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In the contemporary market environment which is characterized by increasing inter - firm rivalry, low or no government intervention in corporate decisions, improvements in communication and media and a growing concern to retain wholesalers, retailers to market the firm's products, price decisions appear at the centre stages. Pricing is one of the important elements of marketing mix, but lately it has come to occupy the centre - stage in marketing wars. The reasons for this are:
As technologies get standardized, differentiation among firms on the basis of the product is going to get blunted. More products and' brands will transcend to a commodity situation. This is not a healthy sign Essential steps in setting price of a product as commodities are always subject to price fluctuation and price wars. For at this stage, the only way to differentiate between brands is the price.
The intensity in inter-firm rivalry increase as the entry and exit barriers in the industry are lowered with an increase in this rivalry. We find that a firm's cost of, operation also increase as it now has to spend more money to lure the customers and the middlemen. It has to invest money in new product development. If it is already a high overhead and low margin company, a wrong pricing decision can cause a havoc for it in the market. Hence, firms have to be cautious in these pricing decisions.
When the products enter the maturity stages and the markets are also matured, the only way to differentiate various offers is on the basis of augmented services or price cuts. Many firms opt for the latter and then find their bottom lines getting eroded. Thus, pricing decisions become relevant as. the leverage with the firm is low unless it embarks upon non-price strategies.
Another factor contributing to the importance of pricing decisions is the customer's perception of the product's current and potential value. To a customer price always represents the product's value, Many a time, the customer's perception of the product value may not necessarily be in line with its price. There are instances when the product is overpriced when .its value perception is lower than the price tag on it and vice versa. For marketer, it is important that the product are priced at the right level. Another major challenge to the marketer is to assess the customer's perception of the future value of his or her product.
It’s Meaning To a manufacture, price represents quantity of money received by the firm or seller. To a customer, it represents sacrifice and hence his perception of the value of the product, Conceptually : Price = Quantity of money received by the Seller
Quantity of goods & services received by the buyer.
Price is a complex decision that has direct bearing on the company's profitability and the marketer needs to know the cost function and also the customer perception of his and his competitor's product value at different price levels.
A company may seek to achieve one or more objectives by pricing policy. A number of factors, some of which may be internal to the company, and some others external, must be considered while formulating the pricing objective(s). Thus, the image it wants to project about it, long run/short run profit maximization, maintaining increasing market share, sales maximization, return on investment, social responsibility, adhering to the legal requirements etc. are some of the factors that a company may have to take into account while formulating the pricing objectives. Very often, companies may have to pursue more than one objective. Therefore, as a marketer you may have no choice but to strike a balance among a number of objectives, some of which may conflict with some others.
Current Profit Maximization:
A number of companies have the objective to earn maxirnum profit possible in the immediate future. For this objective, the firm decides highest possible price for the product. They estimate demand and costs at different prices and select the unit price that maximizes profits. Charging a high price to earn maximum profit is possible if the product is a unique product catering to the requirements of a select group of consumers who are not price conscious, but more status conscious.
Achieving Desired Return on Investment (ROI):
Another revenue oriented objective could be achieving a pre-determined return on investment. In this case, the companies first decide on what percentage of return they would like to earn on investment, and accordingly price the product in such a way that the profit margins ensure that they achieve the objective.
Sales Related Objectives
Obtaining Desired Sales Volume: Some companies may fix a target regarding the volume of sales they want to achieve and arrive at a price which will give them that desired sales volume. The target may be maximization of sales volume during a particular year in relation to the production level of the firm, or market leadership in I sales as far as the particular/industry is concerned or different sales levels for different years. Though this strategy may not result in profit maximization, a company may opt for this strategy so long as it does not result in loss. This objective may prove to be a better strategy in thcllong run to survive in the market and proper in the business, than maximization of profits in the short run. This strategy may, however, I result in loss to the company for the firm may have to resort to heavy promotion, price discounts and high incentives to salesmen and distributors in order to achieve the desired sales level. However, since the company has established itself in the market, it may be able to raise the price.
Achieving Desired Market Share:
In case of some companies the pricing objective may be dominant market share or a desired market share, as they feel that market share is a better indicator of customer support and corporate strength than sales volume or profits or return on investment
. Market share objective may be in different forms such as obtaining maximum market share or obtaining desired share
Step 1: Selecting the Pricing Objective
The company first decides where it wants to position its market offering. The clearer a firm’s objectives, the easier it is to set price. Five major objectives are:
Step 2: Determining Demand
Each price will lead to a different level of demand and have a different impact on a company’s marketing objectives. The normally inverse relationship between price and demand is captured in a demand curve. The higher the price, the lower the demand.
Most companies attempt to measure their demand curves using several different methods.
Step 3: Estimating Costs
For determination the price of product company should estimate the cost of product.
Variable and Fixed Cost :
Price must cover variable & fixed costs and as production increases costs may decrease. The firm gains experience, obtains raw materials at lower prices, etc., so costs should be estimated at different production levels.
Differential Cost in Differential Market :
Firms must also analyze activity-based cost accounting (ABC) instead of standard cost accounting. ABC takes into account the costs of serving different retailers as the needs of differ from retailer to retailer.
Target Costing :
Also the firm may attempt Target Costing (TG). TG is when a firm estimates a new product’s desired functions & determines the price that it could be sold at. From this price the desired profit margin is calculated. Now the firm knows how much it can spend on production whether it be engineering, design, or sales but the costs now have a target range. The goal is to get the costs into the target range.
Step 4: Analyzing Competitors’ Costs, Prices, and Offers
The firm should benchmark its price against competitors, learn about the quality of competitors offering, & learn about competitor’s costs.
Step 5: Selecting a Pricing Method
Various pricing methods are available to give various alternatives for pricing.
Step 6: Selecting the Final Price
Pricing methods narrow the range from which the company must select its final price. In selecting that price, the company must consider additional factors.
Pricing process for any management is not a simple affair, while undertaking such an exercise , a complex of factors, and consideration have to be entertained.
A) Individuals affected by Pricing Decision:
Any pricing decision affects several individuals. A dynamic management must consider the impact of a pricing decision on each of these individuals. In a simplified way, there are two individuals buyers and sellers, who are involved in pricing. The listed persons involved are as:
Sales Promotion Personnel
• Rival Firms
• Suppliers
• Middlemen
• The Government
• Potential Rivals
• Consumers
The pricing process is not a single stage process, It involves a series of successive decisions. The various stages are:
- The firm must try to identify the segment of the market which will be most suitable for the product under consideration. The suitability may be judged on the basis of consumer - income groups, tastes, competitive, advantages, etc.
Different firms may-aim at different images. Some firms try to project an image of being economical, other as high quality, high price producers, while some others as innovators.
If a firm increases price, it must be accompanied by an advertising campaign which highlights the quality, and such other - characteristics. On the other hand, reduction in price should be accompanied by an advertising campaign to influence the demand.
The firm must have for itself a framework of pricing. It would choose a pricing policy most suited to its needs and conditions. It has a number of pricing policy options available to it like following a price leader, fixing price taking the price of the pricing leader as a bench work.
The pricing must be consistent with the firm's capabilities and corporate goals. A firm may choose a strategy of low prices to enter the market or to discourage the entry of rivals. vi) Setting specific prices:- Within the frame work of pricing policy and pricing strategy, the firm can go ahead in fixing the prices of individual products in the product range.
The following are some of the considerations which are often taken care by the management while pricing a product:
i) Impact of price and output on revenue and cost.
ii) Elasticity of demand and revenue.
iii) Output level that contribute maximum towards overheads and profit.
iv) Incremental contribution of output to overheads and profit.
v) Consideration of goodwill vis-a-vis price changes.
vi) Possibilities of price adjustments to change in cost and demand conditions.
vii) Impact of price change in a product on product line
viii) Finding out long-run implications Vs. short run implications of any price change.
ix) Consideration of rivals price strategies and reactions.
x) Impact of price changes on entry of new rivals.
xi) Coordination of pricing policy with other policies of the firm.
xii) Coordination of pricing policy with overall corporate goals.
Price is a point at which exchange takes place i.e. a point where demand and supply rneet. Thus, factors on both demand and supply sides influence price setting. The rnajor factors influencing price determination are:
The level of demand for a product sets the "ceiling" for the price of that product. It is not easy to estimate precisely the demand for a product. Hence, demand is taken as an uncontrollable variable in marketing. According to demand theory, as you know, price and demand are inversely related (though there are exceptions to this) i.e. a price decline is associated with rise in demand and a price increase results in fall in demand. Hence, a marketer must be aware not only of the absolute level of demand but, more particularly of the sensitivity of demand to price changes.
A measure of this sensitivity is provided by the price elasticity of demand. Price elasticity of demand is the relative change in the quantity demanded for a given change in price. It is measured by dividing the percentage change in the quantity demanded by the percentage change in price. The formula is:
Price elasticIty of demand (E) = (Q1 – Q2) + (Q1+Q2)
(P1-P2) + (P1 + P2)
Where Q, = Quantity demanded at the original price '
Q2 = Quantity demanded at the revised price
P, = Original price
P, = Revised price
2) Product costs
Cosls are broadly divided into two:
1 ) fixed costs and (2) variable costs.
Fixed costs are, as the term indicates, those costs which do not increase or decrease with changes in production or sales level in the short run. Fixed costs are also referred to a overhead costs. A company will have to incur certain expenses such as rent for the building, expenditure on machinery, interest on the borrowed capital, salaries for some staff, etc.. whether it produces to its full capacity or partial capacity or completely stops production
Variable costs vary directly with the level of production. These include costs of raw materials, power, packaging, etc., whose consumption is directly related to the volume produced. They remain the same for each unit produced. Total costs are the sum of the fixed and variable costs together for a certain production level.
Average total cost refers to the total costs divided by the number of units produced. Generally a company would like to fix the price of a product to cover the average cost plus a reasonable profit margin.
While costs set the 'floor' and demand sets the 'ceiling', competition provides the reference point' for pricing a company's product. Under market conditions of perfect competition (many buyers and sellers trading in a uniform commodity, products tend to be priced low because buyers will not pay a higher price since there are a number of substitute products at a given price and the sellers need not reduce the price since there are many buyers at the going price. Under monopolistic competition, the market consists of many buyers and sellers.
Therefore, exchange takes place over a range of prices rather than a single price because the sellers are able to differentiate their offers through product differences and/or varied services. Buyers do not think that the products are perfect substitutes and hence are prepared to pay different prices and sellers also try to develop differentiated offers for different customer segments.
Under oligopolystic competition, there are a few sellers who are sensitive to one another's pricing and marketing strategies. Therefore, marketer has to be very careful about changing the price of his product since any change will invite retaliatory action by the competitors. A pure monopoly consists of only one seller.
Theoretically, a monopoly producer can price his product as he wishes, but in practice, it may be difficult to charge a very high price as it may invite competition, government action and consumer resistance. Thus, a company must be aware of the competitive conditions in the market for the product before it decides on a price.
Product pricing is generally tailored to the company's objectives and policies. If a company desires to project an image of producer of high quality goods for a quality conscious high-income group of consumers, then it will charge high prices for its products. On the other hand, if it wants to project an image of a producer of a product for the masses, then it will price its products low.
Law enforcing agencies of the Government are generally very active when it comes to the question of pricing products used regularly by the poor and vulnerable sections of the society. There are also consumer movements in many countries which keep a close watch on the activities of companies. Nowadays there is a general tendency among industries in almost all countries to lay down standards of self-regulatory code of conduct for the member companies, and industry associations ensure that the "member companies" do not violate the self[1]imposed rules.
Thus, there are government laws prescribing price floors and price ceilings; almost all products are supposed to carry the selling price or the maximum retail price (MRP) on the packages; laws against monopoly and restrictive practices are in place to ensure that the companies do not misuse their monopoly position and adopt practices which restrict competition. Since this is an external environment factor, over which a company has no control, the company must adjust its marketing strategy including pricing strategy to suit the regulations.
Like other three marketing mix elements, price is also influenced by and influences the remaining elements of marketing mix. Hence, decisions in respect of pricing cannot be taken in isolation of the decisions regarding the remaining marketing mix elements. For instance, the customer segment which the company targeted is a quality conscious well to do segment which also expects good after sales service. In that case, obviously, the costs incurred in meeting customer requirements can be recovered only by pricing the product appropriately high. Similarly, a personalized product such as perfume or soap or garment, which warrants heavy promotion has to be necessarily priced high. An intensive distribution channels and wide distribution means costs and the product price should cover the costs. On the other hand, a mass consumed product of low technology may be able to support only minimum costs. Hence, price of the product is very much dependent on quality, brand, package, service, distribution and promotion.
Costs, demand and competition underlie different pricing methods that a firm may adop. Let us turn to these methods.
1. Cost - Oriented Methods:-
There are two pricing methods under this group. One is based on full cost, the other on' variable cost.
a) Full cost or mark up Pricing:- Under this method, the marketer estimates the total cost of producing or manufacturing the product and then adds to it a mark up or the margin that the firm wants. This is indeed the most elementary pricing method and many of the services are priced accordingly. To arrive at the mark - up price, one can use the following formula :
Mark - Up price =a/ 1- r
a = Unit cost (Fixed cost + variable cost)
r = expected return on sales experessed as % age.
This approach ensures that all costs are recovered and the firm makes a profit.
(b) Marginal cost or. Contribution Pricing:- This method works well in a market already dominated by gaint firms or characterised by intense competition; The objective of the firm is to get a foothold in. the market. As long as the firm is able to recover its overheads, it is an acceptable pricing method.
2. Going Rate of Follow the crowd :-
This method is competition oriented. In this method, the firm prices its products at the same level, as that of the competition. This method assumes that there will be no price wars within the industry. This method is used in, ologopolistic market.
Another form of competition oriented pricing is the sealed bid pricing. In a large number of projects, industrial marketing and marketing to the government, suppliers are asked to submit their quotations, as a part of tender. The price quoted reflects the firm's cost and its understanding of competition.
It is a refined versioin cost - plus pricing. Rate of return or larger pricing is determined in the following way:
- i) The firm specifies an expected rate of return on investment (Earnings divided by Capital invested).
ii) To determine a 'normal rate' of output by the firm and then to estimate the 'full cost' on the basis of this normal rate of production.
iii) To estimate 'Capital turnover' ratio (capital invested divided by full cost
iv) To multiply capital turnover ratio with the expected rate of return. on investment. This will give us the mark - up percentage.
v) to compute" ROR (Rate Of Return), price , we add up the full cost arid the mark up i.e.
p = Full Cost + Mark-Up
Sometimes, the firms or the manufacturers sell multiple products, charge relatively low price on some popular product with the hope that the customers, who come for this product, will also buy some other product produced by the firm. Such a product is the firm's loss leader. It only means that the actual price charged is lower than what could have been charge. The basic idea of marking a popular product a loss leader is that the profit thus sacrificed will be made good by profits on the other products.
in case of some commodities, the prices get 'fixed because they have prevailed over a long period of time. Any change in costs for such products gets reflected in quality or quantity of the product rather than-its price.
It often happens that in an industry there is one or many big firms whose cost of production is low and they dominate the industry. In such a situation, the small firms will not like to enter into price war with these big firms. The former may, follow the price fixed, by the leader. Small firms may change the price only when there is a general change in the cost of production and the price leader had recognized and adjusted his price on* that basis. Pricing under the pattern of price - leadership does not fluctuate much.
When Pricing by a firm is based on an assessment of general economic environment, it is known as cyclical pricing, in a condition of depression in the market, the firm has reduce the price to continue in the market, and in a condition of depression in the market, the firm has to reduce the price to continue in the market. In case of boom, the firm will be foolish not to lake the benefit of rising prices in the market. The firm has to make this adjustment in prices despite the fact that his cost of production may have remain unchanged.
This approach is often used in retail business. In oligopolistic market conditions, the firms often follow a price leader But in non-oligopoly situations it is useful to imitate the price set by other firms. This a approach marks decision making quit the easy, as the decision maker does not have to undertake the demand and cost analysis. Suggested price is one that the manufacturer or the wholesaler has found feasible , given the market conditions and it suggests to the retailer to charge this price from the customers. This saves the management of the retail trade from undertaking its own individual analysis of market and cost condition. The manufacturers and wholesaler, on their part, prefer to stick to suggested price as it can help in control and stability of prices.
Sector Researchers have directed much attention to the development of classification for services. Classification scheme use a wide range of factors such as:
(a) Type of service
(b) Type of seller
(c) Type of Purchaser
(d) Demand Characteristics
(e) Degree of Labour Intensity etc
Researchers have directed much attention to the development of classification for services. Classification scheme use a wide range of factors such as:
(e) Dergee of Labour Intensity etc
Pricing Objectives in Service Sector
The alternative pricing methods or approaches for services are similar to those used for goods. The pricing method to be adopted should start with a consideration of pricing objectives. These might include :-
In adverse market, conditions, the price objective may Involve forgoing desired levels of profitability to ensure survival.
Pricing to ensure maximization of profitablity over a given period. The period concerned will be related to the life cycle of the service.
Pricing to build market share. This may involve selling at a loss initially in an effort to capture a high share of the market.
A service company may wish to use pricing to position itself as exclusive. High prices of premium restaurants and Concorde are examples.
ROI + Pricing objective may be based on achieving a desired return on investment. These above, represent some of the more common, but by no means all pricing objectives. The decision on pricing will be dependent on a range of factors, including
1) Positioning of the service
2) Corporate Objectives.
3) Nature of competition
4) Lifecycle of the Services
5) Elasticity .of demand
6) Cost structures
7) Shared Resources
8) Service Capacity
9) Prevailing economic condition
10) Service capacity
Now, once the pricing objectives have been considered, the services marketer needs to consider the method by which prices will by set. Such methods vary/ considerably in the services sector.
1) Cost - Plus Pricing;- Where a given percentage mark up is sought.
2) Rate of Return Pricing:- Where prices are set to achieve a given rate of return on investments or assets. This is also known as 'target return' pricing.
3) Competitive Partly Pricing:- Where prices are set on the basis of following those standards set by the market leader.
4) Loss leading pricing: - Usually applied on a short-term basis, of following those standards set by the market leader.
5) Value-Based Pricing:- Where prices are based on the services' perceived value to a given customer segment. This is a market driven approach which reinforces the positioning of the services and the benefits the customer receives from the services.
6) Relationship Pricing:- Where prices are based on consideration of future potential profit streams over the life time of customers.
1. Stay-Out Pricing:- When a firm is not certain about the price at which it will be able to sell its product, it starts with a very high price. If at this high price quotation it is not able to sell, it then lowers the price of its product. It will keep on lowering the price till it is able to sell the targeted amount of the product.
2. Price- Lining:- In this price of one product in the total range of the products is fixed. Price of rest of the commodities is automatically determined by the relationship between the commodity whose price has be fixed and rest of the commodities in the range e.g. if firm producing shoes or shirts fixes up the price for a particular size, the price of rest of the sizes is then fixed simultaneously on the basis of the differences in their sizes.
3. Psychological Pricing:- In this, a firm fixes the price of Its product in a manner which gives the impression of being low e.g. if the price of a product is fixed at Rs. 89.90 rather than Rs. 90, it may have the psychological impact on consumers that price is in 80 rather than in 90s. This may have some impact on sales.
4. Limit Pricing:- A firm may also try to establish a price that reduces or eliminates the threat of entry of new firms into the industry.
5. Skimming Pricing:- Pre-conditions for such a strategy are :-
i) a sufficiently large segment whose demand is relatively in elastic, net sensitive to a high price.
ii) Unit costs relatively unaffected by small volume, high ratio of variable to fixed costs.
iii) high price unlikely to attract competition.
6. Discriminatory Pricing :- In this pricing, the company sells a productor service at two or more prices, even though the difference in prices is not based on differences in costs.
7. Discount pricing and Allowances:- Most companies adjust their basic price to reward customers for certain responses , such as easily payment of bills, volume purchases and buying off-season. These price adjustments are called discount and allowances.
8. Optimal product Pricing:- This pricing offering to sell optional or accessory products along with main product.
9. By Product Pricing:- Using this pricing, the manufactures will seek a market for the by products should accept any price that covers more than the cost of storing and delivering them.
Thus, from the above approaches we can say that, pricing behaviour is a function of a complex of objective and subjective variables. The objective variables are concerned with the type of product, methods of production, Methods of distribution, industry sector and size, the subjective variables are the choices made by executives responsible for pricing and type of respondent manager.
By: NIHARIKA WALIA ProfileResourcesReport error
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