MEANING OF PRICE

of
price is the single one element in marketi ng mix, which generat es revenue and income. Price
to
duct is the amount of money that the buyers have to pay in order to purchas e it. Price refers
::ney e
value of p~~duct f~atures which charged or expecte d to charge from a cust_om er in exch_a ng_
Pnce ts
of the expected utility. It 1s the exchang e value of a product or service express ed m money.
paid by a buyer for a produc t and represe nts a sacrifice of his purchas ing power.

DEFINITIONS OF PRICE
"Price is the amount of money charged for a product or service. It is the sum of all the
values that
consumers exchange for the benefits of having or using the product or service. "
- Philip Kotler

"Price is the amount of money needed to acquire a product with utilities."

the factors
"Pricing is a managerial task that involves estabHshing pricing objectiv es, identifying
in monetary
governing the price, ascertaining their relevance and significance determi ning the product value
terms and formulation of price policies and the strategies, impleme nting them and controlli
ng them for the
· - K.C. Kite
best results."

ROLE AND IMPORTANCE OF PRICING IN MARKETING

Prices and price policies are of great importa nce to the manufa cturer, wholes aler, retailer and
the
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thi' pri) !it,1 bili t) of ,my bus 1·n es~

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, 11, pricinp,:.__ _ _ __ _ _ _7
nrg,rnis,111\m . th' nilc pl,1, i t1
I Central Point of Economy
The fnlln \\'in g p11111ts i''-P ,1111
t

Demand Regulation

competitive Weapon

Profitability Determinant

lmport.=int Decision Input

Promotional Tool

Base for Marketing Strategies

Determines Standard of Living

Different ways of Pricing

Communicates the Quality

Coordination with Distributors

hou t prices in
tral Poi nt of Economy. The re can not be any type of ma rke ting wit
1. Cen ply in a competitive
modern economy. Price is decided by free play of dem and and sup
ness
nom y. Pric e occ upi es the cen tral poi nt in an eco nom y wh ich regulates busi
market eco tion.
s the eco nom ic reso urc es for opt imu m pro duc tion and distribu
profits, allo cate production,
resources. The pri me reg ula tor of
Economics revolves around pricing of of consumer are
duc ts is price. Pur cha se decisions
distribution and consumption of pro It helps to
influen ced by pric e. The pur cha sin g pow er is reflected by price.
greatly directly or
the gen era l living stan dar ds. Eve ry aspect of our eco nom ic life is
determine omy.
ern ed by pric e. Hen ce, pric e is the pri me mo ver of the wh eel s of the econ
indirectly gov
nomic gro wth .
Price is a powerful agent of consistant eco
2 De~ and Regulation. Price acts as an ins trum ent to reg ula te the dem
and of products of tl1e
· .
org anis atio n. The re is an inv erse rela tion bet we en the pric e and dem and
business ·
t price
If · · eases demand falls and if price decreases dem and increases. The produc
pnce incr oun t of surplus
be. reduce d by ma nag em ent of firm to pro mo te the dem and on acc
may on accoUJlt
tion cap acity. Pric e ma y be inc reased to dis cou rag e the dem and
produc
 p co Polle/es and Methods

harnpt•n ·d mput cl \ c1 ilabilit_v . ID

p 111mnd1t\ . · wn•c1 st•s
l fl'l1C't', f)ritt• 11 J
C
or re un•s !ht> d t•mond for the

Price
t i i t Demand
Price Demand
3. Competitive Weapon. Price is a
'
compe titors. A f'1rm has to dec·d, . powerful
. . compef1five weapon to compete with th
• • J e , ts pnces m ace d . e
TI1e entire marketing process . . or ance with the prices of competitors
. d 1
is cosed influenced b h . .
mtro uces a ne"' product laun h . Y t e pncrng policy. If a competitor
' c es a sale promof .
product to extend its market sh , . ,on compaign or decreases the price of his
an:, tie1 firm may I . ·
company can reduce its nnce k . oose its markets to competitors. The
r or ma e a smtabl h .
successfully with the move of co .. e c ange rn the pricing policy to meet
· mpehtion.
4. Profitability Determinant. The 1 bT
ft 1
increase or decrease in the . prof a ity of a company is determined by price. An
pnce O products brin b t ·
profitability. Price is th b . f . gs a ou a rncrease or decrease in the
tb dt ch d f e as1s or generating the profits in the firm . Profit motive of a finn
canno e e a e rom price determination.
5. Important
. Decision
. . · · m akin g rnput
Input. Price acts as a signifi'cant d ec1S1on · rn ·
· a vanetv of
marketing
. deas1ons
. · The function of · · · ·
pncmg 1s more rmportant the consumer response to ,
pnce changes IS more tangible and faster on account of the higher marginal value of monev.
The ~ajor decisions in consumerism centre revolve around the price levels. Hence, pri~g
IS an important managerial function of marketing.

6. Promotional Tool : Price in combination with promotion becomes a strong tool for
influencing customers to purchase products. It highlights the image of the brand to increase
sales.
7. Base for Marketing Strategies : Pricing plays a significant role to set guidelines and
boundaries for management to set marketing strategies.
8. Determines Standard of Living : Pricing determines standard of living. The lower the
prices in the market, the higher is the purchasing power in the hand of buyers. Price reflects
purchasing power of the market.
9. Different Ways of Pricing: Depending on the marketing programmes, business firms use
price in different ways- demand oriented strategy, cost oriented strategy and competition
oriented strategy.
10. Communicates the Quality : Price communicates the quality of the product. It should be set
in relation to the delivered value and perceived value of the product.
. h uld b d' ti' Tith distributions.
11. Coordination with Distributors : Pnces s o e set in coor ma on v\ .
'd hi d ' 'b tors to aggressn e1\
Most business firms strive to prov1 e gher profit margins to IStn u ·
promote the products to buyers.
PRICING OBJECTIVES
Establishment of pricing objectives is the important managerial activity in the managcrn,
pricing. Pricing objectives serve as the standards against which an effort is made by managernc,nt !\f
decide the prices and frame the pricing policies and strategies. It is a managerial activity to int:~ l()
the pricing with other inputs of marketing to develop a common framework of marketin g at~
g ancJ
corporate objectives.
Some of the following pricing objectives of an organisation: -Pricing Objectives

1. Profit Maximisation. Profit maximisation is the

traditional and important objective of pricing in Profit Maximisation
organisations. Business firms attempt to maximise
Survival
their profits through the mean of price in a given set of
market conditions. Marketing executives have a long-
Return on Investment
term perspective while establishing the objective of the
profit maximisation. This objective aims at making as Market Share
much as money as possible. Business organisation can
sacrifice some short-run profits by reducing price to a Prevent Competition
capture market share and to face the competitors
successfully. Price Slabllisation

2. Survival. The basic objective of pricing is to survive.

Resource Mobilisation
Business firms bear almost any type of difficulties like
short-run losses, internal restructuring etc. If these are Maintenance of Reputation
necessary to continue in existence. It should be a short-
term or a temporary objective and is only adopted by Quick Cash Collection
the organisation to face a survival crisis. Price is used
to expand sale volume to levels that balance the firms' expenses.
3. Return on Investment. One of the prime objectives of pricing is an adequate return on
investment or net sales. Pricing helps in achieving the predetermined profit in form of
return on investment or sales. It is based on the thought to generate a sufficient return on
capital invested for particular products of departments. The sales revenues yield a pre·
determined average return for the firm to recover all the fixed expenses and costs incurred
by the company over a period of time. It is usually a long-term objective and very common
in both public and private business organisations. This objective is generally followed by
companies that are industry leaders because they are in a position to establish industry
standards.
4. Market Share. Price is an important input used by a company to secure a target market
share. Market share refers to that segment of the sale of an industry which a firm desires 10
attain. It is generally explained as percentage of industry sale. Price carries the heavieSI
responsibility to improve or maintain market share. Market position in relation to
competition is a very significant benchmark of success. An organisation may establish a
target market share as its main pricing objective.
5. Prevent Competition. Another important objective of pricing is that it can be used as all
important weapon to meet the competition or to prevent the competion. A firm may set
 . po//c/es and Methods
prfCI.
rices to discourage new competit f ~
P . ors rorn enter·
to keep the pnces at the same levels of ri mg the market. Meltin co ..
and cost factors are to be considered
.. .
p ces as fixed by cornpetito
more or less identical
i
rs.
thix:r'petition refer
s case, quality
rice stab1bsabon. The obJ·ective f b' . . ·
6, P 0 sta 1lismg .
fluctuations by checking the frequent . prices refers to elirninat li .
. . f . increase or deer . e eye ca1 pnce
run obJective
.
o a business organisati . ease m the prices. It may be 1 _
. . . on. 1t aims at . a ong
fluctuations m prices which results in fluctu tin . preventing frequent and violent
also prevented through this objective of p . a g ~r_ofit~. Price wars amongst competitors is
made to design prices in such away th tcte stabilisation. Under this objective an effort is
. a 1 ranges within th f limi. '
slump pnces are not allowed to fall below . e sa e ts-during business
. b a pomt whereas dur· . .
allowed to rise eyond a point. Hence 1-t. . . mg prosperity pnces are not
, 1s responsibility f · 1
stable prices in an industry to check the undesirabl ? pnce eaders to maintain the
.. . e change m the market share and profits.
7· Resource Mob1hsation. Resource mobilisati·on is · th
ano er very criti 1 b. · f · ·
Prices are deliberately set high for certained cas . h ca o Jective o pncmg.
·1 bl · h .es m sue a way that sufficient resources are
made ava1 a e e1t er for the own expansion of th
. h e company or for the developmental
investment m t e economy. Petrol prices are set very high ·t h
. as 1 earns a and some revenue
for the government m form of taxes and excise duty used for infrastructural development in
the economy.
s. Maintenance of Reputation. Pricing helps to maintain the reputation and image of an
organisation. Every business firm has its own identity and image among its customers.
Reputation includes sum-total of impression inform of products, packaging, branding,
graphics that the customers have about the firm. This reputation of a firm closely depends
upon proper management and handling of weapon of pricing. A company known for its
high quality and high price cannot take the risk to produce low quality and low priced
products. Hence, pricing policy helps to build the image and reputation of a company.
9. Quick Cash Collection. Pricing objective may enable a firm to collect the cash quickly in
respect of products sold. It may be essential for a growing company to accelerate cash
inflow from selling activities for its developmental products. The firm can design its price
structure in such a way that it encourages cash sales and discourages credit sale.

FACTORS AFFECTING PRICING DECISIONS

Pricing decisions are influenced by numerous factors. Pricing decisions require a s~dy. of the
overall marketing environment of a company. All the factors influencing the price determination are
grouped into two categories.
(I) Internal Factors
(II) External Factors

(I) Internal Factors

. . . the study of internal
1. Organisational Considerations. Organisational consideration is t ti n This internal
. . kin and its implemen a o .
arrangement for price dec1s10n-ma g process . . Management must
and tune to time.
mechanism widely vary from company to company ill b ade acc<3untable with
appoint the authority to set the prices for the products; who w em
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Factors Affecting Pricing D1cl1lon1 .

Internal Factors [ I· ,10111a11 0,,10,. ]

Organisation al Consldor~tlons J Prorluct Domund j

Marketing Mix I Compolltlon

Product Differentiation [Economic Condition~

Product Costs Buyer Behaviour

Product Life Cycle Price Quality Relationship

Pricing Objectives Negotiating Margins

Functional Position Political Factors

Effect on Distributors and Retailers

Buyers

Market Position of a Company

2. Marketing Mix. Price is one of essential components of market mix that a firm utilises to
attain its mrketing objectives. Other components like promotion, physical distribution,
product have a close impact on the pricing decisions. Marketing executive must consider
01
the total marketing mix while setting the price of a product. Any change in one variable
marketing mix has an immediate impact on all other variables of the marketing mix. Price
can't be isolated from other elements of marketing mix i.e. product, promotion and pl~ce.
Therefore, in most cases, the company will consider price alongwith all other marketing
mix elements.
3. Product Differentiation. Product differentiation is the technique which provides freedoJ11
th
to the organisatio n in deciding the prices for the products if performed better than e
competito rs. Product differentiation helps the producer to show his product seprate {rof!l
 . poIlCjeS au u m~"''"'~- ~ - -
- .- - - - - - - - - ~ - - -
price . t·
lie co mpetitors prod uct. Product differenti a wn can be d one thr ough package design,
t . vertising message etC.
C
oJour, share, bran d mg, ad
n exists betw een th e costs and pric p ne · d f
ro duct Costs. A close relatio b c e. e sta n s or cost plus
4 P it. The pr ice of a pr od uc t is greatly determined 0sts. There are two types of costs of
· rof co st p· d Y h
Pcompany i.e. fixed costs
and va ria bl es
s. IXe co sts remain. fi xed and d o not c ange
nd .
a level, on the other ha th the level
with production or sales od u t, v~ ~1 ab le costs d1rectly vary wi ·
of co sts on pr n be stud·ied m · th gh t of ratio
li
roduction. The influence c pn cm g ca . e
tial scale of operation · Ce
rtain
ble costs, and substan
Of P
of fix ed costs to va ria ec on of fil es of .
. th
er e
•
m w
h'
1ch va ria bl e costs occupy th e greater proportion of .total. costs.
mdustn. es are. kn .
ns itive indu str·1es because even a ffilnor nse m price
.
ow n as pn ce se
These m du stn es ar. e
co m pa ny ca n b •d d if 1arge sea1e econoffil.es
are of a e w1 en e
adds muc h to earrungs. Market sh . ice m ay be red uced to expand mar et
k
. ati on s of a fir m Pr
e oper ·
are attainable th ro ug h th
share in Jong-run. oduct. A
-c yc le ha s a do se im pact on the pr ice of a pr
s. Product Life-Cycle . .Product prlifeicing policies in different states of life cycle. Market
compan~ adop_ts ~iffer~
nt
du cti on sta ge wh ich builds reputation in the
1 table in the in tro
penetration policy s Sm t to ler ate d by bu ye rs in the growth stage. The
creased to the exten ease the
market. Prices can be in te d in the sta ge of product maturity to incr
m in g can be ad op to be
po lic y of m ar ke t sk im
of co m pe tit or s. In the decline stage, prices are
the presen ce
price with ut m os t care in are.
lowered to maintain th
e de m an d and market sh effort is
tives se rv e as the sta ndards against which an
icing objec nce,
6. Pricing Ob je ct iv es . Pr t an d fra m e th e pr ici ng policies and strategies. He
of pr od uc e
made to decide the prices th e pr e- de cid ed objec tives to be achieved by th
y de pe nd s upon tives on which pricing
the nature of pricing polic d in ter -d ep en de nt ob jec
ni ne inter-related an tives of
management. There are be cle ar ly de fin ed in the light of overall objec
tives sh ou ld
depends. The pr ic in g objec
the firm.
a firm is also influenced by the functional
The pricing policy of ppened
7. Functional Position. r, ag en ts an d retailer . The pr od uc t price is ha
ole sa ler , de ale
position of pr od uc er , wh
ca se of a lo ng ch ain of distribution channels.
to be higher in

II) External Factors ha vi ng great effect on price is pr

oduct
po rta nt fa cto r
1. Product Demand. Th
e single m os t im re levant to product pricing
.
t de m an d ar e ve ry
d size of pr od uc ice increases
demand. The na tu re an uc t de m an d and price of a product. Pr th
n betw ee n pr od
There is an inverse relatio ac ts as an in str um en t to regulate e
ice
creases de m an d rises. Pr nd
demand falls and price de by man ag em en t to pr om ot e the dema
e price m ay be reduced mand of a P uct.
rod
demand of the pr od uc t. Th ca se s re lat in g to th e de
uc tio n. There are four
on account of su rp lu s pr od . • th er 1m· portant external .factor
. ano
2. Compebt • . The pr ic in g strategies of competitors 1s f' •t
• ion ·ces 1·n accordance with the
. . 1x 1 s pn
inf1 uencmg. the pricing decisions of a firm. A firm has to I ve we
fti apon to me d.
et
d
is tre at ed as a po w er compe ca n be stu 1e
·• titors. Price • · du str y
Pncmg of products of compe el of co m pe
.. m
tit 10 n an m y the re
.
lative
an d tit or s. Th e lev . • the in du str
compete with the compe nu m be r of firms m
'
·th rs su ch as th e ti tion and ea se to en try .
WI references to various facto t d1
'fL1
er en a
siz es Of d'ifferent companies of the industry, pr od uc
 Price : Policies an d Me
thoct,

fi is importantly inflik. luenced by th~

Il l . caj
. . pohcy of a The various. factors
g
rm e eco
. no. mi
• Co nd iti on s. The . pn cmin the country. mco111.e
3. Econonuc 1
.
. . b·i ·t y, na tional mcome, pe.r-capita
. conditions preva1 mg. s oll tic al sta. The economic factors like tra 1 1
.
de b 00111,
econowc t reg ula tw n , P s.
. . s governmen h · ing strategie t of pr od uc tio n an d the
pn ce .
cond10 on , pa ct on t e pn c t1 .
h a strong im d int ere st rat e affec t bo th ,e cos pa y the pn ce for a
etc. ~ve . . an . ·t. the bu ye r wh.o ha s. to t th ..
recess10n, mflanon th ess of ma rk eting, I fisbu ye r ha ve dIIect rmpac on 1 e pricing
4 Buyer Behaviour.
. In e proc and behav1. 0ur o sin es s bu ye r an
d f"
ma users. The
·t·10 f b i e bu
.
Product. Bo
th the composi ntwo types o uyers bu . .
ye rs lik e wholesaler, retailer and
for
h .
are ol1.c1es for usmess b . types of
Policies of the fir
m. T ere · · the co mp an y for both the.
d t d by
firm s fol low dif ferent pn cm g P y cannot be a op e ich assist
. · · fe
1 th t' ns an d reactions of bu ye r wh
fin al user. A smgleye pn cm g po highlights e ac IO
consum ers . Th e bu r behaviour .
pr od uc ts. products.
in deciding the prices of the inf l ce s qu ali ty pedrchiepgh tio ns of ins
er the tin ti
. . g 1y ue n . . c ve
Re lat ion sh ip : Pn ce str on od uc t 1s pn ce ,
5. Pr ice -Q ua lit y • tor of qua 1 · 1·t y If a pr b hi h
indica
Customers use price as an t the qu ali ty of the pr od uc t muS e
t g er.
sto me r is tha
judgement of the cu · lie r to re .du ce .pr ice an d in such
• : A buyer ma y expect its su pp of
6. Negotiating Margms pa ys is dif fer en t fro m the h st pn ce . ~e se _types
bu ye r discoun . ts ,
situations the price that the k an d t a k e the fo rm of or de r-s ize
· · busmess ma · r ets s
discounts are pervasive m dis co un ts, an nu al vo lu me bo nu s an d promotion
t pa ym en t
competitive discounts, fas
allowance. dd lem en like
tai ler s : W he n pr od uc ts ar e so ld th ro ug h mi
s and Re by them.
7. Effect on Distributor rs m us t ref lect th e m ar gi ns re qu ire d
pr ice to cu sto me
retailers, distributors, the list e intermediaries wa nt hi gh
er pr of it.
ice s wi ll be hig h be ca us
Sometimes list pr sts , po lit ica l pr es su re may
e wi th pr od uc tio n co
8. Political Factors : W
here price is ou t of lin
act to force do wn prices. s of
d bu sin es se s th at pu rc ha se a pr od uc t or service
9. Buyers : The vario
us consumers an tu re an d be ha vi ou r for the
ici ng de cis ion . Th eir na
luence in the pr
company ma y ha ve an inf ice etc . in flu en ce wh en th eir nu m be
r is large.
uc t, br an d or se rv
purchase of a specific pr od e minds
ar ke t po sit io n or th e im ag e of th e co m pa ny in th
Company : M y
10. Market Position of a ty, tec hn olo gy , du ra bi lit y, us ef ul ne ss etc ma
pr od uc t mix, qu ali
of consumers reg ard ing its
ions of the co mp an y.
also influence the pricing decis
DURE
RICING PROCESS/PROCE set
x. It en su re s a sy ste ma tic an d lo gi ca l m et ho d to
mi
rtant element of· ma rk eti ng · · and
P~ice is an impoinv
ste ps ol d · · ll dif fer de pe nd in g up on th e pr ic in g objectives
pn ce . Th e
ve m pn cm g pr oc es s wi . . . .
me th od s selec ted by the fir m A 1 · 1
ap pr oa c
h
to pn cm g mv ol ve s th e fo llo wi ng ste ps
· og1c a
Th fin e pr ice for. a
1. Identify the Target Cu
stome G
ro up s. e al us er s ar e th os e wh o pa y th
rs · t • .
pr od uct. They ar e the ce
ntral . .
cm g po lic y. Th e fir st ste p in th e pr ice fixation
. g the po tenpo
. ym rn m pn de sig ne d. The
. 1'd en tif t' 1 om th e pr ic in g pl an is
pr oc es s 1s
Ia cu sto me rs fo. r wh .
. d the ir b · b h 10ur in flu en ce th e pr ic e fix ati on pr oc es s to a
ty pe of po ten tia l bu ye rs an uy m g e av
great extent.
p'nr-- - - - - - - -

Step s Invo lved in Pr'ice p rocess

Identify the Target Customer Group

Estimating Demand

Determine the Price of Competitors

Identification of Alternative Basic Prices

Calc ulate Net Price of Producer

Estimate Costs

Calc ulate Expected Profit

Deve lopin g a Feedback System

ess of pric e is the estimation of demand. The

2. Estimating Dem and . The nex t thing in the proc
the products. The dem and estimation
marketing executives will estimate total demand for
ions of distribution channels and
depends upo n various factors like sales forecast, opin
grouped into homogeneous buyers on
degree of competition in the market. The markets are
The market potential is determined by
the basic of regional, economic, demographic factors.
stud y of dem and is the segment of the
trying different prices in different test markets. The
ate the fair and accurate price ranges
research activity whi ch allows the marketers to estim
the dem and will be inelastic for the
that might be charged. If there is a possibility that
product then the pric e can be kep t high.
tive profile in the mar ket has muc h to
3. Determine the Prices of Competitors. The competi
in taking the pricing decisions in an
do with price fixation. The firm has to be careful
near future in the market. It becomes
intense competition pres entl y or likely to be in the
ntially for mar keti ng exec utiv es to get the exac t information abo ut the pricing policy of
esse
and the desi red mar ket share on the
the competitors. Mar kete rs can select a bran d image
to price above, below or at par in
basis of competitive reaction. It enables the firm
accordance with the level of competitive pricing.
c price is the list price whi ch is fixed and
4. Identification of Alternative Basic Prices. The basi
t step, after identifying the potential
quoted by a com pan y to its customers. The nex
tors ' price is usua lly possible to explain
customers, estimating dem and and finding com peti
pric e from whi ch actual prices can be
the basic pricing alte rnat ives . It is the referencP
basic prices due to price differentials
decided by the firm. Act ual pric es differs from the
erences caused by market segments.
with different prod ucts in a pro duc t line and diff
ing alte rnat ives dep end s upo n the pric e rang es with in whi ch a firm selects to compete
Pric
and price elasticity that exists.
5 diar ies like wholesaler, retailer etc· are
· Calculate Net Price of Producer. Cer tain inte rme
use ........,..,.,.,, eces sar to calculate the amo unt the basic price
 EIJII -.. ,aa.
unt retained by these intermediaries. If the prou
vable to producer and th e amo . 1 f. Uq
pa_ f turer to customers without the mvo vement o mterrnect·1 1
directlv sold bv the manu ac . . h · f ar1l..
· . · d'ff between the basic pnce and t e net pnce o producer. ,
then there will be no 1 erence . . .
~h t t in the process of pricing 1s the estimation of costs. The
6 Estimate Costs. l e nex s ep . . . re ar'
· . fi d sts and variables costs. Fixed costs remain fixed and d ~
two types of costs 1.e. xe co d' 1 o not
. d ti' sales On the other hand variable costs 1rect y vary With
change with pro uc on or . f . the
level of production. Generally, price stands for cost plus pro it margm. The price of a
product is greatly determined by these costs.
7. Calculate Expected Profit. One of the important steps in pricing process is the calculation
of expected profit.
Expected Profit= Total Cash Inflows - (Expected Output x Cost Per Unit)
Break Even Analysis can be used easily to estimate the expected profit. The relationshi
between total costs and total revenue at alternative price levels and volume of output an~
sales are easily explained through Break Even Chart.
8. Developing a Feedback System. It is always appropriate to develop a feedback system so
as to monitor market reactions after having decided the product price but before quoting it
as the list price to buyer. This feedback received by the management to study the
effectiveness of price in achieving the pricing objectives.

METHODS OF PRICE DETERMINATION

There are large number of price determination methods available to firms to resolve their pricing
issue. The choice of method would depend upon the pricing needs and decision input constraints
faced by the management.

(1) Cost Based Pricing Methods

Under cost based method of price determination, the cost of producing a product uses as the base
for price fixation. The cost-based methods includes,

Cost Plus Pricing

Cost Based
Pricing Methods

Break Even Pricing

1. Cost-Plus Pricing · Cost-plus pncmg

· · metho d 1s
· a1so known as mark-up pncmg.
· · Th'1s
method is considered the bes t me th o d of pncmg
· · · very popular in retail trade and
and 1s
wholesale trade It is very · 1
simp e an commonly used pricing method. It is based on the
, . · d
sellers per-urut cost of the product plus an additional margin of profit.
Types of Costs. Management
.
'd •
may cons1 er different types of production costs for t e
h
purpose of pnce determination Th h d
. . · e costs may be broadly classified as Total cost, over ea
or fixed cost and Variable cost.
Total cost= Fixed cost+ Variable Costs of p d •
ro uchon
 . policies and Methods
price• lilll
f,ixed costs = Depreciation, salary d
ction level) an wages, rent, rates and taxes (donot vary with
pwdu
Variable costs = Cost raw materials, sales and distribu . .
(vary in proportion to the f
1eve1 o output) hon expenses, cost of packagmg and
storJJ1g
Break Even Pricing. Under this method .
2. k even analysis lt determ. th . , manufacture tnes to fix the price with help of
brea ak . t. mes e prices at a desired percentage return over and above
the bre even porn .

Break Even Volume= . ~ixed Cost

Sellrng pnce - Variable Cost

Total Revenue

Total Cost
en
U)
0
(_)
'1:1
C:
ell Variable Cost
en
(I)

ell
Cl)

Fixed Cost

Output

Advantages of Cost Based Method

1. Simple. It is a simple and easily understandable method of pricing. It is easy to estimate the
cost with this method.
2. Competitive Harmony. It ensures greater competitive harmony and helps to reduce price
war-amongst the competitors as all firms in industry and uniform mark-up to their costs to
determine the price.
3. Socially Fair. Cost based methods are socially justifiable in comparing to demand oriented
or other methods of pricing. Manufacturer remains content with a fair price even in a
favourable and rising demand.
4. Safe. Cost based price is safe from the manufacturer point of view as it guarantees tht'
recovery of cost of production and distribution.
5. New Technology. This method is quite reasonable to follow in case when production
problems and long term cost conditions cannot be predicted easily in a case firm is interfaCL'
with new technology.

Disadvantages of Cost Based Method

1
· Ignores Demand. The biggest limitation of cost-based method is thill it ignon•s thl' dem.1 nd
factor which has an equal influence on the price and sak•s voluml'.
 n:wn. f cost-based method is that it fails
~ . r weakness o t (i

etition. One of the maJO otentia1 competition.

2. Ignores Com~d ation both current and p . ot always relevant to the Pricih
· t cons1 er t which 1s n "tg
take 1Jl o . re based on cos I ant relative to the full cost in cert .
1 vant Cost. Pnces a ·ty cost is more re ev alt\
3. Jrre e tal or opporturll
·wation. Incremen .
st . f w product on account of lack of c
situations. . lement in case o ne Ost
It is difficult to imp
4 New Products. . the market .
. experience and without testing t enalise inefficiency for ~low progress. The price
Jty for Inefficiency. It does no p k toppages material wastages etc. If fact it
5. No Pena . es due to wor s ' '
will sufficient to cover the cost_ r~s
. ·um on efficiency·
tends to give a pretnl

(II) Competition Based Pricing . f . ing of its competitors for similar

. · On the basis o pnc
A firm also has the option to set its pnce f' d technique of pricing in which a firm
.. d . . y be de me as a . .
product. Hence, competition base pncmg ma . etitors by disregarding its cost and
try to determine this price more or less at par with its comp .
demand situations. There are two forms of pricing in this category i.e.
Going Rate Pricing

Competition
Based
Pricing
Sealed Bid Pricing

1. Going-Rate Pricing. Going-rate pricing is an important method of competition-based

pricing. The firm may charge the same price as its competitors charges without giving
attention to its own costs or demand. Companies in industries like steel, paper or fertilizers
normally follow this method of pricing. This method of pricing is also suitable where it is
difficult to measure the costs and demand for the product. It shows the collective wisdom
of industry to the pricing which ensures industrial harmony and fair return.
2. Sealed Bid Pricing. Sealed-bid pricing is used when firms bid for jobs. Under this method
of pricing, a firm determines its price as low as it thinks the competitors will price rather
than considering its own costs or its demand. The winning bid needs lesser price than other
competitors to win a contract. The chances of getting a contract will be less if higher prices
are determined by the firm.

11. Demand Based Pricing Methods

Demand Modified BEP

Demand Based
Pricing

Perceived Value Pricing

The primary feature of this method of ricin . .
P g is the expectation of profits depending upon
 ____ _____
. po/fcfes an Merrrc""",__,_ _ _ _

P~
~- oernand of the pro duc ts has a cJo se
.
unp act on the pric e. The re are two ma in me tho ds bas
ed

~t10· .
j_ficatwn. . . . .
P1"'. . . . 1s det erm ine d to ach iev e
oe ·5 c1aspei s
llan d Mo dif~ e~ Break_ Even_ An aly
sis. Un der this me tho d pri ce
ofl tliJ es. In ord er to set the
hig hes t pro fit m con sid era tion of the dem and ed at diff ere nt pric
1- be join ed
:a:jc pric e at wh ich a firm ~~ y ma xim ise pro fits , the cos t and vol um e dat a ma y
.
to dev elo p the bre ak- eve n pnc mg

0 utpu t
er' s
Pri cin g. Va lue -ba sed pri cin g refe rs to det erm ine pri ces bas ed on buy
2. Per ceiv ed Va lue
rat her tha n on the cos t of sell ers . Value bas ed pri cin g def ine s tha t the
perceptions of val ue pro duc t val ue. Pri cin g sta rts wi th
bas ed on buy er per cep tio n of the
firm decides tar get pri ce ide d in
the con sum er exp ect atio ns and val ue per cep tion s and pri ce is dec
studyin g
the cus tom er.
accordance wit h the val ue per cei ved by
the val ue per cei ved by the con sum ers . Un der thi s me tho d, buy ers
But it is difficult to me asu re pro duc t.
the y wo uld pay for a bas ic pro duc t and for eac h ben efi t inc lud ed to the
are asked how mu ch val ue
pay a hig her pri ce dep end s upo n the ir per cep tio n of the qua lity and
The desire of buy ers to ma rke t res ear ch in ord er to set the
. Th is me tho d req uir es pro per
ey attain from the pri ce the y pay
effective pri cin g.
arket's perception of val ue as a gui de to

RICING POLICIES AN D ST RA TE GI ES
On the Basis of Cost and Demand on the
Pri cin g Po lic y: It is the mo st bas ic me tho d of pri cin g wh ich is bas ed
l. Cost Ori ent ed er.
t inc urr ed by the ret aile r in ma kin g the pro du ct ava ilab le to the cus tom
cos
2 g Po licy : De ma nd ori ent ed pri cin g is a me tho d of pri cin g in
· De ~an d Oriented Pricin pay .
em pts to set pri ce at the lev el tha t the int end ed bu yer s are wil lin g to
which the sel ler att
On th e Basis of Price Level
1. Meeting Com t'ti' p 1· : C om peb · e pn..
·tiv cm g con sis ts of set tin g the pri ce at the sam e
a , pe on o icy
I
com pet itiv e
8 8 pet ito rs. It is oft en use d wit hin we ll-e sta bli she d and hig hly
one com
markets.
 MUSH
Price : Policies artd At....~
. -.. 10o.
2. Below the Market: Under this method, products are offered at a lower prin• than the
rate. gflli
3. Above the Market : It refers to an order to buy or sell at a price higher than the ,
market price. 1.:urrt'tit
111. On the Basis of Flexibility
1. One Price Policy: One price policv a strategv in ,..,,hich the seller offers the sarn
15 .
. . · · e price
every customer irrespech\ e of volume or pavment for purchase. The price does I()
. -
according to payment method or promotional offers. Customers cannot negotiate thenotricary v

2. Flexibile P~cing Policy : Flexible pricing enables price segmentation by offering difer:·
segments different rates. Comparues are able to offer similar product at rates appropriat nt
each buyer. e lo
IV. On the Basis of Geographical Conditions
1. Uniform Delivery Pricing : It is a type of pricing in which buyer would
be able to purch
a product at same price irrespective of its location. ase
2. Point of Production Pricing : Under this policy, the seller quotes the selling price at th
point of production and the buyer selects the mode of transport and pays all freight cost. e
3. Zone Delivery Pricing : It is the process of establishing prices for products depending on
where people buy them.
4. Basing Point Pricing: It refers to a system in which a buyer must pay a price for a product
inclusive of freight costs that does not depend upon the location of the seller.
5. Freight Absorption Pricing : It is a pricing policy in which the seller absorbs all or part of
the freight charges to get the desired business .

. On the Basis of Speciality

1. Skimming Pricing Policy : Price skimming is a product pricing strategy by which a firm
charges the highest initial price that customers will pay and then lowers it over time. It
involves setting high prices when a product first enters the market to skim profit from those
willing to pay more before gradually lowering the price to reach the remaining markets.
2. Penetration Pricing : Penetration pricing is a marketing strategy used by businesses to
attract customers to a new product or service by offering a lower price during its initial
offering. The lower price helps a new product penetrate the market and attract customers
away from competitors. It relies on the strategy of using low prices initially to make a wide
number of customers aware of a new product.
3. Price Lining Policy: Pricing lining is also called as product line pricing. It is a marketing
strategy where a business prices its products according to the quality, features or attributes
to differentiate it from similar products.
4. Unit Pricing Policy : Unit price is the price for a single unit of measure of a product sold in
more or less than the single unit. The unit price tells the cost per kg.
5. Bait Pricing Policy : Bait pricing refers to an advertising strategy used to attract ~ustome:
by making them think that they have to pay less for something that costs more. It 15 used
attract customers by advertising low priced models.
 . ·es and Methods
po/JCI
pricC. • ••
psych0Jog1cal Pnc1ng : Some busines f' lltt
b, f bl s irms char
rices have a avoura e psycho1og·ica I effect ge odd prices like~' 99 ·90 or J 99 90 Such
Pstilt jn more sa1es. on customers However, such prices · · may
re. ·
ChaJ111 Pricing : Sellers often set pr·ices on the basis f h
7.
of the n~mber s used to express the prices. This meth~ t. e presumed psychological meaning
. set w1th the hope that custom ers wil] . d 1s called charm .
pricing Ah'1gh pnce
15 conside r the d . •
features. pro uct as uruque, consisting of special

customary Pricing : Custom ary pricing IS . th .

8• e prachc Of · a simple and well known
price for an extende d period of time. e usrng

: Image pricing are often · d h'igh It is also

9· Jmage Pricing price II d ·
are charged to portray a quality image for a brand. · ca e as prestige price which

oly price is set b

10 Monopoly Price : A monop d ya monopoly. It occurs when a firm lacks any
. viable compet ition and is the s 1
o e pro ucer of the product in industry The firm has
.
absolute market power and can set a price above th e margrna . ·
1cost of firm.
11 Price Discrim ination Policy ·· It is a se11'mg strategy that charges different prices from
•
different custom ers for the same produc t based on wh at the se11er thinks they can got th e
customer to agree to.

12. Dual Pricing Policy : Dual pricing is the practice of setting different prices in different
markets for the same produc t. The same produc t is sold at different prices in different
markets.
13. Administrated Pricing Policy : An adminis tered price is the price of a produc t as dictated
by a govern ment or centrali zed authori ty as opposed to buyers and sellers interacting
according to deman d and supply.
14. Sealed Bid Pricing Policy : It is a compet itive pricing method in which prices are decided
on the basis of quotati on/ estimat ed price or in sealed bids. This method of pricing is
usually used in constru ction or contrac t business. A tender notice is printed in the newspa per
about the work proposa ls, type of job, quality and duratio n of project. Interested parties
send their sealed bid stating their price, particul ars before deadline. On due date, submitted
sealed bids are opened and allocate d to bid at a lower price with satisfaction conditions.
15. Break Even Price Strateg y: Break-e ven price is the price at which the cost to manufacture a
product is equal to its sale price. It is often used as a competitive strategy to gain market share. It
is the practice of setting a price point at which a busines s will earn zero profits on a sale.
l6. Loss Leader Strateg y : It is a pricing strategy where a produc t is sold at a price below its
market cost to stimula te other sales of more profitab le goods.
3. c ost-demand Based 44'-'" ur-uo1cc--cc~wreeeie1rr1Timiee:S<Se:;"tfvWr./l..OY:.~ - - - - - - - - - - - -

This method removes the defi . .

;
bas,s of cost. data from
. . .
accountmg ciencies
records dof the cost-based and demand ba,ed pricing. On the
even analysis. This IS also known b ' emand schedules are built so as to develop the break-
·
and sa es voIuroe d e terrmnes · ·
the a as reak-even pncmg. Because the interrelation~hip of costs
I 'f£
the effects o 1 erent prices on rof mount of profit 1 . .
. 1 or oss, break-even analysis helps in estlffiatmg
fd
the profit it is seeking. This is c1!r /s. The firm tries to determine the price that would produce
. rom the chart given below·
UlustratIOD : .
. year of a factory:
You are given the following data for the costmg
1,0U,000 units
Budget output
Fixed expenses
Rs.
s,oo ,000
Variable expenses Rs. 10 per unit
Selling price Rs. 20 per unit
Draw a break-even chart showing the break-even point. If the selling price is reduced to
Rs. 18 per unit, what will be the new break-even point. (B. Com., Jaba/pur)

Solution: Fixed Cost

B.E.P. = Selling cost - Variable cost

= 5,00,000 5,00,000 = 50,000 units

20-10 - 10
Break-even sales= 50,000 x Rs. 20 = Rs. lO,OO,OOO
NEW PRODUCTS PRICING
Factors governing new product pricing
The success of a product introduced a fresh depends on so many
factors the most important of which is the way it is priced. It must
be fixed in such a way as to ensure its consumer acceptance as well
as profits for the firm.
1. Estimating the Demand for Product
The firs( stage in pricing a new product is to assess the likely
market ·demand for it. If the price is too low customers may become
suspicious of the quality of the product and hence they may not come
forward to buy it.
The prices of comparable competitive products and how
consumers react to their prevailing prices must be considered.
 The marketer can also estitnate ~h_at the sales volume Will be
at different price levels. Den1and elast1c1ty of the product Will guide
him in the matter.
2. Product Characteristics . .
. ,t· ., of tJ1e product such as its penshability
Tht' charactens ILs . . . . or
1
l Tt , )f the den1and for it or its ut1 tty to vast majoft
p~stponal· n I ) tl be taken into account while setting the price ; y
ot peop e mus . b · or
, . an1ple 1 in the case of fashion goods, the pnce must e determined
~x su1..:,11 ,3 ,,·aJ·
m , .v • ~ , before
. . the entire stoc,k
as ·to clear . a new style sets 1.n .
J. Custonier-characterisdcs: If the product introduced is a general
item of conunon consumption like soaps, b~ad~s, tooth pastes, hair
oil etc. knov,.ledge of the consuming pubhc IS generally low anct
hence the producer has greater freedom in pricing his product.
But in the case of industrial buyers who are thorough with product
attributes and with market conditions, the producer's hands are
practically tied.
4. Cost considerations: The price fixed must ultimately cover total
production costs besides leaving him a reasonable profit. Otherwise
mounting losses will not allow the marketer to stay long in the
business. Thus cost of production becomes an important factor in
pricing a new product.
5. Market Policy - Channel considerations: The length of
middlemen and ilie profit-margin requirements of these middlemen
are also factors to be considered before setting a price for the new
product.
6. Discount Policy: Policy to be followed in the grant of various
types of discounts and allowances will also affect pricing because net
earnings depend upon ilie percentage of discount allowed.
7. Expected share of the market and · its productive capacity:
The marketer has first to decide the share of the market that the
product should establish. For this, the company should consider its
present plant capacity. If the new product is to be priced low wi th
an eye on market expansion and if the product also gains favourable
market acceptanc~: ilie company should be in a position to meet ~e
pur_c~ase orders, If the company is to delay dispatches, its image will
be lilJured heavily.
Hence it has to consider its productive capacity before
determining the market share.
 Pricing ♦ 11.1g

h h Whether
8 Competitive Reaction: . the new product possesses any
~ . ctiveness or w et er competitors can easily enter the fi ld ,
d1sUI1 •ct d h' . 1e are
factors to be cons1 ere w 1le pricing.
als0 If because o.f the ct·1st1nct1veness
. . c,f the new product it will take
·me for con1pet1tors to enter the field, a marketer can fix a high
u . e for his product.
pflC f' . . ( . .
Methods o pnc1ng pnc1ng goals)

9
. }\,faximi~i~g profits: During t?e early stage of product's life
cycle, advert1s1ng and personal selhng have more influence on sales
than price.
· By t'1is method of skim-the cream pricing, a manufacturer can
reap enorn1ous profits and thus recoup the investment costs.
He can also limit the mar~et demand within the limits of his
productive capacity because of the high price fixed for the product.
Thus the initial limitation on the plant capacity, distinctiveness
and exclusiveness of the new product, the deep desire to recover
investment costs quickly and maximization of earnings all favour the
adoption of skim-the cream pricing methods.
10. Market penetration pricing: If quick market expansion
is the objective of the marketer, he can set a low price for the
product. The detennination of a low price discourages competition
as profit margin is very low.
If the market potential of the product is promising and competition
will ensue quickly, the policy of penetration pricing is advisable.
Thus the objective that the manufacturer has set before himself
whether maximization of profit or market penetration is an important
factor influencing pricing for a new product.
Thus all these factors must be taken into account before setting
a price for a new product.