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Pricing Strategy

Steps in Setting Price:


Following are the steps in setting price for a product:
1. Selecting the pricing objectives;
2. Determining the consumers' demand;
. estimating costs;
!. "nal#sing the competitors' costs$ prices and offers;
%. Selecting a pricing method; and
&. Selecting the final price.
1. Selecting the pricing objectives: 'efore selecting a suitable price for a product$ the
mar(eter is needed to review the compan#'s objectives. )he more clearer the
compan#'s objectives$ the more easier to set a price. Following are the possible
pricing objectives:
a* survival$
b* ma+imum current profit$
c* ma+imum mar(et share$
d* ma+imum mar(et s(imming$ and
e* product ,ualit# leadership.
)he decision whether to select high price or low price depends on various factors:
-i* .rice susceptibilit# of mar(et$
-ii* /umber of competitors in the mar(et$ and
-iii* .roduction cost per unit.
)he price level also depends on the t#pe of mar(eting strateg# adopted for the product.
)he possible mar(eting strategies are listed below:
(a) Rapid Skimming: 0t refers to launching a new product at a high level of price with
high level of sales promotion. 0t refers to the product which is of high ,ualit#$ but
not (nown to the bu#ers. "s soon as the product is (nown to the bu#ers$ the bu#ers
are willing to purchase them even at a higher price. 0t ma# also refer to the mar(et
where there are strong potential competitors.
(b) Slow Skimming: 0t refers to launching a new product at a high price with low level
of promotion. 0t also refers to the situation where the compan#'s brand is (nown to
the bu#ers and the# are willing to purchase them even at a higher price. 0t ma#
also refer to the mar(et where there are few competitors.
(c) Rapid Penetration: 0t refers to launching a new product at a low price with high
level of promotion. )his mar(eting strateg# is adopted where the compan#'s brand
is un(nown in the mar(et and where there are strong potential competitors.
(d) Slow Penetration: 1nder the slow penetration mar(et strateg#$ the compan#
launches a new product at a low level price with low level of promotion. )he brand
of the compan# is (nown and there are few competitors in the mar(et.
2. Determining the consumer's demand: )he ne+t step is determining the consumer's
demand. "t this stage$ mar(eter anal#ses the different level of demand at different
prices. )herefore$ it leads to the stud# of law of demand$ elasticit# of demand$ demand
curve$ etc. 0n normal case$ the demand and price are inversel# related$ i.e$ the higher
the price$ the lower the demand$ and vice versa. 'ut some goods have 'elastic' or
'inelastic' demand. For e+ample$ demand for automobiles$ perfumes$ etc. are elastic;
whereas the demand for rice$ flour$ eggs$ etc. are inelastic.
3. Estimating costs: Demand sets a ceiling on the price and the costs set the floor. )he
compan# wants to charge a suitable price covering the cost of production$ selling and
distribution$ and administration. 2osts ta(en into two forms$ i.e$ variable costs and
fi+ed costs. 3ariable costs var# directl# with the variation in production$ but remain
fi+ed per unit of production. 4owever$ the fi+ed cost does not var# with the change in
production units$ but it does not remain fi+ed per unit$ as the production units varies. 0n
other words$ the fi+ed cost remain fi+ed in total and decreases in 5s. per unit with the
increase in the production units or increases in 5s. per unit with the decrease in the
production units.
4. Analysing the competitors' costs prices and o!!ers: For a mar(eter$ the ne+t step
in setting a price for a product is to anal#se the costs and prices of the product and
after6sales services and different other services offered b# the competitors of the
compan#. " deep anal#sis ma# enable a mar(eter to discover the strengths and
wea(nesses of the competitor and the tastes or the purchasing trends of bu#ers.
5. Selecting a pricing method: )he compan# has to select an appropriate method for
pricing its products. Following are the suggested pricing methods:
(a) "ark#up Pricing: 1nder mar(6up pricing$ the price is e,ual to cost plus percentage
mar(6up on cost. For e+ample$ the cost of constructing one residential flat for a
constructor 7 developer is 5s. %88$888 and the constructor 7 developer charges 2%9
above cost$ the selling price of 1 residential flat will be e,ual to 5s. &2%$888$ i.e$
:%88$888 ; -%88$888 < 2%9*=. )his (ind of pricing method is common among the
contractors$ law#ers$ chartered accountants$ different practitioners and
manufacturing companies for pricing job orders$ custom products$ etc.
(b) $arget Return Pricing: 1nder target return pricing$ the price of a product is e,ual
to cost plus re,uired rate of return on investment. For e+ample$ the shareholders 7
owners of a product6selling compan# is e+pecting a return of 289 on net assets
that amounts to$ let sa#$ 5s. 288$888$ the mar(eter would select a price which
would scratch a net profit of 5s. 288$888. )his sort of pricing method is adopted in
public investment companies$ large6scale manufacturing companies$ etc.
(c) Perceived %alue Pricing: )he mar(et price of a product is calculated on the basis
of customers' perceptions about a product. 0t is e+tensivel# used in non6durable
consumer goods manufacturing companies. /on6durable or soft goods ma# be
defined either as goods that are used up when used once$ or that have a lifespan of
less than #ears. >+amples of non6durable goods include cosmetics$ food$
cleaning products$ fuel$ office supplies$ pac(aging and containers$ paper and paper
products$ personal products$ rubber$ plastics$ te+tiles$ clothing and footwear$ etc.
(d) %alue Pricing: 0t refers to pricing high ,ualit# products at fairl# level. )his sort of
pricing method is e+tensivel# used in personal computer manufacturing industr#$
electronic goods manufacturing industr#$ etc.
(e) &oing Rate Pricing: 1nder this pricing method$ the price of a product is based on
prices of e+isting products in the mar(et. )he going rate pricing method is used in
pricing paper$ cement$ fertili?ers$ steel$ petrol and chemical industries.
(f) Sealed 'id Pricing: 0t also refers to 'competitive6oriented pricing'. 0t is common
where firms submit scaled bids for jobs 7 contracts. For e+ample$ pricing for scraps$
wastages of factor#$ etc.
6. Selecting a !inal price: )he final and the last step in setting prices is$ of course$
selecting a final price from a number of alternative prices$ which would match the
compan#'s short term and long term objectives.
Price Adaptation Strategies:
Following are the price adaptation strategies:
1. &eographical Pricing: @eographical pricing refers to the product pricing for the
customers in different locations$ cities and countries. 0t also accounts for various
tariffs$ ta+es and shipping costs. 0n foreign trade$ another term is e+tensivel# used$ i.e$
counter6trade. 0t has ta(en 1%62%9 of the total world trade and ma# have the following
forms:
(a) 'arter: >+change of goods with no mone# and third part#.
(b) (ompensation deal: )he seller receives partial cash pa#ment and the rest in
products b# the bu#er.
(c) 'uyback arrangement: )he seller receives cash$ as partial pa#ment for the plant
or machiner# or an# other technolog# being sold. "nd the rest of pa#ment is made
in the products manufactured on that machiner#.
(d) )!!set: )he seller receives the full amount$ but he will have to spent a part of it in
the countr# or the location of bu#er.
1. Price Discounts and Allowances: )o promote the sales$ the seller has to allow price
discounts and allowances. Following are the forms of price discounts and allowances:
(a) (ash Discounts: 2ash discounts are allowed b# suppliers on earl# pa#ments
within the stipulated time$ e.g$ 2718$ net 8$ 7A >BC$ 271%$ net !8 5B@$ etc. which
are e+tensivel# used in trading and merchandising. 2718$ net 8 means the bu#er
must pa# within 8 da#s of the invoice date$ but will receive a 29 discount if the#
pa# within 18 da#s of the invoice date.. 7A >BC 6 this means the bu#er will receive
a cash discount of 9 if the bill is paid within A da#s after the end of the month
indicated on the invoice date. 0t should be noted that if an invoice is received on or
before the 2%th da# of the month$ pa#ment is due on the Ath da# of the ne+t
calendar month. 0f a proper invoice is received after the 2%th da# of the month$
pa#ment is due on the Ath da# of the second calendar month. 271% net !8 5B@ 6
this means the bu#er must pa# within !8 da#s of receipt of goods$ but will receive a
29 discount if paid in 1% da#s of the receipt of goods b# the purchaser. -5B@ is
short for D5eceipt of goods.D*.
(b) *uantity Discounts: Euantit# discounts are the price reductions generall# allowed
on bul( purchases$ for e+ample$ 19 on less than 1888 units$ 29 on 1888 units or
more than 1888 units. )he rationale behind them is to obtain economies of scale
and pass some -or all* of these savings on to the customer. 0n some industries$
bu#er groups and co6ops have formed to ta(e advantage of these discounts.
Euantit# discounts are$ generall#$ of two t#pes$ i.e$ cumulative ,uantit# discounts
and non6cumulative ,uantit# discounts.
(i) (umulative +uantity discounts: also (nown as accumulation discounts. )hese
are price reductions based on the ,uantit# purchased over a set period of time.
)he e+pectation is that the# will impose an implied switching cost and thereb#
bond the purchaser to the seller.
(ii) ,on#cumulative +uantity discounts: are price reductions based on the
,uantit# of a single order. )he e+pectation is that the# will encourage larger
orders$ thus reducing billing$ order filling$ shipping$ and sales personal
e+penses.
(a) -unctional Discounts: Functional discounts are allowed to channel members if
the# perform various functions li(e distribution$ storing$ shelf6stoc(ing and record
(eeping. "lso (nown as 'trade discounts'. )rade discounts are often combined to
include a series of functions$ for e+ample 287127% could indicate a 289 discount for
warehousing the product$ an additional 129 discount for shipping the product$ and
an additional %9 discount for (eeping the shelves stoc(ed. )rade discounts are
most fre,uent in industries where retailers hold the majorit# of the power in the
distribution channel.
(b) Seasonal Discounts: Seasonal Discounts are allowed on off6seasoned bu#ings.
For e+ample$ warm6wear in Fune6Ful#$ cold drin(s in December6Fanuar#$ etc.
(c) Allowances: "llowances are e+tra6pa#ments designed to gain reseller participation
in special programmes$ e.g$ trade allowances$ promotional allowances$ bro(erage
allowances$ etc.
1. Promotional Pricing: )he promotional pricing strategies are:
(a) .oss#.eader Pricing: Super mar(ets and departmental stores often drop prices on
branded products to promote their stores' sales. 'ut it dilutes the compan#'s brand
image and ma# lead to complaints from other retailers who charge the normal list
price.
(b) Special Event Pricing: Special event pricing are for special events$ e.g$ >id sale$
2hristmas sale$ bac(6to6school sale$ >id Cela$ etc.
(c) (ash Rebates: 2ash rebates allowed b# auto manufacturers and some consumer
goods manufacturers within a specified time period.
(d) .ow /nterest -inancing: Gow interest financing is provided on certain consumer
goods li(e automobile$ motorc#cle$ television$ refrigerators$ air conditioners$ etc.
(e) .onger Payment $erms: Sellers$ especiall# mortgage ban(s and auto companies$
stretch loans to their customers over longer periods and thus lower the monthl#
pa#ments.
(f) 0arranties and Service (ontracts: Harranties and service contracts are provided
on$ especiall#$ the consumer goods li(e television$ refrigerators$ air conditioners$
personal computers$ etc.
(g) Psychological Discounting: .s#chological discounting involves in setting an
artificiall# high price and then offering the same product at substantial savings.
1. Discriminatory Pricing: .rice discrimination e+ists when sales of identical goods or
services are transacted at different prices from the same supplier. Different prices are
charged on the basis of different consumer groups$ locations$ product forms$ etc.
Discriminator# pricing ma# ta(e the following forms:
(a) (onsumer#Segment Pricing: Discriminator# pricing based on consumer
segments$ e.g$ museum often charge low admission fee for students and senior
citi?ens.
(b) Product#-orm Pricing: Different versions of the same product are priced
differentl# but not proportionatel# to the increase in costs. For e+ample$ Cicrosoft
sold different versions of its operating software Hindows I. at different price level.
'Hindows 3ista 4ome 'asic 3ersion' is sold at J288 and with some variations the
same operating software 'Hindows 3ista 1ltimate 3ersion' is sold at J28.
(c) /mage Pricing: 0mage pricing refers to pricing the same product on the basis of
different images$ e.g$ a perfume manufacturer ma# put a perfume in a bottle$ name
it and give it an image and ma# price it at J18 per ounce; he ma# put the same
perfume in a different bottle$ give it another name and image and ma# price it at
J1K per ounce.
(d) .ocation Pricing: Discriminator# pricing based on different locations$ even though
the cost of offerings at each location is identical$ e.g$ theatre charges different
prices for different audience preferences for different locations.
(e) $ime Pricing: .rices are varied b# seasons$ da# or hours. )ime pricing is usuall#
applicable in public utilities li(e electricit#$ telephone bills$ hotels and airlines$ and
also for internet hours.
Predatory Pricing: )here is another t#pe of pricing of discriminator# pricing (nown as
'predator# pricing'. 0t refers to setting a price of a product below its cost$ just to beat
the competitors in the mar(et. )his has been prohibited b# law. )here was a strong
legal allegation against the Cicrosoft that it has been perceived from its pricing tactics
that it is involved in predator# pricing. )hus$ the 1S @overnment's anti6trust lawsuits
against Cicrosoft$ bring it to a big trouble. 0t even led the court to thin( to bifurcate the
compan# into two companies. "ctuall#$ in 1LL&$ the compan# started giving awa# its
product '0nternet >+plorer' below its cost and in some cases absolutel# free. )his
Cicrosoft's pricing tactics wrest the mar(et dominance from /etscape 2ommunication
2orporation. /etscape constantl# revised its pricing structure but failed to appeal the
customers. )his cause rivals to label Cicrosoft as a predator$ which was further
tendentious for raising prices as it gains the lion's share of the mar(et.
1. Product "i1 Pricing: 0n pricing a product$ the mar(eter must also accounts for
profitabilit# of product mi+. .roduct mi+ pricing is a difficult tas( because each product
has different demand$ cost and competition. .roduct mi+ pricing ma# ta(e several
forms:
(a) Product#.ine Pricing: 2ompanies normall# develop product lines rather than
single products and develop different price levels$ for e.g$ three price levels J288$
J%8 and J%88 for men's suits$ the customers will associate low$ average and high
,ualit# with the three price levels.
(b) )ptional -eatures Pricing: 0t refers to the pricing of additional features with the
main products$ e.g$ pricing of air conditioners$ personal computers$ automobiles$
etc.
(c) (aptive#Product Pricing: Fr e+ample$ manufacturers of ra?ors and cameras often
price them low and set high mar(6ups on ra?or blades and camera film rolls.
(d) $wo#Part Pricing: 0t consists of a fi+ed charge and a variable charge based on
consumption$ e.g$ pricing in telephone billings$ electricit#$ etc.
(e) 'y#Product Pricing: 0t refers to pricing of b#6products for the consumers see(ing
to purchase the b#6products.
(f) Product#'undling Pricing: Sellers often bundle their products and features at a
set price.

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