MM Unit 5 Notes
MM Unit 5 Notes
MM Unit 5 Notes
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. Here is one framework for making
pricing decisions that takes into account your costs, the effects of competition and the
(i) Cost is the total of the fixed and variable expenses (costs to you) to manufacturer or offers
(ii) Price is the selling price per unit that customers pay for your product or service.
So, the price you set is the cost to the customer. Ideally, it should be higher than the costs you
Think of your cost as the surface of the ocean. You must set your price above the surface to
cover costs or you will quickly drown. Of course, there will be times when you decide to set
prices at or below cost for a temporary, specific purpose, such as gaining market entrance or
clearing inventory.
How the customer perceives the value of the product determines the maximum price
customers will pay. This is sometimes described as “the price the market will bear.”
comparison customers and prospects make between you and your competition.
Somewhere between your cost and the price “the market will bear” is the right price for your
product or service — a price that enables you to make a fair profit and seems fair to your
customers. Consequently, once you understand your costs and your maximum price, you can
cost-based pricing. Value-based pricing makes you think about your business from the
customer’s perspective. If the customer doesn’t perceive value worth paying for at a price
that offers you a fair profit, you need to re-think your game-plan.
But there are several other key costs that customers may incur in using a service:
(i) Physical efforts may be required to obtain some services, especially if the customer must
(ii) Sensory costs may include putting up with noise, unpleasant smells, drafts, excessive
heat or cold, uncomfortable seating, visually unappealing environments, and even unpleasant
tastes (one of the reasons that many children dislike health care).
(iii) For customers, there is an opportunity cost to the time spent in pursuit of service, since
(iv) Psychic costs are sometimes attached to the use of a particular service-mental effort,
In short, as the bundle of benefits presented by the product must be traded off against the
bundle of costs associated with using it. In any given situation, customers are making
judgment about what they get in return for what they give.
Right price is one of the important determinants of business success. Right price, however
doesn’t mean a low price. What is the right price? It depends upon a number of factors like
the nature of other elements of marketing-mix, nature of market, including demand and
competition.
A price policy is a guideline set by the top management to bring about optimum product
market integration. It is that sharp weapon by which the marketer can encourage or
discourage competition, satisfy or dissatisfy the consumers, helps or hinder the army of
salesman in effective selling. Price policies and strategies are important for all the members
of channel of distribution.
A price is the amount one pays for a good or a service or an idea. Price is the amount for
which a product, a service or an idea is exchanged, or offered for sale regardless of its worth
or value, to the potential purchaser. Without price there is no marketing, in the society. To a
manufacturer, price represents quantity of money (or goods and services in a barter trade)
received by the firm or seller. To a customer, it represents sacrifice and hence his perception
The term ‘price’ needs not be confused with the term ‘pricing’. Pricing is the art of
translating into quantitative terms (say rupees or dollars) the value of the product or a unit of
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
In general terms price is a component of an exchange or transaction that takes place between
two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain
Yet this view of price provides a somewhat limited explanation of what price means to
For those making a purchase, such as final customers, price refers to what must be given up
to obtain benefits. In most cases what is given up is financial consideration (e.g., money) in
exchange for acquiring access to a good or service. But financial consideration is not always
Sometimes in a barter situation a buyer may acquire a product by giving up their own
product. For instance – two farmers may exchange cattle for crops. Also, as we will discuss
below, buyers may also give up other things to acquire the benefits of a product that are not
To sellers in a transaction, price reflects the revenue generated for each product sold and,
thus, is an important factor in determining profit. For marketing organizations price also
serves as a marketing tool and is a key element in marketing promotions. For example – most
Pricing is not an end in itself but a means to achieve marketing objectives of the firm.
Therefore, the pricing strategy of a firm should be designed to achieve specific objectives.
Like other operating objectives, the objectives of pricing are derived from the overall
objectives of the firm. The basic objectives of a firm are survival and growth.
The objectives of pricing should be clearly defined because without clear cut objectives a
sound price structure cannot be developed. In practice very few firms define their pricing
objectives in unambiguous terms. The specific objectives of pricing may vary from firm to
firm and even for the same firm at different points of time. Most firms have multiple pricing
objectives.
2. To stabilize prices;
Firms following this objective design their pricing strategy in such a way that will yield
desired return on total investment (ROI). Rate of return refers to the amount of net profits
divided by investment or capital employed. This goal often leads to cost plus pricing. The
price of a product or service is determined by adding the expected margin of profit to the cost
In order to fix the price, the firm estimates the amount of total profit required to earn the
expected rate of return. The figure of total profit divided by the average sales volume gives
profit margin per unit. Suppose, for instance, that a company wants to earn a return of 20 per
cent (before taxes) on its total investment of Rs.50 lakhs. The annual sales volume on an
average is anticipated to be 50,000 units and the total cost per unit is Rs.80.
Target rate of return is an important pricing objective and an increasing number of firms
follow this goal due to several reasons. Firstly, it ensures a reasonable return to the investors.
Secondly, it does not lead to public criticism. Thirdly, the rate of return can be used to
evaluate and compare the performance of different products of the firm. Fourthly, it provides
a measure of restraint and a guideline for judging improvement in a new product line.
However, target return pricing may not be feasible in all conditions. This goal can be
achieved by firms which are industry leaders or which sell in protected markets. Some firms
may attempt to achieve target return on sales during the short run. They set a percentage
markup on sales which is sufficient to cover operating costs and the desired profit.
In such cases, the rate of profit would remain the same, but the amount of profits would vary
with the number of units sold. The target rate of return differs from firm to firm depending
upon the cost of capital and the actual market conditions in the industry.
Objective # 2. Price Stabilization:
This goal is adopted in industries having a few firms. In an oligopolistic situation where one
firm is very big and all others are small, the big firm acts as the price leader and other firms
follow it. All the firms try to avoid price wars. No firm is willing to cut its prices for fear of
In order to avoid fluctuations in prices, they may even forgo maximizing profits during the
period of scarce supply or prosperity. This objective is followed in case of products which are
vulnerable to price wars or which are advertised at the national level. Price stability helps in
planned and regular production in the long run. However, it may create rigidity in pricing.
Objective # 3. Target Share of the Market:
In an expanding market, market share is a better indicator of a firm’s success than the target
rate of return. When the market has a potential for growth, a firm earning the target rate of
return may, in fact, be decaying if its share of the market is decreasing. Therefore,
markets. Market share measures a firm’s sales vis-a-vis the sales of its competitors.
Objective # 4. Facing Competition:
Under conditions of intense competition, a firm may seek to meet or prevent competition. It
may fix prices at a very low level (even below cost) to eliminate its competitors or to prevent
the entry of new firms in the market. Some firms follow this practice while introducing a new
product. This goal is not very popular and cannot be adopted on a regular basis. In the long
run, a firm cannot survive if it continues to charge less than the cost of the product or service.
Objective # 5. Profit Maximization:
economic theory suggests the fixation of prices in such a way that the marginal cost is equal
to marginal revenue where profits are maximized. Even today some firms are not very
conscious of social responsibilities and try to maximize profits. But in recent years there has
been a change in the philosophy of business and profit maximization is not considered
rational business behaviour. In practice, no firm states explicitly that profit maximization is
its pricing objective due to the fear of public criticism and government regulation.
Objective # 6. Improving Public Image:
Another objective of pricing may be to enhance the firm’s public image. The firm may launch
a premium product at a high price for this purpose. Alternatively, it may offer the new
product at a low price to appeal to the common buyer. The pricing policy should be
In addition to the foregoing, business firms may design their pricing policy to achieve the
(i) Sales volume objectives including sales maximization and improvement in market share.
(ii) Profitability objectives consisting of profit maximization and target rate of return.
(iii) Status quo objectives comprising price stabilization, maintaining market share, facing
1. Growth in Sales:
A low price can achieve the objective of increase in sales volume. A low price is not always
necessary. Competitive price, if used wisely, can secure faster increase in sales than any other
marketing weapon.
2. Market Share:
Price is typically one of those factors that carry the heaviest responsibility for improving or
Return on Investment, say 20 to 25 per cent is a common decision in marketing. Pricing for
4. Counter Competition:
Many firms follow a flexible pricing policy to counter competition. Prices are to be varied
A principal pricing objective is to return cash as much as possible (the funds invested) within
etc., should pay back within a specified period. Capital expenditure on any project must be
recovered within 5 to 10 years. Pay-back or cash-flow objectives fit in easily with other
corporate objectives.
While determining objectives of a pricing policy, marketers must take into account reactions
opinion, and so on. For instance, there may be a conflict between sales maximisation
objective and a return on investment or profit objective. However, it should be noted that
maximum market penetration in the short-run (in the early phase of the product life-cycle) is
Many firms enter the market by charging a very low price for the product. Example- Low-
Many firms desire the stabilisation of price levels and operating margins as more important
than the maintenance of a certain level of short-run profits. The price leader maintains stable
Pricing – Importance
When marketers talk about what they do as part of their responsibilities for marketing
products, the tasks associated with setting price are often not at the top of the list.
Marketers are much more likely to discuss their activities related to promotion, product
development, market research and other tasks that are viewed as the more interesting and
distribution decisions, which can take months or years to change, or some forms of promotion
which can be time consuming to alter (e.g., television advertisement), price can be changed
very rapidly.
The flexibility of pricing decisions is particularly important in times when the marketer seeks
to quickly stimulate demand or respond to competitor price actions. For instance, a marketer
can agree to a field salesperson’s request to lower price for a potential prospect during a
phone conversation. Likewise a marketer in charge of online operations can raise prices on
Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation
can lead to the marketing organization losing revenue. Prices set too low may mean the
company is missing out on additional profits that could be earned if the target market is
Additionally, attempts to raise an initially low priced product to a higher price may be met to
customer resistance as they may feel the marketer is attempting to take advantage of their
customers.
Prices set too high can also impact revenue as it prevents interested customers from
purchasing the product. Setting the right price level often takes considerable market
knowledge and, especially with new products, testing of different pricing options.
Often times customers’ perception of a product is formed as soon as they learn the price, such
as when a product is first seen when walking down the aisle of a store. While the final
decision to make a purchase may be based on the value offered by the entire marketing
offering (i.e., entire product), it is possible the customer will not evaluate a marketer’s
It is important for marketers to know if customers are more likely to dismiss a product when
all they know is its price. If so, pricing may become the most important of all marketing
decisions if it can be shown that customers are avoiding learning more about the product
Many times price adjustments are part of sales promotions that lower price for a short term to
stimulate interest in the product. However, marketers must guard against the temptation to
adjust prices too frequently since continually increasing and decreasing price can lead
Firms may choose various kinds of pricing for their various products these are:
(i) Odd Pricing:
It may be a price ending in an odd number. Bata Shoe Company pricing one of its pair shoes
at 299.95 is an example of odd pricing. Such a pricing is adopted by the sellers of specialty or
convenient goods.
(ii) Psychological Pricing:
The prices under this method are fixed at a full number. The price settlers feel such a price
has an apparent psychological significance from the viewpoint of buyers. This differs from
the concept of odd pricing in that the curve doesn’t necessarily have any segments positively
inclined.
Such prices are fixed by the custom. Soft drinks are priced by their customary bases, such a
This kind of pricing is undertaken to meet the competition. It is also called ‘Pricing at the
market. Such a strategy presumes a market in elasticity of demand below the current price.
product is inferior, and higher priced product is superior. This pricing is applied generally to
luxury goods.
(vi) Price Lining:
This policy of pricing is usually found among retailers. Technically it is closely related to
both psychological and customary prices. Under this policy the pricing decisions are made
only initially and such fixed prices remain constant over long periods of time.
(vii) Geographic Pricing:
The manufacturer sometimes adopts different prices in different markets without creating any
ill will among customers, e.g., Petrol is priced depending upon the distance from the storage
Here the buyer will have to incur the cost of transit and in the later the price quoted is
(ix) Dual Pricing:
When the manufacture sells the same product at two or more different prices in the same
market it is ‘Dual Market Pricing’. This is possible only if different brands are marketed. It is
adopted in railways where passengers are charged differently for the same journey and
This applies to the practice of pricing the products for the markets not on the basis of cost,
competitive pressures or the laws of supply and demand but purely on the basis of the policy
decisions of the sellers. These kinds of price remain unchanged for substantial periods of
time.
Pricing – Methods of Pricing the Product: Cost-Oriented Export Pricing Methods and
Market-Oriented Export Pricing
The export price structure, like the domestic price structure, begins on the factory floor. But
there is no similarity in the costs included in the two structures. The pricing of the products
for domestic and export purposes shall be calculated in a somewhat different manner. The
export price structure is the basis of all export price quotations, discount and commissions.
There are various methods of pricing the product in the foreign markets. The methods may be
grouped into two i.e., cost oriented export pricing methods and market oriented export pricing
methods.
The pricing of the products for domestic and for the markets abroad is calculated in a
somewhat different way. The price structure for export is the basis of all export price
The various methods of pricing the product in the foreign markets are grouped into
These are based on costs incurred in the production of the articles. As total cost includes
fixed costs and variable costs, export pricing may be based on full cost (fixed and variable) or
only on variable costs. A reasonable profit will be added to the base cost to arrive at the
export pricing.
This method is also known as cost-plus method and it is the most common method. Under
this method for arriving at the export pricing, the total cost of production of the article is
considered. In addition to the fixed and variable costs incurred in the production of the item,
all direct and indirect expenses needed for the export of the product including cost on
transportation, freight, customs duties, risk. To this a reasonable profit allowance is added to
the cost. From this amount the value of all assistance received from any source is deducted.
ii. Other Costs Directly Related to Exports – These are in addition to the variable costs.
This include:
Selling costs advertising support to importers in the foreign market. Costs on Special
packing, Labelling, Commission to overseas agent, Export credit insurance, Bank charges,
Inland freight, Forward charges, Inland insurance, Port charges, Duties on Exports of the
therein, Interest on funds involved or cost of deferred credit. Cost of after sale service,
including free supply of spare parts, consular fees, preshipment inspection and loss due to
rejection of product.
i. Compensatory assistance,
(a) Its main advantage is that through this method exporter becomes aware of the full cost in
When smaller number of units are to be exported it would be difficult for the exporter to
supply the product at the same price because of its high cost of production per unit due to
fixed costs. This method is justified only when the cost of information about demand and the
administrative cost of applying a demand based pricing policy exceed the profit contribution
In this method the price is determined on the basis of variable cost or direct cost, while fixed
cost element in the total cost of production is totally ignored. The firm is concerned here only
with the marginal incremental cost of producing the goods which are sold in foreign markets.
Now, the fixed cost remains fixed up to a certain level of output irrespective of the volume of
output. On the other hand, variable costs vary in proportion to the volume of production.
Thus, the variable or direct or marginal costs set the price after output at Break-Even Point
(BEP).
(a) The export sales are bonus sales and any return over the variable costs contributes to the
net profit.
(b) The firm has been producing the goods for home consumption and the fixed costs have
already been meet or in other words, breakeven point has been achieved. Thus, if the
manufacturers are able to realize the direct costs, including those involved in export
operations specifically, they would not affect the profitability of their firms. However, the
profitability of firms should be assessed with reference to marginal cost which should
normally constitute the basis for export pricing. Direct costs and other elements in calculating
Advantages:
(i) No Overhead Costs – Export sales are additional sales. Hence these should not be
burdened with overhead costs which are ordinarily met from the domestic trade.
(ii) Large Market – Since the buyers of products from developing countries are usually in
countries with low national income, it is advisable for the firm to serve a large segment of the
market at low prices. Low prices may serve to widen and create markets. In such countries
price is still the decisive factor and quality is comparatively less important.
(iii) Firms from Developing Countries – This approach is advocated for firms from
developing countries who are not well-known in foreign markets as compared to their
competitors from developed countries. Therefore, lower prices based on variable costs may
help them enter a market. Price may be used as a technique for securing market acceptance
(i) Attracts Anti-Dumping Process – Developing countries might be charged of dumping their
products in foreign markets because they would be selling their products below net prices and
(ii) Cut-throat Competition – The use of this approach may give rise to cut-throat competition
among exporting firms from developing countries resulting in loss in valuable foreign
a. If the importers are regularly purchasing the product at a low price, it will be difficult for
exporters to increase the price of the commodities later on. It may lose their market.
b. This policy is not useful or of limited use to industries which are mainly dependent upon
Circumstances of Feasibility:
(i) Large Domestic Market – There must be a large domestic market of the product so that the
(ii) Mass Production – Mass production techniques must have been adopted so that the gap
(iii) Higher Prices in Home Market – The home market has a capacity to bear the higher
prices.
(iv) No Overhead Costs – Additional production for exports is possible without increasing
The costs are no doubt, important but the competitive prices should also be considered before
fixing the export price, competitive prices mean the prices that are charged by the
competitions for the same product or for the substitute of the product in the target market.
Once this price level is established, the base price, or what the buyer can afford, should be
determined.
The base price can be determined by following the three basic steps:
(i) First, relevant demand schedules (quantities to be bought) at various prices should be
(ii) Then, relevant costs (total and incremental) of production and marketing costs should be
estimated to achieve the target sales volume as per demand schedules prepared; and
(iii) Lastly, the price that offers the highest profit contribution, i.e., sales revenues minus all
The final determination of base price should be made after considering all other elements of
marketing mix within these elements, the nature and length of channel of distribution is the
most important factor affecting the final cost of the product. Besides, product adaptation costs
The above three steps; though appear to be very simple, but it is not so because there are
various other factors that should be looked into. The most appropriate method to estimate the
demand of the product shall be the judgmental analysis of company and trade executives.
One other way may be the extrapolation of demand estimates for target markets from actual
The following information gives the nature of analysis for market-oriented export
pricing:
product at that price profitably or not by working back from the market price as shown above.
This analysis gives an idea of the upper limit of what the firm can charge. The price of the
product in the foreign market may be then fixed between these two limits. As the firm gathers
experience, it would be able to set the price that gives the highest profitability. However, in
In such circumstances, the exporter may compare his f.o.b. realization (under market-oriented
export pricing) with the direct cost or full cost as calculated under cost- oriented export
pricing. He can then determine whether he should export the goods or not. He can decide to
export the goods even at a loss if he thinks that market prospectus are better in future and the
Whatever be the price determined by the firm for its product, it must consider the prices and
Are you pricing too high or too low? Do you have the right pricing process to help you
business environment. After a goods or service has been developed, identified, and packaged,
it must be priced. This is the second aspect of the marketing mix. Price is the exchange value
of a good or service. Pricing strategy has become one of the most important features of
modern marketing.
All goods and services offer some utility or want-satisfying power. Individual preferences
determine how much utility a consumer will associate with a particular good or service. One
person may value leisure-time pursuits, while another assigns a higher priority to acquiring
Consumers face an allocation problem; their scarce resource of a limited amount of money
and a variety of possible uses for it. The price system helps them make allocation decisions.
A person may prefer a new personal computer to a vacation, but if the price of the computer
rises, they may reconsider and allocate funds to the vacation instead.
Prices help direct the overall economic system – A firm uses various factors of production,
such as natural resources, labour, and capital, based on their relative prices. High wage rates
may cause a firm to install labour-saving machinery. Similarly, high interest rates may lead
management to decide against a new capital expenditure. Prices and volume sold determine
Yet few firms think systematically about their pricing strategies or acquire the confidence to
leverage their pricing strategies to capture maximum value. An ad-hoc pricing strategy or a
trial-and- error approach to pricing can significantly reduce a firm’s bottom line. Pricing
Strategies will give you a powerful set of tools and frameworks for developing your pricing
strategies. The fundamental underlying pricing strategy can be described with the three
The costs to be recovered set a floor to the price that may be charged for a specific product;
the value of the product to the customer sets a ceiling; whereas the price charged by
competitors for similar or substitute products may determine where, within the ceiling-to-
floor range, the price level should actually be set. Companies seeking to make a profit must
recover the full costs associated with producing and marketing a service, and then add a
An exception occurs in the case of “loss leaders,” designed to attract customers who will also
buy profitable products from the same organisation. But even with such loss leaders,
managers need to know the full costs associated with these products, so that the amount of
promotional subsidy is fully understood. Price may also play a role in communicating the
quality of a service. In the absence of tangible clues, customers may associate higher prices
Many executives and economists argue that not cost but the market fix the prices. While true
in theory, this is rarely the case in practice. Almost all companies set prices on a cost-plus-
basis. They rely on the traditional labour based cost accounting system to establish a cost-
based price.
Since product costs are calculated according to volume and product-mix, prices are set to an
acceptable profit margin above the product costs. Therefore, each company has its costs
influences pricing.
Traditional cost systems ignore the so-called “below-the-line” expenses, like sales,
distribution, R&D and administration. At many companies, those costs are not assigned to
Therefore, these “below-the-line” costs are treated as though they are equally distributed
across all customers. Yet, some customers are much more expensive to serve than others.
Using one price to all customers may either underprice or over-cost to the disadvantage of
some customers.
A company cannot set up a right pricing strategy unless it changes from the traditional
driven.
Product-driven costs are the costs of designing and manufacturing products. These costs
engineering etc.
Customer-driven costs are the costs of delivery, servicing, and supporting customers and
markets. These costs include order entry, distribution sales, R&D, advertising, marketing, etc.
Activity-based costing (ABC) assigns costs to products or customer bands on the resources
they consume. The system identifies the costs of activities such as order entry, shipping,
billing and freight. These costs vary with the frequency of the activities and can be modified
at different levels.
optimization model of microeconomics theory assumes that the firm’s pricing objective is to
intersection point of the marginal cost and marginal revenue curves. A major limitation of the
marginal analysis is the assumption that cost data and demand schedule information are
readily available.
However, we can easily estimate the cost impact of a volume change on a product’s
production cost. Few companies know precisely what their products’ price elasticity is; that
is, what the demand curves look like. The company does not know how much sales volume it
will lose by increasing the product’s price, or vice versa. Therefore, it is only possible to
estimate the optimal price for the highest cash flow; but it is difficult to determine the
profitability of a company.
(i) Rate of return pricing, whereby prices are set to achieve a preset rate of return on
investments or assets.
(ii) Competitive parity pricing, where prices are set on the basis of following those set by the
market leader.
(iii) Loss leading pricing, usually applied on a short-term basis, to establish a position in the
(iv) Bundle pricing, where a set of products or services are combined and a low, single price
(v) Cross-benefit pricing, where price is set at or below cost for one product in a product line,
but relatively high price is set for another item in the line which serves as a direct
complement.
(vi) Stay-out pricing, where the firms set prices lower than the demand conditions so as to
The problems with most of the traditional pricing methods are as follows:
(i) They consider only one party (the customer) in price setting. In the real world, the firm
must consider all channel members such as competitors, suppliers, public policy makers,
(ii) They put strong emphasis on price to set the marketing strategy. Actually, many other
controllable and uncontrollable variables are involved. The marketing manager must consider
the role of each of the other elements in the marketing mix and the relationships among them.
(iii) Almost all pricing decisions remain largely the domain of economic theory, as in the case
customer value.
(iv) Most of the pricing decisions are based on a simple assumption—to increase the sale
volume in the short-run— without considering the activity costing information and the
(v) Traditionally, price setters have considered a very limited number of alternatives when
faced with pricing difficulties. If their prices seemed high, they would lower it, and if it was
too low, they would simply raise it. Much more complex behaviours should be considered
which provide opportunities for novel approaches. For example, price setters might change
the product’s package, advertising, quality design, or the after-sale customer service.
Pricing Strategy for New Products:
Pricing of new product is a critical task for the firms. As we know new products can be
where new products are through marketing modifications, pricing is not as such a big issue;
but altogether new products through technological innovations, pricing becomes a critical
issue. Firm here has no base on which it can work out the price.
Such type of the new products, do not have any demand in the market nor any competitors, or
any leader. Thus, demand based pricing, competition based pricing and leader based pricing
do not provide a solution. Further, the estimation of cost also cannot be done accurately as
many costs such as research and development cannot be easily allocated. Thus, cost plus
The pricing strategy for new products will depend to a large extent on the degree of newness
of the product and how firm considers the concept of new product. The need to introduce a
new product may be different for different companies. For some companies it may be simply
to enlarge their product mix and for others it may be the desire to fulfil an unsatisfied need of
the market. There may be companies which go for new products because they want to
Pricing strategy is also influenced by the fact that how new the product is to the market. The
degree of newness of the product will attract the market and accordingly the price may be set.
In general, the pricing strategy options available for the companies are:
Market skimming pricing strategy is a one where the firm initially charge high prices and
skims the cream of market by concentrating on those segments of the market which are not
price sensitive. The high initial price of the product helps in bringing back the revenues for
the firm which can be further used by the firm. Later, on as product gets accepted and firm
wants to enter mass market; it may lower down the price. For skimming strategy it is
necessary that firm offers something distinctive in the product, worthy of its price, only then
The market penetration pricing strategy is one where firm initially charges a low price for the
product with the objective of the penetrating the market. When the firm sees that market
available for the product is price sensitive, it has to fix a low price of the product. Low price
Penetration pricing is thus used when there is no segment in the market which is willing to
pay any price for the product. At the same time, the product is such that it will face intense
Pricing decision means decision of determining price of a product. A concern has to take a
number of factors like cost of production, cost of distribution, cost of transportation, cost of
advertisement and personal selling, competitive forces, purchasing power of the consumer
etc., other than the demand and supply position of the product in the market. Decision
concerning price to be followed for a period of time may be called as “Price Decision”.
The price of a product must be determined in such a manner as to offer a reasonable amount
satisfaction to consumers.
Every marketer faces a problem of setting the prices of products. The main aim of marketing
strategy of an organization is to attain marketing objectives and satisfy the targeted market.
It refers to set the goals of the pricing policy. An organization can have multiple pricing
objectives.
Some of the price objectives are discussed as follows:
i. Survival:
It involves the formulation of a short-term price objective to face the fierce competition. The
price of a product is reduced to increase sales volume. However, this strategy does not work
in the long term as an organization would not be able to cover its costs, thus, profit margin
It affects the price of products. An organization incurs high cost in research and development
to improve the quality of a product. Therefore, it covers the research and development cost in
the price of the product. Sometimes, the organization raises prices to make customers aware
It helps in knowing the factors that affect the demand of a product. Some of the important
factors can be the prices of products, environmental factors, and income and expectations of
customers. There are three things that are studied by the marketers for estimating the demand.
i. Price Sensitivity:
It affects the demand of a product. If the price of the product rises then the demand falls and
vice versa. In this case, the demand may shift to the substitute of the product. A marketer tries
to study the price sensitivity of the product for making decisions about the price of the
product.
It implies a statistical tool that shows a relationship between the demand and price of a
product. It helps in knowing the demand and price fluctuations of the product.
percentage change in the price of the product. If the demand of a product changes with the
change in price then the demand is said to be elastic. On the other hand, if the demand of a
product does not change with the change in price then the demand is said to be inelastic.
It influences the decisions of setting the prices of products. The pricing strategies of
competitors affect the demand of the product and lead to a loss of market share. Thus, it is
clear that the marketers should be careful about the future competition.
Following are the three ways by which an organization reacts to price changes:
i. Maintaining the status quo and not reacting to any price change.
The process of analysing the prices of competitors is difficult. Therefore, the organizations
depend on the publicly available data or public statements to know the price strategies of
competitors.
It involves the selection of a technique for setting the price. There are various types of pricing
For most customers price by itself is not the key factor when a purchase is being considered.
This is because most customers compare the entire marketing offering and do not simply
In essence when a purchase situation arises price is one of several variables customers
Value refers to the perception of benefits received for what someone must give up. Since
price often reflects an important part of what someone gives up, a customer’s perceived value
For the buyer value of a product will change as perceived price paid and/or perceived benefits
received change. But the price paid in a transaction is not only financial it can also involve
For Example – In addition to paying money a customer may have to spend time learning to
use a product, pay to have an old product removed, and close down current operations while a
product is installed or incur other expenses. However, for the purpose of this tutorial we will
limit our discussion to how the marketer sets the financial price of a transaction.
The international pricing decision depends on the number of factors, such as pricing
objectives, cost, competition, customers and the government laws etc. The total cost method
is considered to be the most important factor in setting price in the international market.
Mainly the following two types of pricing orientations are followed by the
multinational companies:
In the cost approach all the relevant costs are computed first and then after a desired markup
profit is added as to arrive at the price. The cost approach is very simple to comprehend and
use, therefore it is very popular approach in practice. The other benefit of using this approach
This approach, however, has number of benefits but it too had following drawbacks:
Under this approach tentative price charged is calculated on the basis of its costs. The final
price emerges by considering government regulations, demand for the products, competition
in the market, objectives of the company and others. The main emphasize is given to the costs
of the product.
It forces inflexibility also. The main problem in this regard is the meaning of costs, what
should be included in the total cost, should it be both fixed as well as variable costs. Should
the total cost also consist of research and development costs as well as administrative cost of
present company? The exact answer and other classification of all these questions is very
difficult.
While determining the total cost as the basis of pricing a full cost or an incremental cost
pricing method can be applied. A full cost pricing is a conservative approach, whereas an
incremental cost pricing can allow for seeking business otherwise lost.
present the company is producing and selling 15,00,000 units per year. The regular market
Now suppose the company do have an opportunity of selling an additional 3,00,000 units
$10.00 per unit in the overseas market. This particular order does not have any adverse effect
Further if Duke Overseas Ltd. would have used full costing method to reach up till the
decision on pricing for the particular product, the offer would have been rejected. Because the
full cost method does not justify the price quoted for the said offer.
Thus there will not be any other option with the company except to give up this order. The
company will be losing revenue worth $ 300000. On the other hand if company is using
incremental cost method, the offer for said order shall be accepted and thus company will be
price and cost on the basis of full cost method, the cost per unit is calculated by considering
the fixed cost in the total cost. On the other hand in incremental cost method it is considered
that no additional fixed costs shall be incurred if additional units are produced.
Thus fixed costs are not considered in the process of decision making for additional overseas
order. It is pertinent to mention here that an important factor which is always considered and
kept in the mind is the negative effect of such offers on regular market price. If such an offer
is from the regular market, in that case it should not be accepted. Because by doing this, it
can severely hamper the market operations in future course of time in the regular market.
The profit markup or desired profit is added in the total cost as to compute the final price.
For example, if the total investment in the present business is $ 10,00,00,000 and the total
standard cost of annual output is $ 15 crore, the capital turnover ratio would be $ 10 crore/ $
15 crore, or say 0.67. While multiplying it with desired percentage return on investment, it
will give percentage mark up on cost. For example if the desired percentage return on
percent).
This method is considered to be more scientific and is an improvement over the cost plus
method. The determination of fair rate of return may be a problem with the company.
Generally a fair return on investment should be equal to or more than the current cost of
capital. But in actual practice some time a certain amount is to be considered as a fair return.
In this particular method the mark up is linked with total investment and do not consider any
If not the alternatives shall be either to increase the price or to give up that business.
(iii) An additional adjustments can be required as to cope with other factors like, competitors
price, laws of host country, costs and other environmental factors. These factors are
considered essentially in both the approaches i.e. cost plus and market approach. The market
The major drawback and leakage of this approach is lack of price and demand relationship in
many countries which is not possible to develop there. Therefore it is not possible to
implement market approach for pricing in those countries. This uncertainty emphasizes to
One of the most frequently used sales promotion techniques is offering promotional discounts
The simple money-off promotion imprinted on the packaging is the most direct method and
may have the most immediate impact on sales levels. Because it is shown on the package, it
is nearly impossible for any retailer to avoid passing it on to the consumer. It is the most
It may also prove difficult to restore the price to its original level at the end of the promotion,
as consumers may decide to stockpile in order to hold off on additional purchases until the
next promotion. It may also do considerable damage to the image of quality products or
services, especially where the price-off sticker visually dominates the label.
Even though there are many drawbacks to price reductions, researchers have found that in
spite of the success of the everyday low pricing scheme of Wal-Mart and other retailers, a
high-low pricing scheme works more profitably for most firms. At the same time, however,
they concluded that price is not a defensible point of differentiation for a firm unless it is
The offer of more products for the same price (e.g., two for the price of one) has several
advantages. It forces the customer to buy more than usual for the same price during the sale.
However, it clearly signals what a normal price is and that such a discount is temporary.
Therefore, it has less impact on the image of the product and its established price.
3. Tied Offers:
Two or more kinds of products, often shrink-wrapped together and offered at a lower price
(e.g., a Microsoft Windows 2000 manual that comes with a Rand McNally’s Trip Routing
Software on a CD-ROM and its instruction brochure). This packaging requires retooling of
the assembly process and changes to the production and assembly lines with considerable
reductions in productivity. In addition, larger or different shelf space may be required at the
retail store. It could be a dangerous promotional campaign if cooperation was not assured in
Coupons are often used when the aim is to extend the penetration or trial of the product to
new customers. These are most effectively delivered door-to-door, where they achieve high
redemption rates. Increasingly, coupons are also delivered via freestanding inserts, which are
books full of coupons. Coupons can also be incorporated in press advertisements, which are
Depending on the generosity of the offer, the coupon is supposed to tempt consumers away
from the brands they use to try a new one. This can be a very effective type of promotion if
coupon redemption levels are high enough and may be more cost effective than sampling.
The use of traditional coupons, along with other forms of sales promotion, has not been
without controversy. Procter & Gamble, probably the most successful package goods
marketer with a wide array of sales promotions in the United States, came to realize how
difficult the company had made it for consumers over the years to make a purchase decision.
In 1996, the company began standardizing product formulas, eliminating marginal brands,
cutting product lines, and reducing complex deals and coupons. Gone are 27 types of
promotions, including such outlandish tactics as goldfish giveaways to buyers of Spic & Span
(unfortunately, many froze to death during midwinter shipping). Although it is not possible to
attribute the results solely to reduced use of coupons, the company has increased its business
by a third. P&G executives attribute it to the power of simplicity. Obviously, the reduced use
Coupons can also meet with cultural resistance. When ACNielsen tried to introduce money-
off coupons in Chile, the firm ran into trouble with the nation’s supermarket union, which
notified its members that it opposed the project and recommended that coupons not be
accepted. The main complaint was that an intermediary such as Nielsen would unnecessarily
raise costs and thus the prices charged to consumers. Also, some critics felt that coupons
would limit individual negotiations, because Chileans often bargain for their purchases.
However, emerging forms of coupons permit more precise targeting and therefore result in
less waste. Advanced Promotions Technologies, for example, has developed a unit with a
small colour touch screen and a printer that sits on the check-writing stand in supermarkets.
The customer can watch the screen to see coupons that are applicable to the purchases made
Other technology prints out coupons at the checkout counter that either highlight
complementary products that the customer has not bought or products competitive with ones
that have been purchased. Similarly, consumers can sign up on various Internet-based coupon
offering Web sites by providing their residential and other personal information so that the
Web-based companies can show on the screen various coupons on goods and services that
A study by NPD Online Research shows that 46 percent of Internet users who have
expensive and more efficient and is therefore likely to be used more. It can be problematic,
A cash refund (from the retailer or by mail), usually on the basis of a coupon that is part of
the packaging, is another way of offering a controlled price reduction. However, the
redemption procedures may be complex and unwelcome to the trade, because proper
monitoring is required to ensure that cash refunds are issued only for sales that have actually
been made.
Unless there is a matching of inventory held, products sold, and refunds issued, manufactur-
ers may expose themselves to the possibility of retailers claiming cash refund reimbursements
without having sold the merchandise. Cash refunds can also be expensive. Sometimes the
This method may be used to extend buying patterns and build customer loyalty. Such offers
are often part of the product label and require some effort to use. For example, the label may
have to be soaked off the bottle, or the packaging may have to be preserved. Sometimes, the
hassle of such requirements can result in customer dissatisfaction rather than promotion.
7. Loss Leader Pricing:
A product may actually be priced below cost in order to attract customers into a store, in the
hope that they will buy other products or services that are profitable.
8. Cheap Credit:
If credit is offered, lower-priced or even free credit may be used instead of a simple price
reduction. This may be cheaper to the vendor who has access to lower-cost credit, although
the cost of bad debts must also be covered. Such offers are often seen in the furniture
business (e.g., 90 days same as cash; pay nothing until January 2001), where financing rates
Low-cost credit and delayed invoicing can also be used as important tools to get retailers to
carry a new product. By offering payment terms of 120 days, for example, many Japanese
manufacturers and wholesalers achieve high acceptance levels from their retailers, who can
keep the funds for some time after the sale and earn interest. Low-cost credit may also
Other Forms:
Other forms of promotion offer added value but are not directly price related.
1. Contests:
In this case the purchaser receives the right to one or more entries in a competition. Because
the size of the top prize reportedly determines the interest of the customer, a large prize can
be a very attention-getting form of promotion. Contests can be easy and cheap to mount and
have a guaranteed fixed maximum cost. They can also be used as incentives for retailers for
the sales force in the form of bonuses or prizes, such as participation in special top-
2. Free Gifts:
Such offers can be designed to lure customers and channel members from the competition or
to build loyalty. Banks, for example, offer home equity loans without charging financing
points or advertise that they will pay for any legal expenses of the closing costs. Customers
are thus encouraged to change banks. The use of frequent flyer miles by airlines is an
Here customers are encouraged to fly regularly on a specific airline in order to receive, after a
number of flights, a free ticket. On the Internet, there is now a ubiquitous virtual gift. For
example, Internet Perks’ Incentive Ware is an Internet promotional piece that companies can
use to keep their names in front of customers while giving them free desktop applications.
As the use of sales forces declines, the Internet becomes a valuable tool with which to reach
customers. Incentive Ware consists of applications for the desktop called droplets that can be
sent as virtual gifts attached to e-mail, downloaded free from a Web site, or put on disks to be
handed out at trade shows and sales calls. Incentive- Ware is meant to replace promotional
gifts, such as hats, coffee mugs, and T-shirts bearing the corporate logo that companies
frequently use.
3. Self-Supporting Offers:
In this case, the offer is not free, which is why it is also called a premium offer. The
impression is usually given that the supplier is subsidizing the offer so, that the customer will
obtain a good deal on the item. In practice, the intention is usually to cover the cost with the
amount paid by the customer, in effect offering the customer only the benefit of the supplier’s
buying power. Marlboro sweatshirts is one example. Such offers can be difficult to admin-
In this case a number of brands, typically from one supplier, share a single promotion in order
to maximize impact for given costs. This technique can be used to recruit new users to these
brands. For example, Taco Bell promotes Six Flags amusement parks with a “Buy One Get
One Free” discount ticket. Taco Bell has booths and restaurants at Six Flags parks to boost its
sales as well.
Trade promotion can also take the form of special guarantees or services, either to consumers
or to channel members. For example, in order to increase sales for online retailers, much
emphasis has been placed on network and referral programs. Consumers can also be offered a
30-day trial period. Frequently such promotions are used for magazine subscriptions,
allowing customers to cancel the subscription after trying out one or more issues.
However, similar guarantees are emerging in many other sectors, where customers can return
merchandise liberally. The same tool is also applied to channel members, where
manufacturers may desire that retailers stock up in expectation of large demand. Liberal
return privileges facilitate such over ordering. Offering special services, such as restocking
enticements.
WOM
Word-of-mouth marketing (WOM marketing) is when a consumer's interest in a company's
product or service is reflected in their daily dialogues. Essentially, is it is free advertising
triggered by customer experiences—and usually, something that goes beyond what they
expected. Word-of-mouth marketing can be encouraged through different publicity activities
set up by companies, or by having opportunities to encourage consumer-to-consumer and
consumer-to-marketer communications. Also referred to as "WOMM" or "word-of-mouth
advertising," WOM marketing includes buzz, viral, blog, emotional, and social media
marketing.
The encouragement on the part of a company may take one of several forms. The best way is
to give them a reason to talk, such as exceeding expectations or providing insider skills or
information about a product. Other strategies include offering consumers new ways to share
information about a company's products and services, and engaging and interacting with the
consumer, such as through exemplary customer service. This is especially valuable with
social media-based customer service, which provides for seamless sharing and promotion.
Consumers are more emotionally bonded to a company when they feel they are listened to by
the company. That is why many companies will have sales representatives discuss their
products and services with consumers personally or through a feedback phone line. This kind
of interaction, as well as promotional events, can stimulate conversations about a company's
product.
The emergence of rural markets as highly untapped potential emphasizes the need to explore
them. Marketers over the past few decades, with innovative approaches, have attempted to
understand and tap rural markets. Some of their efforts paid off and many markets still an
enigma. Rural marketing is an evolving concept, and as a part of any economy, has untapped
and reach, promise a bright future for those intending to go rural. Rural consumers are keen
on branded goods nowadays, so the market size for products and services seems to have
burgeoned.
The rural population has shown a trend of moving to a state of gradual urbanization in terms
of exposure, habits, lifestyles, and lastly, consumption patterns of goods and services. So,
there are dangers on concentrating more on the rural customers. Reducing the product
features in order to lower prices is a dangerous game to play. Rural buyers like to follow the
urban pattern of living. Astonishingly, as per the census report 2003-04, there are total
638365 villages in India in which nearly 70% of total population resides; out of them 35 %
Rural per capita consumption expenditure grew by 11.5 per cent while the urban expenditure
grew by 9.6 per cent. There is a tremendous potential for consumer durables like two-
wheelers, small cars, television sets, refrigerators, air-conditioners and household appliances
in rural India.
BOP
The balance of payments (BOP) is a statement of all transactions made between entities
in one country and the rest of the world over a defined period of time, such as a quarter or a
year.
The balance of payments include both the current account and capital account.
The current account includes a nation's net trade in goods and services, its net
earnings on cross-border investments, and its net transfer payments.
The capital account consists of a nation's transactions in financial instruments and
central bank reserves.
The sum of all transactions recorded in the balance of payments should be zero;
however, exchange rate fluctuations and differences in accounting practices may
hinder this in practice.
Understanding the Balance of Payments (BOP)
The balance of payments (BOP), also known as balance of international payments,
summarizes all transactions that a country's individuals, companies, and government bodies
complete with individuals, companies, and government bodies outside the country. These
transactions consist of imports and exports of goods, services, and capital, as well as transfer
payments, such as foreign aid and remittances.
relationship Marketing
Relationship marketing is important for its ability to stay in close contact with customers. By
understanding how customers use a brand’s products and services and observing additional
unmet needs, brands can create new features and offerings to meet those needs, further
strengthening the relationship.
Digital marketing
Digital marketing, also called online marketing, is the promotion of brands to connect with
potential customers using the internet and other forms of digital communication. This
includes not only email, social media, and web-based advertising, but also text and
multimedia messages as a marketing channel.
Inbound marketing is a holistic concept. It considers the goal first, then looks at the available
tools to determine which will effectively reach target customers, and then at which stage of
the sales funnel that should happen.
The most important thing to remember about digital marketing and inbound marketing is that
as a marketing professional, you don’t have to choose between the 2. In fact, they work best
together. Inbound marketing provides structure and purpose for effective digital marketing to
digital marketing efforts, making sure that each digital marketing channel works toward a
goal.
B2B clients tend to have longer decision-making processes, and thus longer sales
funnels. Relationship-building strategies work better for these clients, whereas B2C
customers tend to respond better to short-term offers and messages.
B2B transactions are usually based on logic and evidence, which is what skilled B2B
digital marketers present. B2C content is more likely to be emotionally-based,
focusing on making the customer feel good about a purchase.
B2B decisions tend to need more than 1 person's input. The marketing materials that
best drive these decisions tend to be shareable and downloadable. B2C customers, on
the other hand, favor one-on-one connections with a brand.
Of course, there are exceptions to every rule. A B2C company with a high-ticket product,
such as a car or computer, might offer more informative and serious content. Your strategy
always needs to be geared toward your own customer base, whether you're B2B or B2C.
Social marketing
Social marketing is marketing designed to create social change, not to directly benefit a
brand. Using traditional marketing techniques, it raises awareness of a given problem or
cause, and aims to convince an audience to change their behaviors.
So, instead of selling a product, social marketing “sells” a behavior or lifestyle that benefits
society, in order to create the desired change. This benefit to the public good is always the
primary focus. And instead of showing how a product is better than competing products,
social marketing “competes” against undesirable thoughts, behaviors, or actions.
Social marketing is commonly used for causes like:
Health and safety, including:
Anti-smoking
Anti-drug
Promoting exercise and healthy eating
Safe driving
Railroad station safety
Environmental causes, including:
Anti-deforestation
Anti-littering
Endangered species awareness
Social activism, including:
Illuminating struggles that people of color, people with disabilities, etc. face, then
inspiring people to fight against mechanisms that create inequality
Anti-bullying
Fighting gender stereotypes
Who initiates these social marketing campaigns? Nonprofit organizations and charities run
the majority of social marketing campaigns. Government organizations, highway safety
coalitions, and emergency services (police, fire, ambulance) run them as well. But social
marketing is not out of the question if you’re a commercial business. Commercial brands will
sometimes run social marketing campaigns for causes they are passionate about.
Businesses can use sustainable marketing for a specific product, time-sensitive cause, or even
as their businesses’ USP. LEGO is one company that has nailed sustainable marketing.
Dedicating a section of their site to its sustainability programs, it is a brand that has a clearly-
defined goal for its environmental efforts written in its tone of voice:
"Our mission is to make all LEGO® bricks sustainably by 2030. Why? Because being
sustainable is good for the planet! We want to make bricks out of things that we can grow
again or are recycled. This is not easy as we want sustainable LEGO bricks to have the same
high quality that you are used to, but what we know is this: big ideas may start small, but they
will help us build a greener planet one brick at a time."
Generations of customers are still familiar with LEGO, as parents who grew up with the toy
sets pass them down to their children and grandchildren. This means LEGO has the potential
to ingrain a positive message about the importance of sustainability to a wide group of people
around the world.
This guide will take you through how a marketing plan provides focus, defines the
approaches to grow your market share, expand products or move into new markets and
ensures you are on track.
There are many examples of companies promoting programs, objectives, strategies, plans,
and all manner of terminology about how they are becoming more sustainable. However, as
we’ve seen when brands engage with Pride marketing, it isn’t as simple as hitching your
products to a topical issue and then operating business as usual. You need to consider the
context of the issue you are tapping into, how and why your brand fits as a solution in the
mind of the customer, and (like all good plans) having defined goals so your progress can be
measured and celebrated.
Social and environmental issues are extremely large and need to be tackled on a larger time
frame than seasonal promotions. The public knows that sudden change is almost impossible,
so you need an objective that targets high-scale change over a large timeframe. Take the
LEGO example mentioned earlier, its mission is to have production of its LEGO bricks be
sustainable by 2030. This was announced at the end of 2018, meaning this is a 12-year plan.
Does your company have the means to consistently maintain a sustainability program? When
brands change their packaging to something 100% recyclable, they’re often taking a hit in
production costs in the hopes that a sustainable message will raise sales and brand awareness.
You may need to take a short-term loss to fully adopt your new practices and build towards
long-term gain.
Global marketing
Globalisation means integrating the economy of a country with the Global/World Economy.
It means our economy is open to foreign direct investment by providing facilities to foreign
companies to invest in different fields of Indian industry/commerce. MNCs have freedom to
import foreign capital.
Indian companies can enter into foreign collaborations in India and set up joint ventures
abroad. Import duties are considerably reduced. MNCs can enter a number of crucial sectors.
Imports are liberalised considerably. New Economic Policy since July 1991 has introduced
Globalisation in India.
According to Warren J Keegan, “Globalisation is the process of focusing the resources i.e.
people, money and physical assets and objectives of an organization on global market
opportunities and threats”
As per Prof M.V. Kulkarni “Global marketing involves identifying needs, wants and demand
of global customers and making the products/services available to them either through own
manufacturing or outsourcing and distributing the product/service at the places convenient for
consuming.”
Global Marketing is the process of conceptualizing and then conveying a final product or
service worldwide with the hopes of reaching the international marketing community. Proper
global marketing has the ability to catapult a company to the next level, if they do it correctly.
Different strategies are implemented based on the region the company is marketing to. Global
marketing is especially important to companies that provide products or services that have a
universal demand such as automobiles and food.
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