{"id":273,"date":"2018-11-01T09:01:37","date_gmt":"2018-11-01T09:01:37","guid":{"rendered":"http:\/\/mgmtp14.epgpbooks.inflibnet.ac.in\/?post_type=chapter&#038;p=273"},"modified":"2018-11-01T09:50:03","modified_gmt":"2018-11-01T09:50:03","slug":"pricing-methods-and-strategies","status":"publish","type":"chapter","link":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/chapter\/pricing-methods-and-strategies\/","title":{"rendered":"Pricing: Methods and Strategies"},"content":{"raw":"<div>\r\n\r\n<strong>\u00a0 \u00a0 1.\u00a0<\/strong><strong>Learning Outcome<\/strong>\r\n\r\nAfter completing this module, the students will be able to:\r\n<ul>\r\n \t<li>Describe the concept of price<\/li>\r\n \t<li>Explain various methods of determining price<\/li>\r\n \t<li>Understand different pricing policies.<\/li>\r\n \t<li>Explain various pricing strategies followed by firms<\/li>\r\n<\/ul>\r\n<strong>\u00a0 \u00a0 2.\u00a0<\/strong><strong>Meaning<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Price denotes the value of product or service expressed in monetary terms which a consumer pays or is expected to pay in exchange of expected utility. Price is the amount charged for product or service which is inclusive of any warranties, discounts, guarantees, services that are part of conditions of sale.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">Pricing is the act of determining product value in monetary terms by the marketing managers before it is offered for sale to target consumers.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">Price is a powerful marketing instrument. It has a unique role in marketing. It is the only marketing variable to determine revenues or inflow of funds. It is essential for the firm to determine a right price to achieve the goal of maximum profits and large market share.<\/p>\r\n<strong>\u00a0<\/strong>\r\n\r\n<strong>3.\u00a0<\/strong><strong>Types of Prices<\/strong>\r\n<ul>\r\n \t<li style=\"text-align: justify\"><strong>\u00a0<\/strong><strong>Administered Price <\/strong>: It is the price set by marketing manager or authorized company official after considering various factors such as cost, demand, competition, customer expectation, value of products, image of the company etc. It is the result of conscious and deliberate managerial action. The administered price does not change frequently and is fixed for a number of sales transactions or for a certain time period. Different price structures may be developed to meet market requirements or consumer needs. The administered prices of homogenous products in the market are more or less similar. In such cases, companies resort to non-price competition such as after sale services, free home delivery, liberal credit, sales promotion, money back guarantee, advertising, product improvements, personal salesmanship and product innovations, branding or packaging. Thus, it is the administered price in which the firms or marketers are more interested to achieve pricing as well as marketing objectives.<\/li>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Regulated Price : <\/strong><span style=\"text-align: initial;font-size: 1em\">The administered price may lead to consumer exploitation and harm national interests. That is why these prices are usually subject to government regulations. Thus, <\/span>regulated<span style=\"text-align: initial;font-size: 1em\"> price is the price set as per government regulations. It may take any of the two forms. First, setting the price as per the formula or method laid down by the state as applicable in <\/span>cotton<span style=\"text-align: initial;font-size: 1em\"> textile industry. Second, setting the prices as stated by <\/span>government<span style=\"text-align: initial;font-size: 1em\"> agency. In India, for example, it is applicable in <\/span>steel<span style=\"text-align: initial;font-size: 1em\"> and <\/span>aluminium<span style=\"text-align: initial;font-size: 1em\"> industries.<\/span><\/li>\r\n<\/ul>\r\n<\/div>\r\n<div>\r\n<p style=\"text-align: justify\">\u00a0 \u00a0 In real life situation, the administered price is set within the framework of government regulations and its determination is the major concern for marketing managers. For this, they can opt for any method as described in further discussion.<\/p>\r\n&nbsp;\r\n\r\n<strong>4.\u00a0<\/strong><strong>Methods of Price Determination<\/strong>\r\n\r\n<strong>\u00a0<\/strong>\r\n\r\nThere are various methods of price determination. These have been categorised as follows:\r\n\r\n<strong>\u00a0<\/strong>\r\n\r\n(i) Cost based method or cost plus method\r\n\r\n&nbsp;\r\n\r\n(ii) Demand based method\r\n\r\n&nbsp;\r\n\r\n(iii) Hybrid method or cost-demand based method\r\n\r\n&nbsp;\r\n\r\n(iv) Competition based method\r\n\r\n&nbsp;\r\n\r\n(v) Perceived value pricing method\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>(i)\u00a0<\/strong><strong>Cost Based Method: <\/strong>In this method, price is determined on the basis of cost of manufacturing a product. A certain percentage of cost, known as mark up, is added to the cost. Cost based price is also called as \u2018floor price\u2019 as any sale below this price would mean loss to the organisation. This is simple and a popular method used by many companies in India.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">The cost taken as base may be total cost or incremental cost. Total cost includes fixed costs and variable costs. Fixed costs are the costs which remain fixed upto a certain level and do not vary with the level of production. They get distributed more and more among the units produced as the production rises. Depreciation, rent of building, salary of administrative staff are few examples of fixed costs. Variable costs, on the other hand, vary in direct proportion to level of production. These costs include direct wages, cost of raw material and selling and distribution expenses etc.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">Incremental costs are the additional costs which are incurred due to changing the level or nature of activity such as using new machinery or adding new product. When a firm uses total cost for pricing a product, it is called full cost pricing while use of incremental cost as base is referred to as contribution pricing.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">Further cost, as mentioned above, may be historical cost (i.e. actual cost incurred), standard cost (the cost which should be under assumed standard conditions of volume) or expected cost (forecast of actual cost for the pricing period).<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Cost plus method is simple as <\/span>cost<span style=\"text-align: initial;font-size: 1em\"> is comparatively easy to estimate or ascertain. It assures the recovery of <\/span>cost<span style=\"text-align: initial;font-size: 1em\"> of production and is considered best to neutralize the impact of cyclical shifts in business. The advocates of this method consider it socially fair as the firms do not try to earn more profit in case of rising demand by charging higher prices. This method is suitable in case of <\/span>highly<span style=\"text-align: initial;font-size: 1em\"> unpredictable future environment.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Cost plus method has certain weaknesses. It is difficult to allocate joint cost among different products. This method completely ignores <\/span>demand<span style=\"text-align: initial;font-size: 1em\"> factor which also influences price. It is difficult to use this method in case of new products. This method does not take into consideration the probable competitive reactions. Historical cost base method may not be relevant to the pricing situation. In some cases, opportunity cost may be more relevant but it is not available through accounting records. Under this method, management fails to take initiatives for optimizing product mix (as every product is profitable) and reducing those inefficiencies which lead to cost increase.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">(ii)\u00a0<\/strong><strong style=\"text-align: initial;font-size: 1em\">Demand Based Price<\/strong><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">The price can be determined on the basis of demand. Management may ignore cost and allow demand to determine <\/span>price<span style=\"text-align: initial;font-size: 1em\">. In this method, <\/span>price<span style=\"text-align: initial;font-size: 1em\"> can be determined in any of the following ways :<\/span><\/p>\r\n\r\n<ul>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Test marketing : <\/strong><span style=\"text-align: initial;font-size: 1em\">For setting the initial price i.e. base price, a firm can place a product with different prices in different markets under controlled conditions on a trial base and prepare a <\/span>demand<span style=\"text-align: initial;font-size: 1em\"> schedule indicting demand (sales volume or revenue) at different prices. Management can select that price which is ensuring maximum revenue. Thus, this method provides a rough estimate of demand which is reliable to some extent.<\/span><\/li>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Charge what the traffic will bear : <\/strong><span style=\"text-align: initial;font-size: 1em\">Here the idea is to charge that maximum price what the customer can or may be made to pay depending on <\/span>skill<span style=\"text-align: initial;font-size: 1em\"> of seller and demand intensity. No base price or list price is determined and price varies from consumer to consumer. With <\/span>passage<span style=\"text-align: initial;font-size: 1em\"> of time, it becomes easy to arrive at a price acceptable to <\/span>consumer<span style=\"text-align: initial;font-size: 1em\">. In India, this method is usually adopted by railways and professionals like doctors, lawyers etc.<\/span><\/li>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Forecasting : <\/strong><span style=\"text-align: initial;font-size: 1em\">Price may be determined on the basis of <\/span>forecast<span style=\"text-align: initial;font-size: 1em\"> of demand trends by looking into demand data available from company records or other sources and preparing demand schedules keeping in mind the possible future trends.<\/span><\/li>\r\n<\/ul>\r\n<\/div>\r\n<div>\r\n<p style=\"text-align: justify\">\u00a0 \u00a0 The demand based pricing considers consumers\u2019 price elasticity. It also takes into consideration consumer preferences. This method removes the weaknesses of cost plus pricing method as discussed earlier. But it is not socially fair and also ignores the need of competitive harmony in some cases.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Both cost plus and demand based methods have their own merits and demerits. Hence, any one method is imperfect as there is consideration of only one factor either cost or demand. However, for effective pricing both cost and demand should be considered and thus, a hybrid method can be followed.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>(iii)\u00a0<\/strong><strong>Hybrid method or cost-demand based method : <\/strong>This method considers cost and demand factors and then determines a realistic price. Cost data is obtained from accounting records. Management also prepares demand schedules which depict consumer demand and revenue generation at different price levels. Management carries out break even analysis i.e. determines the relationship between cost, profit and volume to determine the base price.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">This method is more realistic in case demand and cost are relatively stable. But it can not be used if demand estimates are inaccurate and frequent fluctuations occur in cost. This method also ignores the competition prevailing in the market.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">(iv)\u00a0<\/strong><strong style=\"text-align: initial;font-size: 1em\">Competition based method<\/strong><span style=\"text-align: initial;font-size: 1em\">: Management can determine the price of <\/span>product<span style=\"text-align: initial;font-size: 1em\"> on the basis of <\/span>price<span style=\"text-align: initial;font-size: 1em\"> charged by competitors selling similar products. It can fix the price of <\/span>product<span style=\"text-align: initial;font-size: 1em\"> more or less same the price of competitors without giving any due consideration to cost of production\/sales and demand situations.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">The price prevailing in the market is ascertained first and then middlemen\u2019s margin (as prevailing) is deducted from this price. This enables management to fix a price ceiling irrespective of its cost and demand constraints.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">This method is suitable when products are homogeneous and their market is highly competitive. However, in <\/span>case<span style=\"text-align: initial;font-size: 1em\"> of differentiated products, this method is not suitable. This method compels management to exercise cost control methods to increase profits. Management cannot resort to <\/span>price<span style=\"text-align: initial;font-size: 1em\"> increase as it will lead to <\/span>fall<span style=\"text-align: initial;font-size: 1em\"> in market share.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">(v)\u00a0<\/strong><strong style=\"text-align: initial;font-size: 1em\">Perceived value pricing method : <\/strong><span style=\"text-align: initial;font-size: 1em\">This method suggests that price should be determined on the basis of consumers\u2019 perception of <\/span>utility<span style=\"text-align: initial;font-size: 1em\"> of the product. The argument in the support of this method is that consumers make <\/span>comparison<span style=\"text-align: initial;font-size: 1em\"> of the cost of the product to them and the benefits (utility, durability, reliability) they will get from the product and then take a purchase decision. Management should make <\/span>cost-benefit<span style=\"text-align: initial;font-size: 1em\"> trade off while determining <\/span>price<span style=\"text-align: initial;font-size: 1em\"> of the product. However, this includes creativity and complex calculations.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Various methods described above provide the understanding about various ways in which pricing of the product can be done. Each method has its own merits and demerits. The selection of <\/span>appropriate<span style=\"text-align: initial;font-size: 1em\"> method will depend upon the needs of the management and its readiness to accept strengths and weaknesses associated with a particular method.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">5.\u00a0<\/strong><strong style=\"text-align: initial;font-size: 1em\">Pricing policies<\/strong><\/p>\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Pricing policies act as guidelines to management to evolve appropriate pricing decisions which can match prices with market needs. Various pricing policies have been described as follows:<\/span><\/p>\r\n\r\n<ul>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Leader Price Policy <\/strong>:<span style=\"text-align: initial;font-size: 1em\"> In this policy, the firm sets the price with an aim that this will be followed by other firms in the industry. The firms which have a substantial share in <\/span>market<span style=\"text-align: initial;font-size: 1em\">, take <\/span>lot<span style=\"text-align: initial;font-size: 1em\"> of initiative, have good reputation and deal in highly standardized products use this policy. The non-leading firms i.e. followers have no other option than to follow the leader in their price fixing.<\/span><\/li>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Geographic price policy <\/strong>:<span style=\"text-align: initial;font-size: 1em\"> Under this, management charges different prices from buyers depending upon their locations and transportation cost involved. Management follows this policy due to wide geographical distances between manufacturing <\/span>centres<span style=\"text-align: initial;font-size: 1em\"> and consuming <\/span>centres<span style=\"text-align: initial;font-size: 1em\">. This ensures <\/span>competitiveness<span style=\"text-align: initial;font-size: 1em\"> of firms\u2019 products and helps in maintaining market share.\u00a0<\/span>The firm can mention ex-factory price in which the buyer has to bear the cost of transportation or it can fix price inclusive of freight and other transportation charges.<\/li>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Flexible price policy <\/strong>:<span style=\"text-align: initial;font-size: 1em\"> It is also called as variable or negotiated price policy. In this policy, <\/span>seller<span style=\"text-align: initial;font-size: 1em\"> charges different prices from different buyers for the sale of similar goods in comparable quantities at a given time under similar conditions of sale.<\/span><\/li>\r\n<\/ul>\r\n<\/div>\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">\u00a0 \u00a0 \u00a0Seller may also charge different prices from <\/span>different<span style=\"text-align: initial;font-size: 1em\"> group of buyers purchasing in comparable quantities. He may set one price for wholesalers, one price for retailers and one price for distributors. Thus, price within the group remains <\/span>same<span style=\"text-align: initial;font-size: 1em\"> but it differs among groups. This policy is also termed as non-variable policy by some authors as price within the group remains same. This policy provides flexibility but creates dissatisfaction among consumers due to discrimination by <\/span>seller<span style=\"text-align: initial;font-size: 1em\">.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Flexible price policy is suitable when products are not standardized and individual sale transaction involves large quantity and sums.<\/span><\/p>\r\n\r\n<ul>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Single price or one price policy : <\/strong><span style=\"text-align: initial;font-size: 1em\">It refers to setting one price for all buyers irrespective of their class, quantity ordered or condition of purchase. There is no question of bargaining. It saves a lot of time of salesman.\u00a0<\/span>This policy secures confidence<span style=\"text-align: initial;font-size: 1em\"> of customers and helps in maintaining seller\u2019s goodwill.\u00a0<\/span>But it does not provide any incentive for bulk purchases.<\/li>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Psychological price policy : <\/strong><span style=\"text-align: initial;font-size: 1em\">It means setting the prices at odd points e.g. Rs. 1999, Rs. 995 etc. to influence the psyche of <\/span>customer<span style=\"text-align: initial;font-size: 1em\">. It is based on the belief that a customer is mentally prepared to pay a little less than the rounded figure like Rs. 995 instead of Rs. 1000. It can create expected motivation. Thus, more goods can be sold at psychological odd prices. This policy is followed mostly in <\/span>consumer<span style=\"text-align: initial;font-size: 1em\"> goods industry. In India, Bata India Ltd <\/span>use<span style=\"text-align: initial;font-size: 1em\"> this policy for shoe wears.<\/span><\/li>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Price differentials policy<\/strong><\/li>\r\n<\/ul>\r\n<div>\r\n<p style=\"text-align: justify\">\u00a0 \u00a0Under this policy, actual price charged is less than the quoted price and difference is termed as price differentiation. Price differentials are the tactics used by the marketers to meet competitive pressures, to allow incentives to buy or to achieve specific financial objectives. The price differentials are usually designed in following forms:<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><em>Discounts: <\/em>These are allowed to buyers as a result of specific services provided by them or meeting managerial expectations. Sometimes discounts are given for buying products in off season. These can be categorized as:<\/p>\r\n\r\n<ul>\r\n \t<li>Trade discount<\/li>\r\n \t<li>Quantity discount<\/li>\r\n \t<li>Cash discount<\/li>\r\n \t<li>Seasonal discount<\/li>\r\n<\/ul>\r\n<p style=\"text-align: justify\">\u00a0 Trade discount is allowed as deduction from quoted price to buyers occupying specific position in distribution channels like wholesalers, retailers.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Quantity discount is allowed to all the buyers as a result of purchasing a specific quantity of goods. They get deduction from quoted price.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Cash discount is allowed to the buyers who pay the price within a stipulated time. They get deduction from invoice price i.e. quoted price-rebate-trade or quantity discount.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Sometimes, the manufacturer allows seasonal discount of say 15% or 10% to dealer, wholesaler, retailer or customer for placing order during slack season. It helps in effective use of plant and manufacturing facilities. It shifts the storing function from manufacturer to middlemen or customers. For example, manufacturers of woollen garments or heaters give seasonal discount during summer season.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><em style=\"text-align: initial;font-size: 1em\">Rebates: <\/em><span style=\"text-align: initial;font-size: 1em\">These are allowed to <\/span>buyer<span style=\"text-align: initial;font-size: 1em\"> by way of deduction from quoted price to accommodate various claims of buyers like defective deliveries of <\/span>goods ,<span style=\"text-align: initial;font-size: 1em\"> delay in transit etc.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><em style=\"text-align: initial;font-size: 1em\">Allowances : <\/em><span style=\"text-align: initial;font-size: 1em\">The manufacturer may offer promotional allowances to intermediaries e.g. window display allowance or advertising allowance. There will be <\/span>price<span style=\"text-align: initial;font-size: 1em\"> reduction of an equal amount of service expected.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Price differentials may raise net price payable in relation to quoted price e.g. a firm may charge <\/span>extra<span style=\"text-align: initial;font-size: 1em\"> price for warranty besides the quoted price. <\/span>Firm<span style=\"text-align: initial;font-size: 1em\">, thus, gets a remunerative price.<\/span><\/p>\r\n\r\n<\/div>\r\n<div>\r\n<ul>\r\n \t<li style=\"text-align: justify\"><strong>Dual price policy <\/strong>: It means charging different prices on the principle of usage and ability to pay e.g. electricity company use different rates for industrial and domestic users.<\/li>\r\n \t<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Premium pricing policy <\/strong>:<span style=\"text-align: initial;font-size: 1em\"> This policy is used when the firm has a premium product i.e. good variety\/superior quality. <\/span>Firm<span style=\"text-align: initial;font-size: 1em\"> employs premium promotion programmes and charges higher prices by ensuring customers that they are getting good value for money. This policy is adopted by established marketers. They have buyers who are willing to pay <\/span>higher<span style=\"text-align: initial;font-size: 1em\"> price for <\/span>good<span style=\"text-align: initial;font-size: 1em\"> quality product and wider choice. In India, Reliance adopted this policy for Vimal fabrics.<\/span><\/li>\r\n<\/ul>\r\n<strong>\u00a0 \u00a0 6.\u00a0<\/strong><strong>Pricing Strategies<\/strong>\r\n\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">Strategy is a competitive policy. There are various strategies available to firm to face market competition and achieve pricing objectives. At different times, it can use different strategies as per market requirements and its own need. The various pricing strategies are described as under:<\/p>\r\n\r\n<ul>\r\n \t<li style=\"text-align: justify\"><em>Skimming pricing strategy<\/em>: In this strategy, higher prices are charged to fully exploit the product distinctiveness by offering product to consumers in high income level group. It provides huge profits in short time. Marketers use skimming strategy at the initial stage of product which is distinctive and has price inelastic demand in the high income customer group.<\/li>\r\n \t<li style=\"text-align: justify\"><em style=\"text-align: initial;font-size: 1em\">Penetration pricing strategy<\/em><span style=\"text-align: initial;font-size: 1em\">: It refers to charging <\/span>low<span style=\"text-align: initial;font-size: 1em\"> initial price of <\/span>product<span style=\"text-align: initial;font-size: 1em\"> with a view to <\/span>stimulate<span style=\"text-align: initial;font-size: 1em\"> rapid and wide spread market acceptance. Once the product is accepted, the prices are increased. Penetration strategy is used in the initial stage of <\/span>product<span style=\"text-align: initial;font-size: 1em\"> if the product is not much innovative and its demand is highly elastic.<\/span><\/li>\r\n \t<li style=\"text-align: justify\"><em style=\"text-align: initial;font-size: 1em\">Pre- emptive pricing strategy<\/em><span style=\"text-align: initial;font-size: 1em\">: This strategy is also called stay out pricing strategy and is represented by very low price with a purpose of restricting entry of competitors.<\/span><\/li>\r\n \t<li style=\"text-align: justify\"><em style=\"text-align: initial;font-size: 1em\">Extinction pricing strategy<\/em><span style=\"text-align: initial;font-size: 1em\">: Under this strategy, a very low level of price is fixed to eliminate the existing competitors in the industry. The remaining inefficient firms will break even.<\/span><\/li>\r\n<\/ul>\r\n<p style=\"text-align: justify\">\u00a0 \u00a0However, these strategies can be grouped as high price strategies and low price strategies. A firm can choose high price strategy or low price strategy as per the prevailing conditions.<\/p>\r\n&nbsp;\r\n\r\n<strong>Conditions favouring High Price Strategy<\/strong>\r\n\r\n&nbsp;\r\n\r\nThis strategy can be preferred under following conditions :\r\n<ul>\r\n \t<li>Goods are durable.<\/li>\r\n \t<li>It is possible to make income based market segmentation and serve high income<span style=\"text-align: initial;font-size: 1em\"> market segment first.<\/span><\/li>\r\n \t<li>Demand is price inelastic due to product distinctiveness.<\/li>\r\n \t<li>There is need<span style=\"text-align: initial;font-size: 1em\"> for a cushion against <\/span>possible<span style=\"text-align: initial;font-size: 1em\"> adverse impact of <\/span>initial<span style=\"text-align: initial;font-size: 1em\"> pricing error.<\/span><\/li>\r\n \t<li>Many ancillary services are required.<\/li>\r\n \t<li>Production is as per order of customer<span style=\"text-align: initial;font-size: 1em\">.<\/span><\/li>\r\n \t<li>High sales promotion expenditure is required.<\/li>\r\n \t<li>Firm desires to keep demand within the limits of its production capability.<\/li>\r\n \t<li>Firm prefers small market share at the initial stage.<\/li>\r\n \t<li>Product package is unique.<\/li>\r\n \t<li>Firm wants to generate more profits.<\/li>\r\n \t<li>Firm needs funds for research and development expenditure to face competition in future<span style=\"text-align: initial;font-size: 1em\">.<\/span><\/li>\r\n \t<li>Low stock turnover is expected.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div>\r\n\r\n<strong>\u00a0 \u00a0 Conditions favouring Low Price Strategy<\/strong>\r\n\r\n&nbsp;\r\n\r\nThis strategy can be preferred under following circumstances:\r\n<ul>\r\n \t<li>Firm desires a large market share.<\/li>\r\n \t<li>There is high<span style=\"text-align: initial;font-size: 1em\"> degree of price elasticity of demand.<\/span><\/li>\r\n \t<li>Less sales promotion expenses are required.<\/li>\r\n \t<li>High stock turnover is expected.<\/li>\r\n \t<li>Tough competition is expected soon after the introduction of product<span style=\"text-align: initial;font-size: 1em\"> in the market. In such case, low price will discourage entry of competitors.<\/span><\/li>\r\n \t<li>Less additional services are required.<\/li>\r\n \t<li>Goods are perishable.<\/li>\r\n \t<li>High income<span style=\"text-align: initial;font-size: 1em\"> market segment is not large enough to follow <\/span>high<span style=\"text-align: initial;font-size: 1em\"> price strategy.<\/span><\/li>\r\n \t<li>Product is not highly distinctive.<\/li>\r\n \t<li>Low price can generate more sales volume and help in realizing economies of large scale.<\/li>\r\n<\/ul>\r\n<p style=\"text-align: justify\">\u00a0 \u00a0Thus, a firm can follow high price strategy or low price strategy depending upon the above mentioned conditions. However, the basic criterion usually remains product differentiation. As long as, there is no fear of loss of product distinctiveness, high price strategy (skimming price) can be followed. But if there is fear of high level of competition after product\u2019s entry in the market, low or penetration policy can be followed.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">In the introduction stage of product life cycle, a high price strategy and high expenditure on promotion will be beneficial. But at later stages of product life cycle low price strategy and normal promotion expenditure will be beneficial.<\/p>\r\n&nbsp;\r\n\r\n<strong>7.\u00a0<\/strong><strong>Summary<\/strong>\r\n\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">Price denotes the value of product or service expressed in monetary terms which a consumer pays or is expected to pay in exchange of expected utility. Pricing is the act of determining product value in monetary terms by the marketing managers before it is offered for sale to target consumers. Price can be categorized as administered price and regulated price. Administered price is the price set by marketing manager or authorized company official after considering various factors such as cost, demand, competition, customer expectation, value of products, image of the company etc. Regulated price is the price set as per government regulations. In real life situation, the administered price is set within the framework of government regulations and its determination is the major concern for marketing managers. For\u00a0<span style=\"text-align: initial;font-size: 1em\">this, they can opt any method of price determination such as (i) <\/span>Cost based<span style=\"text-align: initial;font-size: 1em\"> method or <\/span>cost plus<span style=\"text-align: initial;font-size: 1em\"> method (ii) <\/span>Demand based<span style=\"text-align: initial;font-size: 1em\"> method (iii) Hybrid method or cost- demand based method (iv) Competition based method and (v) Perceived value pricing method. The price is determined as per the pricing policies and strategies of the firm. Pricing policies act as guidelines to marketing managers to evolve appropriate pricing decisions which can match prices with market needs. Pricing policies can be (i) Leader Price Policy (ii) Geographic price policy (iii) Flexible price policy (iv) Single price or one price policy (v) Psychological price policy (vi) Price differentials policy or (vii) Dual price policy.<\/span><\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Strategy<span style=\"text-align: initial;font-size: 1em\"> is a competitive policy. There are different strategies available to <\/span>firm<span style=\"text-align: initial;font-size: 1em\"> to face market competition and achieve pricing objectives. At different times, it can use different strategies as per market requirements and its own need. These pricing strategies are skimming pricing strategy, penetration pricing strategy, pre-emptive pricing strategy <\/span>and<span style=\"text-align: initial;font-size: 1em\"> extinction pricing strategy. However, these strategies can be grouped as high price strategies and low price strategies. At the introductory stage, if <\/span>product<span style=\"text-align: initial;font-size: 1em\"> is distinctive, high price strategy can be followed. Otherwise, low price strategy is preferred to penetrate the market. A firm can choose high price strategy or low price strategy as per the nature of <\/span>product<span style=\"text-align: initial;font-size: 1em\">, its distinctiveness <\/span>and<span style=\"text-align: initial;font-size: 1em\"> other prevailing conditions.<\/span><\/p>\r\n\r\n<\/div>\r\n<strong>\r\nLearn More<\/strong>\r\n\r\n<strong>Few important sources to learn more about pricing methods and strategies:<\/strong>\r\n<ol>\r\n \t<li style=\"text-align: justify\">Baker,J.Michael (2000). <em>Marketing Strategy and Management<\/em>, Macmillan Press Ltd., London<\/li>\r\n \t<li style=\"text-align: justify\">Bearden, Ingram, Laforge (1995). <em>Marketing: Principles and Perspectives<\/em>, Irwin Inc.<\/li>\r\n \t<li style=\"text-align: justify\">Blois Keith (2000). <em style=\"text-align: initial;font-size: 1em\">The Oxford Textbook of Marketing<\/em><span style=\"text-align: initial;font-size: 1em\">, Oxford University Press Inc., New York<\/span><\/li>\r\n \t<li style=\"text-align: justify\">Gandhi,C<span style=\"text-align: initial;font-size: 1em\"> J (1998). <\/span><em style=\"text-align: initial;font-size: 1em\">Marketing- A Managerial Introduction<\/em><span style=\"text-align: initial;font-size: 1em\">, Tata McGraw Hill, New Delhi<\/span><\/li>\r\n \t<li style=\"text-align: justify\">Kotler, Philip; Keller, Kevin; Koshey, Abraham; and Jha Mithileshwar, (2009). <em style=\"text-align: initial;font-size: 1em\">Marketing<\/em> <em style=\"text-align: initial;font-size: 1em\">Management: South Asian Perspective<\/em><span style=\"text-align: initial;font-size: 1em\">. 13th Edition. Pearson Education, New Delhi.<\/span><\/li>\r\n \t<li style=\"text-align: justify\">Nagle, T.T. and Holden, R.K.(1995). <em style=\"text-align: initial;font-size: 1em\">The Strategy and Tactics of Pricing:A Guide to Profitable<\/em> <em style=\"text-align: initial;font-size: 1em\">Decision Making<\/em><span style=\"text-align: initial;font-size: 1em\">, (Englewood Cliffs, NJ: <\/span>Prientice<span style=\"text-align: initial;font-size: 1em\">-Hall)<\/span><\/li>\r\n \t<li style=\"text-align: justify\">Sherlekar,A.S.<span style=\"text-align: initial;font-size: 1em\">(2006). <\/span><em style=\"text-align: initial;font-size: 1em\">Marketing Management<\/em><span style=\"text-align: initial;font-size: 1em\">, Himalaya Publishing House, Mumbai<\/span><\/li>\r\n \t<li style=\"text-align: justify\">Still, Cundiff and Govoni. <em>Sales Management: Decisions, Strategies and Cases<\/em>, 5th Edition, Prentice Hall of India Private Limited, New Delhi.<\/li>\r\n<\/ol>\r\n<ul>\r\n \t<li><a href=\"http:\/\/www.economicsdiscussion.net\/price\/4-types-of-pricing-methods-explained\/3841\">http:\/\/www.economicsdiscussion.net\/price\/4-types-of-pricing-methods-explained\/3841<\/a><\/li>\r\n \t<li><a style=\"text-align: initial;font-size: 1em\" href=\"http:\/\/www.ijmbs.com\/32\/2\/meera.pdf\">http:\/\/www.ijmbs.com\/32\/2\/meera.pdf<\/a><\/li>\r\n \t<li><a style=\"text-align: initial;font-size: 1em\" href=\"http:\/\/www.netmba.com\/marketing\/pricing\/\">http:\/\/www.netmba.com\/marketing\/pricing\/<\/a><\/li>\r\n<\/ul>\r\n<strong>\u00a0 \u00a0 Points to Ponder<\/strong>\r\n<ol>\r\n \t<li style=\"text-align: justify\"><strong>Administered price is the price set by marketing manager or authorized company official.<\/strong><\/li>\r\n \t<li style=\"text-align: justify\"><strong>Regulated price is the price set as per government regulations.<\/strong><\/li>\r\n \t<li style=\"text-align: justify\"><strong>Strategy is a competitive policy.<\/strong><\/li>\r\n \t<li style=\"text-align: justify\"><strong>A firm can choose high price strategy or low price strategy as per the nature of product, its distinctiveness and other prevailing conditions.<\/strong><\/li>\r\n<\/ol>","rendered":"<div>\n<p><strong>\u00a0 \u00a0 1.\u00a0<\/strong><strong>Learning Outcome<\/strong><\/p>\n<p>After completing this module, the students will be able to:<\/p>\n<ul>\n<li>Describe the concept of price<\/li>\n<li>Explain various methods of determining price<\/li>\n<li>Understand different pricing policies.<\/li>\n<li>Explain various pricing strategies followed by firms<\/li>\n<\/ul>\n<p><strong>\u00a0 \u00a0 2.\u00a0<\/strong><strong>Meaning<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Price denotes the value of product or service expressed in monetary terms which a consumer pays or is expected to pay in exchange of expected utility. Price is the amount charged for product or service which is inclusive of any warranties, discounts, guarantees, services that are part of conditions of sale.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">Pricing is the act of determining product value in monetary terms by the marketing managers before it is offered for sale to target consumers.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">Price is a powerful marketing instrument. It has a unique role in marketing. It is the only marketing variable to determine revenues or inflow of funds. It is essential for the firm to determine a right price to achieve the goal of maximum profits and large market share.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p><strong>3.\u00a0<\/strong><strong>Types of Prices<\/strong><\/p>\n<ul>\n<li style=\"text-align: justify\"><strong>\u00a0<\/strong><strong>Administered Price <\/strong>: It is the price set by marketing manager or authorized company official after considering various factors such as cost, demand, competition, customer expectation, value of products, image of the company etc. It is the result of conscious and deliberate managerial action. The administered price does not change frequently and is fixed for a number of sales transactions or for a certain time period. Different price structures may be developed to meet market requirements or consumer needs. The administered prices of homogenous products in the market are more or less similar. In such cases, companies resort to non-price competition such as after sale services, free home delivery, liberal credit, sales promotion, money back guarantee, advertising, product improvements, personal salesmanship and product innovations, branding or packaging. Thus, it is the administered price in which the firms or marketers are more interested to achieve pricing as well as marketing objectives.<\/li>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Regulated Price : <\/strong><span style=\"text-align: initial;font-size: 1em\">The administered price may lead to consumer exploitation and harm national interests. That is why these prices are usually subject to government regulations. Thus, <\/span>regulated<span style=\"text-align: initial;font-size: 1em\"> price is the price set as per government regulations. It may take any of the two forms. First, setting the price as per the formula or method laid down by the state as applicable in <\/span>cotton<span style=\"text-align: initial;font-size: 1em\"> textile industry. Second, setting the prices as stated by <\/span>government<span style=\"text-align: initial;font-size: 1em\"> agency. In India, for example, it is applicable in <\/span>steel<span style=\"text-align: initial;font-size: 1em\"> and <\/span>aluminium<span style=\"text-align: initial;font-size: 1em\"> industries.<\/span><\/li>\n<\/ul>\n<\/div>\n<div>\n<p style=\"text-align: justify\">\u00a0 \u00a0 In real life situation, the administered price is set within the framework of government regulations and its determination is the major concern for marketing managers. For this, they can opt for any method as described in further discussion.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>4.\u00a0<\/strong><strong>Methods of Price Determination<\/strong><\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p>There are various methods of price determination. These have been categorised as follows:<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p>(i) Cost based method or cost plus method<\/p>\n<p>&nbsp;<\/p>\n<p>(ii) Demand based method<\/p>\n<p>&nbsp;<\/p>\n<p>(iii) Hybrid method or cost-demand based method<\/p>\n<p>&nbsp;<\/p>\n<p>(iv) Competition based method<\/p>\n<p>&nbsp;<\/p>\n<p>(v) Perceived value pricing method<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>(i)\u00a0<\/strong><strong>Cost Based Method: <\/strong>In this method, price is determined on the basis of cost of manufacturing a product. A certain percentage of cost, known as mark up, is added to the cost. Cost based price is also called as \u2018floor price\u2019 as any sale below this price would mean loss to the organisation. This is simple and a popular method used by many companies in India.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">The cost taken as base may be total cost or incremental cost. Total cost includes fixed costs and variable costs. Fixed costs are the costs which remain fixed upto a certain level and do not vary with the level of production. They get distributed more and more among the units produced as the production rises. Depreciation, rent of building, salary of administrative staff are few examples of fixed costs. Variable costs, on the other hand, vary in direct proportion to level of production. These costs include direct wages, cost of raw material and selling and distribution expenses etc.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">Incremental costs are the additional costs which are incurred due to changing the level or nature of activity such as using new machinery or adding new product. When a firm uses total cost for pricing a product, it is called full cost pricing while use of incremental cost as base is referred to as contribution pricing.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">Further cost, as mentioned above, may be historical cost (i.e. actual cost incurred), standard cost (the cost which should be under assumed standard conditions of volume) or expected cost (forecast of actual cost for the pricing period).<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Cost plus method is simple as <\/span>cost<span style=\"text-align: initial;font-size: 1em\"> is comparatively easy to estimate or ascertain. It assures the recovery of <\/span>cost<span style=\"text-align: initial;font-size: 1em\"> of production and is considered best to neutralize the impact of cyclical shifts in business. The advocates of this method consider it socially fair as the firms do not try to earn more profit in case of rising demand by charging higher prices. This method is suitable in case of <\/span>highly<span style=\"text-align: initial;font-size: 1em\"> unpredictable future environment.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Cost plus method has certain weaknesses. It is difficult to allocate joint cost among different products. This method completely ignores <\/span>demand<span style=\"text-align: initial;font-size: 1em\"> factor which also influences price. It is difficult to use this method in case of new products. This method does not take into consideration the probable competitive reactions. Historical cost base method may not be relevant to the pricing situation. In some cases, opportunity cost may be more relevant but it is not available through accounting records. Under this method, management fails to take initiatives for optimizing product mix (as every product is profitable) and reducing those inefficiencies which lead to cost increase.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">(ii)\u00a0<\/strong><strong style=\"text-align: initial;font-size: 1em\">Demand Based Price<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">The price can be determined on the basis of demand. Management may ignore cost and allow demand to determine <\/span>price<span style=\"text-align: initial;font-size: 1em\">. In this method, <\/span>price<span style=\"text-align: initial;font-size: 1em\"> can be determined in any of the following ways :<\/span><\/p>\n<ul>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Test marketing : <\/strong><span style=\"text-align: initial;font-size: 1em\">For setting the initial price i.e. base price, a firm can place a product with different prices in different markets under controlled conditions on a trial base and prepare a <\/span>demand<span style=\"text-align: initial;font-size: 1em\"> schedule indicting demand (sales volume or revenue) at different prices. Management can select that price which is ensuring maximum revenue. Thus, this method provides a rough estimate of demand which is reliable to some extent.<\/span><\/li>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Charge what the traffic will bear : <\/strong><span style=\"text-align: initial;font-size: 1em\">Here the idea is to charge that maximum price what the customer can or may be made to pay depending on <\/span>skill<span style=\"text-align: initial;font-size: 1em\"> of seller and demand intensity. No base price or list price is determined and price varies from consumer to consumer. With <\/span>passage<span style=\"text-align: initial;font-size: 1em\"> of time, it becomes easy to arrive at a price acceptable to <\/span>consumer<span style=\"text-align: initial;font-size: 1em\">. In India, this method is usually adopted by railways and professionals like doctors, lawyers etc.<\/span><\/li>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Forecasting : <\/strong><span style=\"text-align: initial;font-size: 1em\">Price may be determined on the basis of <\/span>forecast<span style=\"text-align: initial;font-size: 1em\"> of demand trends by looking into demand data available from company records or other sources and preparing demand schedules keeping in mind the possible future trends.<\/span><\/li>\n<\/ul>\n<\/div>\n<div>\n<p style=\"text-align: justify\">\u00a0 \u00a0 The demand based pricing considers consumers\u2019 price elasticity. It also takes into consideration consumer preferences. This method removes the weaknesses of cost plus pricing method as discussed earlier. But it is not socially fair and also ignores the need of competitive harmony in some cases.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Both cost plus and demand based methods have their own merits and demerits. Hence, any one method is imperfect as there is consideration of only one factor either cost or demand. However, for effective pricing both cost and demand should be considered and thus, a hybrid method can be followed.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>(iii)\u00a0<\/strong><strong>Hybrid method or cost-demand based method : <\/strong>This method considers cost and demand factors and then determines a realistic price. Cost data is obtained from accounting records. Management also prepares demand schedules which depict consumer demand and revenue generation at different price levels. Management carries out break even analysis i.e. determines the relationship between cost, profit and volume to determine the base price.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">This method is more realistic in case demand and cost are relatively stable. But it can not be used if demand estimates are inaccurate and frequent fluctuations occur in cost. This method also ignores the competition prevailing in the market.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">(iv)\u00a0<\/strong><strong style=\"text-align: initial;font-size: 1em\">Competition based method<\/strong><span style=\"text-align: initial;font-size: 1em\">: Management can determine the price of <\/span>product<span style=\"text-align: initial;font-size: 1em\"> on the basis of <\/span>price<span style=\"text-align: initial;font-size: 1em\"> charged by competitors selling similar products. It can fix the price of <\/span>product<span style=\"text-align: initial;font-size: 1em\"> more or less same the price of competitors without giving any due consideration to cost of production\/sales and demand situations.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">The price prevailing in the market is ascertained first and then middlemen\u2019s margin (as prevailing) is deducted from this price. This enables management to fix a price ceiling irrespective of its cost and demand constraints.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">This method is suitable when products are homogeneous and their market is highly competitive. However, in <\/span>case<span style=\"text-align: initial;font-size: 1em\"> of differentiated products, this method is not suitable. This method compels management to exercise cost control methods to increase profits. Management cannot resort to <\/span>price<span style=\"text-align: initial;font-size: 1em\"> increase as it will lead to <\/span>fall<span style=\"text-align: initial;font-size: 1em\"> in market share.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">(v)\u00a0<\/strong><strong style=\"text-align: initial;font-size: 1em\">Perceived value pricing method : <\/strong><span style=\"text-align: initial;font-size: 1em\">This method suggests that price should be determined on the basis of consumers\u2019 perception of <\/span>utility<span style=\"text-align: initial;font-size: 1em\"> of the product. The argument in the support of this method is that consumers make <\/span>comparison<span style=\"text-align: initial;font-size: 1em\"> of the cost of the product to them and the benefits (utility, durability, reliability) they will get from the product and then take a purchase decision. Management should make <\/span>cost-benefit<span style=\"text-align: initial;font-size: 1em\"> trade off while determining <\/span>price<span style=\"text-align: initial;font-size: 1em\"> of the product. However, this includes creativity and complex calculations.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Various methods described above provide the understanding about various ways in which pricing of the product can be done. Each method has its own merits and demerits. The selection of <\/span>appropriate<span style=\"text-align: initial;font-size: 1em\"> method will depend upon the needs of the management and its readiness to accept strengths and weaknesses associated with a particular method.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">5.\u00a0<\/strong><strong style=\"text-align: initial;font-size: 1em\">Pricing policies<\/strong><\/p>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Pricing policies act as guidelines to management to evolve appropriate pricing decisions which can match prices with market needs. Various pricing policies have been described as follows:<\/span><\/p>\n<ul>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Leader Price Policy <\/strong>:<span style=\"text-align: initial;font-size: 1em\"> In this policy, the firm sets the price with an aim that this will be followed by other firms in the industry. The firms which have a substantial share in <\/span>market<span style=\"text-align: initial;font-size: 1em\">, take <\/span>lot<span style=\"text-align: initial;font-size: 1em\"> of initiative, have good reputation and deal in highly standardized products use this policy. The non-leading firms i.e. followers have no other option than to follow the leader in their price fixing.<\/span><\/li>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Geographic price policy <\/strong>:<span style=\"text-align: initial;font-size: 1em\"> Under this, management charges different prices from buyers depending upon their locations and transportation cost involved. Management follows this policy due to wide geographical distances between manufacturing <\/span>centres<span style=\"text-align: initial;font-size: 1em\"> and consuming <\/span>centres<span style=\"text-align: initial;font-size: 1em\">. This ensures <\/span>competitiveness<span style=\"text-align: initial;font-size: 1em\"> of firms\u2019 products and helps in maintaining market share.\u00a0<\/span>The firm can mention ex-factory price in which the buyer has to bear the cost of transportation or it can fix price inclusive of freight and other transportation charges.<\/li>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Flexible price policy <\/strong>:<span style=\"text-align: initial;font-size: 1em\"> It is also called as variable or negotiated price policy. In this policy, <\/span>seller<span style=\"text-align: initial;font-size: 1em\"> charges different prices from different buyers for the sale of similar goods in comparable quantities at a given time under similar conditions of sale.<\/span><\/li>\n<\/ul>\n<\/div>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">\u00a0 \u00a0 \u00a0Seller may also charge different prices from <\/span>different<span style=\"text-align: initial;font-size: 1em\"> group of buyers purchasing in comparable quantities. He may set one price for wholesalers, one price for retailers and one price for distributors. Thus, price within the group remains <\/span>same<span style=\"text-align: initial;font-size: 1em\"> but it differs among groups. This policy is also termed as non-variable policy by some authors as price within the group remains same. This policy provides flexibility but creates dissatisfaction among consumers due to discrimination by <\/span>seller<span style=\"text-align: initial;font-size: 1em\">.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Flexible price policy is suitable when products are not standardized and individual sale transaction involves large quantity and sums.<\/span><\/p>\n<ul>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Single price or one price policy : <\/strong><span style=\"text-align: initial;font-size: 1em\">It refers to setting one price for all buyers irrespective of their class, quantity ordered or condition of purchase. There is no question of bargaining. It saves a lot of time of salesman.\u00a0<\/span>This policy secures confidence<span style=\"text-align: initial;font-size: 1em\"> of customers and helps in maintaining seller\u2019s goodwill.\u00a0<\/span>But it does not provide any incentive for bulk purchases.<\/li>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Psychological price policy : <\/strong><span style=\"text-align: initial;font-size: 1em\">It means setting the prices at odd points e.g. Rs. 1999, Rs. 995 etc. to influence the psyche of <\/span>customer<span style=\"text-align: initial;font-size: 1em\">. It is based on the belief that a customer is mentally prepared to pay a little less than the rounded figure like Rs. 995 instead of Rs. 1000. It can create expected motivation. Thus, more goods can be sold at psychological odd prices. This policy is followed mostly in <\/span>consumer<span style=\"text-align: initial;font-size: 1em\"> goods industry. In India, Bata India Ltd <\/span>use<span style=\"text-align: initial;font-size: 1em\"> this policy for shoe wears.<\/span><\/li>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Price differentials policy<\/strong><\/li>\n<\/ul>\n<div>\n<p style=\"text-align: justify\">\u00a0 \u00a0Under this policy, actual price charged is less than the quoted price and difference is termed as price differentiation. Price differentials are the tactics used by the marketers to meet competitive pressures, to allow incentives to buy or to achieve specific financial objectives. The price differentials are usually designed in following forms:<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><em>Discounts: <\/em>These are allowed to buyers as a result of specific services provided by them or meeting managerial expectations. Sometimes discounts are given for buying products in off season. These can be categorized as:<\/p>\n<ul>\n<li>Trade discount<\/li>\n<li>Quantity discount<\/li>\n<li>Cash discount<\/li>\n<li>Seasonal discount<\/li>\n<\/ul>\n<p style=\"text-align: justify\">\u00a0 Trade discount is allowed as deduction from quoted price to buyers occupying specific position in distribution channels like wholesalers, retailers.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Quantity discount is allowed to all the buyers as a result of purchasing a specific quantity of goods. They get deduction from quoted price.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Cash discount is allowed to the buyers who pay the price within a stipulated time. They get deduction from invoice price i.e. quoted price-rebate-trade or quantity discount.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Sometimes, the manufacturer allows seasonal discount of say 15% or 10% to dealer, wholesaler, retailer or customer for placing order during slack season. It helps in effective use of plant and manufacturing facilities. It shifts the storing function from manufacturer to middlemen or customers. For example, manufacturers of woollen garments or heaters give seasonal discount during summer season.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><em style=\"text-align: initial;font-size: 1em\">Rebates: <\/em><span style=\"text-align: initial;font-size: 1em\">These are allowed to <\/span>buyer<span style=\"text-align: initial;font-size: 1em\"> by way of deduction from quoted price to accommodate various claims of buyers like defective deliveries of <\/span>goods ,<span style=\"text-align: initial;font-size: 1em\"> delay in transit etc.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><em style=\"text-align: initial;font-size: 1em\">Allowances : <\/em><span style=\"text-align: initial;font-size: 1em\">The manufacturer may offer promotional allowances to intermediaries e.g. window display allowance or advertising allowance. There will be <\/span>price<span style=\"text-align: initial;font-size: 1em\"> reduction of an equal amount of service expected.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><span style=\"text-align: initial;font-size: 1em\">Price differentials may raise net price payable in relation to quoted price e.g. a firm may charge <\/span>extra<span style=\"text-align: initial;font-size: 1em\"> price for warranty besides the quoted price. <\/span>Firm<span style=\"text-align: initial;font-size: 1em\">, thus, gets a remunerative price.<\/span><\/p>\n<\/div>\n<div>\n<ul>\n<li style=\"text-align: justify\"><strong>Dual price policy <\/strong>: It means charging different prices on the principle of usage and ability to pay e.g. electricity company use different rates for industrial and domestic users.<\/li>\n<li style=\"text-align: justify\"><strong style=\"text-align: initial;font-size: 1em\">Premium pricing policy <\/strong>:<span style=\"text-align: initial;font-size: 1em\"> This policy is used when the firm has a premium product i.e. good variety\/superior quality. <\/span>Firm<span style=\"text-align: initial;font-size: 1em\"> employs premium promotion programmes and charges higher prices by ensuring customers that they are getting good value for money. This policy is adopted by established marketers. They have buyers who are willing to pay <\/span>higher<span style=\"text-align: initial;font-size: 1em\"> price for <\/span>good<span style=\"text-align: initial;font-size: 1em\"> quality product and wider choice. In India, Reliance adopted this policy for Vimal fabrics.<\/span><\/li>\n<\/ul>\n<p><strong>\u00a0 \u00a0 6.\u00a0<\/strong><strong>Pricing Strategies<\/strong><\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">Strategy is a competitive policy. There are various strategies available to firm to face market competition and achieve pricing objectives. At different times, it can use different strategies as per market requirements and its own need. The various pricing strategies are described as under:<\/p>\n<ul>\n<li style=\"text-align: justify\"><em>Skimming pricing strategy<\/em>: In this strategy, higher prices are charged to fully exploit the product distinctiveness by offering product to consumers in high income level group. It provides huge profits in short time. Marketers use skimming strategy at the initial stage of product which is distinctive and has price inelastic demand in the high income customer group.<\/li>\n<li style=\"text-align: justify\"><em style=\"text-align: initial;font-size: 1em\">Penetration pricing strategy<\/em><span style=\"text-align: initial;font-size: 1em\">: It refers to charging <\/span>low<span style=\"text-align: initial;font-size: 1em\"> initial price of <\/span>product<span style=\"text-align: initial;font-size: 1em\"> with a view to <\/span>stimulate<span style=\"text-align: initial;font-size: 1em\"> rapid and wide spread market acceptance. Once the product is accepted, the prices are increased. Penetration strategy is used in the initial stage of <\/span>product<span style=\"text-align: initial;font-size: 1em\"> if the product is not much innovative and its demand is highly elastic.<\/span><\/li>\n<li style=\"text-align: justify\"><em style=\"text-align: initial;font-size: 1em\">Pre- emptive pricing strategy<\/em><span style=\"text-align: initial;font-size: 1em\">: This strategy is also called stay out pricing strategy and is represented by very low price with a purpose of restricting entry of competitors.<\/span><\/li>\n<li style=\"text-align: justify\"><em style=\"text-align: initial;font-size: 1em\">Extinction pricing strategy<\/em><span style=\"text-align: initial;font-size: 1em\">: Under this strategy, a very low level of price is fixed to eliminate the existing competitors in the industry. The remaining inefficient firms will break even.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify\">\u00a0 \u00a0However, these strategies can be grouped as high price strategies and low price strategies. A firm can choose high price strategy or low price strategy as per the prevailing conditions.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Conditions favouring High Price Strategy<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>This strategy can be preferred under following conditions :<\/p>\n<ul>\n<li>Goods are durable.<\/li>\n<li>It is possible to make income based market segmentation and serve high income<span style=\"text-align: initial;font-size: 1em\"> market segment first.<\/span><\/li>\n<li>Demand is price inelastic due to product distinctiveness.<\/li>\n<li>There is need<span style=\"text-align: initial;font-size: 1em\"> for a cushion against <\/span>possible<span style=\"text-align: initial;font-size: 1em\"> adverse impact of <\/span>initial<span style=\"text-align: initial;font-size: 1em\"> pricing error.<\/span><\/li>\n<li>Many ancillary services are required.<\/li>\n<li>Production is as per order of customer<span style=\"text-align: initial;font-size: 1em\">.<\/span><\/li>\n<li>High sales promotion expenditure is required.<\/li>\n<li>Firm desires to keep demand within the limits of its production capability.<\/li>\n<li>Firm prefers small market share at the initial stage.<\/li>\n<li>Product package is unique.<\/li>\n<li>Firm wants to generate more profits.<\/li>\n<li>Firm needs funds for research and development expenditure to face competition in future<span style=\"text-align: initial;font-size: 1em\">.<\/span><\/li>\n<li>Low stock turnover is expected.<\/li>\n<\/ul>\n<\/div>\n<div>\n<p><strong>\u00a0 \u00a0 Conditions favouring Low Price Strategy<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>This strategy can be preferred under following circumstances:<\/p>\n<ul>\n<li>Firm desires a large market share.<\/li>\n<li>There is high<span style=\"text-align: initial;font-size: 1em\"> degree of price elasticity of demand.<\/span><\/li>\n<li>Less sales promotion expenses are required.<\/li>\n<li>High stock turnover is expected.<\/li>\n<li>Tough competition is expected soon after the introduction of product<span style=\"text-align: initial;font-size: 1em\"> in the market. In such case, low price will discourage entry of competitors.<\/span><\/li>\n<li>Less additional services are required.<\/li>\n<li>Goods are perishable.<\/li>\n<li>High income<span style=\"text-align: initial;font-size: 1em\"> market segment is not large enough to follow <\/span>high<span style=\"text-align: initial;font-size: 1em\"> price strategy.<\/span><\/li>\n<li>Product is not highly distinctive.<\/li>\n<li>Low price can generate more sales volume and help in realizing economies of large scale.<\/li>\n<\/ul>\n<p style=\"text-align: justify\">\u00a0 \u00a0Thus, a firm can follow high price strategy or low price strategy depending upon the above mentioned conditions. However, the basic criterion usually remains product differentiation. As long as, there is no fear of loss of product distinctiveness, high price strategy (skimming price) can be followed. But if there is fear of high level of competition after product\u2019s entry in the market, low or penetration policy can be followed.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">In the introduction stage of product life cycle, a high price strategy and high expenditure on promotion will be beneficial. But at later stages of product life cycle low price strategy and normal promotion expenditure will be beneficial.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>7.\u00a0<\/strong><strong>Summary<\/strong><\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">Price denotes the value of product or service expressed in monetary terms which a consumer pays or is expected to pay in exchange of expected utility. Pricing is the act of determining product value in monetary terms by the marketing managers before it is offered for sale to target consumers. Price can be categorized as administered price and regulated price. Administered price is the price set by marketing manager or authorized company official after considering various factors such as cost, demand, competition, customer expectation, value of products, image of the company etc. Regulated price is the price set as per government regulations. In real life situation, the administered price is set within the framework of government regulations and its determination is the major concern for marketing managers. For\u00a0<span style=\"text-align: initial;font-size: 1em\">this, they can opt any method of price determination such as (i) <\/span>Cost based<span style=\"text-align: initial;font-size: 1em\"> method or <\/span>cost plus<span style=\"text-align: initial;font-size: 1em\"> method (ii) <\/span>Demand based<span style=\"text-align: initial;font-size: 1em\"> method (iii) Hybrid method or cost- demand based method (iv) Competition based method and (v) Perceived value pricing method. The price is determined as per the pricing policies and strategies of the firm. Pricing policies act as guidelines to marketing managers to evolve appropriate pricing decisions which can match prices with market needs. Pricing policies can be (i) Leader Price Policy (ii) Geographic price policy (iii) Flexible price policy (iv) Single price or one price policy (v) Psychological price policy (vi) Price differentials policy or (vii) Dual price policy.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Strategy<span style=\"text-align: initial;font-size: 1em\"> is a competitive policy. There are different strategies available to <\/span>firm<span style=\"text-align: initial;font-size: 1em\"> to face market competition and achieve pricing objectives. At different times, it can use different strategies as per market requirements and its own need. These pricing strategies are skimming pricing strategy, penetration pricing strategy, pre-emptive pricing strategy <\/span>and<span style=\"text-align: initial;font-size: 1em\"> extinction pricing strategy. However, these strategies can be grouped as high price strategies and low price strategies. At the introductory stage, if <\/span>product<span style=\"text-align: initial;font-size: 1em\"> is distinctive, high price strategy can be followed. Otherwise, low price strategy is preferred to penetrate the market. A firm can choose high price strategy or low price strategy as per the nature of <\/span>product<span style=\"text-align: initial;font-size: 1em\">, its distinctiveness <\/span>and<span style=\"text-align: initial;font-size: 1em\"> other prevailing conditions.<\/span><\/p>\n<\/div>\n<p><strong><br \/>\nLearn More<\/strong><\/p>\n<p><strong>Few important sources to learn more about pricing methods and strategies:<\/strong><\/p>\n<ol>\n<li style=\"text-align: justify\">Baker,J.Michael (2000). <em>Marketing Strategy and Management<\/em>, Macmillan Press Ltd., London<\/li>\n<li style=\"text-align: justify\">Bearden, Ingram, Laforge (1995). <em>Marketing: Principles and Perspectives<\/em>, Irwin Inc.<\/li>\n<li style=\"text-align: justify\">Blois Keith (2000). <em style=\"text-align: initial;font-size: 1em\">The Oxford Textbook of Marketing<\/em><span style=\"text-align: initial;font-size: 1em\">, Oxford University Press Inc., New York<\/span><\/li>\n<li style=\"text-align: justify\">Gandhi,C<span style=\"text-align: initial;font-size: 1em\"> J (1998). <\/span><em style=\"text-align: initial;font-size: 1em\">Marketing- A Managerial Introduction<\/em><span style=\"text-align: initial;font-size: 1em\">, Tata McGraw Hill, New Delhi<\/span><\/li>\n<li style=\"text-align: justify\">Kotler, Philip; Keller, Kevin; Koshey, Abraham; and Jha Mithileshwar, (2009). <em style=\"text-align: initial;font-size: 1em\">Marketing<\/em> <em style=\"text-align: initial;font-size: 1em\">Management: South Asian Perspective<\/em><span style=\"text-align: initial;font-size: 1em\">. 13th Edition. Pearson Education, New Delhi.<\/span><\/li>\n<li style=\"text-align: justify\">Nagle, T.T. and Holden, R.K.(1995). <em style=\"text-align: initial;font-size: 1em\">The Strategy and Tactics of Pricing:A Guide to Profitable<\/em> <em style=\"text-align: initial;font-size: 1em\">Decision Making<\/em><span style=\"text-align: initial;font-size: 1em\">, (Englewood Cliffs, NJ: <\/span>Prientice<span style=\"text-align: initial;font-size: 1em\">-Hall)<\/span><\/li>\n<li style=\"text-align: justify\">Sherlekar,A.S.<span style=\"text-align: initial;font-size: 1em\">(2006). <\/span><em style=\"text-align: initial;font-size: 1em\">Marketing Management<\/em><span style=\"text-align: initial;font-size: 1em\">, Himalaya Publishing House, Mumbai<\/span><\/li>\n<li style=\"text-align: justify\">Still, Cundiff and Govoni. <em>Sales Management: Decisions, Strategies and Cases<\/em>, 5th Edition, Prentice Hall of India Private Limited, New Delhi.<\/li>\n<\/ol>\n<ul>\n<li><a href=\"http:\/\/www.economicsdiscussion.net\/price\/4-types-of-pricing-methods-explained\/3841\">http:\/\/www.economicsdiscussion.net\/price\/4-types-of-pricing-methods-explained\/3841<\/a><\/li>\n<li><a style=\"text-align: initial;font-size: 1em\" href=\"http:\/\/www.ijmbs.com\/32\/2\/meera.pdf\">http:\/\/www.ijmbs.com\/32\/2\/meera.pdf<\/a><\/li>\n<li><a style=\"text-align: initial;font-size: 1em\" href=\"http:\/\/www.netmba.com\/marketing\/pricing\/\">http:\/\/www.netmba.com\/marketing\/pricing\/<\/a><\/li>\n<\/ul>\n<p><strong>\u00a0 \u00a0 Points to Ponder<\/strong><\/p>\n<ol>\n<li style=\"text-align: justify\"><strong>Administered price is the price set by marketing manager or authorized company official.<\/strong><\/li>\n<li style=\"text-align: justify\"><strong>Regulated price is the price set as per government regulations.<\/strong><\/li>\n<li style=\"text-align: justify\"><strong>Strategy is a competitive policy.<\/strong><\/li>\n<li style=\"text-align: justify\"><strong>A firm can choose high price strategy or low price strategy as per the nature of product, its distinctiveness and other prevailing conditions.<\/strong><\/li>\n<\/ol>\n","protected":false},"author":3,"menu_order":36,"template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":["dr-rajwant-kaur"],"pb_section_license":""},"chapter-type":[],"contributor":[60],"license":[],"class_list":["post-273","chapter","type-chapter","status-publish","hentry","contributor-dr-rajwant-kaur"],"part":3,"_links":{"self":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/pressbooks\/v2\/chapters\/273","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/wp\/v2\/users\/3"}],"version-history":[{"count":5,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/pressbooks\/v2\/chapters\/273\/revisions"}],"predecessor-version":[{"id":278,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/pressbooks\/v2\/chapters\/273\/revisions\/278"}],"part":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/pressbooks\/v2\/parts\/3"}],"metadata":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/pressbooks\/v2\/chapters\/273\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/wp\/v2\/media?parent=273"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/pressbooks\/v2\/chapter-type?post=273"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/wp\/v2\/contributor?post=273"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp14\/wp-json\/wp\/v2\/license?post=273"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}