, value pricing, going rate
pricing, action type pricing and group pricing.

MARK-UP PRICING:

The most elementary pricing method is to add a standard mark-up to the

product’s cost. Construction companies submit job bids by estimating the
total project cost and adding a standard mark-up for profit.

Suppose a toaster manufacture has a following cost and sale expectation

Variable cost per unit …………….. $10

Fixed cost ………………. 300,000
 Expected unit sales ……………. 50,000

The manufacturer’s unit cost is given by:

Unit cost= variable cost + fixed cost =$10+ $300,000 =$16

Unit sales 50,000

Now assume the manufacturer wants to earn a 20 % markup on sales. The

manufacturer’s markup price is given by:

Markup price = unit cost = $16 =$20

(1-desired return on sales) 1-0.2

TARGET-RETURN PRICING:

In target return pricing the firm determines the price that would yield its
target rate of return on investment (ROI). Target pricing is used to general
motors, which price its auto-mobiles to achieve a 15-20 percent ROI.

PERCIVED-VALUE PRICING:

In increasing number of companies based their price on the customer’s

perceived value. They must deliver the value promised by their value
proposition, and the customer must perceived this value. They use the other
marketing mix elements, such as advertising and sales force, to
communicate and enhance perceive value in buyer’s mind.

VALUE-PRICING:

In recent years, several companies have adopted value pricing, in which they
win loyal customers by charging a fairly low price for a high quality offering.
Among the best practitioners of value pricing are WALL-MART, IKEA, and
SOUTH-WEST airlines.

GOING RATE-PRICING:

In going rate pricing, the firm basis its price largely on competitors prices.
The firm might charge the same, more, or less than major competitors. In
oligopolistic industries that sell a commodity such as steel, paper, or
fertilizers, firms normally charge the same price.

ACTION TYPE PRICING:

Is growing more popular, especially with the growth of the internet. There are
over 2000 electronic market places selling everything from pigs to use
vehicles to cargo to chemicals. One major use of actions is to dispose of
excess inventories or to use good. Company needs to be aware of the three
major types of actions and their separate pricing procedures
 *ENGLISH ACTIONS (ascending bids)
*DUTCH ACTIONS (descending bids)
*SEALED BIDS ACTIONS

GROUP PRICING:

The internet is facilitating methods where by consumers are business buyers

can join groups to buy at a lower price. Consumer can go to volumebuy.com
to buy electronics, computers, subscriptions, and another item.

STEP 6: SELECTING THE FINAL PRICE:

Pricing method narrow the range from which the company must select its
final price. In selecting that price, the company must consider additional
factors including physiological pricing, gain and risk sharing pricing, the
influence of other marketing mix-elements on price, company pricing policy
and the impact of price on other parties.

PHYSIOLOGICAL PRICING:

Many customers use price as an indicator of quality. Image pricing is

especially effective with ego-sensitive products such as perfumes and
expensive cars.

GAIN-RISK-SHARING PRICING:

Buyer may resist accepting a seller’s proposals because of the high perceive
level of a risk. The seller has the option of offering to absorb part or all of the
risk if he does not deliver the full promised value.

THE INFLUENCE OF OTHER MARKETING MIXES ELEMENTS:

The final price must take into account the brand’s quality and advertising
relating to competition.

*Brands with average relative quality but high relative advertising budgets
were able to charge premium prices.

IMPACT OF PRICING ON OTHER PARTIES:

Management must also consider reaction of other parties to the

contemplated price. How will distributors and dealers feel about it? Will the
sales force be willing to sale at that price? How will competitors react? Will
supplier raise their prices when they see the company’s price? Will the
government intervene and prevent this price from being charged?

PRICING-INFLUENCES ON PRICING POLICY:

The factors that businesses must consider in determining pricing policy can
be summarized in four categories:

(1) Costs

In order to make a profit, a business should ensure that its products are
priced above their total average cost. In the short-term, it may be acceptable
to price below total cost if this price exceeds the marginal cost of production
– so that the sale still produces a positive contribution to fixed costs.

(2) Competitors

If the business is a monopolist, then it can set any price. At the other
extreme, if a firm operates under conditions of perfect competition, it has no
choice and must accept the market price. The reality is usually somewhere in
between. In such cases the chosen price needs to be very carefully
considered relative to those of close competitors.

(3) Customers

Consideration of customer expectations about price must be addressed.

Ideally, a business should attempt to quantify its demand curve to estimate
what volume of sales will be achieved at given prices

(4) Business Objectives

Possible pricing objectives include:

• To maximize profits

• To achieve a target return on investment

• To achieve a target sales figure

• To achieve a target market share

• To match the competition, rather than lead the market

PRODUCT PRICING STRATEGIES:

Developing a pricing strategy perplexes many CEOs, marketing and sales

executives, and brand managers. It's not surprising really: real businesses
don't always follow the pricing strategy models that business schools and
books on pricing strategy present. But there are a few basic guidelines that
can help take some of the mystery out of the process of establishing a
successful pricing strategy.

We consider that there are four basic components to a successful pricing

strategy:

1. Costs. Focus on your current and future, not historical, costs to

determine the cost basis for your pricing strategy.

2. Price Sensitivity. The price sensitivities of buyers shift based on a

number of factors and your pricing strategy must shift with them.

3. Competition. Pay attention to them, but don't copy them . . . when it

comes to pricing strategy they may have no idea what they're doing.

4. Product Lifecycle. How you price, and what value you provide for
that price, will change as you move through the product lifecycle.

Strategic pricing is the effective, proactive use of product pricing to drive

sales and profits, and to help establish the parameters for product
development. Used wisely it is a clearly powerful tool for successful
marketing strategies.

NEW PRODUCT-PRICING STRATEGY:

Pricing strategies usually change as the product passes through its life cycle.
The introductory stage is especially challenging. Companies bringing out new
product face the challenge of setting prices for the first time.

1 ) Market-skimming pricing

The practice of ‘price skimming’ involves charging a relatively high price for a
short time where a new, innovative, or much-improved product is launched
onto a market.

The objective with skimming is to “skim” off customers who are willing to pay
more to have the product sooner; prices are lowered later when demand from
the “early adopters” falls.

The success of a price-skimming strategy is largely dependent on the

inelasticity of demand for the product either by the market as a whole, or by
certain market segments.

2) Market-Penetration pricing

Penetration pricing involves the setting of lower, rather than higher prices in
order to achieve a large, if not dominant market share.

This strategy is most often used businesses wishing to enter a new market or
build on a relatively small market share.

This will only be possible where demand for the product is believed to be
highly elastic, i.e. demand is price-sensitive and either new buyer will be
attracted, or existing buyers will buy more of the product as a result of a low
price.

PRODUCT-MIX PRICING STRATEGIES

The strategy for setting the product’s price often has to be changed when
the product is part of a product mix. In this case the firm looks for a set of
prices that maximizes the profit on the total product mix. Pricing is
difficult because the various products have related demand and cost and
face different degrees of competition:

Product Line:

Setting price steps between product line items

Optional Product:
 Pricing optional or accessory products

Captive Product:

Pricing products that must be used with the main product

By-Product:

Pricing low value by product to get rid of them

Product Bundle:

Pricing bundles of products sold together

PRICE ADJUSTMENT STRATEGIES:

A company usually adjusts their basic prices to account for various
customers’ differences and changing situations. Here we examine the six
price adjustment strategies.

1) Discount & Allowance: reduced prices to reward customer responses

such as paying early or promoting the product. (For example. Different
seasonal or occasional offers of Nike or Chen one offering certain discount on
different range of shopping)

2) Discriminatory: adjusting prices to allow for differences in customers,

products, and locations (for example. Price of Pepsi in Pearl Continental Hotel
as it is much higher than its actual value in the hotel just because of the
segment and environmental change in this case the cost is the same but
according to the segment pricing is different)

3) Psychological: adjusting prices for psychological effects. Ex: $299 vs.

$300 (for example. English toothpaste reduced its prices from 12 to 10 just to
attract their customers and increase their sales in this way they implemented
physiological pricing strategy besides that different offers in the market
pricing like just 99 rupees or 999 rupees in various stores is also physiological
pricing strategy.)

4) Value: adjusting prices to offer the right combination of quality and

service at a fair price. (For example a person shopping in Zainab market
might seek value and quality at fair price. This process helps to deliver value
and satisfaction to customers.)
5) Promotional: temporarily reducing prices to increase short-run sales.
(For example. Pepsi reduces its prices during the month of Ramadan and also
offers different schemes and similarly Warid Zem offers nights free offers to
their customers)

6) Geographical: adjusting prices to account for geographic location of

customer. (For example. DHL charges different rates according to the
destination)

*FOB Origin Pricing: Geographical pricing strategy in which goods are

placed free on board a career, the customer pays the freight from the factory
to the destination.

*Uniform Delivered Pricing: A geographical pricing strategy in which the

company charges the same price plus frightened to all customers, regardless
of their location.
*Zone Pricing: A geographical pricing strategy in which the company sets
up to or more zones. All customers within a zone pay the same total price;
the more distant zone, the higher the price.
*Basing Point Pricing: A geographical pricing strategy in which the seller
designs some city as a basing point and charges all customers the freight
cost from that city to the customer.

7) International: adjusting prices in international markets.

Setting The Price:

A firm must set a price for the first time when it develops a new product,
when it introduces its regular product into a new distribution channel or
geographical area, and when it enters bids on new contract work. The firm
must decide where to position its product on quality and price.

FACTORES AFFECTING PRICING DECISION:

For the remainder of this tutorial we look at factors that affect how marketers
set price. The final price for a product may be influenced by many factors
which can be categorized into two main groups:

• Internal Factors :

When setting price, marketers must take into consideration several

factors which are the result of company decisions and actions. To a large
 extent these factors are controllable by the company and, if necessary,
can be altered. However, while the organization may have control over
these factors making a quick change is not always realistic. For instance,
product pricing may depend heavily on the productivity of a
manufacturing facility (e.g., how much can be produced within a certain
period of time). The marketer knows that increasing productivity can
reduce the cost of producing each product and thus allow the marketer to
potentially lower the product’s price. But increasing productivity may
require major changes at the manufacturing facility that will take time
(not to mention be costly) and will not translate into lower price products
for a considerable period of time.
• External Factors :

There are a number of influencing factors which are not controlled by the
company but will impact pricing decisions. Understanding these factors
requires the marketer conduct research to monitor what is happening in
each market the company serves since the effect of these factors can
vary by market.

• Pricing in Different Types of Markets

Pure Competition:

Many buyers and

sellers

where each has little

effect

on the going market

price
 Monopolistic
Competition:

Many buyers and sellers

who trade over a

range of prices

Oligopolistic
Competition:

Few sellers who are

sensitive to each
other’s

pricing/marketing
strategies

Pure Monopoly:

Market consists of a

single seller
Cost-Plus Pricing:

• Adding a standard markup to the cost of the product.

• Popular because:
– Sellers more certain about cost than demand
– Simplifies pricing
– When all sellers use, prices are similar and competition is
minimized
– Some feel it is more fair to both buyers and sellers

Competition-Based Pricing:

• Going-Rate Pricing:
– Firm bases its price largely on competitors’ prices, with less
attention paid to its own costs or to demand.

• Sealed-Bid Pricing:
– Firm bases its price on how it thinks competitors will price rather
than on its own costs or on demand.