MODULE 4

PRICING DECISION
 INTRODUCTION
 Prices assumes a significant role in a competitive economy.
Price is the main factor which affects the sales
organization.
 A good price policy is of great importance to the producers,
wholesalers, retailers and the consumers.
 If the prices are high, few buyers purchase and if the prices
are low, many buyer purchase. Thus market may be
reduced or increased. That is, the price increases in relation
to the sales revenue.
 Thus pricing is a critical situation, a sound pricing policy
must be adopted to have a maximum sales revenue.
 WHAT IS PRICE?
Price may be defined as the exchange of goods
and services in terms of money.
Without price there is no marketing in the
society.
If money is not there, exchange of goods can
be undertaken, but without price; i.e., there is
no exchange value of a product or service
agreed upon in a market transaction, is the
key factor which affects the sales operations.
Significance of Pricing:

Denotes the value of product/service.

Talks about the company.
Regulates production, distribution and
consumption.
It influences consumer purchase decision.
It acts as a marketing weapon.
Objectives of Pricing:

 To profit maximization.
 To earn target return (ROI).
 To keep competition out.
 To increase market share.
 To bring price stability.
 To enter new market.
 To survive in competition field.
Factors Affecting Pricing Decisions:

The influencing factors for a price decision can

be divided into two groups:

Internal Factors.
External Factors.
Internal Factors:

Organizational Factors.
Marketing Mix.
Product Differentiation.
Cost of the Product.
Objectives of the Firm.
Organizational Factors:
Pricing decisions occur on two levels in the
organization. Over all price strategy is dealt
with by top executives. They determine the
basic ranges that the product falls into in
terms of market segments.
The actual mechanics of pricing are dealt with
a lower levels in the firm and focus on
individual product strategies.
Marketing Mix:
 A shift in any one of the elements has an immediate
effect on the other three – production, promotion
and distribution.
 If a firm may use price reduction as a marketing
technique. Other firms may raise prices as a
deliberate strategy to build a high prestige
technique. In either case, the effort will not succeed
unless the price change is combined with a total
marketing strategy that supports it.
Product Differentiation:

In order to attract the customers, different

characteristics are added to the product, such
as quality, size, color, attractive package,
alternative uses etc.
Generally, customers pay more price for the
product which is of the new style, fashion,
better package.
Cost of the Product:

 The most important factor is the cost of

production. In deciding to market a product, a firm
may try to decide what prices are realistic,
considering current demand and competition in the
market. The product ultimately goes to the public
and their capacity to pay will fix the cost, otherwise
product would be flapped in the market.
Objectives of the Firm:

Firms may pursue a variety of value oriented

objectives, such as maximizing sales revenue,
maximizing market share, maximizing
customer volume, maintaining an image,
maintaining stable price etc.
External Factors:

Demand.
Competition.
Suppliers.
Economic Conditions.
Buyers.
Government.
Demand:

The market demand for a product or service

obviously has a big impact on pricing. Since
demand is affected by factors like, number and
size of competitors, the prospective buyers,
their capacity and willingness to pay, their
preference etc.
Competition:

Competitive conditions affect the pricing

decisions. Competition is a critical factor in
price determination. A firm can fix the price
equal to or lower than that of the competitors,
provided the quality of product, in no case, be
lower than that of the competitors.
Suppliers:

 Suppliers of raw materials and other goods

can have a significant effect on the price of a
product. If the price of the cotton goes up, the
increase is passed on by suppliers to
manufacturers. Manufacturers, in turn, pass it
on to consumers.
Economic Condition:

The inflationary or deflationary tendency

affects pricing. In recession period, the prices
are reduced to a sizeable extent to maintain
the level of turnover. On the other hand, the
prices are increased in boom period to cover
the increasing cost of production and
distribution.
Buyers:

The various consumers and businesses that

buy a company’s products or services may
have an influence in the pricing decision. Their
nature and behavior for the purchase of a
particular product, brand or serviced etc.
affect pricing when their number is large.
Government:

Price discretion is also affected by the price

control by the government through enactment
of legislation, when it is thought proper to
arrest the inflationary trend in prices of certain
products. The prices cannot be fixed higher, as
government keeps a close watch on pricing in
the private sector.
 PRICING STRATEGIES

Value Based.
Cost Based.
Market Based.
Competitor Based.
Value Based:

 The setting of a product or service’s price, based

on the benefits it provides to consumers.
 Companies that offer unique or highly valuable
features or services are better positioned to take
advantage of value based pricing, than companies
whose products or services are relatively
indistinguishable from those of their competitors.
For Example: A company that sells basic,
white, 100% cotton athletic socks would
probably use cost-plus pricing, because its
product does not have any special features.
However, a company that sold sweat-wicking,
extra-padded athletic socks could use value-
based pricing and sell its socks at a higher
price, because it provides something unique
and valuable to athletic consumers.
Cost Based:

Cost based pricing is the act of pricing based

on what it costs a company to make a product.
In addition, a company must also consider
factors such as its competition, applicable
government regulations, the cost of
production and the customers.
 For Example:
Selling Price =Total cost of the product + profit
margin
Assumption:
 Total cost of the product is 250
 Profit margin 25%
Selling Price = 250 + 62.5 (25/100)
= 312.5 Rs
Market Based:

 A market based pricing strategy is also known as a

competition based strategy.
 In this pricing strategy, the company will evaluate
the prices of similar products that are in the market.
 It is important to only consider those products that
are similar to the product being offered.
 Depending on if the product has more or less
features than the competition, the company sets the
price higher or lower than the competitor pricing.
While proceeding for Market Based Pricing,
following things are kept under
consideration:

Customer Needs
Competition
Price Sensitivity
Example:
Consider tickets for a newly released bollywood
movie. People go crazy to watch new movie at the
earliest and are ready to pay high prices. As a
result, they are highly priced during first week of
the release but later on the price of the ticket comes
down. So we can see that based on demand, the
prices of tickets are determined. This involves
a market based pricing strategy.
Competitor Based:

The marketer will set prices depending on the

results their research.
If the competitors are pricing their products at
a lower price, then it’s up to them to either
price their goods at a higher or lower price, all
depending on what the company wants to
achieve.
• Competitive pricing is setting the price of a product
or service based on what the competition is
charging. This pricing method is used more often by
businesses selling similar products, since services
can vary from business to business , while the
attributes of a product remain similar. This type of
pricing strategy is generally used once a price for a
product or service has reached a level of
equilibrium, which occurs when a product has been
on the market for a long time and there are many
substitutes for the product.
 RETAIL PRICING STRATEGIES

Differential Pricing.
Lifecycle Pricing.
Price Stability.
Psychological Pricing.
i. Odd/Even Pricing.
ii. Prestige Pricing.
 Skimming Pricing.
 Penetration Pricing.
 Leader Pricing.
 Promotional Pricing.
i. Special-Event Pricing.
ii. Rebates and Coupons.
iii. Low or No-Interest Financing.
iv. Buy One Get One Free.
 Pre-Emptive Pricing.
Pricing Procedure:

 Market segmentation.
 Estimating the demand for the product.
 Anticipate and analyze the competitive reaction.
 Establish expected share of market.
 Selecting pricing strategy to reach market target.
 Consider company’s marketing policies.
 Setting the price.
MARKETING CHANNELS

 Channels of distribution are mainly

concerned with distribution of goods and
services.
 It is the distribution network through
which a producer puts his products in the
hands of the actual user.
 It is the set of marketing intermediaries
or institutions who participate in the
distribution of goods and services from
the point of production to the point of
consumption.
We can define formally the distribution channel
“as the set of interdependent marketing
institutions participating in the marketing
activities involved in the movement or the flow
of goods and services from the primary
producer to the ultimate consumer”
Purpose:

 To distribute goods and services, with minimum

losses.
 To establish markets for new products.
 To offer after sale services to customers.
 To facilitates maximum exposure of goods in the
markets.
 To establish brand loyalty.
To match goods to the requirement of market.
To persuade and influence the prospective
buyers.
To undertake all physical distribution
functions.
To provide feed back information.
To conduct market research.
To increase customer confidence.
“RIGHT quantity of the RIGHT
product/services to the RIGHT place in the
RIGHT conditions at the RIGHT cost and at the
RIGHT time with the RIGHT impression”. (7R’s)
Factors Affecting Channel Choice:

Company.
Intermediaries.
Product.
Market.
Environmental.
Company:

 Goodwill
 Financial Strength
 Desire to Control
 Expertise Level
 Size
 Objectives
 Strategies
Intermediaries:

Services
Cost
Availability
Product:

Unit Value.
Std/Customized.
Perishability.
Market:

Number of Buyers
Types of Buyers
Buying Habits
Buying Quantity
Market Size
Market Geography
Environmental:

Economic
Social
Cultural
Competitive
Technological
Legal
 CHANNEL DESIGN

Channel design refers to those decisions

involving the development of new marketing
channels where none had existed before, or to
the modification of existing channels.
It is a key factor to gain a differential
advantage.
 Channel Design Process:

 Recognizing the need for a channel design decision.

 Setting and coordinating distribution objectives.
 Specifying the distribution tasks.
 Developing possible alternative channel structures.
 Evaluating the variables affecting channel structure.
 Choosing the best channel structure.
 Selecting channel members.
Channel Management Decision:

Selecting channel members.

Training channel members.
Motivating channel members.
Evaluating channel members.
Modifying channel members.
 CHANNEL CONFLICT
 Is generated when one channel member’s actions prevent
the channel from achieving its goal.
 Even when a company has an effective distribution set up
in the market, some conflict between channel members
and the company may take place.
 Eg: The company wants the distributor to extend the
activities to new and uncovered markets and appoint new
dealers for increasing sales volume. But the distributor
focuses on existing, developed markets and loyal dealers
and is comfortable to work in the established market. He is
reluctant to explore new and unknown markets.
 There are three types of channel conflict:

 Vertical channel conflict relates to conflict between different levels

within the same channel. Eg. Conflict between distributor and the
retailer.
 Horizontal channel conflict means conflict between members at the
same level of the distribution channel. Eg. Price cutting between
retailers in the same market.
 Multi channel conflict: Here the company selects two or more
channels to sell its products in the same market. Eg. Company
makes direct supplies to wholesales as well as key retailers in the
same market. The wholesaler is hurt since this arrangement affects
his sales in the market.
 DESIGNING A PHYSICAL DISTRIBUTION
SYSTEM

Physical distribution “involves planning,

implementing and controlling the physical
flows of materials and final goods from place
of production to the place of end use to satisfy
buyers needs”. - Philip Kotler
Company may deliver directly to customers
Use other companies or individuals to deliver
goods
Intermediaries:
 Wholesales
 Transportation
 Agents
 Warehouses
This concerns movements of a finished
product/ services to consumers.
In physical distribution, the customer is the
final destination of a marketing channel, and
the availability of the product/service is a vital
part of each channel participant’s marketing
effort.
Physical Supply: Goods moving from supplier
to manufacturer “inbound”.

Physical Distribution: Goods moving from

manufacturer to customers “outbound”.
NETWORK
MARKETING
NETWORK MARKETING:

Definition: A business model in which a

distributor network is needed to build the
business. Usually such businesses are also
multilevel marketing in nature in that payouts
occur at more than one level. .
Network marketing is a type of business
opportunity that is very popular with people
looking for part-time, flexible businesses.
Some of the best-known companies in
America, including Avon, Mary Kay Cosmetics
and Tupperware, fall under the network
marketing umbrella
 Network marketing programs feature a low
upfront investment--usually only a few hundred
dollars for the purchase of a product sample kit--
and the opportunity to sell a product line directly
to friend, family and other personal contacts.
Most network marketing programs also ask
participants to recruit other sales representatives.
The recruits constitute a rep's "downline," and
their sales generate income for those above them
in the program.
END OF MODULE 5
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