PRICING POLICY

AND OBJECTIVES
• A pricing policy is a company's approach to determining the price at which it offers a good or service to the market.
Pricing policies help companies make sure they remain profitable and give them the flexibility to price separate
products differently.
• In markets with increasing volume and price pressure, the right pricing approach is essential to remain competitive.
It brings you the value you deserve for your products and services offered and secures the profits you need to invest
in change and growth
• In business, a systematic approach is required in pricing the commodities produced. Decision-making in this respect
is very important, as it leads to a permanent source of revenue to the business and also survival in the venture. It is
the most important device for the firm to expand its market.
• If the price is too high, a seller may have to go out of the market. If the price is too low, the firm may not cover its
cost and face loss. Hence, setting prices is a complex problem. There is no cut and dried formula for fixing the
prices. It depends upon various situations in the business.
• Taking all these into consideration, the firm has to meet the pricing in a generalized and codified policy, covering all
the principles of pricing problems. This pricing policy should be made to meet the various competitive situations.
 OBJECTIVES OF PRICING POLICY

• The pricing policy of the firm may vary from firm to firm depending on its objective.
• In practice, we find many prices for a product of a firm such as wholesale price, retail price, published price,
quoted price, actual price and so on.
• Special discounts, special offers, methods of payment, amounts bought and transportation charges, trade-in
values, etc., are some sources of variations in the price of the product.
• For pricing decision, one has to define the price of the product very carefully.
• Pricing decision of a firm in general will have considerable repercussions on its marketing strategies.
• This implies that when the firm makes a decision about the price, it has to consider its entire marketing efforts.
Pricing decisions are usually considered a part of the general strategy for achieving a broadly defined goal.
 OBJECTIVES OF PRICING
• The objective of pricing for any company is to fix a price that is reasonable for the consumers and also for the producer to
survive in the market.
• Every company is in danger of getting ruled out from the market because of rigorous competition, change in customer's
preferences and taste.
• (i) Achieving a Target Return on Investments
• (ii) Price Stability
• (iii) Achieving Market Share
• (iv) Prevention of Competition and
• (v) Increased Profits! Before determining the price of the product, targets of pricing should be clearly stated.
• (vi)maximize long-run profit.
• (vii)maximize short-run profit.
• (viii)increase sales volume (quantity)
 AIMS OF SETTING PRICE
• While setting the price, the firm may aim at the following objectives:
• (i) Price-Profit Satisfaction:
• The firms are interested in keeping their prices stable within certain period of time irrespective of changes in
demand and costs, so that they may get the expected profit.

• (ii) Sales Maximisation and Growth:

• A firm has to set a price which assures maximum sales of the product. Firms set a price which would enhance
the sale of the entire product line. It is only then, it can achieve growth.

• (iii) Making Money:

• Some firms want to use their special position in the industry by selling product at a premium and make quick
profit as much as possible.
• (iv) Preventing Competition:
• Unrestricted competition and lack of planning can result in waste­ful duplication of resources. The price system in a competitive
economy might not reflect society’s real needs. By adopting a suitable price policy the firm can restrict the entry of rivals.

• (v) Market Share:

• The firm wants to secure a large share in the market by following a suitable price policy. It wants to acquire a dominating
leadership position in the market. Many managers believe that revenue maximisation will lead to long run profit maximisation
and market share growth.

• (vi) Survival:
• In these days of severe competition and business uncertainties, the firm must set a price which would safeguard the welfare of
the firm. A firm is always in its survival stage. For the sake of its continued existence, it must tolerate all kinds of obstacles and
challenges from the rivals.
• (vii) Market Penetration:
• Some companies want to maximise unit sales. They believe that a higher sales volume will lead to lower unit costs and higher long run profit. They set the lowest
price, assuming the market is price sensitive. This is called market penetration pricing.

• (viii) Marketing Skimming:

• Many companies favour setting high prices to ‘skim’ the market. Dupont is a prime practitioner of market skimming pricing. With each innovation, it estimates the
highest price it can charge given the comparative benefits of its new product versus the available substitutes.

• ( ix) Early Cash Recovery:

• Some firms set a price which will create a mad rush for the product and recover cash early. They may also set a low price as a caution against uncertainty of the
future.

• (x) Satisfactory Rate of Return:

• Many companies try to set the price that will maximise current profits. To estimate the demand and costs associated with alternative prices, they choose the price
that produces maximum current profit, cash flow or rate of return on investment.
CONSIDERATIONS INVOLVED IN FORMULATING THE PRICING POLICY:

• The following considerations involve in formulating the pricing policy:

• (i) Competitive Situation:

• Pricing policy is to be set in the light of competitive situation in the market. We have to know whether the firm is facing perfect competition
or imperfect competition. In perfect competition, the producers have no control over the price. Pricing policy has special signifi­cance only
under imperfect competition.

• (ii) Goal of Profit and Sales:

• The businessmen use the pricing device for the purpose of maxim­ising profits. They should also stimulate profitable combination sales. In
any case, the sales should bring more profit to the firm.

• (iii) Long Range Welfare of the Firm:

• Generally, businessmen are reluctant to charge a high price for the product because this might result in bringing more producers into the
industry. In real life, firms want to prevent the entry of rivals. Pricing should take care of the long run welfare of the company.
 PRINCIPLES OF PRICE POLICY

• 1. Equality in Increase of Income and Production

• Price policy should be such that national income and national production should have equal increase. The government
should try that the increase in income should not be less than of production increase in a developing country, otherwise, it
will lead to rise in prices.
• 2. Income increase by transfer
• In a developing economy, an increase in any class or sector necessarily should be by transfer of less income of other
sector class; otherwise increase in demand of a class and decrease in demand of another class will substitute and give birth
to price rise i.e. inflationary impulse in the economy.
• 3. Balance in savings and Investment
• It should balance in savings and investment as far as possible; otherwise decrease in savings, monetary fluctuation will
result. In other words, saving must be matched with increased investment.
• 4. Adequate Distribution Management
• If compulsory consumer goods supply is according to demand, then there will be price stability. But, this is
not possible in short time. Under such condition, price control, distribution control and price
encouragement policy should be used in co-ordination. To keep balance in demand and supply of
compulsory goods, proper rationing is must.
• 5. Control over the prices of goods of compulsory consumption
• In UDC, inflation is caused by the increase in the prices of consumption goods and not by capitalized price
increase. Hence, by price policy only compulsory consumer goods prices should be controlled. Further
more, it gives birth to cost inflation and this type of rise in prices should be controlled immediately.
• 6. Formation of Buffer Stock
• In UDC, buffer stock should be created for controlling price increase caused due to draught, heavy rain,
famine, flood-like sudden seasonal or temporary causes. During crisis such stock can supply the goods.
FACTORS INVOLVED IN PRICING POLICY

• (i) Cost Data in Pricing:

• Cost data occupy an important place in the price setting processes. There are different types of costs incurred in the production and marketing
of the product. There are production costs, promotional expenses like advertising or personal selling as well as taxation, etc.
• They may necessitate an upward fixing of price. For example, the prices of petrol and gas are rising due to rise in the cost of raw materials,
such as crude transportation, refining, etc.
• If costs go up, price rise can be quite justified. However, their relevance to the pricing decision must neither be underestimated nor
exaggerated. For setting prices apart from costs, a number of other factors have to be taken into consideration. They are demand and
competition.
• Costs are of two types:
• Fixed costs and variable costs. In the short period, that is, the period in which a firm wants to establish itself, the firm may not cover the
fixed costs but it must cover the variable cost. But in the long run, all costs must be covered. If the entire costs are not covered, the producer
stops production.
• (ii) Demand Factor in Pricing:
• In pricing of a product, demand occupies a very important place. In fact, demand is more impor­
tant for effective sales. The elasticity of demand is to be recognised in determining the price of
the product. If the demand for the product is inelastic, the firm can fix a high price. On the other
hand, if the demand is elastic, it has to fix a lower price.
• In the very short term, the chief influence on price is normally demand. Manufacturers of
durable goods always set a high price, even though sales are affected. If the price is too high, it
may also affect the demand for the product. They wait for arrival of a rival product with
competitive price. Therefore, demand for product is very sensitive to price changes.
• (iii) Consumer Psychology in Pricing:
• Demand for the product depends upon the psychology of the consumers. Sensitivity to price change will vary from
consumer to consumer. In a particular situation, the behaviour of one individual may not be the same as that of the other.
In fact, the pricing decision ought to rest on a more incisive rationale than simple elasticity. There are consumers who
buy a product provided its quality is high.
• Generally, product quality, product image, customer service and promotion activity influence many consumers more
than the price. These factors are qualitative and ambiguous. From the point of view of consumers, prices are quantitative
and unambiguous.
• Price constitutes a barrier to demand when it is too low, just as much as where it is too high. Above a particular price, the
product is regarded as too expensive and below another price, as constituting a risk of not giving adequate value. If the
price is too low, consumers will tend to think that a product of inferior quality is being offered.
• (iv) Competition Factor in Pricing:
• Market situation plays an effective role in pricing. Pricing policy has some managerial discretion
where there is a considerable degree of imperfection in competition. In perfect competition, the
individual producers have no discretion in pricing. They have to accept the price fixed by demand and
supply.
• In monopoly, the producer fixes a high price for his product. In other market situations like oligopoly
and monopolistic competition, the individual producers take the prices of the rival products in
determining their price. If the primary determinant of price changes in the competitive condition is the
market place, the pricing policy can least be categorised as competition based pricing.
• (v) Profit Factor in Pricing:
• In fixing the price for products, the producers consider mainly the profit aspect. Each producer has his
aim of profit maximisation. If the objective is profit maximisation, the critical rule is to select the price
at which MR(marginal revenue)= MC.(marginal cost) Generally, the pricing policy is based on the goal
of obtaining a reasonable profit. Most of the businessmen want to hold the price at constant level.
• They do not desire frequent price fluctuation. The profit maximisation approach to price setting is
logical because it forces decision makers to focus their attention on the changes in production, cost,
revenue and profit associated with any contemplated change in price. The price rigidity is the practice of
many producers. Rigidity does not mean inflexibility. It means that prices are stable over a given period.
• (vi) Government Policy in Pricing:
• In market economy, the government generally does not interfere in the economic decisions of the
economy. It is only in planned economies, the government’s interference is very much. According
to conventional economic theory, the buyers and sellers only determine the price. In reality, certain
other parties are also involved in the pricing process. They are the competition and the government.
• The government’s practical regulatory price techniques are ceiling on prices, minimum prices and
dual pricing. In a mixed economy like India, the government resorts to price control. The business
establish­ments have to adopt the government’s price policies to control relative prices to achieve
certain targets, to prevent inflationary price rise and to prevent abnormal increase in prices.