PRICING

THE ROLE AND CHARACTERISTICS OF PRICE

Price as been defined as the value of a good or service for both the buyer and seller in a market exchange . FUNCTIONS OF PRICE From customer point of view: It is used as a yardstick to compare competing options It is the means by which value is assessed It may be used as an indicator of product or service quality It represents the cost of the good or service It can influence the frequency of purchase or quantum of an individual purchase From providers point of view: It is a crucial determinant of margin and profit It influences the level of demand for its products and services It plays a key role in affecting relative competitive position It can be adjusted quickly to enable the provider to achieve short term volume or margin priorities

FORMS OF PRICING
Explicit or overt pricing This approach makes the price paid for the service very clear. Consumers are presented with clear and precise figures about what they will pay for this service. Advantages: a) Very clear about the price to both consumer and to supplier b) It allows the organisation to signal costs of different services and use price as a way of influencing consumer behavior. Example: Bank charges for ATM withdrawal Implicit or covert pricing This is a system of pricing in which the actual price to the consumer is unclear and appears not to be paid by consumers. Advantages: a) It is very simple for both the organisation and the customer b) It is relatively low cost to administer because it does not necessarily require the same sort of detailed understanding of costs. Example: The bank that offers free banking but pays no interest on credit balances .

METHODS FOR DETERMINING PRICE

Shapiro and Jackson (1978)propose three core approaches to the determination of price:  COST-BASED APPROACH The cost based approach to pricing operates by identifying the costs associated with a given product and then adding on a profit margin to arrive at a price. Variants of cost-based approach to pricing: a) Full-cost pricing It takes account of all components of cost(overhead as well as direct or variable costs) Example: Fixed overhead costs Rs 100000 Variable(direct) costs per unit Rs 25 Forecast sales 5000 units Profit margin mark-up 20% Total costs Rs 100000+(5000*Rs 25) = Rs 225000 Full cost per unit Rs 225000/5000 = Rs 45 Mark-up (20%) Rs 9 Price Rs 54

Advantages of Full-cost pricing:  It should ensure that the profit is achieved and that all costs have been covered. Disadvantages:  It can result in an uncompetitively high price b) Marginal cost pricing It relates to the direct costs associated with the manufacture of the good or service. Example: The marginal cost-based price is arrived at by adding a profit margin onto the direct, variable costs of manufacture. Direct cost per unit Rs 25 Mark-up(20%) Rs 5 Price Rs 30 Marginal costing results in a much lower price than the full cost approach because no account is taken of overhead cost attribution.

 THE COMPETITIVE APPROACH Price can also be based upon competitors price levels. Two variants commonly encountered are: a) Going-rate pricing It implies that there is little heterogeneity between competing products and that providers are in effect price takers than price setters. The idea of going rate pricing seems at odds with strategies based upon product and service differentiation. It suggests a largely commoditized marketplace with little scope for premium pricing. b) Competitive bidding In this case, prospective suppliers are invited to submit their most competitive bid to the prospective customer. Such an approach to pricing is rarely encountered in the domestic market place, and is more feature of the business to-business environment. As can be readily appreciated ,such a method is fraught with the twin dangers of bidding too high a price and failing to get the business or bidding too low and damaging margins.

 THE MARKET ORIENTED APPROACH Marketing oriented pricing sets out to reflect a broad range of variables in the determination of price. Significantly ,it recognizes that price has a strong strategic dimension in being closely implicated in issues such as positioning and competitive advantage. David Jobber(2004) identifies an array of ten components of a marketing oriented approach to pricing as follows: 1. Marketing strategy 2. Price quality relationships 3. Product line pricing 4. Negotiating margins 5. Political factors 6. Costs 7. Effect on distributors and retailers 8. Competition 9. Explicability 10. Value to customer

PRICE DIFFERENTIATION AND DISCRIMINATION

Discrimination refers to a product or service being offered to a buyer at a lower price than applies to other buyers. Implicit in price discrimination is the notion that the buyer presented with the higher price is being treated unfairly. Thus, deliberately disadvantaging one group of customers through price discrimination represents a highly undesirable practice. Price differentiation, on the other hand, has a number of positive features that serve the interests of a wide range of stakeholders. Differential pricing can be based upon a number of factors, reflecting both genuine commercial considerations on the part of providers and also customer characteristics, including: lower costs associated with bulk purchase costs that vary according to different factors, such as geographical variation in labor coasts and rents costs that vary according to buyer characteristics- for example, people with a poor credit history indicate a greater propensity to default an loans and therefore may pay a higher rate of interest utilization of off-peak capacity demographic factors- age, employment status, gender Arguably, price differentiation is particularly well- advanced in the field of financial services. The most graphic example is life assurance, where prices vary according to age, sex, occupation and health status.

PRICE DETERMINATION
Some form of process is required for an organisation to arrive at the finally agreed selling price. A number of steps need to be considered when setting price. The nature of these steps will vary according to whether the cost based, competitive or market oriented approach is used. Step 1: Decide upon pricing objectives Step 2: Assess influence of 10 pricing factors Step 3: Propose indicative pricing approach Step 4: Model price/demand relationships Step 5: Assess impact on pricing objectives Step 6: Assess responses expected from competitors and distributors Step 7: Consult relevant internal departments and gain agreement to price Step8: Set up implementation project Step 9: Launch price