Mohan Jo Manjooran

• Pricing Objectives

• Pricing Methods

• Pricing Strategies

• Price War
Pricing is the art of translating into quantitative terms the
value of the product or a unit of a service to customers at a
point in time.
It is the process of setting objectives, determining the
available flexibility, developing strategies, setting prices,
and engaging in implementation and control.

It is a fundamental aspect of financial modeling, and is one

of the four Ps of the marketing mix. The other three aspects
are product, promotion, and place.
Profit-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Status Quo Pricing Objectives

 Profit-Oriented Pricing Objectives

Target
Profit Satisfactory
Return on
Maximization Profits
Investment
 Sales-Oriented Pricing Objectives

Market Sales
Share Maximization
 Status Quo Pricing Objectives

Maintain Meet
existing competition’s
prices prices
Setting the Initial price
• Cost Pricing
• Market Pricing
• Competitive Pricing
• Bid Pricing
Setting Price using Cost Pricing
Under cost pricing the marketer primarily looks at
production costs as the key factor in determining the initial
price. This method offers the advantage of being easy to
implement as long as costs are known.

But one major disadvantage is that it does not take into

consideration the target market’s demand for the product.
This could present major problems if the product is
operating in a highly competitive market where competitors
frequently alter their prices.
Setting Price using Cost Pricing
There are several types of cost pricing including:
• Markup Pricing
• Cost-Plus Pricing
• Breakeven Pricing
Cost Pricing : Markup pricing
This pricing method, often utilized by resellers who
acquire products from suppliers, uses a percentage
increase on top of product cost to arrive at an initial
price
(e.g., womens' clothing, Boutiques, jewellery shop,
furniture shop)
Mark up Pricing
Two types of Mark up Pricing
• Markup-on-Cost method
• Markup-on-Selling-Price method.
 Mark up Pricing
E.g.: An item that costs a reseller Rs.50 to purchase from a
supplier and sells to customers for Rs.65.

Using Markup-on-Cost method:

Markup Amount = Markup Percentage i.e.,(Rs.15/ Rs.50 = 30%)
  Item Cost

Item Cost + (Item Cost x Markup Percentage) = Price

i.e., 50 + (50 x .30 = Rs.15) = Rs.65
 Mark up Pricing
Markup-on-Selling-Price method:
Markup Amount = Markup Percentage i.e.,(Rs.15/ Rs.65 = 23%)
Selling Price

Item Cost = Price

(1.00 – Markup Percentage)

Rs.50 = Rs.65
(1.00 – .23)
 Cost Pricing : Cost Plus Method
Cost-plus pricing also adds to the cost by using a fixed
monetary amount rather than percentage.
For instance, a contractor hired to renovate a homeowner’s
bathroom will estimate the cost of doing the job by adding
their total labor cost to the cost of the materials used in the
renovation.
Assuming most material in the bathroom project are
standard sizes and configuration, any change in the total
price for the renovation is a result of changes in material
costs while labor costs are constant
 Cost Pricing : Break Even Method
Breakeven pricing is associated with breakeven
analysis, which is a forecasting tool used by marketers
to determine how many products must be sold before
the company starts realizing a profit
 Cost Pricing : Break Even Method
For example, assume a company operates a single-product
manufacturing plant that has a total fixed cost (e.g.,
purchase of equipment, mortgage, etc.) per year of
Rs.3,000,000 and the variable cost (e.g., raw materials,
labor, electricity, etc.) is Rs.45.00 per unit. If the company
sells the product directly to customers for Rs.120, it will
require the company to sell 40,000 units to breakeven.
Rs.3,000,000     =    40,000 units
Rs.120 – Rs.45
 Setting Price using Market Pricing
Under the market pricing method cost is not the main
factor driving price decisions; rather initial price is
based on analysis of market research in which
customer expectations are measured.
The main goal is to learn what customers in an
organization’s target market are likely to perceive as an
acceptable price. Of course this price should also help
the organization meet its marketing objectives
 Setting Price using Market Pricing
Option of methods are:
• Backward Pricing
• Psychological Pricing
• Price Lining
 Market Pricing : Backward Pricing
In some marketing organizations the price the market
is willing to pay for a product is an important
determinant of many other marketing decisions. This is
likely to occur when the market has a clear perception
of what it believes is an acceptable level of pricing
In situations where a price range is ingrained in the
market, the marketer may need to use this price as the
starting point for many decisions and work backwards
to develop product, promotion and distribution plans.
 Market Pricing : Backward Pricing
For eg., assume a company sells products through retailers.
If the market is willing to pay Rs.199 for a product but is
resistant to pricing that is higher, the marketer will work
backwards factoring out the profit margin retailers are
likely to want (e.g., Rs.40) and as well as removing the
marketer’s profit (e.g., Rs.70). From this, the product cost
will remain (Rs.199 –Rs.40-Rs.70= Rs.89).
The marketer must then decide whether they can create a
product with sufficient features and benefits to satisfy
customers’ needs at this cost level.
 Market Pricing : Psychological Method
For many years researchers have investigated
customers’ response to product pricing. Some of the
results point to several interesting psychological effects
price may have on customers’ buying behavior and on
their perception of individual products.
 Market Pricing : Psychological Method
Odd-Even Pricing :
Eg: Many times a buyer will pass along the price as
being lower than it is either because they recall it being
lower than the even number or they want to impress
others with their success in obtaining a good value. For
instance, in our example a buyer who pays Rs.299.95
may tell a friend they paid “a little more than Rs.200”
for the product when in fact it was much closer to
Rs.300.
 Market Pricing : Psychological Method
Prestige Pricing :
The higher the price the more likely customers are to
perceive it has being higher quality compared to a
lower priced product. (Although there is point at which
customers will begin to question the value of the
product if the price is too high.)
 Market Pricing : Price Lining
Price lining can also be effective as a method for
increasing profitability. In many cases the cost to the
marketer for adding different features to create
different models or service options does not alone
justify a big price difference.
For instance, an upgraded model may cost 10% more
to produce than a base model but using the price lining
method the upgraded product price may be 20% higher
and thus more profitable than the base model.
 Setting Price Using Competitive Pricing
Below Competition Pricing - A marketer attempting to
reach objectives that require high sales levels (e.g., market
share objective) may monitor the market to insure their
price remains below competitors.
Above Competition Pricing - Marketers using this approach
are likely to be perceived as market leaders in terms of
product features, brand image or other characteristics that
support a price that is higher than what competitors offer.
Parity Pricing - A simple method for setting the initial price
is to price the product at the same level competitors price
their product.
 Setting Price Using Bid Pricing
Bid pricing typically requires a marketer to submit a
price to a potential buyer that is sealed or unseen by
competitors. It is not until all bids are obtained and
unsealed that the marketer is informed of the price
listed by competitors
 Setting Price Using Bid Pricing
Target Profit Pricing:- set annual Rupee volume or
profit. Eg.: If I need to make Rs.5000, & I can make 5
units, selling price is Rs.1000.
Target Return-on-Sales Pricing :-Want to receive 1% of
sales as my profit – actors & directors
Target Return-on-Investment Pricing : –
I can make 5 % on my money in the bank. Set price so
I make 6% on my investment if I invest it in my
business
 Penetration Pricing:
• Price set to ‘penetrate the market’
• ‘Low’ price to secure high volumes
• Typical in mass market products – chocolate bars,
food stuffs, household goods, etc.
• Suitable for products with long anticipated life cycles
• May be useful if launching into a new market
 Market Skimming:
• High price, Low volumes
• Skim the profit from the market
• Suitable for products that have short life cycles or
which will face competition at some point in the
future
• Examples include: Playstation, jewellery, digital
technology, new DVDs, etc.
 Value Pricing:
• Price set in accordance with customer perceptions
about the value of the product/service
• Examples include status products/exclusive products
 Loss Leader:
• Goods/services deliberately sold below cost to
encourage sales on other products
• Typical in supermarkets, e.g. at Christmas, selling
plastic containers at lower prices in the hope that
people will be attracted to the store and buy other
things
• Purchases of other items more than covers ‘loss’ on
item sold
• e.g. ‘Free’ mobile phone when taking on contract
package
 Psychological Pricing:
• Used to play on consumer perceptions
• Classic example – Rs. 199.99 instead of Rs.200!
• Links with value pricing – high value goods priced
according to what consumers THINK should be the
price
 Going Rate (Price Leadership):
• In case of price leader, rivals have difficulty in
competing on price – too high and they lose market
share, too low and the price leader would match
price and force smaller rival out of market
• May follow pricing leads of rivals especially where
those rivals have a clear dominance of market share
• Where competition is limited, ‘going rate’ pricing
may be applicable – banks, supermarkets, electrical
goods – find very similar prices in all outlets
 Tender Pricing:
• Many contracts awarded on a tender basis
• Firm (or firms) submit their price for carrying out the
work
• Purchaser then chooses which represents best value
• Mostly done in secret
 Price Discrimination:
• Charging a different price for the same good/service
in different markets
• Requires each market to be impenetrable
• Requires different price elasticity of demand in each
market
 Destroyer Pricing / Predatory Pricing:
• Deliberate price cutting or offer of ‘free
gifts/products’ to force rivals (normally smaller and
weaker) out of business or prevent new entrants
• Anti-competitive and illegal if it can be proved
 Absorption / Full Cost Pricing:
• Full Cost Pricing – attempting to set price to cover
both fixed and variable costs
• Absorption Cost Pricing – Price set to ‘absorb’ some
of the fixed costs of production
 Marginal Cost Pricing:
• Marginal cost – the cost of producing ONE extra or ONE
fewer item of production
• MC pricing – allows flexibility
• Particularly relevant in transport where fixed costs may
be relatively high
• Allows variable pricing structure – e.g. on a flight from
London to New York – providing the cost of the extra
passenger is covered, the price could be varied a good
deal to attract customers and fill the aircraft
 Contribution Pricing:
• Contribution = Selling Price – Variable (direct costs)
• Prices set to ensure coverage of variable costs and a
‘contribution’ to the fixed costs
• Similar in principle to marginal cost pricing
• Break-even analysis might be useful in such
circumstances
 Target Pricing:
• Setting price to ‘target’ a specified profit level
• Estimates of the cost and potential revenue at
different prices, and thus the break-even have to be
made, to determine the mark-up
• Mark-up = Profit/Cost x 100
 Cost Plus Pricing:
• Calculation of the average cost (AC) plus a mark up
• AC = Total Cost/Output
 Influence of Elasticity:
• Any pricing decision must be mindful of the impact
of price elasticity
• The degree of price elasticity impacts on the level of
sales and hence revenue
• Elasticity focuses on proportionate (percentage)
changes
 Geographic Pricing Strategies
• F.O.B. Point-of-Production pricing: Price quoted at
factory-- buyer pays transportation.
• Uniform delivered pricing: Same delivered price
quoted to all; works if transportation costs small.
• Zone-delivered pricing: Set same price within several
zones,
• Freight-absorption pricing: Seller absorbs transport
cost to penetrate market.
 Discount and Allowances strategies
• Quantity discount: The more you buy, the cheaper it
becomes-- cumulative and non-cumulative.
• Cash discount: A deduction granted to buyers for
paying their bills within a specified period of time,
(after first deducting trade and quantity discounts
from the base price)
In business, a price war is the act of competitive price
reduction between two or more businesses. It results
when competitors sell the same products using
strategic pricing meant to win over the business of the
average consumer. A price war can have a domino
effect on the market, affecting businesses and consumers
alike because as prices drop, accessibility to products
increases for consumers and business profits can decline.