UNIT II: PRICE

Chapter 1:
MEANING AND IMPORTANCE OF PRICE
Price is one of the most important elements of the marketing mix. This is the only element which
generates revenue for an organization and determines its growth. The other three main elements of
the marketing mix are Product, Place and Promotion. A firm incurs a certain cost to produce a
Product or service. The Place element is concerned with the sale and distribution of the product
through various channels, therefore a firm incurs some expense there, like in choosing the sales-
methods, payment to salesmen, expense incurred on transporting products to place of selling, etc.
The Promotion element, concerned with the advertising and promotion of the firm‟s product leads
to expenditure on different promotion and advertising media like TV& Radio advertising, sample-
promotion, etc. All of these are the variable costs for an organization, that is, these costs change
with the changes in level of production and sales activity; therefore influence the process of setting
the right price for the product. „Right price‟ denotes the level of price which can cover all these
expenditures on the final product and brings some profit to the firm.

Meaning of Price
The term price denotes money value of a product. It represents the amount of money that
customers pay to the sellers to gain benefits of having or using a good or service. In fact it is
marketers' assessment of the value customers see in the product. So price indicates the money value
which a buyer is ready to exchange for purchase of certain good or service.

Definition of Price
The definition of Price according to Philip Kotler is- “Price is the amount of money charged for a
product or service.”

Similarly according to Stanton “Price is the amount of money needed to acquire some combination
of goods and its companying services.”

Pricing is defined as „the process whereby a business sets the price at which it intends to sell its
products and services’.

It is the key variable in a firm‟s marketing plan. While setting prices for its products, i.e. goods or
services, the business takes into account various aspects of production, listed below

 Price of raw material- The firm considers price at which it could acquire the goods and raw
material to prepare final product to be sold in the market. A higher cost of acquiring these
implies a higher product-price and vice versa.
 Cost of manufacturing- If manufacturing cost is higher, the price of product will also be
higher, whereas lower manufacturing cost leads to lower price. This cost includes the wages
of labour, expenses on power and other overheads during manufacturing.
 Market condition- When market has positive sentiment i.e. high demand for goods and
services because of high income and purchasing power of consumers, companies set higher
prices for their products. On the contrary when there is depression or negative sentiment
due to lack of demand in market, price is also kept low by firms. For example, automobile
companies increase prices of cars when there is high demand and offer heavy discounts
when demand is low.
 Competition in the market- If there is no other firm in the market offering similar product,
the firm may set a higher price for its product or service, but if there are many market
players for the same product, the price will be kept competitive. For example, Airtel initially
kept high prices for its mobile services, but with entry of Vodafone, Idea and Reliance Jio the
prices for various mobile services have been slashed.
 Brand and quality of product- A higher brand-value and better quality corresponds to a
higher product price in the market. For example, a simple jewellery store in the Chandni
Chowk market of Delhi will set price of its ornaments based on cost of gold/silver and
making charges (cost of labour for making a particular piece of jewellery). But a high-end
jewellery store such as Kalyan Jewellers or Tanishq will price similar ornaments at a much
higher price owing to its brand-value and reputation in the market.

Price must be supporting other elements of the marketing mix. Too high or too low pricing of a
product could mean lost sales for the organisation.

Objectives of Pricing

Survival is the basic objective of any business. In order to continue their existence organizations
may tolerate short run losses, but to obtain working capital for uninterrupted operations and
sustainability appropriate pricing for the product is very necessary.
As an element of the marketing-mix, a firm‟s pricing strategy should be directed towards the
achievement of specific marketing-objectives which would lead to the accomplishment of overall
organisational objectives. Pricing is not an end in itself; but a means to achieve certain objectives
of the marketing department of a firm. Therefore, every firm should carefully set pricing-
objectives so that there is clarity and consistency in the firm with respect to pricing in the long
run.
The objectives of pricing are as follows:

1. Profitability objectives:

Target Rate of Return on Investment or Net Sales.

This is an important goal of pricing policy of many firms. In this, the price represents cost of
production and profit margin. The basic objective is to build a price structure to provide
sufficient return on the investment or capital employed.
Profit Maximization

In practice, no firm expressively states this as an objective for fear of public criticism.
However, in economic theory, profit maximization is an important objective for any business
for its survival. In recent times though, the business philosophy has changed. Businessmen
have started to think from the perspective of society instead of only focusing on maximizing
profits, and have incorporated business with other activities which help fulfil their societal
obligations.

2. Market-Related Objectives:

 Meeting or Preventing Competition in the Market Some firms adopt pricing policies to meet
or prevent competition in the market. They are ready to fix their prices at a competitive level
to meet competition in the market. They even follow “below cost pricing”, that is, charge
less than the cost because they believe it will prevent new firms from entering the market.
 Maintaining or Improving Market Share .

Market share is meaningful measure of success of a firm‟s marketing strategy. This price
objective helps to maintain the market share, i.e. either to increase or sometimes to
decrease it. This pricing objective is followed by firms operating in expanding markets. When
a market has a potential for growth, market share is a better indicator of a firm‟s
effectiveness than target return on investment. A firm might be earning a reasonable rate of
return on investment or capital employed but its market share could be decreasing. Target
market share means that sale which a company wishes to attain and it is normally expressed
as a % of the total industry sales. Therefore, this is a worthwhile pricing objective for firms
operating in expanding markets.

 Price Stabilization
Price Stabilization as an objective is prevalent in industries that have a priceleader. For
example, in an oligopoly, there are only a few sellers which follow one big seller who acts as
the price leader, and try to stabilize their prices simultaneously. No firm is willing to engage
in price wars. They may even forego maximizing profits in times of prosperity or short supply
in order to stabilize prices. This is because price stability helps in planned and regular
production in long-run.

3. Public Relations’ Objectives

 Enhancing Public Image of the Firm

A company‟s public image is important to its success. Every company has an identity
representing what it has done to convey the public about its product, packages, trademarks,
brand names, employees and the marketing programme. This image is deeply influenced by
how the company handles the delicate and sharp weapon of pricing. Suppose a company
with an established reputation in the market based on existing products and price lines
introduces a new product to a different market segment. This new product could be at a
higher or lower price. If this segment hasn‟t tried the product but is aware of its prestige
and brand-value, it might desire to purchase its products because price is no longer a
deterrent factor. Similarly, a firm known for high quality and high priced products will lose its
current customers if it goes in for low quality and low priced products. However, a company
image well established will favour price policies of its choice because the customers have
accepted the company.

 Resource Mobilization –
Resource Mobilizing means the creating resources for either self – development or
reinvestment in the firm. Prices are deliberately set high in certain cases to generate surplus
for reinvestment in the same firm or its sister concerns, e.g. petrol rates are kept very high
as it yields a good surplus (excess of income over spending) because gasoline automobiles
depend fully on petrol. As a governmental exercise, it works well as the public escapes tax
on their backs. This objective of price is mostly found in the developed countries where it
adds to the exchequer (former government departmental in charge of national revenue) for
reallocation.
Importance of Pricing
Pricing is an important element of the marketing mix of the firm. All other Ps of marketing
i.e. Product, Place and Promotion are highly dependent on the price at which the firm can
sell its products to the buyers. Price will usually be set relatively high by the firm if
manufacturing is expensive, distribution and promotion are exclusive. On the contrary a low
price may be a viable substitute for product quality, but firm requires effective promotion
and an energetic selling effort to increase its market share. Similarly consumers‟ buying
decisions also depends upon price of the product up to a great extent. Highly priced
commodities generally witness a sluggish sale trend in comparison to moderately priced
goods.

A. Importance of Pricing for Firm

Pricing is significant for firms in the following manner

1. To determine firm’s Competitive Position and Market share

Pricing Policy of a firm is a major determinant of a firm‟s success as it affects the firm‟s
competitive position and share in the market. If prices are too high, the business is lost. If
prices are too low,the firm may be lost. The wrong price can also negatively affect sales and
cash flow to the firm.

2. To achieve the financial goals of the company

Price has an important bearing on the firm‟s financial goals, i.e. Revenue and Profit. For a
given level of production, higher price means a higher revenue and higher profitability
(revenue minus costs).With the help of price; a firm can make estimates of expected
revenue and profits.

3. To determine the quantum of production –

Price also helps in determining the quantum of production which should be carried out by
the firm. The management of a firm can make estimates of profit at different levels of
production at different prices and can choose the best combination of production, volume,
and price.

4. To determine the product positioning and distribution in the market-

The sale of product is supported by extensive advertising and promotional campaigns. What
type of promotional techniques is to be used and how much cost will be incurred, these
decisions depend upon prospective revenues of the firm, which again are influenced by the
product price.

5. To determine the quality and variants in production-

Before setting the price, managers try to explore „Will customers buy the product at that
price?‟ to fit the realities of the marketplace. This helps them to determine various product
models that can be produced to fit different market segment, e.g. Samsung offers Samsung
Grand for a medium-income group and Galaxy S7 Edge for a high-income group of
consumers.

6. To establish consistency with the other variables in the marketing mix-

Pricing decisions and policies directly influence the nature and quality of product, its
packaging, promotion policies, channels of distribution etc. For instance, a firm may decide
to improve the quality of a product, increase the number of accompanying services and
spend more on promotion and packaging etc. only if it is confident to sell its product at the
price which is good (high) enough to cover the cost of additional improvements and services.
If this same product cannot command a very high price in the market, then the company will
have to keep normal quality, reduce the number of accompanying services, go with
different, less-expensive channels of distribution and simplify packaging etc. Therefore there
is no doubt that the nature and type of product, promotion and distribution policies of the
firm are influenced by the price-policy of the firm.

7. Helpful in maintaining system of free enterprise and long run survival of firms

Pricing is the key activity in the economy of a country which permits system of free
enterprise. It influences factor prices, i.e. Wages, interest, rent and profit, by regulating
production and allocating resources in a better way. The firms which are not able to market
their products at good prices cannot survive in the long run as they are not able to pay for
various factors of production. So pricing weeds out inefficient firms and shows way to long
run survival.

8. Improvement in company’s image

A company‟s image is important to its success and pricing helps to make that image. A firm
with an established reputation for quality at existing price lines may introduce a new
product at either higher or lower prices to attract different market segments. Buyers who
are aware of its prestige might desire to purchase its products because price no longer
remains a limiting factor for them. For example different models of Apple mobiles have good
demand in the market in spite of being high priced.
B. Importance of Pricing to Consumers

1. Helpful in decision-making
Goods and services offered by various producers at different prices help the consumer
to make rational and informed buying decisions. For example, a person may choose to
buy a T.V. from one shop which offers the product at Rs 20,000, or from another shop
which offers the same T.V. at Rs 21,500 but gives free-repairsservice for five years.

2. Helps in satisfaction of needs:

Goods and services offered by different producers at different prices help the consumer
to take that buying-decision which will give him/her maximum satisfaction. By making a
market survey and comparing the prices of different variants available vis a vis his
budget, the consumer tries to make the best choice. It gives him value for his money
spent, and maximizes his satisfaction and welfare.

3. Helps determine the purchasing power and standard of living of the consumer-

If a consumer purchases expensive, luxury items, it implies that he/she has a higher
purchasing power and enjoys good standard of living. On the other hand, if a consumer
purchases only low-priced, essential items, then he/she has a lower purchasing power
and standard of living. This tendency generally persuades consumers to buy branded
goods to flaunt their status.

4. Enhancement in social welfare–

Pricing decisions affect the competitive strength of the firm in the market. Since each
firm tries to outsell others through price reduction and better quality products in
competitive market, consumers are benefitted. In this way, quality goods are available at
competitive price which maximizing social welfare in society.

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