12.pricing decisions - notes 270910

8/12/2019 12.Pricing Decisions - Notes 270910

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MARKETING MANAGEMENT

PRICING DECISIONS

Price is what you pay

Value is what you get

- Warren Buffet

Introduction:

Price is an expression of value or utility in terms of money. Pricing is easily one of the

most delicate areas though very important area of marketing. Besides calculations thatneed to be carried out in pricing it is also important that a study!"udgment is made of the

market situation.

#here are three approaches to pricing strategies:

$lassical or demand-supply oriented pricing

$ost-oriented pricing

%arket oriented pricing.

Price should cover the cost of production marketing expenses and a reasonable return on

investment. Price mechanism should be geared towards expansion of business and not forthe exploitation of consumers or for profit maximi&ation.

Objectives of Pricing:

'. Profit %aximi&ation

(. #arget )eturn on *nvestment

+. Price ,tabili&ation. ace!/void $ompetition

0. ,ales Promotion

1. $ash low ,tabili&ation2. $apacity of $ustomers!$onsumers

Role of Pricing:

Price is a powerful marketing instrument!tool and price has the following role to play:

!" PRICING DECISIONS

S# $MS % SEM III % ACADEMIC #EAR !&&%!& % MMK CO''EGE

$ompiled by aculty: 3. /. 45$osta 67' 78'7+ 22001 dcosta.l.a9gmail.com,ource of $ompilation: %arketing %anagement ;. %. /hmed > Web


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'. Pricing acts as a demand regulator thereby controlling the demand for theproduct!s

(. Pricing is a marketing tool especially in competitive situations

+. Pricing determines the profitability of the firm!company. Pricing acts as an input for various marketing strategy decisions

0. Price can be used as a sales promotion techni?ue for offering discounts and

incentives.

()ctors Influencing *ricing Decisions:

Intern)l ()ctors:

'. @b"ective of the company

(. $haracteristics of the product!s+. $ost of production and expected profit margin

.


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Adv)nt)ges of Cost *lus Pricing:

'. $ost plus pricing strategy is normally used when one is in the sellers5 market as

the sellers have the dominating position(. #he method is simple in terms of calculation

'i0it)tions of Cost *lus Pricing:

'. #he consumer is likely to suffer as the manufacturer will calculate the cost of

production and recover the cost from the consumers. #here will not be an attempt

to reduce the cost of production(. ;ot suitable in a highly competitive market

+. $ost plus pricing is a mechanical method of pricing as market competition and

other factors are completely neglected.

Perceived 1)lue Pricing: #he modern trend is to price the product on the basis of the

customer5s perception of its value. #he key is to understand correctly the customer5sperception of product value and not to overestimate the firm5s product value. %arketing

)esearch plays an important role in this type of pricing.

Perceived value of a product is based on two constituents:

/c?uisition value

#ransaction value

/c?uisition value refers to the perceived benefits and sacrifices made by the customer to

obtain the product while the #ransaction value is determined by comparing the buyer5s

reference price to the actual price the customer pays.

1)lue Pricing: is a new and innovative method of pricing which is favourable to sellers.Price and value of a product are closely related. Price is the exchange value of a product.#he essence of value pricing rests on the premise that the ob"ective of pricing is not to

recover costs but to capture the value of the product perceived by the customer.

#he following alternatives are possible with the cost-value price chain:

1)lue 2 *rice 2 costs: *n this alternative the marketer recovers costs through the price

but fails to recover the value of the product hence missing out the profit opportunity.

Price 2 v)lue 2 costs: #he marketer recovers the costs as well as the value but errs on the

excess side by giving less value to the customer than what is due as per the price in whichcase the marketer is likely to lose out on the loyalty of the customer.

Price 2 costs 2 v)lue: nder this pricing the value that the marketer passes on to thecustomer is till lesser and it is doubtful if the company will be able to at all sell the





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product. *n this case the cost itself is higher than the value of the product and by keepingprice above costsD one makes the value delivery to the customer all the more negative.

Price 3 v)lue 2 costs: *n this case the marketer matches the value and price and therebywins customer loyalty. #he company also ensures profits as the value created is larger

than the costs. #his situation guarantees sustained sales and profits to the marketer.

Geogr)*.ic Pricing: is mainly applicable to exports. #he seller considers the costs ofshipping goods to the buyer. reight in such cases is larger part of total variable costs.


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Res*onse to Co0*etitors t.roug. Price )nd Non%Price 1)ri)bles:

Pricing policy decisions have to be taken in the context of the marketing environment

policies of competitors and the consumers5 ability and desire to pay for the product.$ompetition is an integral aspect of marketing. Avery producer has to slug it out with the

competitors in order to stay entrenched in the market. / producer can respond to market

competition through different variables. #hese variables could be price-related or non-

price variables.

Res*onding to Co0*etitors t.roug. Price 1)ri)bles: Price is related to cost and

production cost tends to remains more or less uniform to all competitors. $ost reductionis possible by using new technology or by using cheaper raw materials. $ost reduction

through new technology re?uires huge investment.

*n view of the above a manufacturer under competitive market conditions has two

alternatives.

'. )educe the market price of the product which could lead to an improvement in

sales(. )aise the market price by a suitable margin which could lead to buyers moving

towards competitors but the profit may not be adversely affected as the profitmargin increases due to a rise in price.

Res*onding to Co0*etitors t.roug. Non%Price 1)ri)bles: ;on-price variables areVariables which are not concerned with the price of the product. Product modification

effective advertising and sales promotion measures are non-price variables and are useful

for facing market competition effectively. ;on-price variables used for responding tocompetitors are:

Product Differenti)tion: / manufacturer suggests that the product is different ascompared to the product of one5s competitors. Product differentiation could come about

through different methods: trademark copyright or patent etc. 4ifferentiation can also be

increased through a change in the appearance of the product i.e. colour packing etc. @r

there could be a provision of supplementary services.

Selling Costs: / firm which wants to sell a differentiated product has to incur huge

expenditure on populari&ing the product. ,uch expenditure supports productdifferentiation and is broadly termed as selling costs.

Axpenditure on the following items is regarded as selling costs:

Axpenditure on aggressive and extensive advertising

Axpenditure on displays exhibitions free sampling

*ncentives to sales personnel

4iscounts offered to consumers retailers etc.





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#he trend is towards an extensive use of non-price variables for responding to intense

market situation.

Product 'ife C,cle 7 Pricing Decisions:

#he stages of a Product 3ife $ycle are:

*ntroduction

12.pricing decisions - notes 270910

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