MODULE 4 PRICING STRATEGIES

27.1 PRICING OBJECTIVES

A business firm will have # of objectives in the area of pricing. Usually,
some of these will be even long-term. Also, some will be primary
objectives while others will be secondary. And, all these objectives
emanate from the corporate & marketing objectives of the firm.
Profit is one of the major objectives of pricing. Firms usually adopt
profit optimization rather than profit maximization as the objective, as
they consider optimum profit over a long period to be a sounder
objective than maximum profits in the short-term. Obviously,
optimum is a relative term here & its definition will vary from firm to
firm. The firm must evolve a clear idea of the optimum from its
perception of business realities & the objectives/standards set for itself.

Objectives firms seek in Pricing

Profit maximization in the short-term
Profit optimization in the long-term
A minimum return on investment
A minimum return on sales turnover
Achieving a particular sales volume
Achieving a particular market share
Deeper penetration of the market
Entering new markets
Target profit on the entire product line
Keeping competition out/under check
Keeping parity with competition
Fast turnaround & early cash recovery
Stabilizing prices & margins in the market
Providing the commodities at prices affordable
Providing the commodities at prices helping economic development
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27.2 FACTORS INFLUENCING PRICING
Two sets of factors internal & external influence pricing decisions of
any firm. In each, some factors may be economic & some psychological;
again, some may be quantitative & some qualitative.

Internal Factors

Corporate & marketing objectives of the firm

Image sought by the firm through pricing
Characteristics of the product
Price elasticity of demand of the product
Stages of the product in PLC

Use pattern & turnaround rate of the product

Costs of manufacturing & marketing
Extent of distinctiveness of the product
Interaction of other marketing mix with pricing
Composition of the product line of the firm

External Factors

Market characteristics Demand/Consumer/Competition

Buyer behavior for the product
Bargaining power of the major customers
Bargaining power of major suppliers

Competitors pricing policy

Government controls/regulation on pricing
Other relevant legal aspects
Societal (or social) considerations
Understanding reached with price cartels

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27.3 PRICING METHODS

Broad Categories of Pricing Methods

Cost-based pricing
Mark-up pricing
Cost + pricing
Absorption cost pricing (Full cost pricing)
Target rate of return pricing
Marginal cost pricing
Demand-based pricing
Competition-oriented pricing
Value pricing
Product-line oriented pricing
Tender pricing
Affordability-based pricing
Differentiated pricing
Under each of the above categories, we can think of many different
pricing methods. They will vary from one another in some respects, but
as a category, they share a common orientation.

Common merits/Demerits of all cost-based Methods of Pricing

Cost-based methods as a class have certain merits & demerits. The main
merit is that so long as the method works, the firm is assured of the
target profit. The risk involved is minimal. The main demerit is that the
method assumes a level of demand for the product independent of price.
Also, the profit % is often arbitrary. There is the chance that a much
better opportunity for profits is lost by keeping the price too low; there
is also the chance that the sales volume is lost because of insistence on a
higher level of profit, which the market cannot return.

MODULE 4 PRICING STRATEGIES

27.4 BREAK-EVEN CONCEPT
An idea of the break-even concept is essential for correctly
understanding most of the cost-based methods of pricing.
In any business, costs/volumes/price/profit is interrelated. For most
products, different demand levels & sales volume may materialize at
different price levels. Also, the different volume levels have different
associated cost levels. The firm can project profits at different levels &
choose the one that is particularly suited to it.
In producing & selling a certain volume of any product, certain fixed
costs & certain variable costs are incurred. When the volume is
increased or decreased, the variable costs go up or down. The fixed costs
usually remain the same. The firm is essentially concerned with the total
of the variable & fixed costs incurred for the particular volume.
The break-even exercise is aimed at relating these 2 entities the total
costs & the total revenues at different levels of volume & consequently
at different levels of prices.
At a level where the total costs exactly equal to the total revenues, the
breaking even of costs & revenues take place. The result is zero profit. At
a level where the revenues exceed the costs, profits are earned & at the
other level, losses are incurred. The # of units that are required to be
produced & sold in order to reach a no loss-no profit position at the
given level of unit price is known as the break-even point.
Many business firms use the break-even concept in their pricing
methods. They use the concept not only for price fixation but also for
determining levels of production or levels of utilization of the
production capacity that is required for achieving the desired levels of
profits. The concept is also used in the appraisal of new projects. It is a
tool for making cost-volume-profit analysis.
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27.5 OTHER PRICING METHODS
Demand/Market-Based Pricing
What the traffic can bear pricing
Skimming pricing
Penetration pricing

Concept of Price Elasticity of Demand

In all demand-based pricing methods, the price elasticity of demand is
taken into account directly or indirectly. In fact, whatever be the
method of pricing adopted, the firm has to keep in view the price
elasticity of demand of the products.
Price elasticity of demand refers to the relative sensitivity of demand for
a product to changes in its price how significantly the sales of the
product are affected when price is changed. If the price change does not
significantly affect the sales volume, a product is said to be price
inelastic.
In the case of products whose demand is highly price elastic, the pricing
decision has to be based on how it will affect the demand/sales volume.
In the case of products with a low price elasticity of demand, the pricing
decision can be made based on other considerations, ignoring the effect
on demand due to changes in the price.

Competition-Oriented Pricing
Three policy options are available to the firm under this pricing
method:
Premium pricing price above competition
Discount pricing price below competition
Parity pricing/Going rate pricing matching competition
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27.6 PRICING TO VALUE/PRICING PROCEDURE
Pricing methods based on cost, demand & competition belong to the
conventional/standard category of pricing methods. Value pricing, in
contrast, is a modern, innovative & distinctive method of pricing.

Relationship Between Price & Value

That price & value have a relationship with each other is obvious. The
crux is that price represents the exchange value of a product. In fact, in
the nature of things, price revolves around value, apart from utility.
While utility refers to the generic ability of the product to satisfy a need,
value is the worth the consumer attaches to it.

Essence of Value Pricing

Value pricing rests on the premise that the purpose of pricing is not to
recover costs, but to capture the value of the product perceived by the
consumer. Analysis will readily show that the following scenarios are
possible with the cost-value price chain;
Value > Price > Costs
Price > Value > Costs
Price > Costs > Value
Price = Value > Costs

Steps Involved in Pricing Procedure

Identify the target customer segments, draw up their profiles
Decide market position & price image the firm desires for the brand
Determine the extent of price elasticity of demand of the product
Take into account the lifecycle stage of the product
Analyze competitors prices
Analyze other environmental factors
Choose pricing to be adopted, considering all factors into account
Select the final price
Periodically review the pricing method as well as procedure

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27.7 OTHER RELATED DIMENSIONS TO PRICING
Price Plays a Communicative Role
Many firms use price as an index of quality/luxury/status/technical excellence of
their products. Such products are usually sold on the exclusiveness idea. Firms also
use price to communicate that the product is a common mans product. Price also
involves psychological factors over & above the key economic factors & transmits
certain communication clues to the consumers.

Resale Price Maintenance

Some firms believe in resale price maintenance while others leave it to the trade.
Often there are statutory provisions on this. Some firms follow a policy of protecting
the trade from the losses resulting from price reductions, while others leave both
loss/profit arising out of the fluctuations in prices to the trade.

Judgment, a Key Factor

In making pricing decisions, judgment is as important as facts & formulae.
Analytical & quantitative approach is no doubt a must in handling the pricing issue,
but pricing still remains an area where judgment plays a vital role.

Psychological Pricing
Example of BPL: BPL, has priced its popular model 21 CTV @ Rs
10,990/-. In this case, based on costs & profit requirements, BPL had to
price upwards of Rs 11K. It has preferred to play on the psychology of
the consumers.
Example of GODREJ: similarly, Godrej has priced its popular model
computer chair @ Rs 1900 + duties & Taxes. In this case, the seller has
actually gone one extra step in psychological pricing. In order to
psychologically appeal to the consumers, the firm has separated duties
& taxes and pegged the price @ Rs 1900/-. This way, it has made it
appear that the price is well below the Rs 2000/- band.
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