UNIT-6

PRICING DECISIONS
Concept of Price and Pricing:
Price is an important mix in marketing mix.
Price is taken to be such a standard on which
the success of a marketing program depends.
So, a marketing manager should pay attention
to price mix while formulating a marketing
program. Commonly, price means cost or
monetary amount to be paid for receiving
certain goods or services. In other words,
price means the exchange of things with value
among the parties involved in business.
In the economic context, price means the
value of something expressed in money or any
other monetary medium of exchange. Tuition
fee for education, interest on principal
amount, rent for building or room, fare for
taxi, fee for doctors service, premium for
insurance, wages for workers, commission for
seller, etc are the example of price. In
marketing, monetary amount paid for
receiving goods or services or ideas is called
price.
Pricing means the task of determining
reasonable price of particular goods or
services. Customers should pay certain
amount to the producers or sellers for their
goods or services they provide. For this,
certain monetary value or exchanging capacity
of goods or services should be determined on
the basis of their importance. The same is
called pricing. Pricing in marketing is to take
an important strategic decision.
Thus, the meaning of price depends on
perspective. The meaning of price may be
different in the view point of customers and
producers. Consumers pay money for goods or
services according to their buying decision. So,
in their view point price is the expense paid
for receiving benefit. But in the producers
viewpoint, price means the volume, cost and
margin of the goods sold out.
Objectives of Pricing:-
1. Profit-oriented objectives: Some firms
adopt profit-oriented objective of pricing.
They determine price of their products with
the purpose of earning a profit. Profit-
oriented price is determined in order to
achieve the target from investment or net
sales or to earn maximum profit.
a) To achieve target return: Any business firm
may determine the price of its goods or
services so that certain percent of its
investment or sales can be achieved.
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Producers determine the price of their products
with the purpose that certain percent profit is
earned from their investment. They may determine
price so that 15% or 20% net profit can be earned.
b) To maximize profit: Some companies determine
the prices of their goods or services either to
maximize profit or to earn a much profit or possible
for a short or long term. The meaning of maximizing
profit is not to take high prices forever. There are
two motives for adopting the profit maximization
objectives. The first is to maximize profit from each
unit sold and the second is to maximize profit from
total sales.
2. Sales-oriented objectives: Some companies
especially big firms determine prices keeping in
mind the high sales, volume rather than profit
margin. The sales oriented objective is generally
adopted in order to increase sales volume or to
maintain an increase market share.
a) To increase sales volume: Some firms
determine the prices of their products with the
purpose of increasing sales volume within a
certain period.
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This does not mean to be careless towards
profit. Increase in sales should be favorable to
profit, because total profit increases
automatically if sales value gradually increases
every year.
b) To maintain or increase market share: While
determining the prices of their goods or
services , under the sales oriented objective,
some companies may be ready to enter into
new markets or maintain the existing ones or
expand.
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In this objective, there may be the motive of
earning attractive profit in the long term.
Some new companies start selling their
products at the cast with the objective of
earning more profit in the long run.
3. Status quo-oriented objectives: Besides
profit oriented and sales oriented pricing
objectives, there are also other objectives.
The status quo-pricing objective is to maintain
their reputation and market share and lessen
the risk of loss. These objectives are related to
stability in price and meeting competition.
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a. To stabilize price: Some firms, particularly
leader industries, determine the prices of their
products to achieve the objective of price
stability. Keeping in mind the possible fluctuation
in the demand for their goods or services, big
companies make effort to maintain price stability
to save markets from instability and uncertainty
of prices. This objective helps increase goodwill
and reputation of the company.
b. To meet competition: Some companies
determine the prices of their goods or services
with the objective of meeting competition.
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They determine the prices of their products as
much as the price of the products of other
companies in market. No care is taken for the
cost or profit. Since, this is a difficult task, only
few competitive companies adopt this
objective.
In this way, while setting prices of the goods
or services, the concerned companies may
select any of the above-mentioned objectives.
Doing so, the marketer should carefully
consider the internal and external pricing
factors.
Methods of Pricing:
1. Cost-oriented pricing
2. Demand-oriented pricing
3. Competition-oriented pricing
1. Cost-oriented pricing: This cost oriented
method gives special care to cost of products.
The cost oriented pricing method is also
divided in three classes:
a. Cost-plus pricing: This cost-plus pricing
method is also called mark-up pricing.
According to this method, price of any product
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is determined adding certain percent of profit.
Mostly small producer and retailers use this
method. According to this method, no special
qualification or experience is needed to fix
price. So, this method can be used by any
person.
b. Target-return pricing: Every investor invests
his capital to get return. The income expected
from such investment is called target result.
According to this method, expected result is
added to total cost and is divided by sales
units. Break even analysis can also be used for
this.
c. Break-even pricing: The situation when
income and total costs become equal is called
break even pricing. In this break even situation,
the firm neither earns profit nor suffers loss. If
goods are produced in large quantity from
breakeven point, the firm can earn more profit,
but gets loss from the production if less quantity
is produced from this point.
2. Demand oriented pricing: Demand oriented
pricing method is also called profitable pricing.
This method gives emphasis only on customers
value, perception rather than to the cost of
production or services and market fees.
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Under demand oriented pricing, the following
methods can be included:-
a. Perceived value pricing: According to this
method, business firm collects information
about consumers views, perception,
experiences, feelings etc. Then price is
determined by calculating average on the basis
of such information. In this method, at first,
customers perceptions are collected and
average is made out from them.
b. Customer-value pricing: According to the
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Customer-value pricing method, business
company fixes very low price for high quality
products. The company does so in order to
occupy/control market share. This method of
pricing is used by the companies having several
product lines or products. Even such companies
may this method only to some products but not
to all products.
3. Competition-oriented pricing: The method of
determining prices of products or services giving
priority to market competition is called
competition-oriented pricing.
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This method does not care demand &
production cost. In this method, price may be
fixed at going on rate, more or less than
market price. Under market oriented or
competition oriented pricing, the following
methods can be used:
a. Going rate pricing: If price of products or
services is determined on the basis of market
price, it is called going rate. In this method,
price is determined on the basis of
competitors price (equal to the price of the
products of the competing companies).
b. Pricing below competition: The method of
fixing prices lower than the competitors price
is called pricing below competition. This
method aims to attract price sensitive
customers by sweeping market competitors
aside.
c. Pricing above competition: According to this
method, price of products or services are fixed
higher than the prices fixed by competitors.
Generally, such pricing method may be
applied for quality products or reputed
brands.
d. Sealed bid pricing: Sealed bid pricing is also
based on competition. In this method, price is
determined on the basis of estimates of the
price, the competitors may offer. So, in this
method, production cost is not considered.
Price should be fixed lower than the price
offered by the bidders to get success in sealed
bid. If the price becomes higher than
competitors price, such sealed bid may be
rejected. So the price should be fixed lower in
competition than the price of the competing
bidders who have registered sealed bid.
Pricing Strategies:
1. Market Entry Strategy
2. Product Life Cycle
3. Price Change Strategy
4. Psychological Strategy
1. Market Entry Strategy: Producers produce
various products. All the old and new products
should be sent to market for sale. Specially,
the marketing manager may adopt two
strategies for sending new products to market
for selling. They are as follows:-
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a. Market skimming pricing: Fixing more price
of new product at the beginning is called
market skimming pricing. According to such
pricing strategy price of new products become
a little more than estimated price of target
market.
b. Market penetration pricing: Determining
very low price in the course of supplying new
products to market is called market
penetration pricing. According to such policy
of pricing the price of new products is fixed
much lower than the expectation of the target
market.
2. Product life cycle strategy: Products/goods
also have life cycle like living things. Different
pricing strategies should be determined
according to the lifecycle of the products. The
given strategies is to be adopted in the
following situations:
a. Introduction stage of products: At this
stage, market entrance strategy may be
adopted. This strategy includes market
hunting pricing and market penetration
pricing from which large share of market can
be occupied.
b. Growth stage of product: At this stage, sale
of products mounts very high. Prices of the
products should be cut down a little to
encourage this tendency.
c. Maturity stage of product: Competition of
the products grows at this maturity stage. Sale
and profit remain stable. In this stage, a
strategy should be adopted to cut down price
rate slightly in order to maintain market share.

d. Decline stage of products: Sale quantity
declines very fast at this stage of product.
Only some loyal customers may decide to buy
the product. So, the strategy to decrease
advertisement costs, cut price down and
maintain existence of the firm should be
adopted.
3. Price change strategy: Price should be
changed according to the change of market
environment.
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But, while changing price, study and analysis
of customers, competitors, suppliers and
governments reactions should be thoroughly
considered. There are two alternatives in price
changing strategy:-
a. Price increase strategy: Even a country has
to face different problems. Due to inflation in
the country, new taxes arrangement by
government and lack of supply, prices need to
be increased.
b. Price decrease strategy: The producer
should face market competition at any cost.
On the other hand, full capacity of the
company should also be used. Besides, the
company should not escape from price war. In
such situation, any company or firm should
cut down the price.
4. Psychological pricing strategy: Determining
price considering the customers perception is
called psychological pricing strategy.
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This type of strategy encourages sentimental
customers to buy products. This pricing
strategy includes the following strategies:-
a. Odd-even pricing strategy: Odd price should
be fixed to make the customers realize the
price is low. For example, Rs. 99.95 instead of
Rs. 100. Even price fixing make the customers
realize that the product is of good quality. For
e.g. Rs. 150, Rs. 200 etc.


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b. Customary pricing strategy: This pricing
strategy is based on the traditional practices.
Product prices are determined on the basis of
customers expectation. For e.g. as a practice
every body has known that the price of
Nepalese match is Rs. 1. So, if the price of a
match is fixed more or less than Rs. 1., then
the customers may be psychologically
affected. So, the producer should also fix price
Rs. 1 for the new match. However, such
pricing strategy may not be practical in view of
cost.
c. Prestige pricing strategy: Prestige pricing
strategy can also be adopted to establish
prestige of any product. According to this
strategy, price of the product is determined
very high. This makes the customers think the
product is of high quality and want to
heighten their prestige by buying such
products. Prestige price may be determined
for ornaments, drinks, vehicles, other luxury
goods etc because the customers of such
products/goods may be economically strong.
d. Discount Strategy: Discount pricing strategy also
may be adopted for any product. According to this
strategy, price of product goes high. Then the seller
can be offered heavy discount for the products. Such
pricing techniques encourages the customers.
e. Promotional pricing strategy: Reputed companies
can be offered cash rebates, longer payment terms
and low price of the established product. Such
pricing techniques are called promotional pricing of
the product. This strategy remains for short run term
because the competitors may follow it. So the firm
should improve product quality and services through
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