PRICING

Pricing is the process of setting price. Price can be

defined as:
An amount of money charged for a product.
Sum of the values that customers exchanges for
the benefits of having or using the product.
The amount of money a seller is willing in accept
in exchange of his product at a given time and
under a given circumstance.

 An amount a manufacturer sets to his

merchandize.
Price is the most significant element or tool of
marketing mix because it produces revenue
whereas other tools produce cost.
Through most of the history, prices were set by
buyer and seller negotiation. Setting one price for
all buyers is relatively modern idea. Setting a
fixed price releases the tension of customer.
Small companys higher management sets the
price, rather than by marketing department in large
companies.

Price is what you pay

For what you get

Tuition

Education

Interest

Use of money

Rent

use of living quarters or a

price of equipment for a
period of time

Fare

Taxi ride or Airline flight

fee

Services of a physician or
lawyer

Retainer

Lawyers or consultants
services over a period of
time

Toll

Long distance phone call or

travel on some highways

Salary

Services of an executive or
other white-collar worker

Wage

Services of a blue-collar
worker

Commission

Sales persons services

Dues

Membership in union or a
club

Methods of price setting\

General pricing approaches
Cost based or cost- plus pricing :In the simplest form of cost based
pricing, the seller sets a price of his
products based on only the cost he bears.
He does not charge profit on his product.
Means he sales his product on no profit no
loss (break-even).

Break-even Analysis
Break even is a cost oriented pricing
approach. A seller analysis preliminary
forecast of sale to determine at what point
sales begin to exceed cost and the earning
of the profit begins, as well as how much
profit may be earned on a given volume of
sales.

Break-even Formula
Break-even point =
Total fixed cost
price variable cost (contributed marginal cost)

Break-even assumptions
The selling price remain same throughout period.
F.C and V.C are separated.
F.C and V.C do not change throughout the period.

Value based pricing

Setting price based on buyers perceptions of
value rather than on the sellers cost.
Value based pricing reverses cost based and target
profit pricing process. The company sets its target price
based on customer perception of the product value.
Here seller sets a price by analyzing consumer needs,
want, and behavior.
Suppose:-Imported goods are valuable.

Competition Based Pricing

In competition based pricing the firm
essentially ignores cost and demand.
Instead, it uses competitor's price as guides
in setting its own price. There are two forms
of competition based pricing:

 Sealed Bid pricing:It is a form when a firm sets a price on

how it thinks competitors will price, rather
than its own cost or on demand. Firm sets
lower price than competitor.

Going rate pricing:This form is probably most important

when competing product are very similar in
nature. Firms normally charge the same
price of commodities such as gold, steel,
paper or fertilizer.

New Product Pricing Strategies

PRICING STRATEGIES
1. SKIMMING PRICING STRATEGY:
Price skimming is the strategy of charging a
highest possible price for a product during the
stage of introduction of its life-cycle. The seller
essentially skims the cream off the market to
cover the high cost of research and development
(R&D). This is happening mostly in pharma
companies. Many consumers are willing to pay a
high price for a innovative product, either
because of its novelty, prestige, or status,
uniqueness or quality. This is only effective
when the firm is facing an inelastic curve.

ADVANTAGES:
Skimming generates an initial cash flow
to cover R&D.
DISADVANTAGES:
It encourages the entry of competitors (high
margins)
It results in a slow rate of diffusion and adoption.
Company could develop negative publicity of lower
the price.

PENETRATION PRICING STRATEGY:

At the opposite extreme, penetration pricing
is the strategy of selling a low price for a
new product. This idea is useful for
developing a large market for a product. It
hopes that this approach will sell more units
during the early life cycle stage and this
discourage competitors to enter in market.

ADVANTAGES:
It results in fast adoption and diffusion.
It creates good will among users.
It creates cost control and cost reduction
pressures from the start.
It discourages competitors to enter in
market.
Low price acts as a barrier to enter.

PREMIUM PRICING
STRATEGY
A company that plans to develop an
imitative new product, company
might decide to use a premium
pricing strategy while producing a
high quality product.

Economical Pricing Strategy

At the other extreme, some organizations
set economical price of their imitative
product which is good in quality but
charging low price.

Product Mix Pricing Strategies

Product Line Pricing

Setting the price steps between the various
products in a product line based on cost
differences between the line products,
customer evaluations of different features
and competitors price.

Optional Product Pricing

Many companies use optional product
pricing- offering to sell optional or
accessory products along with their main
products. For example,
A car buyer may choose to order power
windows and a CD changer.

Captive Product Pricing

Setting a price for a products that must be
used along with a main product, such as
blades for razor and film for a camera.

By-Product Pricing
Setting a price for by-products in order to
make the main product price more
competitive.

Product Bundle Pricing

Combining several products and offering the
bundle at a reduced price. For example,
Fast food restaurants bundle a burger, french
fries, and a soft drink at a combo price

Price adjustment strategies

Price Discount Strategy

1. CASH DISCOUNT
A cash discount is a price
reduction who buy and pay their bills
promptly . A typical example is 2/10, net
30 which means that although payment is
due within 30 days the buyer can be
deducted 2% more if he will pay bill within
10 days . This discount must be granted to
all buyers meeting these terms

QUANTITY DISCOUNT.
A quantity discount is a price
reduction to buyer who buys large volume ,for
example :
Rs 10/= per unit for less than 100 units.
Rs 9 = per unit for 100 or more units

 SEASONAL DISCOUNT .
A seasonal discount is a price
reduction to buyers who buy goods out of
season ,for example: Hotels at Murree offers
discount in off seasons. Air lines offer seasonal
discount in their lower selling periods .
Seasonal discounts allow the
seller to keep production steady in these periods .

Cumulative Discount
Cumulative discount is based on
the total volume purchased over a specified period

Allowance
Allowance is another type of
reduction from the price list. This
reduction seller offers to buyer for
turning in an old item when buying
new one. Trade-in allowance is most
common in the automobile industry.

Allowance
In some other words allowance can be
described as:
Promotional money paid by manufacturer as a
reward to channel member for participating
in promotion and sales support programs
(paying early\ in advance)

Geographical Pricing Strategy

Geographical pricing involves the

company in deciding what to charge
the price of its products to different
customers at different locations.

Psychological Pricing Strategy

This is the approach used when marketer
wants the consumer to respond in an
emotional, rather than rational basis.
Some time about imported products
consumer perceives or use price as an
indicator of quality, or more expensive
products are assumed to be a better
quality. Therefore, marketer sets the price
(High) by keeping in mind buyers
perception about their products.

Discriminatory Pricing Strategy

Companies often charge different
price to different people, location,
timings and segment.

CUSTOMER-SEGMENT PRICING
Different customer groups are
charged differently for the same
product for example PIA charges one
fare for adult and one for infant
similarly musums often charge a
different price as admission fee to
student and senior citizens. Similarly
businessman charges low price to
regular and high to irregular
customers.

Location Pricing
A same product is price differently at
different locations even though the
cast of offering at each location is the
same suppose: a theater varies its seat
price according to audience
preference for different locations.

Time Pricing
Prices are charged differently by
some organizations from their
customers at different times suppose
PIA charges fare from customers
different at morning and night coach
flights or PTCL charges different call
rates at early morning from 6am to
6pm and from 6pm to 9:30pm half
and from 9:30pm to 6am one forth

Factors to consider when setting prices

A companys pricing decisions are
affected by both internal company factors
and external environmental factors.

External Factors

Internal Factors
Marketing objectives
(survival)
Marketing mix strategy
Cost
Organizational
considerations

Pricing
Decisions

Competitions
Nature of the
market and demand
Other environmental
factors, like;
Economic condition
(Boom, Recession)