1.

Marketing objectives: There are four major objectives

on which prices are determined.
They are survival, current profit maximization, market
share leadership and product quality leadership.
Survival strategy is adopted when company is facing
stiff competition from the competitors and it wants
quick reaction and recovery.

Current profit maximization strategy is used to defend

the market position. For example, assume a company
is operating in the lubricants business. Its sales and
market share are very high. It always tries to hold their
current position. To do this, it increases the price of the
product.
The next objective is market share leadership. Here,
company strives to achieve the leadership position in the
market. It reduces the price of the product so that more
number of customers buy the product. Through volume
generation, company gets the market leadership position.

Product quality leadership objective is used when

company decides to come with high quality product and
premium price. The intention of the company is to cater to
the needs of the niche segment.
2. Costs: The cost of marketing and promoting the product
will have direct impact on the price. For example, When
airline fuel cost went up all airline companies increased
the ticket prices Company will be incurring fixed cost
(plant, machinery etc…) as well as variable cost (raw
material, labor etc…) The fixed cost will go down if the
number of products produced increases. The variable cost
of the product decreases if the product is produced up to
an optimal level and then once again it goes up.
3. 4Ps of marketing: The price of the product is
determined by the other marketing mix elements also.
Product influences the price level, i.e. if the product
quality is very high company would like to price it high and
vice versa. The new product requires aggressive
promotion and results in higher promotion cost and
higher price.
For example, Nokia when it introduced 1100 handset in
Indian market priced it at Rs. 5200. It did so to get back its
R&D and promotion cost. When the sales picked up, the
price of the product has come down to Rs 3800.
4. Nature of the market and demand:
The price determination depends on the nature of the
market also. The nature of the market is classified into
following categories.
a. Perfect competition
b. Monopolistic competition
c. Oligopolistic competition
d. Monopoly
a. Perfect competition: The nature of the market where
many buyers and sellers exist. Both the buyers and sellers
exhibit the switching habit. If the seller charges more for
the product, then buyer will shift to another seller. Usually
in these types of markets, companies set their prices
according to the competition. For example, in a stock
market, prices of shares are frequently affected due to the
large number of buyers and sellers.
b. Monopolistic competition: The nature of the market
where many buyers and sellers exist but no particular
buyer or seller has total control over the market. In case of
monopolistic competition, prices are fixed by the gap in
the product line of all competitors and on the level of
differentiation. For example, food suppliers, footwear
manufacturers and various service providers exist in
monopolistic competitive market.
c. Oligopolistic competition: The market consists of few
suppliers who dominate a large portion of the market.
They do not allow new players to enter the market. They
are price sensitive to each other and so are dependent on
each other For example, automobile manufacturers,
pharmaceutical companies do business in oligopolistic
market.
d. Monopoly: In a monopolistic market there is only one
seller due to regulatory, technical or economic entry
barriers. Indian Railways has monopoly over the railway
industry in India. It is able to sell its products and services
at the determined rates. Prices are economical in the
monopoly markets that are usually controlled by the
government.
5. Competition: Price is also determined by how intense
the competition is in the particular industry. Cellular
industry and airline industry in India are involved in such
type of price wars. The price war between Reliance Jio and
Airtel is exemplary.

6. Environmental Factors. These external factors are very

crucial for the company’s price decisions. We discussed
the impact of macro and micro environment on the
company’s strategies. For example, in the union budget,
tax on cigarette is increased. Hence company that
manufactures cigarette should increase the price. The
increase in the price is determined by the government
environment which the company cannot control.
Pricing Policies and Strategies
Cost based pricing
I. Cost plus pricing: The method of adding markup to the total cost of the
product.
Problem: Company X would like to sell 75,000 units in the year 2008. The
fixed cost of the company is Rs 2 lakhs and variable cost is Rs 5 per unit.
Company wants 30 % profit after sales. Calculate the price of the product
to achieve desired sales and profit.
Solution:
Unit cost = VC+ (FC/ unit sales)
= 5+ (200,000/75000)
= 7.67
Price = Unit cost/ (1- desired return on sale)
= 7.67/ (1-0.3)
= 10.85
Approx Rs 11/unit.
Pricing Policies and Strategies
Cost based pricing
II. Break even pricing:
The firm determines the price at which it will make the target
profit.
Procedure to calculate the break even volume:
1. Find out the total fixed cost of the company.
2. Determine the price at which company would like to sell
3. Calculate the variable cost per unit.
4. Determine the break even volume by the following formula
Break even volume= Fixed cost/ (Price- variable cost)
Pricing Policies and Strategies
Competition Based pricing:
In this method a seller uses prices of competing products
as a benchmark instead of considering own costs or the
customer demand. Some techniques of competition
based pricing are as follows -

a) Destroyer Pricing
This strategy is used as an attempt to eliminate
competition. It involves lowering the prices of the
company’s products to an extent where competition
cannot compete and consequently they go out of
business.
b) Price Matching or Going Rate Pricing
Many businesses feel that lowering prices to become
more competitive can be disastrous for them (and often
very true!) and so instead, they settle for a price that is
close to their competitors. Any price movements made by
competition is then mirrored by the organization so long
that one can compensate for any reductions if they lower
their price.

c) Price Bidding or Close Bid Pricing

Price bidding is a strategy most common with
manufacturing, building and construction services. In this
strategy, companies submit the quotation according to the
tender stipulations
Competition has forced companies to adjust their base
prices according to the situations. There are basically five
different types of pricing strategies that companies
adopt. They are
1. Discounts and allowances
2. Location pricing
3. Psychological pricing
4. Geographical pricing
5. International pricing
1. Discounts and allowances
Companies offer price reduction for the customers on the
following basis:
a. Cash discount is given when the customer makes early
payment before the due date. To explain, a
manufacturer gave 21 days credit to a grocery store
person. If the customer pays the bill within 7 days,
company may ask him to pay 2% less than the actual
amount.
b. Quantity discount is a price reduction to buyers who buy
the products in large quantities. Suppose a manufacture
sells submersible pumps for Rs 20,000, and if customer
buys three motors at one go, then he will reduce the price
of the product to Rs 18,000.
c. Functional discount is offered when customer carries
the promotion or other marketing activities. To
illustrate, a chemist will be paid a nominal amount for
displaying the company products or promoting the
company products.

d. Seasonal discount is usually offered when customer

purchases the product in the off season. For example, if
customers purchase the winter cloth in rainy season,
then he/she will get discount on the total products
produced.
2. Location pricing is the method of setting the price of
the product according to the locations. Here company
changes the price from one location to another location
though other cost remains the same. To make it more
clearer, company X is having two stores, one in a market
area and another in suburban area. It charges more in
the market area and less in the suburban area.
3. Psychological pricing: It is ‘a pricing approach that
considers the psychology of prices and not simply the
economics; the price is used to say something about the
product. For example, a company sets Rs 299 and Rs 399
for their leather product which in turn creates the
impression that the price is in the range of 200 rather
than 300.
4. Geographical pricing: setting the price on the basis of
geographies they are selling and freight charges. In this
strategy, different options exist for the company.

5. International pricing: Organizations should consider the

different external factors and customer profiles in
different countries before arriving at a pricing strategy. It
should adopt their products and their prices according to
that. For example, CIPLA sells some medicines in Africa
and America with different prices.