Pricing: Definitions, Scope, Factors, Importance, Methods, Strategies, Problems

Pricing is one of the most important elements of the marketing mix, as it is the only element of the marketing mix that generates a turnover for the organisation. Pricing involves determination of the optimum price for a product by the marketer.

“Price is the amount of money charged for a product or service or the sum of the values that the consumers exchange for the benefits of having or using the product or service.” -Philip Kotler

Learn about:- 1. Definitions of Pricing 2. Scope of Pricing 3. Importance 4. Objectives 5. Steps 6. Factors Influencing Pricing Decisions 7. Types 8. Methods 9. Strategies 10. Myths 11. Problems.

Pricing: Definitions, Scope, Importance, Objectives, Steps, Types, Methods, Strategies, Problems and Factors

Pricing – Definitions and Meaning

Whenever we go to buy something to a retail store, a mall, a departmental store, a vegetable shop etc. which is the most prominent thing, we try to find out? It is the price of the product we would like to buy. The price, in most of the cases is in the tag itself or the salesman tells us the price. Do we ever try to understand how the retailer fixes the price?, which factors he considers?, what is the basis?

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Price is nothing but the value that is put to a product or service and is the result of a complex set of calculations, research and understanding and risk-taking ability. Price is the only element in the marketing mix that leads to generation of revenue for the firm. All other elements of marketing mix represent costs.

Price has many meanings. A price is the amount we pay to purchase a product or an idea. Price is an amount for which a product or service is exchanged regardless of its value. An economist defines price as the exchange value of a product or a service which is always expressed in terms of money. Price is the source of revenue to the seller and a sacrifice of purchasing power to the buyer.

“Price is the amount of money charged for a product or service or the sum of the values that the consumers exchange for the benefits of having or using the product or service.” -Philip Kotler

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“A value that will purchase a definite quantity, weight, or other measure of a good or service.” – Business Dictionary

“The sum or amount of money or its equivalent for which anything is bought, sold, or offered for sale.”

Pricing – Scope

Price is the stimulator that converts the procrastination of buyers into the desired choice, that suggests value that moves someone to take certain risks, that encourages them to spend the money to incur shopping and travel costs.

Pricing decisions have an impact on all phases of the supply/marketing channels. Suppliers, sales people, distributors, competitors and customers – all are affected by the pricing system.

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Price also gives a perception of quality. For example, a hotel chain, servicing the tourist package holiday market, will offer cheap prices to its customers. The customers will have a lower expectation of service quality than those offered at full premium price package. Since any offering is merely perceived as a bundle of diverse values, the opposite course, in product choice, is to agree to sacrifice service quality in favour of a lower price.

Price, of course, is not the only marketing tool available to the formulation of a marketing strategy. The price of money is only one of many interdependent references used to make a purchase that may favour or inhibit purchase. In fact, price often is not the decisive factor. The inherent belief that price is the main determinant of buyer choice, will lead a business to react to any sales-led crisis by discounting to distributors or final customers or both.

Unless sales responds strongly, this strategy will compound disaster, in that continued low sales at the lower price known as price war, will make an even smaller contribution to fixed overheads. But even if a sale goes up, gross margins will remain squeezed and a higher total income cannot be generated.

Worse, the extra sales may be the result of pipeline-filling by the distributors or by final customers stocking up ahead. Such increases may only be temporary, to be later compensated by a downward re-adjustment. Worse still any significant increase in sales that will come at the expense of other suppliers, and is likely to encourage retaliation by the most badly hit competitor. This, in turn, usually leads to a general price war, which quickly drives the weakest suppliers from the market and leaves even the strongest on permanently reduced margins.

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In the early 1980s, People Express gained a significant market share in the air travel market through much curtailed prices. Other airlines, as a reaction, cut also their prices in order to maintain passenger loads. The final result was not an increased share of the market for People Express, but was adversely affected, falling into near bankruptcy. The condition deteriorated in 1986, it was taken over by one of its competitors.

A workable marketing strategy must take full account of the following factors, in addition to price:

(i) Conforming quality;

(ii) Perceived quality;

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(iii) Time expenditure costs;

(iv) Time and place availability costs;

(v) Risk costs;

(vi) Learning costs;

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(vii) Search effort costs; and

(viii) Design compromise costs.

The market strategy must be planned in terms of the way customers perceived value and react to differing stimuli affecting them.

Customer value perception and expectations are structured in the following ways:

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(i) There are clearly established noticeable difference thresholds.

(ii) Customers expect price lining and price slotting.

(iii) Customers impute both quality criteria and the appropriate pricing system.

(iv) Customers make judgments about correct cost-price relationships.

(v) When a customer decides to buy, he or she uses a fair price reference in mind, comparing with past purchases made and with other or similar situations. The customer will assess what seems to be the best price.

Pricing – Importance

The importance of pricing as a function of marketing is brought out in the following points:

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1. Price is essential to marketing – Price is a matter of great importance to both the buyer and the seller in the market place. In money economy without prices there can be no marketing. Price denotes the value of a product or service expressed in monetary terms. Only when a buyer and a seller agree on the price, does exchange and transfer of ownership take place.

2. Price allocates recourses – In a free market economy and to some extent in a controlled economy, the resources can be allocated and reallocated by the process of price reduction and price increase. Price is used as a weapon, to realise the goals of a planned economy, and to allocate resources towards sectors, which have priority from the planning point of view.

3. Price determines the general standard of living – Price influences consumer purchase decisions. It reflects the purchasing power of money and thus reflects the general standard of living. The lower the prices in an economy, the greater will be the purchasing power in the hands of the consumer and the higher will be the standard of living.

4. Price regulates demand – Price is the strongest ‘P’ of the four “Ps” of the marketing mix. The marketing manager can regulate the demand of a product by increasing or decreasing its price. To increase demand, reduce the price and to decrease demand increase the price.

However as an instrument to control demand, price should be used by those who are familiar with the dangers involved in using price as a mechanism to control demand, as the damage done by improper pricing can ruin the effectiveness of a well-conceived marketing programme.

5. Price is a competitive weapon – Price is an important weapon to deal with competition. Any company whether it is selling high, medium or low priced products, has to decide as to whether its prices will be above, below or equal to the prices set by the competitors. This is a basic policy issue and affects the entire planning process.

6. Price is a determinant of profitability – Price influences the sales revenue of a product, which in turn determines the profitability of the firm. Price thus is the basis of generating profits for the firm. A change in the price mix of the marketing mix can be made more easily than a change in any other element of the marketing mix.

Thus price changes are used more frequently for defensive and offensive strategies of a firm. The impact of price rise and fall is reflected instantly in the rise and fall of the profitability of a product, all other variables remaining the same.

Thus price is a powerful marketing instrument. Every marketing plan involves a pricing decision. As such all marketing planners should make accurate and planned pricing decisions.

Pricing – 8 Important Objectives

Pricing objectives are the overall goals that describe the role of price in an organisation’s long term plans. Pricing objectives help the decision makers in formulating price policies, planning pricing strategies and setting actual prices. There is no denying the fact that the ultimate objective of every business enterprise is “Profit Maximization”. However, there are some general objectives which each organisation wishes to attain through its effective pricing policy.

Some of the important objectives are discussed below:

1. Market Penetration Objective:

The market penetration objective is meant setting a relatively low price. This is mainly to secure a large share of the market. When the entrepreneurs feel that they have no alternative to penetrate the market or for entering a highly sophisticated market, they continue the business even without profit. The entrepreneurs appear to be interested in growth rather than in making profit.

Such objective is prevalent in a price sensitive market. In market penetration objective, the unit cost of production and distribution starts decreasing after reaching certain targeted level of sales. This objective is generally applicable at the very initial stage of entering the market. The attempts are being made to bring down the production and distribution costs. With gradual increase in sales volume, cost comes down and the product sets in the market.

2. Market Skimming Objective:

The market skimming objective hints on utilizing the opportunity benefits. Some of the entrepreneurs study the buyers’ needs and make efforts to provide them the required goods but charge higher prices. This is called market scamming objective. The objective does not stimulate the rival competitors. The entrepreneurs prefer it to earn profit over a short period. This objective is applicable in the markets where the magnitude of competition is very low.

3. Targeted Return on Investment Objective:

It is one of the major objectives of pricing. Every entrepreneur expects a specific rate of return on the capital employed in the business. This is also known as Return on Investment (ROI). In this respect, the producer attempts to get handsome dividends as return on the capital invested. But such pricing objective would suitable to the firms which have already established an outstanding reputation in the market. The producers enjoying the protection facilities also prefer to adopt this objective.

4. Targeted Return on Sales:

This objective of pricing is generally preferred by the middlemen. They want a specific return on the goods sold. As for example, if the objective is to make 15 per cent profit, the price would be set accordingly. The whole thing would depend on the image of the middlemen. If they have some influence on the consumers, this pricing objective would be successful.

5. Price Stabilization Objective:

The price stabilization objective is to even out the cyclical fluctuations in the prices. During the periods of business depression, entrepreneurs work to keep prices from falling too low and during the periods of good business, they try to keep prices from rising too high. The firms seeking stability in their prices are anxious to avert price wars, when demand is declining. The price leaders take a long-run point of view in achieving stability. Their goal is to “live let live.”

6. Market Share Objective:

Market position or sales in relation to competition is a very meaningful benchmark of success. Therefore, a firm may set a target market share as its pricing objective, so that by focusing attention on it, it may not lose its former market position. It tries to maintain at least status quo or to improve its position through low pricing in commensurate with cost.

7. To Prevent Competition Objective:

Such pricing objective prevents competition. If the firm is its industry price leader, it may set prices designed to discourage new competitors from entering the market. Similarly, the firms that are price followers set their prices in order to meet competitors’ prices. When introducing a new product, low prices should be set to discourage competition.

8. Profit Maximization Objective:

The prime objective of every business is to earn profit. To uphold this primary objective of business, every firm sets its long term goal to maximize profit. The pricing policy of management also follows this objective and sets the product prices accordingly. But the aim of the management should be to maximize profit on total output rather than on each single item.

These are the most common objectives on which the pricing policy of the firms is based.

Pricing – 6 Step Procedure to be Followed by a Marketing Manager to Determine the Price

As a marketing manager one has to follow the given six-step procedure to determine the price:

Six Step Procedures:

(i) Selecting the Pricing Objective:

A firm must decide upon its objective of pricing which could be either survival of the firm, maximizing the current profit, maximizing-market share, maximizing market skimming (creating a niche) or having a product quality leadership. For example – Haier has a product quality leadership, whereas Sony has created a niche and LG has maximum market share because of its price and range.

(ii) Determining the Demand:

Relation between price and demand is universally proportional, i.e., as price increases, demand decreases and vice- versa but in case of luxury goods like branded jewellery, perfumes etc. this proportion does not hold good. Thus a proper demand analysis needs to be done, as at times a higher price also indicates good quality. Also, one needs to find out the price elasticity of demand of the product.

(iii) Estimating Cost:

A manager should make an estimate of every kind of cost like fixed cost, variable cost, average cost and activity based cost and thus total costing of the product on the basis of which price can be decided.

(iv) Analyzing Competitor’s Costs, Prices and Offers:

Within the range of possible price determined by market demand and company’s cost, the firm must take competitor’s cost, price and possible price reactions into account. If the firm’s offering contains more features than offered by the competitor, it should evaluate their worth to the customer and add that value to the competitor’s price and vice-versa.

(v) Selecting a Pricing Method:

There are various methods available by applying of which a firm can decide upon the pricing of an offering. For example – mark-up pricing, i.e., by adding a standard percentage of profit to the cost, target-return pricing, perceived value pricing, going- rate pricing and auction type pricing etc.

(vi) Selecting the Final Price:

Finally when the marketer is about to decide the pricing of any offering he should also take into consideration the company pricing policies, gain and risk sharing pricing and the impact of other parties etc.

Pricing – Factors Influencing Pricing Decisions

1. Objectives – Many companies have established marketing goals or objectives such as growth in sales, profits, market share and pricing plays a major role in achieving the objectives.

2. Cost of Production – The most decisive factor in pricing is the cost of production. In the past, fixing of price was a simple affair, just add up all the costs incurred and divide the final figure by the number of units produced. Adding necessary profits with the cost of production would give the price.

The main defect with this approach is that it disregards the external factors, particularly demand and the value placed on goods by the ultimate consumer. Again under this approach, the manufacturer believes that whatever may be the price, the consumer will buy. Furthermore, today, on account of the various lines of production as well as distributing, the overhead costs finding the cost of production is not so simple.

3. Demand – In consumer-oriented marketing, the consumers influence the price. Every product has some utility for the buyer. It gives the buyer service, satisfaction, pleasure, the consumer would continue to buy the product. Higher the demand for a product, lesser the need for giving additional discounts, credit, etc., to the distributors and dealers. This leads to higher price realisation.

4. Competition – Another factor that influences pricing is competition. No manufacturer is free to fix his price without considering competition, unless he has a monopoly.

To avoid competitive pricing, a firm may decide that its product may be sufficiently different from that of the others. This is achieved through methods of advertising, branding, etc. Sometimes, a higher price may itself differentiate the product. This is known as prestige pricing. But this is possible only when the product is backed by perfect quality. Sometimes, the opposite also takes place. It is seen that many products are sold at low prices, mostly in the initial stages. This is referred to as “Mark-down Prices” or price cutting.

5. Distribution Channels – Distribution channels also sometimes affect the price. There are many middlemen working in the channel of distribution between the manufacturer and the consumer. Each one of them has to be compensated for the services rendered. This compensation must be included in the ultimate price which the consumer pays. Because of these costs, sometimes it happens that the price of products becomes so high that the consumer rejects it.

6. Supply of the Product – If the supply is less than demand, then the price of the product will be more.

7. Achieve Planned Return on Investment – While fixing the expected rate of return, the cost of the product, inflation rate, profits desired, etc., are taken into account.

8. Availability of Raw Materials in the domestic market will generally enable the firm to bring down cost of production. The firm can fix a low selling price.

9. Profit Expectations – If the firm expects higher price per unit of the product, they may charge a higher price for the product.

10. Trade Barriers – Trade restrictions such as duties, taxes, and quotas would increase the price of the product and the firm fixes a higher price to recover the taxes and duties.

11. If the brand is very popular among consumers, then the manufacturer can charge a higher price for the product.

12. If the Purchasing Power of the consumers is high, then the company can charge a higher price for the product.

13. Promotion Cost would normally increase the selling price as the company would like to recover the cost from the consumers.

14. Research and Development – Many large organisations spent millions of rupees in developing new products and new processes and would like to recover the cost of research by increasing the price of the products.

15. Legal Constraints, Government Interference such as control of prices, levying taxes, etc., are other considerations which also affect the pricing of the products.

The following are some of the factors that influence pricing of a product. They are classified under product or industry factors and the factors influencing the buyers’ decisions.

I. Characteristics of the Product or Industry:

Several factors have to be taken into account.

They are:

1. Factors Affecting Demand:

i. Durability

ii. Producer or consumer goods

iii. Degree of processing-finished or semi-finished goods

iv. Joint demand

v. Availability of substitutes

vi. Type of the product – luxury or fashion, standardised, unique or differentiated products

vii. Number of buyers

viii. Seasonality.

2. Factors Affecting Cost:

i. Rigidity of wage rates

ii. Rigidity of materials prices

iii. Non postponable overhead increases

iv. Cost of production – historical and future

v. Volume anticipated

vi. Relationship of capacity to cost

vii. Break even points

viii. Extent of vertical, horizontal integration.

3. Factors Affecting Physical Supplies:

i. Ease of entry for new suppliers

ii. Number of sellers

iii. Time required to expand capacity and output

iv. Perishability or product seasonality.

4. Law or Administrative Decree:

i. Government agencies, telephone authorities

ii. Energy supplies (gas etc.)

iii. Legislation on minimum wage and maximum hour

iv. Tariffs, quotas, import control through –

a. Control of production output,

b. Loan programmes,

c. Marketing agreements.

Those factors which make it possible for private interests to control prices are- (a) patents, (b) copyrights, (c) resale price fixing, (d) limitations on sales below costs.

5. Concentration of Control:

i. Monopoly or oligopoly

ii. Producers labour unions

iii. Collusion to restrict output

iv. Collusion to allocate production

v. Collusion to share markets

vi. Price leadership

vii. Central sales agencies

viii. Trade association activities.

6. Industrial Buyer Factor Inputs:

i. Utility to the buyer

ii. Return to the buyer

iii. Comparable and substitute products

iv. Custom and customary prices

v. Prestige position of product and brand

vi. Presence of buying habits and motives

vii. Psychological appeals, actual or cultivated.

7. Market Structure and Promotional Policies:

i. Suggested prices on package deals

ii. Advertising on standard prices

iii. Promotional program

iv. One-price policy

v. Product differentiation

vi. Organized or unorganized market

vii. Scope of market area

viii. Marketing channels used

ix. Price lining

x. Distributor relationship distributor margins

xi. Share of market current and desirable

xii. Market leader or follower.

8. Individual Firm, General and Economic Considerations:

i. Eliminate slack periods

ii. Extend territory

iii. Provide continuous employment

iv. Provide socially needed goods or services

v. Maintain national income

vi. Adjustment to cyclical changes.

II. Factors Influencing Buyers Decision:

Industrial customers, in general, differ from each other with regard to the technology in their production processes, their market growth and potential, the competition for the customer, the customers buying policy and the composition of the buying center.

In addition, the factors influencing the industrial buyer behaviour are the fitness of the product for the buyer’s purpose; The buyer’s personal opinion of the design and appearance of the product; The selling price of the product in relation to the buyer’s opinion of its design and fitness for the purpose; The availability of the product; The suppliers’ reputation for consistency in quality; The suppliers’ reputation for reliability on delivery; The suppliers’ after sales service; and the credit facilities provided; The predisposition to buy the product that has been created in the buyer’s mind by advertising or other promotional activities; The persuasion exercised by a salesman.

Pricing – Top 12 Types

Type # 1. Cost Based or Cost Plus Pricing:

This is the most common method used for pricing. Under this method the price is set to cover all costs (materials, labour and overheads) and a predetermined percentage of profit. It takes the full cost into consideration including an allowance of all the overheads and adds the profit margin to the total cost. Full cost, cost plus, cost based and absorption costing are the terms by which this method is called.

Absorption costing attempts to determine the unit cost of each product. The price changes affect the volume of sales which in turn affect unit fixed cost which finally open up possibility of further price changes. Break-even analysis determines fixed and variable costs and enables the price-setter to investigate the profit implications of alternative price-volume strategies.

The cost plus pricing is advocated for the following reasons:

(a) Cost plus pricing offers a means by which fair and acceptable prices can be found with ease and speed.

(b) Prices based on full cost look factual and precise and may be more defensible on moral grounds.

(c) Firms preferring stability use full cost as guide to pricing in an uncertain market and in market where knowledge is incomplete.

(d) Fixed costs must be covered in the long-run and firms feel that if they are not covered in the short- run they will not be covered in the long-run either.

(e) Management tends to know more about the product costs than other factors which are relevant to pricing.

(f) A major uncertainty in setting a price is the unknown reaction of rivals to that price. Hence cost plus pricing is best suited.

(g) Where firms are uncertain about the shape of their demand curve and about the probable response to any price change makes it too risky to move away from full cost pricing.

The cost plus pricing is specially suitable in:

(a) Public utility pricing

(b) Product tailoring i.e. determining the product design when the selling price is predetermined.

(d) Monopsony buying where the buyers know a great deal about suppliers’ costs.

Cost pricing method ignores demand – there is no relationship between cost and what people pay for a product. It fails to reflect the forces of competition adequately. It exaggerates the precision of allocated costs.

Over concentration on full costs of production may lead to incorrect allocation of overheads and the foregoing of worthwhile profit opportunities. It is unreasonable to expect that different products at different stages of their life cycle all earn the same profit or return on investment.

Type # 2. Standard Cost Pricing:

Standard cost pricing is based on the cost standards developed in Management accounting systems. The standard variable cost per unit is calculated by adding the total variable costs of production, namely cost of materials and direct labour, and the cost of bought in components, and dividing this sum by the number of units produced.

The steps taken to establish a standard cost price are as follows:

(a) Calculate the standard variable cost per unit.

(b) Calculate the fixed cost per unit (the running expenses, including administration and selling expenses of the business over a period of time divided by the number of units to be sold in that period.

(d) Add (a), (b) and (c) together to give the provisional price.

(e) Analyze market prices for competitive products.

(f) Adjust provisional prices as necessary to take account of market price levels.

Type # 3. Marginal Cost Pricing:

Marginal cost is the change in total costs that results from production of additional unit of a product or service. Under this method fixed costs are ignored and prices are determined on the basis of marginal cost. A firm seeks to fix its prices so as to maximize its total contribution. This method is suitable where prevalence of multi-product, multi-process and multi-market concerns makes the absorption of fixed costs into product costs is difficult.

Marginal cost pricing permits to develop an aggressive pricing policy which lead to higher sales and reduced marginal costs. This method avoids the need to artificially allocate among products a share of fixed indirect cost.

The method is most useful in fixation of price under the following situations:

(a) Where supply is in excess to existing demand

(b) Pricing of new products

(d) Where the installed capacity is more than operating level of production

(e) Public utility services

(f) When cut-throat competition is prevailing in the market

(g) Pricing for export products

(h) Pricing decision relating to special orders

Marginal cost pricing method requires thorough knowledge over cost analysis and cost behaviour. The objective of the organization is to earn a reasonable surplus on its production after meeting all fixed costs. Pricing at marginal cost is a short-run measure. Excess reliance on this method of pricing should be avoided.

Type # 4. Pricing for Target Rate of Return:

Under this method, in determining the product price, a certain percentage of capital employed as profit margin is added to the total cost. The markup percentage varies from industry to industry depending upon its nature. This method is commonly employed because it recognizes full cost of product plus reasonable return on investment.

For this purpose the following popular policies are followed:

(a) Maintain a markup rate of profit over costs.

(b) Maintain a markup rate of profit over total sales.

Return on investment pricing attempts to link the markup to the capital employed, and so set the price which includes a return on capital employed.

Type # 5. Conversion Cost Pricing:

This method is also called as ‘added value’ method of pricing. It takes into account only the costs incurred by the firm in converting raw materials and semi-finished goods into finished goods.

In some industries it may be preferable to take only the conversion cost by excluding the material cost for the following reasons:

(a) It is simpler to find a relation between the conversion cost and the margin of profit.

(b) Material prices may be fluctuating and so any profit margin cannot be expected to be stable and the actual revenue may widely differ from that expected.

(c) When profit is the remuneration of the entrepreneur, who is responsible for converting the raw materials into finished product, treatment of the profit will be similar to treatment of absorbing the overhead.

(d) When costs vary only due to different qualities of material, comparatively higher selling prices for products using costly material will not be justified.

Type # 6. Opportunity Cost Pricing:

Opportunity cost is the revenue foregone by not making the best alternative use. Opportunity cost of good or service is measured in terms of revenue which could have been earned by employing that good or service in some other alternative uses. In managerial pricing decisions, quite often it becomes necessary to consider not the actual cost of a product but its opportunity cost.

Type # 7. Going Rate Pricing:

The main emphasis under this method is pricing based on the prevailing market prices of similar products. This method completely ignores the costs incurred on it. The firm adjusts its price policy to the general pricing structure in the industry. This occurs when a firm, tries to keep its price at the average level charged by the industry.

The approach is typically found in conditions where there are many sellers of an undifferentiated product i.e. in a perfectively competitive environment. Where costs are particularly difficult to measure or where price according to what competitors are charging will be the safe policy, going rate pricing is followed.

Type # 8. Administered Pricing:

Sometimes government enforces price control or fixing prices on certain essential or basic products like sugar, drugs etc. In administered pricing, the government does not allow market forces to play their part in pricing of such product and the consumers are charged one single price on the one hand and the producers may be paid retention prices.

Administered prices are fixed by the government normally on the basis of cost plus, a stipulated margin of profit. In order to ensure the fair price it is necessary to examine the cost structure of various concerns of the same industry and the fair return on capital expected for existing and further development of the industry.

Customary Prices:

Prices of certain goods become more or less not fixed not by deliberate action on the seller’s part but as a result of their having prevailed for a considerable period of time. For such products changes in costs are usually reflected in changes in quality or quantity. Only when the costs change significantly the customary prices of these goods are changed.

Following Competitors:

This pricing policy, assumes that price is the only important factor in the marketing mix, but otherwise makes no concessions to marketing. In the last resort it allows your competitors do determine your profitability and therefore your survival.

Type # 9. Psychological Pricing:

It is based on theories of buyer behaviour, but often not going beyond removing the last coin from a round figure (e.g. Rs. 499). This method does include those few companies who use game theory in tendering.

Type # 10. Promotional Pricing:

The promotional pricing deliberately using price as major mix element. Wheeling and dealing’ to move stock quickly and giving an image to goods of urgency and value of money.

What the Market will Bear:

It is as much as you can get, based on experience and any research evidence you can obtain about the behaviour of your market and the extent to which you can add to the perceived value of your product by advertising.

Pricing under Inflation:

Under conditions of cost inflation, raising costs which are not matched by increases in productivity and will reduce profit margins. This will put pressure on management to increase selling prices. When price increases are often greater than would be justified by the cost increases already experienced, in order to cover further cost escalation before it arises, and avoid the annoyance to customers of frequent changes.

The following methods are in practice:

(a) Reductions to quantity discounts and other differential allowances.

(b) The imposition or increase of minimum order quantities (quantities below this level being charged at a premium over normal price).

(d) Unbundling products or services, so that a separate charge is made for each element.

(e) Reducing product weight or quality.

(f) Putting greater marketing effort into those products which yield the highest marginal contributions.

Pricing during Recession:

During recessionary period the factory fails to utilize its full capacity and the management may think of lowering the selling price in order to attract customers or to withstand in the market. Marginal cost pricing method is much help in this situation where the selling price should cover atleast variable cost of the product and should contribute to atleast part of the fixed costs.

Pricing when Inputs are in Short Supply:

An undertaking may have orders in hand, ample labour and production capacity but fails to produce sufficiently due to shortage of raw materials or skilled labour. In such cases, the management should stress on the limitation to maximize profit. Opportunity cost pricing is suitable method of pricing in such cases.

Type # 11. Skimming Pricing:

This method is also known as ‘premium pricing’ strategy. The skimming policy involves charging a high initial price, recovering development costs quickly and making large profits that attract entry. Under this strategy, price is set high to skim as much as possible in the early stage of the product life cycle.

The rationale behind premium pricing is generally to reap the benefits of superior quality image. New products when entering the market may resort to pricing at a premium, the idea is to sell the product, which is a novelty item at a higher price, at the beginning capture the niche market and later on lower the price and thereby make huge initial cash-flows.

The skimming policy is useful for new product when:

(a) Demand is more elastic in the short-run than the long-run because of novelty.

(b) Each consumer only purchases the good once.

(d) The firm is a ‘snatcher’ and intends to leave the industry after a short period of high profits.

(e) The product seems to have a high esteem value.

(f) The brand of the product is identifiable and distinguishable.

(g) The new product is a drastic improvement or is far superior to the existing options.

(h) The market is less price sensitive.

(i) There is a distinct class of buyers for whom quality is important.

The skimming approach will be successful if a firm is able to differentiate its products in terms of higher quality, superior features or special services.

Type # 12. Penetration Pricing:

The penetration pricing policy implies charging a low price to deter entry, so that a smaller profit is made over a longer period. It is a strategy where marketer deliberately keeps the offering at a somewhat lower price as a wedge to get into mass market early. This policy is adopted when the product is first launched in order to gain sufficient penetration into the market. It is therefore, a policy of sacrificing short-term profits in the interest of long-term profits.

The penetration price policy is likely to be successful if:

(a) The short-run price elasticity of demand is high. By charging a low price, the first entrant is able to establish a market, creating brand loyalty and a high barrier to entry and discourage rivals from entering the market.

(b) Economics of scale are significant. By entering a large scale the first firm can both enjoy low average costs and impose a cost penalty on any small scale subsequent entrant.

(d) The firm wishes to shorten the initial period of the product’s life cycle, in order to enter the growth and maturity stage as quickly as possible.

(e) The firm might deliberately build excess production capacity and set its prices very low, as demand build lip, the spare capacity will be used up gradually, the unit cost will fall, the firm might even reduce prices further as unit costs fall.

(f) In this way early year losses will enable the firm to dominate the market and have the lowest costs.

(g) This method is adopted when market is highly price sensitive and the demand is highly elastic.

(h) The market is unwilling to pay a higher price to obtain the product.

Pricing – Methods: Cost-Based, Demand-Based, Competition-Based and Other Pricing Methods

An organization has various options for selecting a pricing method. Prices are based on three dimensions that are cost, demand, and competition. The organization can use any of the dimensions or combination of dimensions to set the price of a product.

The discussion of different pricing methods is as follows:

Method # 1. Cost-Based Pricing:

Cost-based pricing refers to a method in which some percentage of desired profit margins is added to the cost of the product to obtain the final price.

Following are the two types of cost-based pricing:

i. Cost-Plus Pricing:

It refers to a method in which an additional amount is added to the cost of a product. The cost incurred by a seller is estimated and then the additional percentage is added to set the price. For example, XYZ organization bears the total cost of Rs. 100 per unit for producing a product. It adds Rs. 50 per unit to the price of product as profit, thus, earns 50 % of profit on products as final price comes out to be Rs. 150.

The advantages of cost-plus pricing method are as follows:

a. Requires minimum information.

b. Involves the simplicity of calculation.

c. Insures sellers against the unexpected changes in cost.

The disadvantages of cost-plus pricing method are as follows:

a. Ignores the price strategies of competitors.

b. Ignores the role of customers.

ii. Markup Pricing:

It implies a method in which the fixed amount or the percentage of cost of the product is added to product’s price to get the selling price of the product. Markup pricing is more common in retailing in which a retailer sells the product to earn profit. For example, if a retailer has taken a product from the wholesaler for Rs. 100 then he/she might add up a markup of Rs. 20 to gain profit.

It is mostly expressed by the following formulae:

a. Markup as the percentage of cost = (Markup/Cost) * 100

b. Markup as the percentage of selling price = (Markup/Selling Price)* 100

Method # 2. Demand-Based Pricing:

Demand-based pricing refers to a pricing method in which the price of a product is finalized according to its demand. If the demand of a product is more, an organization prefers to set high prices for products to gain profit; whereas, if the demand of a product is less, the low prices are charged to attract the customers. The success of demand-based pricing depends on the ability of marketers to analyze the demand. This type of pricing can be seen in the hospitality and travel industries. For instance, airlines during the period of low demand charge fewer rates as compared to the period of high demand. Demand-based pricing helps the organization to earn more profit if the customers accept the product at the price more than its cost.

Method # 3. Competition-Based Pricing:

Competition-based pricing refers to a method in which an organization considers the prices of competitors’ products to set the prices of its own products. The organization may charge higher, lower, or equal prices as compared to the prices of its competitors. The aviation industry is the best example of competition-based pricing where airlines charge the same or fewer prices for same routes as charged by their competitors. In addition, the introductory prices charged by publishing organizations for textbooks are determined according to the competitors’ prices.

Other Pricing Methods:

In addition to the pricing methods mentioned in the preceding sections, there are other methods that are discussed as follows:

i. Value Pricing:

It implies a method in which an organization tries to win loyal customers by charging low price for their high-quality products. The organization aims to become a low cost producer without sacrificing the quality. It can deliver high-quality products at low prices by improving its research and development process. Value pricing is also called value-optimized pricing.

ii. Target Return Pricing:

It helps in achieving the required rate of return on investment done for a product. In other words, the price of a product is fixed on the basis of expected profit.

iii. Going Rate Pricing:

It implies a method in which an organization sets the price of a product according to the prevailing price trends in the market. Thus, the pricing strategy adopted by the organization can be same or similar to other organizations. However, in this type of pricing, the prices set by the market leaders are followed by all the organizations in the industry.

iv. Transfer Pricing:

It involves selling of goods and services within the departments of the organization. It is done to manage the profit and loss ratios of different departments within the organization. One department of an organization can sell its products to other departments at low prices. Sometimes, transfer pricing is used to show higher profits in the organization by showing fake sales of products within departments.

Pricing – Steps Involved in Price Setting (With Formula)

Pricing is a problem when a firm has to set price for the first time. This happens when the firm develops or acquires a new product when it introduces its regular product into a new distribution channel or geographical area and when regularly enters bids on new contract work. The firm has to consider a large number of factors in setting a price for the first time.

Following are the steps involved in price setting:

1. Setting the pricing objective

2. Determining demand

3. Estimating costs

4. Analysing competitor’s prices and offers

5. Selecting a pricing method

6. Selecting the final price.

1. Selecting the Pricing Objective:

The company first has to decide what it wants to accomplish with the particular product. If the company has selected its target market and market positioning carefully, then its marketing mix strategy including price will be fairly straight forward. For example, if a recreational vehicle company wants to produce a luxurious truck for affluent customer segment, this implies charging the high price. Thus pricing strategy is largely determined by the prior decision on market positioning.

At the same time, the company may pursue additional objectives. The clearer a firm is about its objectives, the easier it is to set price. Each possible price will have a different impact on such objectives as profits, sales revenue and market share.

Company mainly can pursue following major business objectives through its pricing:

(a) Survival

(b) Current profit maximization

2. Determining Demand:

Each price that the company might charge will lead to a different levels of demand and therefore have a different effect on its marketing objectives. The relation between the price charged and the resulting demand level is captured in the familiar demand schedule.

The demand schedule shows the number of units the market will buy in a given time period at alternative prices that might be charged during the period. In the normal case_: demand and price are inversely related, that is the higher the price, the lower the demand (and conversely).

Marketers need to know how responsive demand would be to a change in price. Consider the two demand curves. In (a) a price increase from P1 to P2 leads to a relatively small decline in demand from Q1 to Q2. In (b) the same price increase leads to a substantial drop in demand from Q1 to Q2. If demand hardly changes with a small change in price, we say the demand is inelastic. If demand changes greatly, we say demand is elastic.

Specifically, the price elasticity of demand is given by the following formula:

3. Estimating Cost:

Demand largely sets a ceiling to the price that the company can charge for its product. And company wants to charge a price that covers its entire costs of producing, distributing and selling the product, including a fair return for its effort and risk.

A company’s cost takes two forms – fixed and variable.

i. Fixed Costs:

Fixed costs (also known as overhead) are costs that do not vary with production or sales revenue. Thus a company must pay bills each month for rent, interest, executive’s salaries and so on, whatever the company’s output. Fixed costs go on irrespective of the production level.

ii. Variable Costs:

Variable costs vary directly with the level of production. These costs tend to be constant per unit produced. They are also called as variable because their total varies with the number of units produced.

Total Cost:

Total cost is the sum of the fixed and variable costs for any given level of production. Management wants to charge prices that will atleast cover the total production costs at a given level of production.

4. Analysing Competitor’s Prices and Offers:

While the market demand might set a ceiling and costs set a floor to pricing, competitor’s prices and possible price reductions help the firm establish where its prices might be set. The company needs to learn the price and quality of each competitor’s offer.

Once the company is aware of competitor’s prices and offers, it can use them as an orienting point for its own pricing. If a firm offers a similar to a major competitor’s offer then the firm will have to price close to the competitor or lose sales. If the firm’s offer is inferior, the firm will not be able to charge as much as the competitor does. The firm must be aware; however, that competitor might change their prices in response to the firm’s price. Basically the firm will use price to position its offer vis a vis competitors.

5. Selecting a Pricing Method:

Given the demand schedule the cost function and competitor’s prices, the company is now ready to select a price. The price will be somewhere between one that is too low to produce a profit and one that is too high to produce any demand.

Companies resolve the pricing issue by selecting a pricing method that includes one or more of these three considerations. The pricing method will then hopefully lead to a specific price.

We shall examine the following price-setting methods:

(a) Mark-up pricing

(b) Target return pricing

(d) Going rate pricing

(e) Sealed bid pricing

(a) Mark-Up Pricing:

The most elementary pricing method is to add a standard mark up to the cost of product.

(b) Target Return Pricing:

Another cost oriented pricing approach is that of target profit pricing. The firm tries to determine the price that would produce the profit it seeing.

The manufacturer will realize this return on investment providing its costs and estimated sales turn out to be accurate but what if sales do not reach 50,000 units, manufacturer can prepared Break Even Chart to learn what would happen at other sales level.

It means that after selling 18,750 units the manufacturer will reach to no profit no loss position. After 18,750 the manufacturer will start earn profits.

(c) Perceived Value Pricing:

An increasing number of companies are basing their price on the product’s perceived value. They see the buyer’s perception of value, not the seller’s cost as the key to pricing. They use the non-price variables in the marketing mix to build up perceived value in the buyer’s minds. Price is set to compute the perceived value.

(d) Going-Rate Pricing:

Here the firm bases its price largely on competitor’s price with less attention paid to its own costs or demand the firm might change the same, more or less than its major competitors.

Going rate pricing is quite popular where costs are difficult to measure or competitive response is uncertain. Firms feel that the going price represents a good solution. The going rate price is thought to reflect the collective wisdom of the industry as to the price that would yield the fair return and not disturb industrial harmony.

(e) Sealed Bid Pricing:

Competitive oriented pricing also dominates where firms bid for jobs. The firm bases its price on expectations of how competitors will price rather than on a rigid relation to the firm’s cost or demand. The firm wants to win the contract and this require prices lower than the other firms.

Yet the firm cannot set its price below a certain level. It cannot price below cost without worsening its position. On the other hand, the higher it sets its price above its costs, the lower the chance of getting the contract.

6. Selecting the Final Price:

The purpose of previous price methods is to narrow the price range from which to select the final price. In selecting the final price, the company must bring in some additional considerations.

Pricing – Strategies: 3 Broad Categories of Pricing Strategies

Formulating prices for new products is one of the most difficult problems faced by company management. These decisions are often complicated by lack of adequate information on both demand and costs. As the product has not been sold before, price elasticity cannot be estimated from an analysis of past data. In spite of all these problems the firm must set a price that will help sell the product and at the same time contribute something to the profits of the firm.

Basic pricing strategies can be divided into three broad categories:

1. Cost-oriented —based on total costs plus a desired profit,

2. Demand-oriented — based on a balance between estimates of demand in the market and the cost of supply, and

3. Competition-oriented —based on competitive conditions prevailing in the market.

1. Cost Oriented Pricing:

The overall process of cost-oriented pricing is known as cost plus pricing which means that the selling price is fixed in such a way as to equal to the costs of production and marketing plus an amount to cover anticipated profit. One study of pricing behaviour made in UK by Hall and Hitch revealed that a majority of businessmen set prices on the basis of cost-plus a fair profit percentage. By fair profit is meant a fixed percentage mark-up which differs greatly among industries and firms.

The use of rigid customary mark-up cost does not make logical sense in the pricing of products. Any pricing technique that ignores current demand elasticity in formulating prices is not likely to lead, except by chance, to the achievement of maximum profits, either in the short run or in the long run.

As elasticity of demand changes, the optimum mark-up should also change. If mark-up remains a rigid percentage of the cost, then under ordinary conditions it would not lead to maximum profits. Secondly, up-to-date cost data are not easy to collect. There are also some subjective elements in costing, particularly in the allocation of overhead costs. Again, cost data which are useful for accounting purposes might not be suitable for pricing decisions. Calculation of costs is particularly difficult in the case of joint products.

So companies that use the cost-plus pricing strategy generally look upon it as a starting point. The price originally set on cost plus basis is gradually adjusted to suit demand, competition and other conditions as the companies gain more knowledge and experience in these respects.

There can be no denying the fact that all prices must be sufficient to ultimately cover the costs of production and marketing and yield some profit in the long run. This is overall strategy. At the same time it is nothing else than foolhardiness, to try to have all the costs that are incurred. In the short run price should cover MC and in the long run it must cover AC.

2. Demand-Oriented Pricing:

This strategy consists in setting a price according to the demand for a product. As Joel Dean puts it, what the product is worth to the buyers, not what it costs the seller, is the controlling consideration. It is also described as ‘Charging what the traffic will bear’ — the price which will lead to profit maximization, taking into account the price sensitivity of demand and the marginal cost of production and marketing.

The fact is that at a particular time or in the short run there is something like a going rate for a product. Competition and other factors have already set a price for it. At this price a certain volume is sold which represents the aggregate demand for the product. For the industry as a whole if the demand is elastic, its sales will decline with increase in price, so more units can be sold by lowering the price.

In the case of products having inelastic demand, the producer is in a more advantageous position. He can go on raising prices up to a point beyond which there is the risks of substitutes. Where demand is inelastic and the suppliers are few, the price can be set high.

But where there is keen competition, if an individual supplier raises his price, it is bound to affect his sales. In case of old established products certain prices already rule in the market. Some firms are price leaders, others generally follow them. Still if a leader raises his price and others do not follow, he runs the risk of losing the market.

Under oligopolistic competition, most big producers are able to blunt to the edge of competition through the introduction of product differentiation and emphasis on non-price aspects. By these means an individual firm becomes virtually a sole supplier of its products and exercises considerable control over its price.

Perceived-Value Pricing:

One strategy which is usually followed is judging demand on the basis of the value perceived by the consumers in the product. The relative perceived value of the offer made by the seller is attempted to be measured and utilized in setting the price. Thus when a company develops a new product, it anticipates a particular position for it in the market in respect of price, quality and service.

Then it estimates the volume it can sell at this price, which in turn suggests the capacity to be installed, capital to be invested, unit cost and so on. Then the company judges whether at the level of production and sale, it will have a satisfactory return on investment. If it appears to be so, the company goes ahead with translating the perception into practice, otherwise it drops the proposal.

This strategy has some advantages- First, it takes into account the prevailing market situation and turns it to advantage. Secondly, it goes a little deep into the matter and attempts at measuring the intensity of demand as it exists in the minds of consumers. But it is not free from shortcomings. First, it is largely subjective. Secondly, measurement of the intensity of demand is a very difficult job as it depends upon many arbitrary elements. Finally, there is every chance the experiment may turn into a flop involving tremendous loss to the company.

3. Competition-Oriented Pricing:

This strategy means setting the price of a product on the basis of what competitors are charging irrespective of costs involved or the demand situation prevailing in the market. The cost of production or marketing may change and the demand may also change but still the firm would not change its price as the competitors have not changed theirs. It is not necessary to take into consideration the price charged by all competitors. It is the important ones that count—those who are able to lure customers away.

Competition-oriented pricing falls under three categories:

i. Market-equated pricing,

ii. Pricing below competition, and

iii. Pricing above competition.

i. Market-Equated Pricing:

Market-equated pricing consists in setting a price at the level which other competitors are charging. It is commonly called going rate, i.e., the average price prevalent in the industry as a whole. Under conditions of near-perfect competition firms have other competitors and charge the going rate. It is virtually that price at which MR equals the MC.

If price is set above this level, buyers will react by switching over to other suppliers. On the other hand, there is no scope for reducing the price below the competitive level because that will lead to loss. No firm can operate at a loss on long-term basis. Market-equated pricing is generally followed by producers of agricultural products in a locality and by small firms turning out standardized products.

Such pricing also prevails in the case of certain traditional products like soft drinks or chewing gums where a customary level has been reached over the year. The advantage of the strategy is that it is easy to apply. It avoids the difficult process of knowing how buyers and competitors would react if price is changed.

But it bogs down revenue to a more or less specified level. The so called going rate has been upset by recent inflationary conditions which are worldwide. The going rate may be disturbed by technological improvement and once it is disturbed, there is no knowing where the conditions will drift to.

ii. Pricing below Competitions:

In this strategy the price is set below the competitive rate, i.e. rate charged by competitors. Theoretically this is not possible under condition of near perfect competition. If one producer can sell at a lower price and still make profit, there is no reason why others will not be able to do likewise. In practice, however, cost structure, profit policies, etc., vary from firm to firm.

So, one firm may be satisfied with a low margin of profit per unit and a high volume of sales. Another firm may sell cheaper on the ground that its product is of slightly inferior quality, yet not inferior to such an extent that buyers will be discouraged to buy. Some firms may be able to sell at lower prices because of their lower promotional expenses.

iii. Pricing above Competition:

Sometimes price is set at a level above that which is determined by competition or what prevails in the market. This strategy is followed by a producer who may want to skim off the cream of a market. It is most appropriate when the product has got certain distinctive characteristics or the seller has acquired a reputation in the market.

For introducing new products, two alternatives are open – (a) initially setting a high price and lowering it in the latter stages of the product life cycle, and (b) setting a low price from the very beginning and lowering it further as the cost of production declines with increase in volume. The former is known as skim the cream pricing and the later penetration pricing.

(a) Skim the Cream Pricing:

Skim the cream pricing means the strategy of setting the price high in order to take away the cream of the market in initial stages. This high price need not be maintained later but may be lowered progressively as the product moves into later stages of its life cycle. Many books are priced on this basis. They start with a high priced hard-cover edition. Subsequently paperbacks are brought out and sold cheaper.

The skimming price policy assumes that the demand for the product is likely to be more inelastic with respect to price in the early stages than it is when the product is full grown. The situation is illustrated by the following figure –

The high price P₁ (in Figure A) is designed to skim off the segment of the market that is insensitive to price and subsequent price cuts (P₂P₃) broaden the market by tapping more elastic segments of the market.

The skimming pricing strategy has the advantage that it generates more profits per unit than would be possible with lower prices. By setting a high initial price and then gradually lowering the price, the company is able to reap the maximum that each market segment is willing to pay for the product.

Another advantage of a skimming price strategy is that it helps to restrict sales at a time when the firm may be unable to keep up with customers’ orders. Moreover, a high price carries the impression of good quality.

This strategy has many disadvantages. The most important disadvantage of the skimming price strategy is that the high margins associated with such a strategy attract competitors into the field. This suggests that the skimming price strategy is best used when the product has patent protection or any barrier to entry. Secondly, the initial high price may scare away large sections of buyers.

The goal of short-term profit maximization may even mean premature death of the product. In India Colgate-Palmolive once introduced a good quality perfume “Spree Forever” with an attractive outer package but it did not succeed as it was priced very high at that time —in the Rs. 20-25 range.

(b) Penetration Pricing:

A penetration price is a relatively low price designed to stimulate the growth of the market and to capture a large share of it. The penetration price strategy is based on the assumptions that the demand for the product is highly elastic as the Figure B shows and that there is no elite market that can be exploited with high initial prices.

Under these conditions, a high price (P) may actually result in zero sales. The unit cost of production and distribution fall with increased output. A low price would discourage actual and potential competition. Market penetrators are prepared even to lose money in the initial years if they find that they will be able to make up later when they will have a dominant position in the market.

Penetration policy will be successful when certain conditions are fulfilled viz., (i) the product has a highly elastic demand and the saleable volume is sensitive to price even in the initial stages, (ii) the product is such that there is the danger of competition soon after its introduction, (iii) substantial economies can be achieved in the costs of production and distribution through large scale operation, and (iv) there is no elite market for the product.

Pricing – Myths

Whether the business deals in products or services, it needs to make good decisions about prices. However, there is least awareness among the major areas of marketing and pricing which may lead to negative impact on business.

Here we explain the major myths marketers are having about pricing with certain examples regarding the technology and information flow leads to change the way in which companies negotiate with consumer.

Myth 1 – Most companies are sophisticated in researching and setting prices:

Research done by McKinsey & Co.’s Pricing Benchmark Survey reflects that more than 80% of companies do not go for any pricing research. This also has been proved by the American Marketing Association Survey.

Myth 2 – Pricing should be based upon cost:

Every marketer has to decide on the cost before setting up the price. For a marketer cost is not what the consumer wants to pay but it includes the total expenditure during production of a product plus the profit margin. Besides profit, quality perceptions, emotion and perceptions of fairness should also be considered before deciding the price.

Myth 3 – If one or more competitors are cutting prices, you have to do the same or perish:

Yes, it is true if the major players are cutting the price of a product the minor players have to cope up with such pricing in order to survive in the market. A packaged-goods manufacturer had developed and marketed two versions of a product, A and B. The versions were nearly identical except that version B’s label and packaging gave it a higher-quality look.

The company priced version A at Rs. 14.95 and version B at Rs. 18.95. As you might expect, version A was the better-selling product. Similarly, in the case of Surf Excel and Tide, the price charged by Tide was around Rs. 85 which was cut down later to survive in the market. Hence, it is advisable for the small players to cope up with the pricing in the market or to go away from the market.

Pricing – Problems

Pricing is a problem when (i) a firm must set a price for the first time, (ii) a firm initiates a price change, (iii) competition initiates a price change and, (iv) the firm produces several products which have interrelated demands.

Economists show how the price of a product is determined under different market structures. In that analysis we proceed on the basis of some simple assumptions. It is assumed that the firm produces only one product and it has only one objective – that of profit maximisation. It is often felt that there is a dichotomy between the pricing theory and pricing practice.

However, the so-called conflict between theory and practice is more apparent than real. Basically there are two ways of looking at pricing problems – one is the prescriptive approach, under which we apply the techniques of economic analysis and formulate logical pricing rules. The other is the descriptive approach, under which we study what firms actually do about their prices. In marketing management we are concerned with descriptive approach.

Formulating price policies and setting prices is a very complex problem and there are no hard and fast rules about pricing. The recent development in the field of administrative prices and inflation has once more highlighted the inadequacy of our knowledge of price making processes. Three points should be remembered in connection with the analysis of price formation.

First, pricing is only one aspect of market strategy which should be considered along with other variables like selling costs, product quality etc. Secondly, pricing policy depends on business objectives. For example, the price charged by a profit maximising firm will be different from the price charged by a sales maximising firm.

Thirdly, pricing policy may or may not be regarded as a matter of importance of the firm. Some empirical investigations reveal that big firms particularly take pricing policy less seriously than economists visualise.

Both external and internal factors affect prices. The external factors are those, which are beyond the control of a firm, and the firm must take them as given. Such factors include the government price policy, elasticity of demand, consumers’ tastes and preferences, purchasing power of the buyer and so on. On the other hand, internal factors are those which are within the control of the firm. Such factors comprise cost and the management policy towards the gross margin and sales turnover.

Price is the amount of money charged for a product or service. Pricing is a critical aspect of marketing because the price set for a product or service involves and affects every aspect of organisation.