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Pricing Strategy

Introduction:
A business can use a variety of pricing strategies when selling a product or service. The price
can be set to maximize profitability for each unit sold or from the market overall. It can be
used to defend an existing market from new entrants, to increase market share within a
market or to enter a new market.

Pricing is one of the most vital and highly demanded component within the theory of
marketing mix. It helps consumers to have an image of the standards the firm has to offer
through their products, creating firms to have an exceptional reputation in the market. The
firms decision on the price of the product and the pricing strategy impacts the consumers
decision on whether or not to purchase the product. When firms are deciding to consider
applying any type of pricing strategy they must be aware of the following reasons in order to
make an appropriate choice which will benefit their business. The competition within the
market today is extremely high, for this reason, businesses must be attentive to their
opponents actions in order to have the comparative advantage in the market. The
technology of internet usage has increased and developed dramatically therefore, price
comparisons can be done by customers through online access. Consumers are very selective
regarding the purchases they make due to their knowledge of the monetary value. Firms
must be mindful of these factor and price their products accordingly.
The strategic role of price

Price plays an important role in any the marketing of any product. However, it is one of the
last things that is decided about.

Any decisions about the target market, positioning strategies and product distribution
strategies, set guidelines for both price and promotional strategies.

Certain attributes like :

Product quality
Product feature
Type of distribution channel
End-users served
All these help in establishing a feasible price of a product.

Customers are attracted to products seeing the benefits they get from it and at the same
time the quality of the product makes it reasonable for the customers. However, it is the
price of the product that plays the final role in the decision of buying the product. Price is a
factor that affects the mind-set of the customer. Therefore, price is a positioning strategy.

The following points list the factors that are considered when a product is priced.

Product strategy

There are several ways in which a product is priced. The price of the product will depend a
lot on the product itself.

For example,

Rupchandasoyabean oil is priced at Tk 505 and is


supplied to many shops by the manufacturer. When
manufacturers supply this to the local stores they keep
the sales target in mind. They must maintain the price at
a point where the retailers can profit from it and so can
the manufacturers.

Another important point that help determines the price


of a product is its quality.

For example, there different kinds silkof available in the


market. But when we think of quality, then Usha Silk,
Sophura silk are trustworthy. We are ready to pay a
higher price for the silks at these shops because we believe in the quality.
Distribution Strategy

The type of channel, distribution intensity, and channel configuration all these help in
influencing the price of a product.

Pricing is important when distribution is performed by the producer. When the channel is a
multi-channel one, marketers need to be very careful.

Websites usually offer products at a lower price than the usual shops.

For example, many products of Chaldal.com vary in price than that of Agora or Meena
Bazar.

PricingSituations

In pricing situations constant monitoring of the market is essential. This includes :

a) Increasing
b) Decreasing
c) Holding the price at the existing level
Here, competitor price is constantly monitored.
For example :

Vim was the first bar soap for washing dishes. Trix was available in the form of liquid only.
Seeing the rising demand of Vim bar, Trix dishwashing bar was introduced and priced at the
same level. Currently, Trix and Vim bar is equally priced.

Roles of Prices

Signal to buyer

Pricing is the fast and direct way of communicating with the buyer. They
buyer can see the price and compare it with the competitors. Also, it is a
means of differentiating between high and low quality goods.

For example, if we compare Mojo with Coke, we know that Coke would be
costlier because of its image, quality, and taste.
Instrument of competition

Price war is a common activity that keeps on going between companies. Companies attract
customers through better prices.

For example, every weekend Swapno and Agora sends text messages to customers telling
them about the prices they are offering for weekend. Customers then choose and go to the
shop that gives them the best offer.

Improving financial condition

No doubt that price of the product is the revenue for the company. This is why companies
are very careful in deciding the price of a product.

Pricing Objectives:

1. Profits-related Objectives (Achieve Financial Performance):


Profit has remained a dominant objective of business activities.Companys pricing policies
and strategies is aimed at following profits-related objectives:

i. Maximum Current Profit:


One of the objectives of pricing is to maximize current profits. This objective is aimed at
making as much money as possible. Company tries to set its price in a way that can
achievemore profits but company cannot set its price beyond the limit.

ii. Target Return on


Investment:
Most companies want to earn
reasonable rate of return on
investment. Company sets its
pricing policies and strategies
in a way that sales revenue
ultimately yields average
return on total investment.
For example, company decides
to earn 20% return on total
investment of 3 crore taka. It
must set price of product in a
way that it can earn 60 lakh
taka.
2. Sales-related Objectives (Gain Market Position):
Sales objective is very important for company to gain a strong market position. Sales
objective help the company to grasp the market share easily. The sales objectives are:

i. Sales Growth:
Companys objective is to increase sales volume. Sales growth has direct positive impact on
the profits. So, pricing decisions are taken in way that can raise sales volume. Setting price,
altering in price, and modifying pricing policies are targeted to improve sales.

ii. Target Market Share:


A company aims its pricing policies at achieving or maintaining the target market share.
Pricing decisions are taken in such a manner that enables the company to achieve targeted
market share. Market share is a specific volume of sales determined in light of total sales in
an industry. For example, company may try to achieve 25% market shares in the relevant
industry.

iii. Increase in Market Share:


Sometimes, price and pricing are taken as the tool to increase its market share. When
company assumes that its market share is below than expected, it can raise it by
appropriate pricing. Low prices may be used to gain market share.

3. Competition-related Objectives:
Competition is a powerful factor affecting marketing performance. Every company tries to
react to the competitors by appropriate business strategies.With reference to price,
following competition-related objectives may be prioritized:

i. To Face Competition:
Pricing is primarily concerns with facing competition. Company sets and modifies its pricing
policies to respond the competitors strongly. Many companies use price as a powerful
means to react to level and intensity of competition.

ii. To Keep Competitors Away:


To prevent the entry of competitors can be one of the main objectives of pricing. To achieve
the objective, a company keeps its price as low as possible to minimize profit attractiveness
of products. In some cases, a company reacts offensively to prevent entry of competitors by
selling product even at a loss.

iii. To Achieve Quality Leadership by Pricing:


Pricing is also aimed at achieving the quality leadership. In order to create a positive image
that companys product is standard or superior than offered by the close competitors; the
company designs its pricing policies accordingly.
iv. To Remove Competitors from the Market:
The pricing policies and practices are directed to remove the competitors away from the
market. This can be done by forgoing the current profits by keeping price as low as
possible. Price competition can remove weak competitors.

4. Customer-related Objectives:
Customers are in center of every marketing decision.Company wants to achieve following
objectives by the suitable pricing policies and practices:

i. To Win Confidence of Customers:


Company sets and practices its pricing policies to win the confidence of the target market.
Company, by appropriate pricing policies, can establish, maintain or even strengthen the
confidence of customers that price charged for the product is reasonable one.

ii. To Satisfy Customers:


To satisfy customers is the prime objective of the entire range of marketing efforts.
Company sets, adjusts, and readjusts its pricing to satisfy its target customers. In short, a
company should design pricing in such a way that results into maximum consumer
satisfaction.

5. Other Objectives:
Over and above the objectives discussed so far, there are certain objectives that company
wants to achieve by pricing.

ii. Promoting a New Product:


To promote a new product successfully, the company sets low price for its products in the
initial stage to encourage for trial and repeat buying. The sound pricing can help the
company introduce a new product successfully.

iii. Maintaining Image and Reputation in the Market:


Companys effective pricing policies have positive impact on its image and reputation in the
market. Company, by charging reasonable price, stabilizing price, or keeping fixed price can
create a good image and reputation in the mind of the target customers.

v. Price Stability:
Company with stable price is ranked high in the market. Company formulates pricing
policies and strategies to eliminate seasonal and cyclical fluctuations as price stability has a
good impression on the buyers.

vi. Survival and Growth:


Finally, pricing is aimed at survival and growth of companys business activities and
operations. It is a fundamental pricing objective. Pricing policies are set in a way that
companys existence is not threatened.

Analyzing the pricing situation:

Pricing analysis is essential in evaluating new product concepts,developing test marketing


strategy and designing a new product introduction strategy.Pricing analysis is also important
for existing products because of changes in the market and competitive environment,
unsatisfactory market performance and modifications in marketing strategy over the
product's life cycle.

Customer Price Sensitivity:

One of the challenges in pricing analysis is estimating how buyers will respond to different
prices.The pricing of Procter& Gamble Company's analgesic brand,Aleve,illustrates this
situation.Analysis of buyers price sensitivity should answer the following questions:
1. Size of the product-market in terms of buying potential.
2. The market segments and market targeting strategy to be used.
3. Sensitivity of demand in each segment to changes in price.
4. Importance of non-price factors,such as features and performance.
5. The estimated sales at different price levels.

1. Price elasticity:
Price elasticity is the percentage change in the quantity sold of a brand when the price
changes, divided by the percentage change in price. Elasticity is measured for changes in
price from some specific price level so elasticity is not necessarily constant over the range of
prices under consideration.
2. Non price Factors:
Factors other than price may be important in analyzing buying situations.For
example,buyers may be willing to pay a premium price to gain other advantages or,
instead,be willing to forgo certain advantages for lower prices.Factors other than price
which may be important are quality,uniqueness,availability,convenience,service and
warranty.

3. Forecasts:
Forecasts of sales are needed for the price alternatives that management is considering.In
planning the introduction of Aleve,P&G's management could look at alternative sales
forecasts based on different prices and other marketing program variations.

A. Cost analysis:

Cost information is essential in making pricing decisions.

1. Composition of Product Cost:


First,it is necessary to determine the fixed and variable costs involved in producing and
distributing the product.Also,it is important to estimate the amount of the product cost
accounted for by purchases from suppliers.It is useful to separate the costs into
labor,materials and capital categories when studying cost structure.

2. Volume Effect on Cost:


The next part of cost analysis examines how costs vary at different levels of production or
quantities purchased.Can economies of scale be gained over the volume range that is under
consideration,given the target market and positioning strategy.

3. Competitive Advantage:
Comparing key competitors costs is often valuable.Are their costs higher,lower or about the
same although such information may be difficult to obtain,experienced managers can often
make accurate estimates.

4. Experience Effect:
It is important to consider the effect of experience on costs.Experience or learning curve
analysis indicates whether costs and prices for various products decline by a given amount
each time the number of units produced doubles.

5. Control over Costs:


Finally,it is useful to consider how much influence an organization may have over its product
costs in the future.To what extent can research and development,bargaining power with
suppliers,process innovation and other improvements help to reduce costs over the
planning horizon.
B. Competitor's responses analysis:

Each competitor's pricing strategy needs to be evaluated to determine:


1. Which firms represent the most direct competition for buyers in the market targets that
are under consideration.
2. How competing firms are positioned on a relative price basis and the extent to which
price is used as an active part of their marketing strategies.
3. How successful each firm's price strategy has been
4. The key competitors probable responses to alternative price strategies.

D. Pricing Objectives:

Pricing strategies are expected to achieve specific objectives. More than


one pricing objective is usually involved and sometimes the objectives may conflict with
each other. If so, adjustments may be needed on one of the conflicting objectives. Several
examples of pricing objectives follow:
1. Gain Market Position:
Low prices may be used to gain sales and market share. Limitations include encouraging
price wars and reduction of profit contributions. Even though buyers may have been
responsive to a price for MACH 3 that was 45 percent about SensorExcel,Gillette's
management used a 35 percent price increase that was more likely to gain market position.

2. Achieve Financial Performance:


Prices are selected to contribute to financial objectives such as profit contribution and cash
flow.Prices that are too high may not be acceptable to buyers.A key objective for Dell Inc.in
the consumer market segment was pricing to achieve financial performance in combination
with holding market position.

3. Product Positioning:
Prices may be used to enhance product image,promote the use of the product,create
awareness and positioningobjectives.The visibility of price may contribute to the
effectiveness of other positioning components such as advertising.

4. Stimulate Demand:
Price is used to encourage buyers to try a new product or to purchase existing brands during
periods when sales slowdown.A potential problem is that buyers may balk at purchasing
when prices return to normal levels.

5. Influence Competition:
The objective of pricing actions may be to influence existing or potential competitors.
Management may want to discourage market entry or price cutting by current competitors.
In selecting pricing strategy information management needs to

1.
etermine the extent of pricing flexibility
2. How to position price relative to cost

Price flexibility: Demand and cost factors


determine the extent of pricing flexibility. A
narrow gap simplifies the direction .but a
wide gap need a lot of factors to be consider
like competitors strategy, relationship with
the customer, market condition, and
management pricing objective. For example
if we consider packaged spice in BD market
firms control over price is very small because
its a very perfect competitive market. But if
we think about eastern refinery ltd then the
scenario is different. Because the sole
authorized authority to control over the
market.

Price positing relative to cost: A relatively low market price used to building volume and
market position instead high price may be selected to generate a large profit margin.
Former is a penetration strategy later one skimming.
Others factors like legal and ethical
consideration: A wide variety of laws and
regulation affects pricing policy.

Price fixing is an agreement between


participants on the same side in a market to buy
or sell a product, service, or commodity only at
a fixed price, or maintain the market conditions
such that the price is maintained at a given level
by controlling supply and demand. Price of
mineral water in BD are almost same by the leading company because price is being
determined by the contraction of supply and demand.

Price discrimination is a microeconomic pricing strategy where identical or largely similar


goods or services are transacted at different prices by the same provider in different
markets.

Predatory pricing (also undercutting) is a risky, and dubious pricing strategy where a
product or service is set at a very low price, intending to drive competitors out of
the market, or create barriers to entry for potential new competitors. Theoretically if
competitors or potential competitors cannot sustain equal or lower prices without losing
money, they go out of business or choose not to enter the business.

Determining Specific Prices and Policies:

Determining specific prices:

Pricing is an extremely important component of marketing, because it helps determine how


many consumers buy a product or service and, ultimately, whether a business succeeds or
fails. A business owner must employ a number of strategies to determine the right price for
various goods and services that yields a profit without discouraging customers from
patronizing his business.

Prices must be competitive if a business is to succeed. Charging too much for a product or
service discourages customers from even doing business at a particular place. A
businessman, however, does not want to cut his profits so severely that his business does
not survive. If his prices are too high, too few products sell, and the overhead cost per
product rises, costing the owner money. Sometimes a businessman wants to consider selling
a particular product at a lower price than his competitors. These items are known as loss
leaders. While he makes less money on that one item, his profits often rise for a couple of
reasons. With the lower price, he brings in new customers who potentially become
permanent patrons, and those who come in to buy the one item often buy other items
while they are shopping. On the other hand, a businessman must take care not to price
items so low that they are perceived as being of poorer quality. Customers tend to believe
overall that they get the quality for which they pay. Pricing is a delicate balance. When done
poorly, business owners risk losing customers.

Price oriented approaches:

A method of setting prices that takes into account the company's profit objectives and that
covers its costs of production. For example, a common form of cost-oriented pricing used by
retailers involves simply adding a constant percentage markup to the amount that the
retailer paid for each product.

Break Even Pricing

Break even pricing is the practice of setting a price point at which a business will earn zero
profits on a sale. The intention is to use low prices as a tool to gain market share and drive
competitors from the marketplace. By doing so, a company may be able to increase its
production volumes to such an extent that it can reduce costs and then earn a profit at what
had previously been the break even price.

We can calculate the break even price based on the following formula:

(Total fixed cost / Production unit volume) + Variable cost per unit

This calculation allows us to calculate the price at which the business will earn exactly zero
profit, assuming that a certain number of units are sold. In practice, the actual number of
units sold will vary from expectations, so the true break even price may prove to be
somewhat different. A business intent on following the break even pricing strategy should
have substantial financial resources, since it may incur significant losses during the early
stages of this strategy.

Cost Plus Pricing:

Cost plus pricing is a cost-based method for setting the prices of goods and services. Under
this approach, you add together the direct material cost, direct labor cost, and overhead
costs for a product, and add to it a markup percentage (to create a profit margin) in order to
derive the price of the product. Cost plus pricing can also be used within a customer
contract, where the customer reimburses the seller for all costs incurred and also pays a
negotiated profit in addition to the costs incurred.

Price= average unit cost/(1-Markup Percent)


Competition oriented pricing:

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.

Based on the competitor's prices, a business can decide whether they want to sell their own
product at a price lower than their competitor's or higher, depending on what they are
trying to achieve by basing their prices on someone else's.

If they are trying to appear higher end or of better quality than their competitors, they may
want to price their own product higher. But if that will not necessarily help them, and they
want their own product to be more affordable than that of their competitor, they may
choose to price theirs lower.

Demand Oriented Pricing Approaches:

Demand oriented pricing as the name suggests uses the customer demand to set up the
price in the market. We first determine the customers willingness to pay for any good or
service. A high price is charged when the demand is high and a low price is charged when
the demand is low. In case of service, high price is maintained during the peak hours and
vice-versa.

Establishing pricing policy and structure

Pricing policy:

Pricing policy refers to the way a company sets the prices of its services and products basing
on their value, demand, cost of production and the market competition. Pricing policy is
essential for all companies as it provides a guideline for creating profits and areas that bring
in losses.

Price Structure

A pricing structure is an approach in products and services pricing which defines various
prices, discounts, offers consistent with the organization goals and strategy. Price structure
can affect how company grows and is perceived by the customers.

Price segmentation:

Price segmentation is simply charging different prices to different people for the same or
similar product or service. You see examples every time you go shopping: student prices at
movie theaters, senior prices for coffee at McDonald's, people who use coupons and many
more.

Distribution Channel Pricing

Channel-Based Pricing is adopted in order to set price depending on the means of delivery
of goods or services. Channel Pricing is different from traditional pricing because
traditionally price was based on the value of the product .But now the value is determined
by the entire customers experience including the interaction that the customer has with the
distribution channels. The channel pricing covers the charges for the third party involvement
on suppliers side. It drives the supply chain and adjusts the channel cost. Five channel
pricing strategiesfunctional discounts, activity-based pricing, results-based programs,
multi-price strategies, and resale price setting.

Price flexibility:

It is a pricing strategy in which the final price at which the product or service being sold is
open for negotiation between buyers and sellers. This strategy is common in services which
are customized as per customers requests. For example a tailor charges a customer based
on the amount of customization needed in the clothes and the price which he thinks the
customer is capable of paying. Customer then negotiates the price based on his
understanding of the market and the rates that he has heard for this service.

Flexible pricing is used by the companies to gain competitive advantage. This way a
company is attract customers of different segments like age, geographies, income levels and
more. Railways for example has different pricing for senior citizens, adults and children.
Thus people of all age groups can travel but at different prices.

Product Life Cycle Pricing:

Product Life Cycle Pricing means to adjust the price that a business charges for a good based
on its position in the product life cycle. Companies must adapt to the stages of the product
life cycle to effectively sell and promote their products. Depending on the product life cycle
stage, a company will develop branding techniques and an appropriate pricing model.
Understanding each stage helps businesses increase profits.

The stages of a product life cycle govern how a product is priced, distributed, and promoted.
A new product goes through multiple stages during the course of its life cycle, including an
introduction stage, growth stage, maturity stage and a decline stage. As a product ages,
companies look for new ways to brand it, and also explore pricing changes. Market and
competitor research help businesses assess the proper course of action to maintain product
profitability.
Counterfeit Products:

To counterfeit means to imitate something. Counterfeit products are fakes or unauthorised


replicas of the real product. Counterfeit products are often produced with the intent to take
advantage of the superior value of the imitated product.

The word counterfeit frequently describes both


the forgeries of currency and documents, as well
as the imitations of clothing, handbags, shoes,
pharmaceuticals, aviation and automobile parts,
watches, electronics (both parts and finished
products), software, works of art, toys, movies
and any other type of products such as those.
Counterfeit products tend to have fake company
logos and brands. In the case of goods, it results in patent infringement and/or trademark
infringement. Counterfeit consumer products have a reputation for being lower quality
(sometimes not working at all) and may even include toxic elements.
Conclusion:

Pricing might not be as glamorous as promotion, but it is the most important decision a
marketer can make. Price is important to marketers because it represents marketers'
assessment of the value customers see in the product or service and are willing to pay for
a product or service.

Price is important to marketers because it represents marketers' assessment of the value


customers see in the product or service and are willing to pay for a product or service. The
other elements of the marketing mix (product, place and promotion) may seem to be
more glamorous than price, and thus get more attention, but determining the price of a
product or service is actually one of the most important management decisions.

So, as we can see, it is important that a company sets the right price. A company's success
can depend on it. However, with so many factors to consider along with the lack of a
crystal ball that will show the effect of a price change, It isn't so easy to do
References :

1. Strategic Marketing ninth edition, David W. Cravens. Nigel F. Piercy


2. www.wikipedia.com
3. www.marektingstrategy.com
4. https://chaldal.com/cooking
5. https://www.facebook.com/pages/Agora/115244298555419
6. https://www.google.com.bd/search?q=vim+bar+soap
7. https://www.boundless.com/marketing/textbooks/boundless-marketing-
textbook/pricing-8/introduction-to-price-57/the-importance-of-price-to-marketers-
289-1052/
8.