Pricing Decision, Marketing Management Video Lecture | Marketing Management - B Com

hello students welcome to the lecture on
pricing decision and after this lecture
we will be able to learn the following
objectives understand concept of pricing
explain price and non-price competition
define factors affecting pricing
decisions discuss pricing methods
describe demand based pricing explain
other pricing strategies discuss pricing
strategies and define economic
feasibility of differential pricing
concept of pricing let us start with the
concept of pricing organizations
producing goods and services need to set
the price for their product setting the
price for an organization's product is
one of the most important decisions a
manager faces cost is one of the major
considerations in price determination of
the product it is one of the three major
factors which influence racing decision
the two other factors are customers and
competitors customer in a situation
where the product has many substitutes
customers decide the price that is the
demand of customers is the paramount
importance in setting the price of the
product similarly under competitive
condition price is determined by market
forces and an individual firm or an
individual customer cannot influence the
price competitors when there are only
few players in the market competitors
usually react to the price changes and
therefore pricing decisions are
influenced by the possible reaction of
competitors cost cost is the third major
factor its role in price setting varies
widely among industries some industries
determine price by market forces and in
some industries managers set prices
the basis of production costs firms want
to charge a price that covers its costs
like production costs distribution costs
and cost related with selling the
product and also including a fair return
for its effort objectives of pricing
policy formulation of pricing policy
begins with the classification of the
basic objectives of the firm pricing
objectives have to be in conformity with
overall organizational objectives in
most of the situation profit
maximization is the main objective of
price policy but it is only one
objective following may be other
objectives of pricing policy in an
organization pricing the goods based on
reasonable costs increase the market
share or growth rate at the expense of
immediate profits avoid adverse public
reaction consequent on charging high
price ethical consideration not to reap
high profit immediate survival of the
firm charge reasonable price so as to
have good relations with government and
public at large maximization of prestige
of the firm rather than profit and to
safeguard against the emergence of new
producers in same line
factors affecting pricing decisions I
hope you understood what we discussed
right now let us move further and study
about the factors affecting pricing
decisions the factors affecting the
price are marketing objectives there are
four major objectives on which prices
are determined they are survival current
profit maximization market share
leadership and product quality
leadership survival strategy adopted
when company is facing stiff competition
from the competitors and it wants quick
reaction and
current profit maximization strategy is
used to defend the market position
company reduces the price of the product
so that more number of customers buy the
product through volume generation
company gets the market leadership
position product quality leadership
objective is used when company decides
to come with high quality product and
premium price the intention of the
company is to cater to the needs of the
niche segment costs the cost of
marketing and promoting the product will
have direct impact on the price company
will be incurring fixed cost plant
machinery etc as well as variable cost
raw material labor etc the total cost
fixed cost plus variable cost vary
according to both fixed cost and
variable cost the break-even point for a
product is the point where total revenue
received equals the total costs
associated with the sale of the product
TR is equal to TC a break-even point is
typically calculated for businesses to
determine whether it would be profitable
to sell a proposed product as opposed to
attempting to modify an existing product
instead so it can be made lucrative B's
of marketing the price of the product is
determined by the other marketing mix
elements also product influences the
price level that is if the product
quality is very high company would like
to price it high and vice versa the new
product requires aggressive promotion
and results in higher promotion cost and
higher price nature of the market and
demand the price determination depends
on the nature of the market also the
nature of the market is classified into
following categories perfect competition
the nature of the market where many
buyers and sellers exist each seller is
selling the same product and if the
seller charges more for the product then
buyer will shift to another seller
usually in these type of market
companies should set their prices
according to the competition
monopolistic competition the nature of
the market where many buyers and sellers
exist the difference between perfect
competition and monopolistic competition
is in case of latter prices for the
products vary according to the
differentiation whereas in case of
former there is only one price exists in
case of monopolistic competition prices
are fixed by the gap in the product line
of all competitors and level of
differentiation the company is able to
do oligopolistic competition the market
consists of few players and dominant in
the market they do not allow new players
to enter the market they are price
sensitive to each other monopoly here
market consists of one seller a British
Railway has monopoly over the railway
industry in England it is able to sell
its products and services at the
determined rates
competition price is also determined by
how intense the competition is in the
industry environmental factors these
external factors are very crucial for
the company's price decisions the impact
of macro and micro environment on the
company's strategy for example in the
union budget tax on cigarette is
increased
hence company that manufactures
cigarette should increase the price the
increase in the price is determined by
the government environment which is
external to the company pricing methods
to understand the concept of pricing it
is important to know the methods of
pricing so in this section
we will study about the pricing methods
for your pricing strategy now you need
some way to crunch the actual numbers
here are the ways to calculate prices
cost plus pricing set the price at your
production cost including both cost of
goods and fixed cost at your current
volume plus a certain profit margin
target return pricing set your price to
achieve a target return on investment
ROI value-based pricing price your
product based on the value it creates
for the customer this is usually the
most profitable form of pricing if you
can achieve it the most extreme
variation on this is pay-for-performance
pricing for services in which you charge
on a variable scale according to the
results you achieve psychological
pricing ultimately you must take into
consideration the consumers perceptions
of your price figuring things like
positioning if we want to be the low
cost leader we must be priced lower than
your competition if we want to signal
high quality we should probably be
priced higher than most of your
competition popular price points there
are certain price points specific prices
at which people become much more willing
to buy a certain type of product
dropping your price to a popular price
point might mean a lower margin but more
than enough increase in sales to offset
it fair pricing sometimes it simply does
not matter what the value of the product
is even if you do not have any direct
competition there is simply a limit to
what consumers perceive as fair demand
based pricing I hope you understood what
we just discussed now we will move
further and discuss about the demand
based pricing demand based pricing uses
consumer demand
and therefore perceived value to set a
price of a good or service value-based
pricing a car value optimized pricing
sets prices primarily on the perceived
or estimated value to the customer
rather than on the cost of the product
the market price competitors prices or
historical prices the goal of
value-based pricing is to align the
price with the value of the product
price skimming is a pricing strategy in
which a marketer sets a relatively high
price for a product or service at first
and then lowers the price over time it
is a temporal version of price
discrimination yield management price
discrimination or price differentiation
exists when sales of identical goods or
services are transacted at different
prices from the same provider yield
management is the process of
understanding anticipating and
influencing consumer behavior in order
to maximize yield or profits from a
fixed perishable resource such as
airline seeds or hotel room reservations
psychological pricing or price ending is
a marketing practice based on the theory
that certain prices have a psychological
impact the retail prices are often
expressed as odd prices a little less
than a round number example 1,000 INR
product bundling is a marketing strategy
that involves offering several products
for sale as one combined product this
strategy is very common in the software
business example bundle a word processor
a spreadsheet and a database into a
single office suite penetration pricing
is the pricing technique of setting a
relatively low initial entry price often
lower than the eventual market price to
attract new customers
value-based pricing of value optimized
pricing is a business strategy it sets
prices primarily but not exclusively on
the value perceived or estimated to the
customer rather than on the cost of the
product the market price competitors
prices or historical prices competitive
based pricing competitive based pricing
occurs when a company sets a price for
its good based on what competitors are
selling a similar product for if
competitors are pricing their products
at a lower price then it is up to the
company to either price their goods at a
higher or lower price all depending on
what they want to achieve one advantage
of competitive based pricing is that it
avoids price competition that can damage
the company potential disadvantages
include that businesses may need to
engage in other tactics to engage
customers if the price is not enough of
an incentive another concern for
companies is that this pricing method
may barely cover production costs
resulting in low profits other pricing
strategies apart from demand based
pricing there are other pricing
strategies also in this section we will
study about the other pricing strategies
one pricing strategy does not fit all
thus adapting various pricing strategies
to new scenarios as necessary for a firm
to stay viable cost plus pricing is the
simplest pricing method the firm
calculates the cost of producing the
product and adds on a percentage profit
to that price to give the selling price
dynamic pricing allows online companies
to adjust the prices of identical goods
to correspond to a customer's
willingness to pay the airline industry
is often cited as a success story
most of the passengers on any given
airplane have paid different ticket
prices for the same flight non-price
competition means that organizations use
strategies other than price to attract
customers advertising credit delivery
displays private brands and convenience
are all examples of tools used in
non-price competition marketing mix a
business tool used in marketing products
often crucial when determining a product
or brands unique selling point often
synonymous with the 4ps price product
promotion and place economies of scale
the cost advantages that an enterprise
obtains due to expansion as the scale of
output is increased factors such as
facility size and usage levels of inputs
cause the producers average cost per
unit to fall competitive based pricing
occurs when a company's set surprise for
its good based on what competitors are
selling a similar product for pricing
strategies before we get to the actual
pricing models here are some of the
factors that you need to consider
positioning how are you positioning your
product in the market is pricing going
to be a key part of that positioning if
we are running a discount store we are
always going to be trying to keep your
prices as low as possible as or at least
lower than your competitors the pricing
has to be consistent with the
positioning people really do hold
strongly to the idea that you get what
you pay for demand curve how will your
pricing affect demand we are going to
have to do some basic market research to
find this out even if it is informal get
10 people to answer a simple
questionnaire asking them would you buy
this product service at X price Y price
set price
cost calculate the fixed and variable
costs associated with your product or
service how much is the cost of goods
that is a cost associated with each item
sold or service delivered and how much
is fixed overhead cost environmental
factors are there any legal or other
constraints on pricing for example in
some cities towing fees from auto
accidents are set at a fixed price by
law short term profit maximization this
approach is common in companies that are
bootstrapping as cash flow is the
overriding consideration it is also
common among smaller companies hoping to
attract venture funding by demonstrating
profitability as soon as possible
short term revenue maximization this
approach seeks to maximize long term
profits by increasing market share and
lowering course through economy of scale
maximize quantity there are a couple of
possible reasons to choose the strategy
it may be to focus on reducing long term
costs by achieving economies of scale
this approach might be used by a company
well-funded by its founders and other
close investors maximize profit margin
this strategy is most appropriate when
the number of sales is either expected
to be very low or sporadic and
unpredictable examples include custom
jewelry art handmade automobiles and
other luxury items differentiation at
one extreme being the low cost leader is
a form of differentiation from the
competition at the other end a high
price signals high quality and/or a high
level of service some people really do
order lobster just because it is the
most expensive thing on the
menu survival in certain situations such
as a price war market decline or market
saturation you must temporarily set a
price that will cover costs and allow
you to continue operations economic
feasibility of differential pricing now
let us move further and study about the
economic feasibility of differential
pricing differential pricing can be in
the interests of both consumers in poor
countries and manufacturers while not
adversely affecting consumers in richer
countries and maintaining incentives for
research and development it was noted
that a number of conditions have to be
in place in order for differential
pricing to be feasible one is that the
fixed cost of the producer have to be
substantial in relation to marginal
production costs and the producer must
have the necessary degree of market
power to be able to allocate those fixed
costs differentially between different
consumers a second condition is that
differential pricing requires market
segmentation it was pointed out that
this entails prevention of leakage of
low-priced products into high-priced
markets a technical issue and a
readiness to accept sustained price
differences by consumers in high-income
markets a political issue promotional
pricing promotional pricing also known
as marketing price promotion or
penetration pricing is a cost setting
strategy in consumer marketing it
involves reducing the price of a product
or service temporarily to attract
customers and develop loyalty for
increased future revenue and profit
purpose this strategy is meant to
attract attention to a product brand or
retailer the idea is to use the appeal
of low cost to
consumers know that a seller label or
item exists users both retailers and
manufacturers
use promotional pricing with
manufacturers promotional pricing alerts
the consumer to a specific line of
services or products and provides a
platform to introduce a brand method the
application of promotional pricing is
relatively simple retailers and
manufacturers first come to the
conclusion that more attention is needed
on a label item or company they then
look at the typical market value of the
item or service they calculate how much
of a discount they can afford and decide
how long the discount is feasible to
apply once management approves the
promotional price marketers use standard
marketing techniques such as print ads
to alert consumers of the discount
sustainability whenever this method is
in practice a major key is that the
discount selected is almost never
financially sustainable products and
services often are at or below cost or
part of a buy one get one free offer
retailers and manufacturers expect that
any loss they experience from the
promotional pricing will be recouped by
the future sales gained by new loyal
customers frequency financial
sustainability aside pricing items at a
promotional rate cannot be done with
extreme frequency repeated promotions
may cause customers to anticipate lower
pricing when the retailer or
manufacturer raises the cost back up to
the normal level consumers might feel
that the regular price is too high and
refused to buy unless they are shown
there is something significant about the
product or service flaws promotional
pricing assumes that the discounted
price will
with a current need that the consumer
has this is not necessarily the case
during promotional events retailers and
manufacturers have to make some
estimates about how consumers will
receive the special offers they
sometimes do not make accurate
predictions however if a mistake means
that a manufacturer or retailer cannot
meet the consumers expectations
customers can be upset and turned off
the promotion ends up having the
opposite of the desired effect summary
now in the end let us summarize what we
have learnt in this lecture setting the
price for an organization's product is
one of the most important decisions a
manager faces when there are only few
players in the market competitors
usually react to the price changes and
therefore pricing decisions are
influenced by the possible reaction of
competitors price determination is very
important aspect of strategic planning
marketers fix the price of the product
on the basis of cost demand or
competition demands for the product vary
according to the price set generally
customers think that higher the prices
better the quality of the product and
lower the price lower the quality of the
price promotional pricing assumes that
the discounted price will align with a
current need that the consumer has