Introduction
Price
of a product is “its” value expressed in terms of money which the consumers are
expected to pay.
Form the seller’s point of view, it is return on the exchange & in economic terms, it is the value of satisfaction.
Form the seller’s point of view, it is return on the exchange & in economic terms, it is the value of satisfaction.
Pricing is
the process of determining what a company will receive in exchange for its
product or service. Pricing
factors are manufacturing cost, market place, competition, market
condition, brand, and quality of product.
Pricing is a
fundamental aspect of financial modeling and is one of the four
Ps of the marketing mix. (The other three
aspects are product, promotion, and place.) Price is the
only revenue generating element amongst the four Ps, the rest being cost
centers. However, the other Ps
of marketing will contribute to decreasing price elasticity and so
enable price increases to drive
greater revenue and profits.
Importance of Price/Pricing
1. Price
is a key factor, which affects a company’s operation.
2. It plays an important role at all levels of activities of a company.
3. It influences the wages to be paid, the rent, interest & profits.
4. It helps in proper allocation of resources by controlling the price, the demand & supply factor may easily be adjusted.
2. It plays an important role at all levels of activities of a company.
3. It influences the wages to be paid, the rent, interest & profits.
4. It helps in proper allocation of resources by controlling the price, the demand & supply factor may easily be adjusted.
Objectives of Pricing
1. To increase the profit: this is
the most common objective. A company may fix the price with the aim of earning
certain percentage of profits
2. Market Share Objective: some
companies fix the price with a view to capture new market or to, increase or
maintain the existing market share. The objective here is to either avoid
competition or to meet it.
3. To Stabilize the Price: This is
usually followed in the oligopoly market by the market leaders. The objective
here is to avoid the price war & fluctuations in price.
4. To Recover Cost: To get back the
cost incurred as early as possible, is another objective of pricing. It is for
this reason that different prices are set for cash & credit sales for the
same product.
5. Penetration Objective: The
objective of penetration pricing is to fix a low-price so as to enter the new
market.
6. To Maintain the Product Image: In
this case, the objective is to fix a higher price to create a perception that
the product is of superior quality. This is called market skimming strategy.
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Factors
Influencing the Price Determination
The
decision to fix the price is influenced by many factors which are controllable
& uncontrollable. They are followings
1. Product
Characteristics.
2. Demand
Characteristics.
3. Manufacturer’s
Objectives.
4. Cost
of the Product.
5. Economic
Condition.
6. Government
Regulation.
1.Product Characteristics:
a. Product
Life Cycle: A product manufacturer charges the price depending upon the
stages of the life cycle of the product.
Eg: If he has introduced a new product, he may charge a lower price & increase it when it enters the growth stage.
Eg: If he has introduced a new product, he may charge a lower price & increase it when it enters the growth stage.
b. Perishability: According
to the general principle, other things being equal, if a product is perishable,
the price will be lower because it has to be sold as early as possible.
c. Product
Substitution: If there is a substitute in the market, then the price will
be either equal to or lower than the price of the substitute, because if the
price is more that the substitute, people may purchase the substitute product
only.
2. Demand Characteristics:
It is one of the most important factors influencing the price. The company must forecast demand for its products & its elasticity before fixing the price. Demand estimation helps a company to prepare sales & the expected price; the consumers are willing to pay. The expected price of the market is the influencing factor here.
According to the general principle, the final price fixed must neither be lower nor higher than the expected price.
It is one of the most important factors influencing the price. The company must forecast demand for its products & its elasticity before fixing the price. Demand estimation helps a company to prepare sales & the expected price; the consumers are willing to pay. The expected price of the market is the influencing factor here.
According to the general principle, the final price fixed must neither be lower nor higher than the expected price.
3. Manufacturer’s Objective:
If the manufacturer wants to increase the market share, he has to fix the competitive price. In other words, he has to offer more discounts etc. On the other hand, if his objective is to increase profits, he may fix a higher price.
If the manufacturer wants to increase the market share, he has to fix the competitive price. In other words, he has to offer more discounts etc. On the other hand, if his objective is to increase profits, he may fix a higher price.
4. Cost of the Product: Most of the
companies fix the price on the basis of cost. Accordingly, selling price is
equal to total cost plus profit. Total cost includes manufacturer’s cost,
administrative cost & selling cost.
5. Economics Condition: According to
the general economic theory, price will not be lower during the depression
& higher during the inflationary period. The company has no control over
this factor because it is the result of general condition prevailing in the
entire country.
6. Government Policy / Regulation: If
government thinks necessary, it may fix minimum price for a product. If it
wants to discourage consumption, it may increase the price & reduce it
to encourage consumption.
Pricing
Policies & Pricing Methods or Determination of the Price:
1. Cost Plus Pricing:
In this method, the cost of manufacturing a product serves as the basis to fix the price, the desired profit is added to the cost & the final price is fixed. Most of the companies follow this method.
Following are various methods of cost plus pricing.
In this method, the cost of manufacturing a product serves as the basis to fix the price, the desired profit is added to the cost & the final price is fixed. Most of the companies follow this method.
Following are various methods of cost plus pricing.
a. Price
Based on the Total Cost: Here a percentage of profit is added to the cost
to calculate the selling price. It is usually followed by the whole sellers
& the retailers. For industries such as construction, printing, repair
shops, etc. this method is more suitable.
b. Price
Based on the Marginal Cost: It is the method of pricing where the price is
fixed to recover the marginal cost only. Marginal cost is the extra cost
incurred to produce extra units. Hence, this method is suitable only when
pricing decisions are to be taken to expand the market to accept the export
orders etc.
c. Break
Even Pricing: Under this method, the price is fixed first to recover the
total cost incurred to produces the product. It is fixed in such a manner that
the company neither earns profit nor does it suffer losses. This method is
suitable during depression when there is acute competition, when a new product
is to be introduced or when the product enters the declining stage of its life.
Advantages of Cost plus Pricing:
Advantages of Cost plus Pricing:
1. This
method is simple & hence price can be easily determined.
2. Companies,
which cannot estimate the demand may follow this method.
3. It
is suitable for long-term pricing policies
Disadvantages of Cost plus Pricing:
Disadvantages of Cost plus Pricing:
1. It
neglects the demand factor of the product
2. It
is difficult to determine the exact cost.
2. Pricing Based Upon Competition:
Competition based pricing is defined as a method where a company tries to maintain its price on par with its competitors.
It is suitable when the competition is serve & the product in the market is homogeneous. This price is also called the going rate price. The company cannot take risk of either increasing the price or decreasing it.
Following are some of the methods based upon competition:
Competition based pricing is defined as a method where a company tries to maintain its price on par with its competitors.
It is suitable when the competition is serve & the product in the market is homogeneous. This price is also called the going rate price. The company cannot take risk of either increasing the price or decreasing it.
Following are some of the methods based upon competition:
a. Pricing
above the Competition: It is usually followed by well-recognized
manufacturers to take advantage of their goodwill. The margin of profits is too
high. This method is useful to attract upper class & upper middle class
consumers.
b. Pricing
below Competition Level: This type of pricing is followed by the
wholesalers & the retailers. They offer various kinds of discounts to
attract consumers. Even established companies follow this method to maintain or
to increase their sales during the off season.
3. Pricing Based on Markets:
Depending upon the market of product, the manufacturers may fix the price for their products.
In a perfect market, he has to go for the expected price in the market. It is also called the market price or going rate price.
In case of monopoly, he is free to fix the price & can effectively practice the price discrimination policy.
Depending upon the market of product, the manufacturers may fix the price for their products.
In a perfect market, he has to go for the expected price in the market. It is also called the market price or going rate price.
In case of monopoly, he is free to fix the price & can effectively practice the price discrimination policy.
In
oligopoly where there are few sellers, the price is fixed by the largest seller
called the market leader & others follow him. If price is above this level,
he loses sales considerably & if he reduces it, sales may not increase
because competitors immediately react & reduce their price also.