Pricing mix in marketing

Pricing Mix in Marketing
P R E P A R E D B Y
J I T E N D R A P A T E L
A S S I S T A N T P R O F E S S O R
P R E S T I G E I N S T I T U T E O F
M A N A G E ME N T A N D
R E S E A R C H , I N D O R E

Module
 1. Pricing Concepts
 2. Pricing Definition
 3. Role of Pricing Mix
 4. Pricing Objectives
 5. Pricing Methods
 6. Importance of Pricing in Marketing
 7. Factors Influencing/Affecting Pricing Decisions
 7.1 Internal Factors
 7.2 External Factors
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Jitendra Patel, Assistant Professor, PIMR, Indore

Pricing
 Price is all around us.
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Pricing Concept
 Price is the value that customers give up or exchange to
obtain a desired product.
 Price is the only element of the marketing-mix that
directly affect the income of the organization.
 Companies with a higher volume of sales and lower profit
margin, a small mistake in pricing-decision may affect
it’s whole existence.
 For similar or modified product categories, it is possible
to look at competitor’s price and market situations before
making any decision.
 Price is equivalent to the total product offering (brand
name, a packaging, product benefits, after sales services,
delivery, credit , etc.).
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Pricing
 You pay rent for your apartment, tuition for your
education, and a fee to your dentist or physician.
 The airline, railways, taxi and bus companies charge
you a fare; the local utilities call their price a rate;
and the local bank charges you interest for the
money you borrow.
 The guest lecturer is paid an honorarium
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Pricing
 Method adopted by a firm to set its selling price.
 It usually depends on the firm's average costs, and
on the customer's perceived value of the product in
comparison to his or her perceived value of
the competing products.
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Price brings in the revenues
 This is the only element in the marketing mix that
brings in the revenues. All the rest are costs
 Price communicates the value positioning of the
product.
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Pricing
A firm must set a price for the first time when
 It develops a new product
 It introduces its regular product into a new
distribution channel or geographical area
 It enters bids on new contract work ( as in Industrial
Sale )
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Pricing
 A company must set its price in relation to the value
delivered and perceived by the customer
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Pricing
Higher
price
Lower
perceived
value
Company
misses
potential
profits
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Pricing
Lower
price
Lower
perceived
value
Company
fails to
harvest
potential
profits
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Price = Cost + Profit
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Pricing Definition
• According to W.J. Stanton:
“Price is the amount of money which is needed to
acquire a product.”
• Economists defines price as: “ The exchange value of a product or
services always expressed in money.”
• According to Manufacturer or Producer: “Price represents
quantity of money (or goods or services in a barter trade) received by the
firm or seller.”
• And, According to a Consumer: “Price is an agreement between
seller & buyer concerning what each as to receive.”
Therefore, conceptually, it is:
Price = Quantity of money received by the seller
Quantity of goods & services received by the buyer.
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Role of Price-Mix
• Price plays an important role in the marketing of a product. After developing
a product, the next step of the company is fixing the price of the product so as
to market the product effectively to earn profits.
• The basis of competition in the market for a product is mostly its price. At the
same time price affects the total sales, total revenue and the total profit of the
organization.
• Price represents the value of the market offering to the buyers.
• Price can affect the demand of the product. Also price indicate the quality of
the product.
• A buyer's decision is largely influenced the price of the product. A company
can increase and reduce the demand of a product through pricing. Pricing can
also regulate the competition in the market.
• As an instrument, it is a big gun and it should be triggered
exclusively by those who are familiar with its possibilities and the
dangers involved.
• It is so because; the damage done by improper pricing may
completely sap the effectiveness of the well-conceived marketing
programme. It may defame even a good product and fame well a
bad product too.
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Pricing policy (Factors )
 Selecting the pricing objective
 Determining demand
 Estimating costs
 Analyzing competitors – costs, prices, offers
 Selecting a pricing method
 Selecting the final price
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The pricing objective
The company first decides where it wants to position
its market offering. The objective could be :-
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PRICING OBJECTIVES
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Profits-related Objectives
Profit has remained a dominant objective of business activities.
i. Target Return on Investment/Target Result:-Most
companies want to earn reasonable rate of return on investment.
Target return may be: (1) fixed percentage of sales, (2) return on
investment, or (3) a fixed rupee amount.
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 rupees. It must set price of product in a way that it can earn 60
lakh rupees.
ii. Maximization of Profit:- This objective is aimed at making as
much money as possible. Company tries to set its price in a way that
more current profits can be earned. However, company cannot set its
price beyond the limit. But, it concentrates on maximum profits.
PRICING OBJECTIVES
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Sales-related Objectives
The main sales-related objectives of pricing may include.
i. To increase Sales volume/Sales Growth: Company’s objective
is to increase sales volume. It sets its price in such a way that more
and more sales can be achieved. It is assumed that sales growth has
direct positive impact on the profits. So, pricing decisions are taken
in way that sales volume can be raised. Setting price, altering in
price, and modifying pricing policies are targeted to improve sales.
ii. Increase in Market Share: Sometimes, price 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;
pricing is aimed at improving market share.
10/13/201919Jitendra Patel, Assistant Professor, PIMR, Indore

Status-Quo related Objectives
It seeks to avoid unfavorable govt. actions, minimize effects of
competitor actions, maintain good channel relations and stabilize
prices.
i. Stability in Price:- Price stabilization is attained by fixing
prices in such a manner that the prices are not allowed to rise
beyond a point, while during a business prices are not allowed to
fall below a particular level. This objective is usually suitable for
public sector companies in order to provide stability to economy.
ii. To meet/prevent Competition:- For a marketing company
which is a price leader, the objective to prevent competition is
relevant when it desires to initiate price changes in such a way so as
to discourage competitors from entering into the industry.
iii. Survival and Growth:- Finally, pricing is aimed at survival
and growth of company’s business activities and operations. It is a
fundamental pricing objective. Pricing policies are set in a way
that company’s existence is not threatened.

The pricing Methods
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Cost based pricing
 Selling price = Total cost of product + profit margin
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Value Based Pricing
Value-based pricing (VBP) is about setting a price to capture the value
that a potential customer receives. Here are the steps:
1. Identify your customer’s second best option. If your customer
won’t buy your product or service, then what would he or she
choose?
2. Determine the price of the second best option.
3. List all of the ways that your offering is better than the second
best option. Estimate how much you think these differences are
worth to your customers?
4. List all of the ways that the second best offering is better than
yours. Be very honest here. How much do you think these are
worth to your customers?
5. To calculate the best price — take the price of the second best
option (step 2 above) plus the value of your advantages (step 3)
minus the value of the second best option’s advantages (step 4).
6. Price = step 2 + step 3 – step 4
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Pricing Strategies
 Premium Pricing – Used when a product is
considered unique and where a substantial
competitive advantage exists. Premium pricing is
associated with luxury brands like Louis Vuitton,
Jaguar, and Rolex
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Pricing Strategies
 Price Skimming – In this instance, a high price is
set because you have a substantial competitive
advantage, but know that the advantage is not
sustainable. The high price tends to attract new
competitors into the market, and the price inevitably
falls due to increased supply.
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Pricing Strategies
 Penetration Pricing — Charged for products and
services is set artificially low in order to gain market
share. Once this is achieved, the price is increased.
This approach was used by France Telecom and Sky
TV
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Pricing Strategies
 Economy Pricing — This is a no-frills low price.
The cost of marketing and manufacture are kept at a
minimum. Supermarkets often have economy brands
for soups, biscuits, etc
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Pricing Methods/Techniques
1. MARK-UP PRICING.
2. TARGET-RETURN
PRICING.
3. PERCEIVEED-VALUE
PRICING.
4. VALUE PRICING.
5. GOING-RATE PRICING.
6. SEALED-BID AUCTION
PRICING.
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1). MARK-UP PRICING:-
 It involves adding a standard markup (profit) to the cost of the product.
 This method is generally used on seasonal items, slower moving items,
items with high storage.
Ex. :- Prescription Drugs.
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2). TARGET-RETURN PRICING:- (Basis Return On Investment). ,
(Profit- On Overall ROI).
Ex.:- Restaurant or Services.
 In this method, the firm determines the price that would yield its
target rate of return on investment .
 Target Return Price : Suppose the toaster manufacturer has invested
Rs. 1 million in the business & wants to set a price to earn a 20% ROI
; Expected Unit Sales = 50,000 : specifically Rs. 2,00,000. The Target
Return Price is :
Target Return Price = Unit Cost(p.u.)+ Desired Return*Invested Capital
Unit Sales.
= Rs.16 + 0.20 * Rs. 1,000,000 = Rs. 20 .
50,000 .
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3). PERCEIVED VALUE PRICING :-
Ex. :- Perfumes , Nike’s
T-shirts.
 In this method , price of the product is set on the basis
of buyer’s perception of value rather than on the
seller’s cost .
 Perceived value is made of several elements such as ;
image of the product, quality , firm’s reputation , trust
worthiness , etc.

4). VALUE – PRICING :- (More benefits at less
cost).
In this method, the company win loyal customers
by offering them high quality products at fair price.
Ex. :- In India ; Big Bazaar, Bata, Peter
England fall in this category.
Every Day Low Pricing (EDLP) : The seller
charges constant low price with little or no
promotions and discounts.
High Low Pricing : The seller charges price on
everyday basis but runs frequent promotions in
which prices are temporarily lowered below EDLP
Level.

5). GOING – RATE PRICING :-
The firm sets the price of the product on the basis of
competitor’s price.
The firm might charge the same, more or less than the
competitors.
Ex. :- In oligopolistic industries that sell a
commodity such as: steel, paper or fertilizer , all firms
normally charge the same price .
6). SEALED-BID AUCTION PRICING :-
This method is used when firm bid for a jobs .
The firm quotes the price based on the estimation of the
competitor’s quote for price .
Ex. :- Auction for the tenders for the
contracts like: road constructions or auction for taking the
building contracts , etc.

Importance of Pricing in Marketing
 Price is the Pivot of an Economy.
In the economic system, price is the mechanism for allocating resources and
reflecting the degrees of both risk and competition. In an economy particularly free
market economy and to a less extent in controlled economy, the resources can be
allocated and reallocated by the process of price reduction and price increase. Price
policy is a weapon to realize the goals of planned economy where resources can be
allocated as per planned priorities.
 Price regulates demand
 The power of price to produce results in the market place is not equalled by any
other component in the product-mix. Marketing manager can regulate the product
demand through this powerful instrument. Price increases or decreases the demand
for the products. To increase the demand, reduce the price and increase the price to
reduce the demand. Price has a special role to play in developing countries where
the marginal value of money is high than those of advanced nations. De-marketing
strategy can be easily implemented to meet the rising demand for goods and
services.
 Price is competitive weapon
Price as a competitive weapon is of paramount importance. Any company whether
it is selling high or medium or low priced merchandise will have to decide as to
whether its prices will be above or equal to or below its competitors. This is a basic
policy issue that affects the entire marketing planning process. Secondly, price does
not stand alone as a device for achieving a competitive advantage.
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Importance of Pricing in Marketing
 Price is the determinant of profitability
Price of a product or products determines the
profitability of a firm, in the final analysis by influencing
the sales revenue. In the firm, price is the basis for
generating profits. Price reflects corporate objectives and
policies and it is an important ingredient of marketing
mix. Price is often used to off-set the weaknesses in other
elements of the marketing-mix.
 Price is a decision input
In the areas of marketing management, countless and
crucial decisions are to be made. Comparatively
marketing decisions are more crucial because, they have
bearing on the other branches of business and more
difficult as the decision-maker is to shoot the flying game
in the changing marketing environment.
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Importance of Pricing
 Pricing has a direct impact on a company's
revenue, and thus profit, setting the right price
is essential to a company's success.
FROM THE
ECONOMIC
POINT OF
VIEW
FROM THE
ORGANIZATI
ON POINT OF
VIEW
FROM THE
CUSTOMER
POINT OF
VIEW
FROM THE
SOCIAL POINT
OF VIEW
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(A). From The Economic Point Of View :
It is very important as it influences wages, rent, interest and
profits.
It also functions as a regulatory factor as it allocates scarce
resources.
It will move forward or backward with changing supply & demand
conditions.
(B). From The Customer Point Of View :
Price Affects Perception of Quality:- For those products whose
quality cannot be judged by physical inspection, consumers tend to
related quality with the price being asked.
For Ex.:- If a saree is being sold for Rs.1200 its quality will
be thought to be superior to one being sold for Rs.800 .
a

(C). From The Organization Point Of View :
 Price affects Profits:- Price has direct bearing on profit.
&
 Price affects Demand:- There is normally inverse relationship
between demand & price . If price goes up , demand falls and vice-
versa.
 Price affects Company’s Competitive Position & Market
Share:- Many firms go for a non-price competition based on quality
& feature of the product. Some producers on the other hand, try to
increase their sales & market share by under pricing their
competitors.
(D). From The Social Point Of View :
 Value Like in Price Level brings Social Disapproval:- If prices
of consumption goods rise very high the common man can’t afford to
buy them. In such a situation consumer resistance movements would
gain momentum & even govt. intervention can be sought to rectify
matters.
Profit = Revenue -
Cost
Revenue = Price *
Quantity Sold

Factors Influencing/Affecting Pricing
Decisions
INTERNAL
FACTORS
1) Cost .
2) The
Predetermined
Objectives .
3) Image Of The
Firm .
4) Product Life
Cycle .
5) Credit Period
Offered .
6) Promotional
Activity .
EXTERNAL FACTORS
1) Competition .
2) Consumers .
3) Government
Control .
4) Economic
Conditions .
5) Channel
Intermediaries .
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Internal Factors
1. Cost :- While fixing the prices of a product, the firm should consider
the cost involved in producing the product. This cost includes both the
variable and fixed costs. Thus, while fixing the prices, the firm must be
able to recover both the variable and fixed costs.
2. The predetermined objectives:- While fixing the prices of the
product, the marketer should consider the objectives of the firm. For
instance, if the objective of a firm is to increase return on investment,
then it may charge a higher price, and if the objective is to capture a
large market share, then it may charge a lower price.
3. Image of the firm:- The price of the product may also be
determined on the basis of the image of the firm in the market. For
instance, HUL and Procter & Gamble can demand a higher price for
their brands, as they enjoy goodwill in the market.
Factors Influencing/Affecting Pricing
Decisions
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4. Product life cycle:- The stage at which the product is in
its product life cycle also affects its price. For instance,
during the introductory stage the firm may charge lower
price to attract the customers, and during the growth stage,
a firm may increase the price.
5. Credit period offered:- The pricing of the product is
also affected by the credit period offered by the company.
Longer the credit period, higher may be the price, and
shorter the credit period, lower may be the price of the
product.
6. Promotional activity:- The promotional activity
undertaken by the firm also determines the price. If the firm
incurs heavy advertising and sales promotion costs, then the
pricing of the product shall be kept high in order to recover
the cost. 10/13/201942Jitendra Patel, Assistant Professor, PIMR, Indore

B. External Factors:
1. Competition:- While fixing the price of the product, the firm needs
to study the degree of competition in the market. If there is high
competition, the prices may be kept low to effectively face the
competition, and if competition is low, the prices may be kept high.
2. Consumers:- The marketer should consider various consumer
factors while fixing the prices. The consumer factors that must be
considered includes the price sensitivity of the buyer, purchasing power,
and so on.
3. Government control:- Government rules and regulation must be
considered while fixing the prices. In certain products, government may
announce administered prices, and therefore the marketer has to
consider such regulation while fixing the prices.

Factor Influencing Pricing
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Internal Factor
 1. Organizational factors:
 Organizational factors refer to the internal arrangement
or mechanism for decision making and its
implementation. These arrangements differ widely from
concern to concern at the different times in an
organization.
 2. Marketing mix:
 Though price is an important component of marketing
mix, other components cannot be niggard. Any shift or
change in any one of the elements has an immediate
effect on the other three elements. Therefore, pricing
decisions must be seen not in isolation but as a part of
total marketing strategy and should avoid conflict with
other elements namely, product, promotion and place.
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Internal Factor
 3. Product differentiation:
 The technique of product differentiation gives much lee-way
to the firm in setting prices for the products if done better
than the competitors. Product differentiation is the ability of a
manufacturer to make his product distinctive from others in
the market. This differentiation is relevant to consumer and
may be real or imaginary but is meaningful.
 4. Product Costs:
 It is but natural that most of us think that price of a product or
a service is determined by costs solely. That is, price is cost
plus plan. Costs have relevance if market demand and
competition are taken into account. That is, production costs
merely determine the business existence and it is the demand
and the competition that determine the price. Precisely, it is
the market that sets the price and not product costs. There is
nothing wrong if it is said that it is price that determines the
costs.
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Internal Factor
 5. Product life-cycle:
 The pricing policy followed is to be commensurate with the age of
the product. That is, in what stage of the life- cycle the product is,
that is going to decide the pricing policy to be followed. In the
product introduction stage, the policy followed is .one of market
penetration. That is, the prices are to be the lowest possible. This
builds goodwill. In the growth stage, prices can be raised to the
extent tolerated by the consumers. In the third stage the stage of
product maturity prices can be raised by following the policy of
market skimming. However, it should be done with utmost care as
competitors are in action. In the decline stage, the prices are to be
reduced to maintain the demand. Thus, it is the stage of the product
life-cycle in which the product is treading through that determines
the exact nature of price policy in a given concern.
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 6. Pricing objectives:
 A price policy is the means to achieve the price goals so set. Therefore, the
nature of pricing policy is dictated by the objective or set of objectives to be
attained as set by the top management authorities. It is these pricing
objectives that provide the focus for framing policies and strategies.
Though a firm has a basic pricing objective or set of objectives for its
product lines, each product is likely to have a specific pricing objective.
Therefore, a firm is expected to define its price goals in clear-cut terms so
that they are accepted and acted upon.
 7. Functional position:
 Functional position of the manufacturer, wholesaler and retailer has its
own impact on firm’s pricing policy. If the firm has a longer channel of
distribution, the product price for the consumer is bound to be higher than
in case of a smaller channel. From this, one should not jump to the
conclusion that such a channel should be kept quite limited to reduce the
costs so that the consumers get the products at minimum price.
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External Factor
 (1) Demand
 (2) Competition
 (3) Economic conditions
 (4) Governmental regulations
 (5) Ethical considerations
 (6) Suppliers and buyer behaviour.
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External Factor
 1. Product demand:
 Demand is the single most imported factor having tremendous
impact on price, pricing policy and strategy followed by the firm. It
is the nature and the magnitude of the demand that are more
relevant to product pricing. The demand may be elastic or inelastic
or perfectly elastic or perfectly inelastic. The pricing decision will
vary depending on the exact nature and the extent of elasticity.
 Like
 A perfect elastic condition brings about more than proportionate
increase in demand with a slight fall in the market price. Thus, 5 per
cent fall in price brings about say 30 per cent increase in demand.
 In case of elastic demand normally called as unit elasticity a 10 per
cent fall in price would bring 10 per cent rise in demand.
 In case the situation is that of perfect inelasticity, even the
substantial fall in price would not pull up the demand. Say, 25 per
cent fall in price brings 1 per cent rise in demand. In case of
inelasticity, the severity is reduced.
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External Factors
 2. Competition:
 Knowing one’s competitors is critical to successful
marketing planning. The firm should constantly compare
its products, prices, channels and promotion with those
of competitors.
 The company is supposed to know as to who are its
competitors?
 What are their objectives?
 What are their strategies?
 What are their strengths and weaknesses?
 And what are their reaction patterns?
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External Factor
 4. The buyer behaviour:
 Buyers, here, we mean both business buyers and final users. The
composition of these buyers and their behaviour has definite impact on the
pricing decisions of the firm. Generally, if the buyers are more in number
and smaller in strength, lesser will be the impact on the company pricing as
they are too small to influence unless they are well organized. On the other
hand, a few buyers but large users have profound influence on the pricing
decisions.
 Again, the pricing policy to be followed would be different in case of
industrial users and the final users. The firm cannot have the same or
identical price policy for both the classes of consumers.
 The study of buyer behaviour both individual and organisational is also of
much relevance that provides focus for the price fixation as it highlights the
buyer reactions.
 In short, the decision-makers are to be aware of both controllable and
uncontrollable factors that have far reaching impact on the price decisions
of the firm. It is worth pondering here that pricing is but one component of
marketing strategy and to attain the best results, all the components are to
be carefully coordinated in the process of formulation and implementation
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External Factors
 3. Economic conditions:
 The economic conditions prevailing in the country or a region
are having decisive impact on firm’s pricing policy. If the
economic climate is good, and invigorating, generally the
demand for and sales of a product or products increases. A
period of prosperity and happiness brings monetary
satisfaction to the people.
 However, boom period encourages competitors to enter the
line to take advantage of profit margin. This leads to keen
competition. Generally, the established competitors are
having greater flexibility as they chewed the prosperity.
 However, when high inflationary trends prevail, there will be
repositioning with further hike in prices. However, this boom
period is not bestowed permanently. Any hike in these will
shoot up the cost of manufacturers.
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4. Economic conditions:- The marketer may also have to
consider the economic condition prevailing in the market while
fixing the prices. At the time of recession, the consumer may
have less money to spend, so the marketer may reduce the
prices in order to influence the buying decision of the
consumers.
5. Channel intermediaries:- The marketer must consider a
number of channel intermediaries and their expectations. The
longer the chain of intermediaries, the higher would be the
prices of the goods.

References
1. Aakar, D. A. (2012), “Strategic Market
Management” 9th Edition, New Delhi, India, Wiley
India.
2. D. Chandra Bose (2010.) “Modern Marketing
Principles and Practices” PHI Learning, 1st Edition.
3. O. C. Ferrell and Michael Hartline (2012 ).
“Marketing Strategy, Text and Cases” , South
Western Cengage Learning, sixth edition.
4. Philip Kotler, Kelvin Lane, Keller, Abraham Koshi,
Mitihlesh Jha.(2011), Principles of Marketing
Management, South Asian Perspective, Pearson
Education, 14th Edition.
5. S. M. Jha. (2011), “Services Marketing”, Himalaya
Publishing House, 7th Edition, New Delhi.
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Pricing mix in marketing

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