27 Product pricing

L. Shanthi

PRODUCT PRICING

I think you all know the answers for the following terms

1. What is marketing?

2.What is marketing mix?

3. What is the place of price in marketing mix?

Yes, Marketing is an activity directed at satisfying needs and wants through an exchange process.

Marketing mix is the combination of the four inputs –Product, price, place and promotion.

Price which occupies the second place is the only part of the marketing mix that generates revenue to the firm Setting the right price is an important part of effective marketing. Pricing policy of a firm is of great importance to the manufacturer, wholesaler, retailer, and consumers. Customer satisfaction is mainly related with price of the product. Present consumers are well aware of the prevailing market conditions. The customers are given with more choice to choose their products or services.

What is pricing?

Price is the exchange value of goods or services in terms of money.

It is what you pay money for the goods (like groceries, cosmetics, apparels, shoes, toiletries etc.,) to the seller.

PRICE      à  It is what you pay money for the services (like rent, salary, wages, bus fare, train fare, air fare, tuition fees etc.,) to the service provider.

Consumers view on pricing:

As the value for the products /services he/she buys.

• When they feel price worth for the products/services, they are happy, otherwise,
• If they feel pricing as unreasonably high, they are discouraged to buy.

Marketers view on pricing:

• An only important tool that earns profit to them.
• An important factor that helps to survive the firm in the market.
• An important tool that helps to meet competition
• An important measure that provides customer satisfaction.

Societies view on pricing:

• Pricing influences the cost of living.
• Exercises a great influences on investments, savings and consumption patterns
• Pricing influences the standard of living

PROCESS OF PRICE SETTING:

The process of price determination is divided into following steps, which are discussed below:

• Setting the pricing objective.
• Estimating demand.
• Estimating cost.
• Anticipating competition.
• Determining expected share of market.
• Selecting suitable pricing strategy.
• Considering the marketing policies of the company.
• Fixing the price.

Setting the pricing objective:

o  The company should first decide where it wants to position its market  offering.

o   If the firm’s objectives are clear, it can set the price easier.

The important pricing objectives are:

(i) Survival:

• Companies plagued with overcapacity, stiff competition or changing consumer wants, pursue survival as their main objective.
• It is a short-run or temporary goal and can be insisted only during crisis.
• Once, the firm is out the crisis, it shifts to other price objectives.

   (ii)Target return on investment:

• This is seller oriented pricing objective.
• When a businessman invests capital in a business, he calculates the probable return on his investment.
• Based on return on investment, pricing is fixed.

   (iii) Getting maximum market share:

• A good market share is a better indication of progress.
• The firm may lower the price, in comparison to the rival products, with a view to capture the market.

    (iv)Preventing competition:

• Meeting competition is one of the important pricing objectives.
• Adopted, if the product is introduced in a competitive market.
• Price policy should be formulated having considering the prices of rival products, existing competition, etc., which enables the marketing departments to meet the competition.

 (v)  Profit Maximization:

• Business run with an aim of earning profit at the maximum.
• If short-run policy is adopted for maximizing the profit, the company will lose its place in the market very soon.
• The pricing decision should be made with a view to maximize the profit in the long run.

   (vi) Price Stabilization:

A stable price can win the confidence of the public. So, the price should not be allowed to fluctuate very often.

(vii) Ability of the customers:

The pricing decision may be taken according to the ability of the customers to pay for the products.

(viii)    Resource Mobilization:

The products are priced in such a way to make use of all available resources for the firm’s expansion, developmental investment etc,

1. Estimating Demand:

• The price is fixed by simply adjusting to the market condition.
• As demand and price are inversely related, the higher the price, the lower the demand.
• If the price is too high, the level of demand may fall.

2.  Estimating cost:

• The estimated cost plays a major role in fixing the price, which determines the profit of the company.
• The cost to be incurred may be fixed or variable.
• Fixed costs are those that do not vary in total with the changes in the sales. These are depreciation, rent, interest and other general and administrative expenses.
• The variable costs are those that vary in total with output. These are direct material, direct labour, direct expenses and variable overheads.

3.  Anticipating competition:

The competitors can influence the price. Competition may arise from

• Similar products
• Close substitute
• Unrelated products seeking the same consumer’s disposable income.

To anticipate the reactions of the competitors, it is necessary to collect information about their product, cost structure, market share etc.,

4. Determining expected share of market:

• A marketer must decide the share of the market at the price, that the customer is expected to afford to pay.
• Low priced product may capture larger share of the market, and a high priced product may capture a small share of the product.

5.  Selecting a suitable price strategy:

A good pricing policy may be employed to achieve a predetermined share of the market. The two important pricing strategies are:

(i)Skimming pricing

(ii)Penetrating pricing

(i) Skimming pricing:

• A very high price is fixed for a new product initially and later the price is reduced gradually when competitors enter the market.
• This type of pricing is called as “skim-the-cream-pricing” by Stanton.

(ii)   Penetrating pricing:

• Penetrating pricing is intended to help the product penetrate into the markets to hold a position.
• This is done by adopting a low prices in the initial stages. Due to low prices, sales volume goes up, competition falls down.

1.  Considering the marketing policies of the company:

Various marketing policies regarding production, channels of distribution, promotion etc., should be considered while fixing the price for a product.

2. Fixing the price:

• This is the final step in fixing the price.
• While fixing the price for any product, the interest of producer, middlemen and consumer should be considered.
• Consultation with various departments such as production, finance, marketing, etc., also essential while taking any pricing decision.
• As there is no hard and fast rule to fix the price, it heavily relies upon the ability and experience of the top management.

FACTORS INFLUENCING PRICING DECISIONS:

A firm while setting its price for its products has to consider various factors. The factors that influence the pricing decisions may be divided into two factors. They are (i) Internal factors (ii) External factors.

INTERNAL FACTORS:

1. Objectives of the firm:

The pricing policy of the firm must be decided only after considering the firms objective which has been discussed in detail in above chapters.

2.Cost of the Product:

• The expenditure incurred in manufacturing the product must be considered while deciding the price.
• Generally, the price will be fixed only above the cost that is incurred in manufacturing the product.
• Otherwise, survival of the firm for long run will be a big question mark.

    3. Marketing Mix:

• Pricing is one of the main elements in marketing mix.
• Its coordination with other elements like product, place and promotion is also very important.
• Any shift in any one the elements of marketing mix will affect the other elements.
• Hence, marketing mix plays a major role in determining price.

    4. Product Differentiation:

• Price of the product varies with the characteristics of the product in terms of size, colour, quality, attractive package, varied uses etc.
• Generally, the customers is ready to pay high price for new trendy items.

EXTERNAL FACTORS:

1. Market demand:

• If the consumer feels that the product is worth for the price he pays, he buys the product and the demand increase, otherwise he will not buy the product.
• The present market is consumer-oriented, and the consumer influences the price.
• It is the consumer satisfaction which determines the demand and also which in turn determines the price of the product.

   2.  Competitors Pricing:

• While fixing the pricing, the price of the competitors should be taken into consideration.
• The price of the competitors as well as the quality maintained by them should be considered.
• The pricing can be made either less than the competitors price or in par with them, but at no cost, the pricing be fixed higher than the competitors, which affects the sales of the product.

    3. Distribution Channels:

• If the channel of distribution is lengthy, which includes agent, wholesalers, retailers etc., the pricing will be high, because the compensation to be provided to the channel members for the services rendered by them, is to be included in price of the product.
• If the channel is short, the price can be fixed less.

    4. Government Policies:

•  Government interference such as control of prices, levying of taxes, etc., are the other considerations which influences the pricing decisions.

     5.  Economic Environment:

• The economic environment of the country plays a major role in pricing decision.
• The pricing can be fixed high during booming period and to price less during the recession period.

    6. Stages in Product Life Cycle:

• The pricing decision of a product depends upon the stages of the Product life cycle.
• During the introductory period, pricing like skimming, penetrating methods can be implemented. Later during growth stage, pricing can be increased if there is high volume of sales.
• And to offer price discounts, trade discounts etc., during maturity stage.

    7.  Customers:

• The frequency of buying, quantity of purchase, bargaining power, buying ability and willingness to buy etc., affects the pricing decision.

KINDS OF PRICING:

Various kinds of pricing is adopted by the firms. They are

1. Odd Pricing:

• Odd pricing may be a price ending with odd numbers or a price just under a round number.
• A product priced at Rs.99.90 will attract the consumers than when it is priced at Rs.1000.

   2.  Customary Pricing:

• The customers have fixed a certain amount of price to pay for particular products.
• Customers are not ready to spend more than, that fixed price. Example: chocolates, biscuits, match box etc.,

    3.  Skimming Pricing:

• A very high price is fixed for a new product initially and later the price is reduced gradually when competitors enter the market.
• This type of pricing is called as “skim-the-cream-pricing” by Stanton.

     4.  Penetrating pricing:

• Penetrating pricing is intended to help the product penetrate into the markets to hold a position.
• This is done by adopting low prices in the initial stages.
• Due to low prices, sales volume goes up, competition falls down, and the firm in long run captures a huge market share.

    5. Monopoly Pricing:

• This type of pricing is followed where there is only one seller.
• Since there is no competition and no substitute, the seller can fix high price and can earn profit in short run.

  6. Prestige Pricing:

• The quality of the product has got greater influence in fixing the price.
• Many customers are of the opinion that, higher the price, higher is the quality. Hence, the marketers can make use of this customers stand and fix price.
• This pricing can be mainly applicable to luxurious products.

    7.  Administered pricing:

• Pricing decisions made at managerial level, and not on the basis of cost, competition, demand etc.
• While fixing pricing, the manager should consider all the relevant factors affecting pricing.

    8.  Dual Pricing:

o  When the producer sells the same product at two or more different prices, it is dual pricing.

For example, if the company sells its part of its production to government at one price and the remaining may be sold in the open market at different price.

9. Mark up Pricing:

o   In this method, a certain percentage is added to the cost of production.

o   It is also called as cost plus pricing.

10.Competitive Bidding:

• Large firms or government calls for competitive bids when they want to purchase certain products or specialized items.
• The probable expenditure is worked out.
• Then the offer is made quoting the price, which is called as contract price.
• The lowest bidder gets the work.

   11. Negotiated Pricing:

• This method is also known as variable pricing.
• In this type of pricing, the price is not fixed.
• The price to be paid on sales depends upon bargaining power of the customers.
• In certain cases, the product may be prepared on the basis of specification or design by the buyer. Hence, the prices have to be negotiated and then fixed.

12.  Price Lining:

• This kind of pricing is generally followed by retailers.
• The pricing decisions are made initially and remain constant for a long period of time.
• Firm should decide the number of product line and number of each price level.
• Prices should not be too close or too far from each other.
• Ex: pricing of t-shirts- 350 Rs, 375 Rs, 400 Rs etc.,

13.  Geographical Pricing:

• This type of pricing is followed, where a manufacturer serves a number of distinct regional markets.
• The manufacturer adopts different prices in each area without creating any ill-will among customers.

Following are the three types of geographical pricing.

(i) FOB Pricing:

Free on Board may be of two types:

o   FOB origin and

o   FOB destination.

In the first case, the buyer will have to incur the cost of transit, and in the latter, the price quoted is inclusive of transit charges.

(ii) Zone Pricing:

In this method, the firm establishes two or more zones.

o   All customers within a particular zone will pay the same price irrespective of the difference in distance between two places inside the zone.

(iii)   Base point Pricing:

In this system, certain cities are designated as base points and all the customers are charged the freight charges from the city to the location of the buyer irrespective of the city from which the goods are actually transported.

14. Expected Pricing: SLIDE-2

• In this method, the price that will be accepted by the consumers has to be found out.
• Hence, a fixed price cannot be fixed beforehand, so a price range is offered.
• Then the response of consumers is identified, analyzed and later the price is fixed.

    15. Pricing at the prevailing prices: SLIDE-26

• This type of pricing is followed with a view to meet the competition.
• Such a strategy presumes that a price that is above the price of the competitors would bring down the sales and whereas a lower price would not increase sales significantly.
• It is also known as “Pricing at the market”

  PRICING OF NEW PRODUCTS:

Following guidelines are to be followed in setting the price for the new products.

o   Making the product accepted.

o   Maintaining the product.

o   Retaining the products.

Pricing of the products has to be done with utmost care because

• It affects the quantity of the product to be sold.
• It determines the amount of the revenue of the firm.

There are two types of pricing available for pricing new products. They are.

• Skimming Pricing
• Penetrating Pricing.

Skimming Pricing:

Pricing very high initially, and later to cut down the price due to the entrant of the competitors. This type of pricing is followed in the following cases.

• The demand is very high for the product.
• To take back the profit very shortly.
• The product is very new to the market.
•  There is no competition.

Penetrating Pricing:

Pricing very low initially to penetrate into the market. Later to expand the market share by large scale production. This type of pricing is followed in the following cases:

• Main objective of the firm is to expand the market.
• The product faces stiff competition.
• Customers are price sensitive.
• To lessen the price during the decline stage to increase the sales.

Conclusion:

Pricing policies provides guidelines to the firm to take suitable decisions in framing pricing decisions. Pricing is vital to every organization because, it is the only source which provides money flow in to the organization. Pricing not only influences the consumer buying decision, but also it is the major motivating factor for the middlemen involved in promoting the sales of the product. Hence, the organization should be more vigilant and should take utmost care in analyzing the factors influencing pricing, objectives of pricing and fix appropriate pricing methods which in turn yield high revenues to the firm.

Reference Books:

1. Marketing Principles and Practice- A.A.Chunnawalla- Himalaya Publishing House
2. Marketing Management- R.S.N.Pillai, Bagavathi- S.Chand & Company Pvt.Ltd.
3. Marketing Management concepts and cases- S.A.Sherlekar, R.Krishnamoorthy- Himalaya Publishing House
4. Principles of Marketing- S.A.Sherlekar, K.Nirmala Prasad, S.J. Salvadore Victor-Himalaya Publishing House
5. Marketing – Dr.L.Natarajan- Margham Publications