Meaning

Price is the value that is put to a product or service 

Pricing is a process of fixing the value that a manufacturer will receive in the exchange of services and goods. 

Pricing method is exercised to adjust the cost of the producer’s offerings suitable to both the manufacturer and the customer.

The pricing depends on the company’s average prices, and the buyer’s perceived value of an item, as compared to the perceived value of competitors product.

Factors Affecting Price Determination

1. Pricing Objectives

The objective of a firm is an essential factor that plays a major role in deciding the price of a good or service. Usually, the basic objective of an organisation is profit maximisation. Besides this, other pricing objectives of an organisation are as follows:

Survival in a Competitive Market: For surviving in a competitive market, organisations have to decrease the price of their products or services by offering discounts to the customers. 

Obtaining Market Share Leadership: If an organisation wants to capture a big market share, then it is essential for the firm to keep the price of the products or services low. In this way, more people will be attracted to the product or service. 

Attaining Product Quality Leadership: Sometimes organisations charge high prices for a product or service to cover the cost of product and research and development. 

2. Extent of Competition in the Market

The next factor that an organisation has to keep in mind while determining the price of a product or service is the competition level in the market.

If an organisation does not face any competition in the market, then it is free to fix any price for the product or service, as the company has a monopoly in the market. 

However, if the competition is tough, then the organisation has to fix the price of the product or service after keeping the competitor’s price in mind. 

For example, HUL cannot fix the price of Surf Excel without taking the price of Tide (a P&G product) and other detergents into consideration. 

3. Product Cost

The next important factor to keep in mind while deciding the price of a product or service is the cost of the product or service. 

The price of the product fixed by the organisation must cover the total cost of the product. 

Here, total cost includes fixed cost and variable cost of the product. Fixed Costs are the cost of a product or service, which does not change whether the production level gets low or high. For example, rent of the building, cost of machinery, etc. 

Variable Costs are the cost of a product or service, which changes with the change in production level. For example, labour wages, cost of raw materials, fuel, electricity, power consumption, etc. 

The organisation fixes the price of a product or service after calculating the total cost. 

If there is high competition in the market and the firm has to capture a big share in the market, in this case, it has to fix the price, which can at least cover the variable cost. The fixed cost of the product or service can be ignored for a while.

4. Demand and Utility of a Customer

Another factor to keep in mind while deciding the price of a product or service is its demand. 

When the demand for a product is elastic, it means that there are various substitutes for that product available in the market, and thus the organisation has to bring down the price of the product. 

However, when the demand for a product is inelastic, it means that there are very less substitutes for that product available in the market, and thus the organisation can fix a high price for the product. 

Also, when the demand for a product or service is high, then the organisation can charge a high price from the customers. 

But, when the demand for a product or service is low, then the organisation has to lower its price also. 

Similarly, if a product is offering higher utility to the consumers, then they are willing to pay a high price for the same; hence, it easy to charge a high price for those products. 

However, if a product is offering lower utility to the consumers, then the organisation cannot charge a higher price from them. 

5. Marketing Methods Used

Different organisations use different techniques of methods of marketing to promote their products or services, and these methods affect the pricing decision of the organisation.

If an organisation uses intensive advertising techniques to promote the product or service, then it can charge a higher price from the customers. 

Some of the other marketing techniques affecting the price of a product or service are distribution system, customer support services, type of packaging, etc. 

6. Government and Legal Regulations

The government has every right to control the price of a product or service, which includes products that come in the category of essential commodities, such as Drugs, LPG, food items, etc., to protect the interest of the general public. 

These regulations and government interventions help in keeping a check on the monopolists so that they do not charge an unfairly high price from the customers. 

New Product Pricing Strategies

New product pricing strategies involve determining the initial price at which a new product will be introduced to the market. The pricing strategy chosen can significantly impact the product’s success, market penetration, and profitability. Here are several common pricing strategies for new products:

  1. Skimming Pricing:
  • Skimming pricing involves setting a relatively high initial price for a new product to “skim” maximum revenue from the market before competitors enter. This strategy is often used for innovative or technologically advanced products with unique features or benefits. Over time, the price may be gradually lowered to attract more price-sensitive customers.

2. Penetration Pricing:

  • Penetration pricing involves setting a low initial price for a new product to quickly gain market share and penetrate the market. This strategy aims to attract price-sensitive customers and discourage competitors from entering the market. Once market share is established, the price may be increased gradually to reflect the product’s value or additional features.

3. Premium Pricing:

  • Premium pricing involves setting a high price for a new product to position it as a high-quality or luxury offering. This strategy is often used for products with unique features, superior quality, or exclusive branding. Premium pricing can help create perceptions of value and exclusivity among target customers, leading to higher profit margins.

4. Price Skimming and Penetration Combo:

  • Some companies may employ a combination of skimming and penetration pricing strategies by initially launching a new product at a high price to capture early adopters and then gradually lowering the price to attract a broader customer base. This hybrid approach allows companies to maximize revenue from different customer segments over time.

5. Competitive Pricing:

  • Competitive pricing involves setting prices based on competitors’ pricing strategies and market conditions. This strategy aims to position the product competitively within the market and gain market share while still ensuring profitability. Pricing may be set slightly above, at, or below competitors’ prices depending on factors such as product differentiation, brand strength, and target market preferences.

6. Value-Based Pricing:

  • Value-based pricing involves setting prices based on the perceived value of the product to customers. This strategy considers factors such as the product’s features, benefits, quality, and uniqueness relative to competitors. Value-based pricing aims to capture the value created for customers while still providing a fair return for the company.

7. Bundle Pricing:

  • Bundle pricing involves offering multiple products or services together as a package at a discounted price compared to purchasing each item individually. This strategy can encourage customers to purchase more products and increase overall sales revenue.

8. Promotional Pricing:

  • Promotional pricing involves offering temporary discounts, special offers, or incentives to stimulate demand and encourage trial of a new product. Promotional pricing strategies may include introductory discounts, limited-time offers, buy-one-get-one-free deals, or coupons.

When selecting a pricing strategy for a new product, businesses should consider factors such as the product’s unique features, target market preferences, competitive landscape, production costs, and desired positioning within the market. Additionally, businesses should regularly monitor market conditions, customer feedback, and competitors’ pricing strategies to adjust pricing tactics as needed and optimize long-term profitability.

Product Mix Pricing Strategies

Product mix pricing strategies involve setting prices for a group of products or services offered by a company, considering how they interact with each other within the overall product portfolio. These strategies help businesses maximize revenue, profitability, and market share across their product mix. Here are several common product mix pricing strategies:

  1. Product Line Pricing:
  • Product line pricing involves setting prices for different products within a product line based on their features, quality, and positioning relative to each other. This strategy aims to capture value from different customer segments and encourage upselling or cross-selling. For example, offering basic, standard, and premium versions of a product at different price points.

2. Optional Product Pricing:

  • Optional product pricing involves offering optional features, accessories, or add-ons for a base product at an additional price. This strategy allows customers to customize their purchase according to their preferences and budget, while also increasing the overall revenue generated from each sale.

3. Captive Product Pricing:

  • Captive product pricing involves setting a low price for a core product and a high price for complementary products or consumables required for its use. This strategy encourages customers to purchase the core product by making it more affordable, while generating additional revenue from the sale of complementary products or services.

4. Product Bundle Pricing:

  • Product bundle pricing involves offering multiple products or services together as a package at a discounted price compared to purchasing each item individually. This strategy encourages customers to purchase more items and increase overall sales revenue. Bundles can be based on complementary products, related products, or products with different pricing tiers.

5. Price Lining:

  • Price lining involves offering products within a product line at different price points to appeal to different customer segments or price sensitivities. This strategy simplifies the purchasing decision for customers by presenting a range of options at various price levels, from low-cost to premium offerings.

6. Discount Pricing:

  • Discount pricing involves offering discounts or promotional pricing on certain products or services to stimulate demand, increase sales volume, or clear excess inventory. This strategy may include seasonal discounts, clearance sales, volume discounts, or special promotions.

7. Value-Based Pricing:

  • Value-based pricing involves setting prices based on the perceived value of the product or service to customers. This strategy considers factors such as the benefits, features, quality, and uniqueness of the product relative to competitors. Value-based pricing aims to capture the value created for customers while still providing a fair return for the company.

8. Geographical Pricing:

  • Geographical pricing involves adjusting prices based on geographic location or market conditions. This strategy accounts for factors such as shipping costs, taxes, tariffs, exchange rates, and local market demand. Geographical pricing may involve setting different prices for the same product in different regions or countries.

When implementing product mix pricing strategies, businesses should consider factors such as customer preferences, competitive dynamics, cost structures, and overall strategic objectives. By carefully managing pricing across their product mix, businesses can optimize revenue, profitability, and customer satisfaction while maintaining a competitive edge in the market.

Price Adjustment Strategies

Price adjustment strategies involve changing the prices of products or services in response to various internal and external factors, aiming to maximize revenue, profitability, and market share. These strategies allow businesses to adapt to changing market conditions, customer preferences, and competitive pressures. Here are several common price adjustment strategies:

  1. Discounts and Promotions:
  • Offering discounts or promotional pricing is a common price adjustment strategy to stimulate demand, increase sales volume, and attract customers. Examples include:
    • Temporary price reductions (e.g., sales, clearance discounts).
    • Seasonal promotions (e.g., holiday sales, back-to-school discounts).
    • Buy-one-get-one-free (BOGO) offers or bundled discounts.
    • Coupon codes, vouchers, or loyalty rewards programs.

2. Rebates:

  • Providing rebates involves offering partial refunds to customers who purchase a product within a specified time frame or meet certain conditions. Rebates encourage purchase behavior by reducing the effective price of the product after the rebate is claimed.

3. Price Matching:

  • Price matching allows businesses to match or beat competitors’ prices to retain customers and prevent them from switching to competitors. This strategy helps maintain price competitiveness and build customer loyalty. Some retailers even offer price matching guarantees, promising to refund the price difference if customers find a lower price elsewhere.

4. Dynamic Pricing:

  • Dynamic pricing involves adjusting prices in real-time based on demand, market conditions, and other factors. This strategy allows businesses to optimize pricing for maximum revenue and profit. Examples of dynamic pricing include surge pricing for ride-sharing services during peak hours, yield management pricing for airlines and hotels, and personalized pricing based on customer segmentation and behavior.

5. Geographical Pricing:

  • Geographical pricing involves setting different prices for the same product or service in different geographic regions based on factors such as shipping costs, taxes, tariffs, exchange rates, and local market demand. This strategy helps businesses adapt to regional variations in cost and demand.

6. Price Segmentation:

  • Price segmentation involves offering different prices to different customer segments based on their willingness to pay, purchasing behavior, or other characteristics. This strategy allows businesses to capture additional value from customers willing to pay higher prices while still attracting price-sensitive customers with lower-priced options.

7. Product Bundling and Unbundling:

  • Product bundling involves combining multiple products or services together and offering them as a package at a discounted price compared to purchasing each item individually. This strategy encourages customers to purchase more items and increase overall sales revenue. Conversely, unbundling involves offering products or services separately to allow customers to choose only what they need, potentially maximizing revenue from each sale.

8. Price Changes Based on Market Conditions:

  • Businesses may adjust prices based on changes in market conditions, such as fluctuations in supply and demand, changes in input costs, shifts in competitor pricing, or changes in consumer preferences. By staying responsive to market dynamics, businesses can maintain profitability and competitiveness.

When implementing price adjustment strategies, businesses should carefully consider their objectives, market dynamics, competitive landscape, and customer expectations to ensure that pricing decisions align with overall business goals and deliver value to customers. Regular monitoring and analysis of pricing performance can help businesses optimize their pricing strategies for long-term success.

Check out other notes on marketing:

Unit -1 Introduction To Marketing

Unit-2 Marketing Analysis

Unit-3 Market Segmentation

Unit-4 Products, Services and Brands

Unit -5 Pricing

Unit-6 Distribution Channel and Logistics

Unit-7 Promotion

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