Unit 4
Product Pricing
Pricing the product or service is one of the most important business decisions you will make. You must offer your products for a price your target market is willing to pay – and one that produces a profit for your company – or you won’t be in business for long. There are many approaches to pricing, included scientific and unscientific.
According to Prof. K.C. Kite, “Pricing is a managerial task that involves establishing pricing objectives, identifying the factors governing the price, ascertaining their relevance and significance, determining the product value in monetary terms and formulation of price policies and the strategies, implementing them and controlling them for the best results”.
Thus, pricing refers to the value determination process for a good or service, and encompasses the determination of interest rates for loans, charges for rentals, fees for services, and prices for goods.
Significance
1. Achieving a Target Return on Investments: This is the main target which each worry needs to accomplish. The goal is to accomplish a specific pace of profit for ventures and edge the estimating strategy to accomplish that rate. For instance, the worry may have a set objective of 20% degree of profitability and 10% profit for ventures after charges. The objectives might be a present moment (ordinarily for a year) or a long haul. It is prudent to have a drawn-out objective. Now and again, it is seen that the genuine benefit rates might be more than the objective return. This is on the grounds that the objectives previously fixed are low and new chances and request of the product surpassing the return rate previously fixed.
2. Price Stability: This is another significant target of an endeavor. Dependability of costs over a period mirrors the effectiveness of a worry. However, practically speaking, because of changing expenses every now and then, price security can't be accomplished. In the market where there are not many merchants, each vender needs to keep up steadiness in costs. Cost is set by one maker and others follow him. He goes about as a pioneer in price obsession.
3. Achieving Market Share: Piece of the pie alludes to the portion of the organization in the absolute deals of the product on the lookout. A portion of the worries when present their product in the competitive market needs to accomplish a specific offer in the market in the underlying stages. Over the long haul the worry may target accomplishing a sizeable bit of the market by selling its products at lower costs. The fundamental target of accomplishing bigger offer in the market is to appreciate more standing and altruism among the individuals. The other thought of augmenting the business sectors by bringing costs is down to dispense with contenders from the market. It has been seen that organizations dislike to expand the size of their offer because of dread of Government, mediation and control. General Motors, America, catching about half of the vehicle market, gone through this circumstance. A few organizations like General Electric and Johns-Mauville liked to have moderately little market say 20% instead of half.
4. Prevention of Competition: Current mechanical set up is defied with merciless rivalry. Evaluating can be utilized as one of the successful way to battle against the opposition and business contentions. Lesser costs are charged by certain organizations to keep their rivals out of the market. In any case, a firm can't bear to charge less costs throughout an extensive stretch of time.
5. Increased Profits: Boost of benefits is one of the primary goals of a business venture. A firm can embrace such a price strategy which guarantees bigger benefits. Be that as it may, such undertakings are likewise expected to release certain social commitments moreover.
Pricing Policy
A. Internal Factors:
Internal factors are those components that work from inside the association.
Such factors include:
1. Organizational Factors: In the association evaluating choice occurs at two levels. At the more significant level administration, choices like price range and the estimating approaches are chosen. The genuine cost is then dictated by the lower-level administration. It must be noted, notwithstanding, that such genuine price choices must keep into thought singular product systems and the evaluating arrangements chooses by the high-level market.
2. Marketing Mix: Estimating is just a single component of marketing mix. All different components hold equivalent significance to the accomplishment of advertising systems of the firm. Any move in any of the components affects different components of the advertising mix. A firm should roll out reasonable improvements to all the components of marketing mix to prevail with an adjustment in any component, for example an expansion in cost will get satisfactory just on the off chance that it is combined with sufficient up gradation in the product includes also.
3. Product Differentiation: Cost of the product particularly relies on the nature and qualities of the product. A separated product with esteem added highlights like quality, size, shading, alluring bundling, various employments of the product, utility and so on consistently powers the clients to address more cost when contrasted with some other product.
4. Cost of the Product: Cost and cost of a product are firmly related and are free. The firm should choose a reasonable cost dependent on current interest, rivalry, purchasing capacity, and so forth the firm should likewise keep into thought its expense of creation as it would not have any desire to sell underneath the expense of creation on a drawn-out premise.
5. Objectives of Firm: Evaluating contributes its offer in fulfillment of the targets of the firm. The firm may have an assortment of targets including – deals income expansion, benefit amplification, piece of the overall industry augmentation, boost of client esteem, keeping up picture and position, keeping up stable costs and so on Valuing strategy must be set up simply after targets of the firm have been chosen and perceived.
B. External Factors
Outer components are those elements which influence all the organizations of a given industry consistently and are as a rule outside the ability to control of the firm.
1. Demand: Market interest of a product clearly has a significant effect over its estimating strategy. On the off chance that the interest is inelastic, at that point more exorbitant cost might be fixed yet in the event that the interest is flexible, at that point costs must be competitive. Request is influenced by factors like, number and size of contenders, purchasing capacity and eagerness of planned purchasers, their inclinations and so forth.
2. Competition: In a market with numerous contenders, costs must be competitive without settling on the quality. However, in a monopolistic sort of market, costs can be controlled by the market chief, regardless of the valuing methodology of its rivals.
3. Supplies: In the event that costs of crude material go up, at that point the cost of completed merchandise will undoubtedly go up. Additionally, providers evaluating strategy directly affects the costs. Shortage or bounty of crude material will likewise decide its costs along these lines influencing the general cost.
4. Economic Conditions: By and large monetary conditions have a significant task to carry out in the evaluating choice. During downturn costs must be decreased extensively to support. Then again, during blast time, costs can be expanded to receive the rewards of improved economy.
5. Buyers: The nature and conduct of purchasers will likewise affect the evaluating choices. Their purchasing capacity and readiness to follow through on a specific cost can't be disregarded by the advertiser.
6. Government: Government may practice some proportion of price control through authorization of specific enactments and so forth Such measures are taken to secure the interest of individuals on the loose.
The following points must be taken into consideration before fixing the price of a product.
- Costs
- Competition
- Demand
- Legal Considerations
- Elements of Marketing Mix, etc.
However, major determinants of the price are - Costs, competition, and demand. Based on this there are three major approaches to setting the price of a product. They are:
- Cost-oriented pricing
- The demand-oriented pricing
- Competition-oriented pricing
1.Cost-oriented Pricing
In Cost oriented approach to pricing or cost-based pricing, the selling price of a product is determined by adding a percentage of the profit to the product cost. There are two methods of cost-oriented pricing. They are.
A. Cost-plus pricing and
B. Target profit pricing or break-even analysis.
- Cost Plus Pricing
The selling price of a product is calculated by aggregating all the costs of the product such as manufacturing cost, marketing cost, and distribution cost plus a predetermined margin of profit. Giving below an example of cost-plus pricing:
In this method, the product cost includes fixed and variable costs. It can be represented as follows:
Selling price = Variable Costs + Overhead Costs (Fixed Cost) + Profit.
Changes in the cost while changing the volume of production also needs to be taken into consideration before fixing the selling price. This method will encourage the manufacturer to secure his position in the market without any loss to the business. This method protects the interests of both the seller as well as the buyer and can be justifiable. The rate of the profit margin varies from industry to industry and seller to seller. This method is useful when pricing government contracts, where the pricing of a contract needs to be estimated in advance. It can reduce the risk and uncertainties. This method is principally employed for pricing services.
B. Break even analysis and Target profit pricing.
It is to be noted that as the production increases the fixed cost reduces. For example, the fixed cost of a production unit is USD 100 per month.
If the manufacturing unit produces 10 units/products in a month then the cost per unit is USD 10.
If the manufacturing unit produces 100 units/products in a month then the cost per unit is USD 1.
From the above, we can understand that as the production increases the fixed cost reduces. Fixing the price by assuming that the production for the month is 10 units, then the cost will be high and the price also will be on the higher side. On the other hand, by fixing the price by assuming that the production for the month is 100 units then the cost and price of the product will be low. A marketer needs to balance this issue while fixing the price. Keeping this truth in mind, certain manufacturers to fix the prices accordingly. Here the firm has to determine the volume of the sale through which it can cover the fixed as well as a variable cost. This point of sale or revenue is called the break-even point. Whatever revenue comes above this point will generate profit.
A break-even analysis relates to the total cost to total revenue. A break-even point is the level of production at which the total sales revenue (TR) equals the total cost (TC). In other words, a break-even point is the level of production or supply where the firm neither earns any profit nor suffers any loss. There are different break-even points for different selling prices. Any amount of sale below the break-even point gives a loss to the firm. If the amount of the sale is above the break-even point, the business will be profitable.
We can calculate the break-even point by using the following equation.
Break-Even Point = F ÷ (P - V)
F is the Total fixed Cost per month, P is the selling price per unit and V is the average variable cost per unit.
Suppose Adidas is making shoes and selling them for $ 12 in the market. The total fixed cost for manufacturing the finished shoe is $ 800, which is irrespective of the amount of sale volume. The average variable cost per shoe is $8, then the break-even point is.
= 800 ÷ (12 - 8)
= 800 ÷ 4
= 200 shoes.
The firm must sell at least 200 shoes to break even i.e., total revenue to the total cost. To find out the revenue or sale value, you can multiply the number of shoes into selling cost i.e., 200 x 12 = $2400. If the firm has to make a $400 profit, it has to sell 300 shoes (Total revenue = 300 x 12 = $ 3600)
If the firm increases the price of the product to $13 then the break-even point will be 160 shoes. And if it reduces the price to $11 the break-even point will be 266 shoes.
For pricing decisions and financial analysis, this technique is very useful. The marketing manager can ascertain the financial implication of the pricing decision by using this technique. It is useful when the demand and cost of production are stable. For fixing up the price of a new product, this method is very useful. The firm must consider different price levels to earn the desired profit. Possible sale volume also must be taken into consideration while fixing the price.
For some products, the fixed cost will be the same for different volumes of production. But for some other products, the fixed cost may increase as the volume increases. In such cases, this technique is useless. Another limitation is that the company cannot predict the sale volume of the product in advance. A lower level of production or sales may occur in adverse conditions. However, many firms use this method to fix the price of their products.
2.Demand oriented pricing
Some firms fix the price of a product based on the demand, instead of fixing the price on the basis of the competitor's price or costs. The demand-oriented pricing is based on an estimate of how much sales volume can be expected at various prices which can be paid by different types of buyers. If the demand is high, the price will be higher and if the demand is low the price will be lower. In such a situation, the price is fixed neither based on the cost nor the price of competitors. There are two methods adopted for fixing the price in such situations. They are:
A. Differential Pricing
B. Perceived Value Pricing.
A. Differential Pricing
Different customers have different desires and want. The intensity of their demand for the product would also be different. The following four factors affect the differential pricing method. They are the time of purchase, location of the customer (Place), Product version, and the Customer.
In a theatre, there are different classes for viewing the same film. But the film is the same for all the customers. Here some customers are willing to pay more for a comfortable seat. At the same time, some customers are not willing to pay that much money for the same film. The bargaining ability of the customer is another factor for the low and high price of a product. Those who have the ability to bargain well can get the product at a lower cost and others will have to shell out more money for the same product. The level of the knowledge of product features also affects the price paid by the customer. Another factor is the availability of a product. When there are many customers for one piece of the product, the seller can demand a high price. The one who is willing/able to pay more will get the product.
In different places, similar products can be sold at different prices. The factor of the place is the determinant of the price in such a situation. One has to travel a lot to get the same product at a lower rate which is time-consuming and may not be economically desirable. Hotels charge a different amount for different seasons. Telephone call rates are different for working days and non-working days. There are night-call charges and day call charges. This pricing is demand-oriented and time-dependent.
A book can be sold for different prices. By binding the book with an attractive leather cover, the seller can demand a higher price than the ordinary book. The cost of the product will have a slight variation, but the price could have a huge variation in such situations. Slightly different versions of products could be sold at high prices in the market.
B. Perceived Value Pricing
Different buyers often have different perceptions of the same product on the basis of its value to them. A cup of coffee is priced differently by hotels and restaurants of different categories. Because the buyers will assign a different value to the same item. You have to ascertain how different buyers perceive the product in terms of its features, quality, and attributes before you follow this 'perceived value' method.
3.Competition oriented pricing
When the price is determined based on the price of the product of the competitors or the industry leader and not on the basis of the cost of production or the different perceptions of the product by different buyers, then the pricing approach is called Competition oriented pricing.
Going Rate Pricing
Fixing the price as per the market trend is known as going rate pricing. This method is practiced in such products which are easily available in the market and has no variants. In such situations, the marketer would not analyse the market for its intensity of demand or the perceptions of the value of the products in the mind of buyers. It is not necessary that the price should be the same as the competitor or the industry leader. It could be a little higher or a little lower than the price of industry leaders. As the industry leader changes the price, the firm can increase or decrease the price accordingly. This is a popular method of pricing the product among retailers. In such situations, it is very difficult to ascertain the customer reaction as the price change is for everyone throughout the industry.
This is an easy method as there is no need to estimate the price elasticity, demand, or various product costs. It is also felt that the adoption of the going rate pricing method prevents price wars among competitors. This method is practiced mainly in the case of homogeneous products, under conditions of pure competition and oligopoly. The firm selling an undifferentiated product in a purely competitive market actually has very little choice in setting its price. Those who adopt the going rate method of pricing argue that the rate prevailing is the collective wisdom of the industry.
A pricing policy is a company's approach to determining the price at which it offers a good or service to the market. Pricing policies help companies make sure they remain profitable and give them the flexibility to price separate products differently. Your company might value having a well-defined pricing policy so it can make price adjustments quickly and take advantage of products' strengths in one or more markets.
Considerations for pricing policies
Companies often have different priorities when determining how to price their products. Your new company might need to introduce its services while offering good value to consumers, or it might be a well-established and highly profitable company that sells in a market willing to pay higher prices. The most important considerations for pricing policies are-
Competition-Your business likely understands who its competitors are and what they charge consumers. Pricing policies heavily consider competition with other firms in the market.
Profit goals-You might choose a pricing policy to meet a specific profit goal for your company.
Sales totals-Pricing policies directly affect how many people buy your company's product and how much they purchase.
Firm health-The financial circumstances of your company may enable it to prioritize market strategy over immediate profit, or you may need to earn revenue as soon as possible to remain in business.
Flexibility- Companies often react to market shifts by changing prices. Your company might consider if your initial price enables you to respond to the market without losing profitability.
Government regulation-To protect consumers, the government regulates the pricing of certain goods and services. Depending on your industry, this may be irrelevant or a central concern in pricing policy.
Method of price adjustment- Increasingly, companies that sell vast amounts of goods may automate pricing with specialized software. Pricing policies consider how your company intends to change prices.
Sales venue- If your company sells the same product in wholesale, retail or other venues, pricing policies may differ for each one.
Objectives for pricing policies
As with many businesses, you may have objectives other than simply making money in the short-term. Your pricing policies are key tools for achieving the various goals businesses commonly have, such as:
Profit-The most basic business objective of making profit is still an important one. For some businesses, it might be critical to maximize profit in the immediate future.
- Firm survival-Sometimes the only available pricing policy is the one that enables your firm to continue operations.
- Limiting competition-Your business may have structural advantages that enable it to produce a good at a price point no competitor can match. Businesses typically weigh the competitive consequences of any price point against profit potential.
- Gaining market share-Your pricing policy might aim at maximizing market share. Earning a large portion of market share provides both strategic and financial advantages.
- Accessibility- If your company values offering its product to as many people as possible, your pricing policy might have to adapt.
- Consumer satisfaction- Consumers' expectations change depending on the price they pay for something. Your business might consider what expectations you want to meet and price accordingly.
Pricing strategy is a way of finding a competitive price of a product or a service. This strategy is combined with the other marketing pricing strategies that are the 4P strategy (products, price, place and promotion) economic patterns, competition, market demand and finally product characteristic. This strategy comprises of one of the most significant ingredients of the mix of marketing as it is focused on generating and increasing the revenue for an organization, which ultimately becomes profit making for the company. Understanding the market conditions and the unmet desires of the consumers along with the price that the consumer is willing to pay to fulfil his unmet desires is the ultimate way of gaining success in the pricing strategy of a product or a service.
Following are the different pricing strategies in marketing:
1. Penetration Pricing or Pricing to Gain Market Share
A few companies adopt these strategies in order to enter the market and to gain market share. Some companies either provide a few services for free or they keep a low price for their products for a limited period that is for a few months. This strategy is used by the companies only in order to set up their customer base in a particular market. For example, France telecom gave away free telephone connections to consumers in order to grab or acquire maximum consumers in a given market. Similarly, the Sky TV gave away their satellite dishes for free in order to set up a market for them. This gives the companies a start and a consumer base.
In the similar manner there are few companies that keep their product cost low as their introductory offer that is a way of introducing themselves in the market and creating a consumer base. Similarly, when the companies want to promote a premier product or service, they do raise the prices of the products and services for that particular time
2. Economy pricing or No Frill Low Price
The pricing Strategies of these products are considered as no frill low prices where the promotion and the marketing cost of a product are kept to a minimum. Economy pricing is set for a certain time where the company does not spend more on promoting the product and service. For example, the first few seats of the airlines are sold very cheap in budget airlines in order to fill in the airlines the seats sold in the middle are the economy seats whereas the seats sold at the end are priced very high as that comes under the premium price strategy. This strategy sees more economy sales during the time of recession. Economy pricing can also be termed as or explained as budget pricing of a product or a service.
3. Use of Psychological Pricing Strategies
Psychological pricing Strategies is an approach of gathering the consumer’s emotional respond instead of his rational respond. For example, a company will price its product at Rs 99 instead of Rs 100. The price of the product is within Rs 100 this makes the customer feel that the product is not very expensive. For most consumers price is an indicating factor for buying or not buying a product.
They do not analyse everything else that motivates the product. Even if the market is unknown to the consumer, he will still use price as a purchase factor. For example, if an ice cream weighted 100 grams for Rs 100 and a lesser quality ice cream weighted 200 grams is available at Rs 150, the consumer will buy the 200 grams ice cream for Rs 150 because he sees profit in buying the ice cream at lower cost ignoring the quality of the ice cream. Consumers are not aware price is also an indicator of quality.
4. Pricing Strategies of Product Line
Products line pricing is defined as pricing a single product or service and pricing a range of products. Let us take and understand this with the help of an example. When you go for a car wash you have an option of choosing a car wash for Rs 200 or a car wash and a car wax for Rs 400 or the entire package including a service at Rs 600. This strategy reflects a strategic cost of making a product popular and consumed by the consumer with a fair increment over the range of the product or the service. In another example if you buy a pack of chips and chocolate separately you end up paying a separate price for each product; however, of you buy a combo pack of the two you end up paying comparatively less price for both and if you buy a combo of both in a higher quantity you end up paying even lesser.
For the manufactures of the product manufacturing and marketing of larger pack is much more expensive as it does not fetch them good amount of profit, however they do the same to attract more consumers and keep them interest in their products. On the other hand, manufacturing smaller packs and lesser quantity is more beneficial and fetches more profit for the manufacturer of the product.
5. Pricing Optional Products
It is a general approach, if the companies decrease the price of a product or a service, they do increase their price for their other available optional services. Let’s take a very simple and a common example of a budget airline. The prices of their airfare are low however they will charge you extra if you want to book a window seat, if you want to travel with your family and want to book an entire row together you might have to end up paying extra charges as per their guidelines, in case you have too much of luggage to carry you will end up paying extra on the same, in fact you will end up paying extra charges even if you need extra leg space in a budget airline. You can say that even if the price of the air fare is low you will end up paying more for the extra yet mandatory services that you will require as you travel.
6. Pricing of Captive Products
Captive products have products that complement the products without which the main product is of no use or is useless. For example, an inkjet printer is of no use without its cartridge it will not work and have no value and a plastic razor will have no value without its blades. If the company is manufacturing the inkjet printer it will have to manufacture its cartridges and if the company is manufacturing a plastic razor it will have to manufacture blades for the same. For a simple reason that any other company cartridge will not fit into the inkjet printer and neither will any other companies blade fit into the plastic razor. The consumer has no other option but to buy the complementary products from of the same company. This increases the sales and the profit margin of the company anyways.
7. Pricing for promotions
Promotional pricing is very common these days. You will find it almost everywhere. Pricing for promoting a product is another very useful and helpful strategy. These promotion offers can include, discount offers, gift or money coupons or vouchers, buy one and get one free, etc. to promote new and even existing products companies do adopt such strategies where they roll out these offers to promote their products. An old strategy yet it is one of the most successful pricing strategies till date. Reason of its success is that the consumer considers buying the product and service for the offer that the consumer receives.
8. Pricing as Per Geographic Locations
For simple reasons such as the geographic location the companies do vary or change the price of the product. Why does location of the market affect the price of the product? The reasons can be many well some are scarcity of the product or the raw material of the product, the shipping cost of the product, taxes differ in a few countries, difference in the currency rate for products, etc.
Let’s take a few pricing strategies examples, when a few fruits are not available in a country they are imported from another country, these fruits are exotic fruits, they are also scarce this increases their value in the country they are imported to, scarcity, the shipping cost of the imported product along with its quality increase its price, where as it is much cheaper where it is originally grown. Similarly, the government implies heavy taxes on a few products such as petrol or petroleum products and alcohol to increase their revenue; hence such products are expensive in a few countries or part of the country compared to the other parts. Geographic location does create a huge impact on the pricing strategy of a product as the company has to consider every aspect before they price a product. Hence the price needs to be perfect and appropriate.
9. Value Pricing a Product
Let me first be clear about what value pricing means, value pricing is reducing the price of a product due to external factors that can affect the sales of the product for example competition and recession; value pricing does not mean that the company has added something or increased the value of a product. When the company is afraid of factors such as competition or recession affecting their sales and profits the company considers value pricing.
For example, McDonalds the famous food chain has started value meals for their consumer since they have started facing competition with other fast-food chains. They offer a meal or a combination of a few products as a lower price where the consumer feels emotionally content and continues to buy their products.
10. Pricing of Premium Products
Well, this strategy works just the other way round. Premium products are priced higher due to their unique branding approach. A high price for premium products is an extensive competitive advantage to the manufacturer as the high price for these products assures them that they are safe in the market due to their relatively high price. Premium pricing can be charged for products and services such as precious jewellery, precious stones, luxurious services, cruses, luxurious hotel rooms, business air travel, etc. The higher the cost the more will be the value of the product amongst that class of audience.
References:
- Basic Marketing- Concepts, Decisions and Strategies- Cundiff, Edward, W. & Still, R.R.
- Marketing Management - Kotler, Phillip
- Principles of Marketing - Kotler, Phillip & Armstrong, Gray
- Marketing Management - Mamoria, C.B,Mamoria Satish & Suri, R.K.
