UNIT 4

PRICE MIX

ROLE AND IMPORTANCE OF PRICING

The only element that generates revenue

Price and sales volume together decide the revenue of any

business.

Major determinant of a buyer’s choice.

In the last few decades, non price factors become quite

important

Still it remains an important factor in determining sales and

profitability.

CHANGING PRICING ENVIRONMENT

‘We want LG to be an aspirational brand’

Source- http://www.thehindubusinessline.in/catalyst/2007/11/22/stories/2007112250010100.htm

Repositioning of LG Electronics“Value for money” “Aspirational”

FACTORS INFLUENCING PRICING

Internal Factors

External Factors

INTERNAL FACTORS

Corporate and marketing objectives of the firm

The image sought by the firm though pricing

The characteristics of the product

The stage of the product in its life cycle

Use patterns and turnaround rate of the

product

INTERNAL FACTORS

Costs of manufacturing and marketing

Extent of distinctiveness of the product and extent

of differentiation practiced

Other elements of marketing mix and their

interaction with pricing

Composition of the product line of the firm

EXTERNAL FACTORS

Market characteristics

Price elasticity of demand of the product in

particular

Buying behaviour of the customers of the product

Bargaining power of major customers

Bargaining power of major suppliers

EXTERNAL FACTORS

Competitors’ pricing strategies

Government controls/regulation on pricing

Other relevant legal aspects

Societal views

Understanding reached, if any, with competitors/

price cartels

PRICING OBJECTIVES

Profit maximization in the short term

Profit optimization in the long term

A minimum return on investment

A minimum return on sales turnover

Achieving a particular sales volume

PRICING OBJECTIVES

Achieving a particular market share

Deeper penetration of the market

Entering new markets

Target profit on the entire product line,

irrespective of profit level of individual product

PRICING OBJECTIVES

Keeping competition out, or keeping it under

check

Keeping parity with competition

Fast turnaround and early cash recovery

Stabilizing the prices and margins in the

market

PRICING OBJECTIVES

Providing the commodity/service at prices

affordable by the weaker sections

Providing the commodities/services at prices

that will stimulate economic development

Pricing Methods/Pricing Strategies

COST-BASED PRICING

DEMAND BASED PRICING

COMPETITION ORIENTED PRICING

PRODUCT LINE-ORIENTED PRICING

TENDER PRICING

AFFORDABILITY-BASED PRICING

DIFFERENTIATED PRICING

GEOGRAPHIC PRICING

COST BASED PRICING

Mark-up pricing (Cost plus

pricing)

Absorption Cost pricing

Target return pricing

Marginal cost pricing

DEMAND BASED PRICING

What traffic can bear’

pricing

Skimming pricing

Penetration Pricing

Value Pricing

COMPETITION ORIENTED PRICING

Premium pricing

Discount pricing

Parity/Going Rate pricing

PRODUCT LINE-ORIENTED

PRICING

TENDER PRICING

AFFORDABILITY-BASED

PRICING

DIFFERENTIATED PRICING

GEOGRAPHIC PRICING

Point of origin policy

Freight-absorption policy

Uniform Delivered policy

Zonal-Delivered price policy

Base point price policy

RESPONDING TO COMPETITORS

Through

Price and

Non-price variables

PRICE VARIABLES

Cost reduction using new technology or by

using cheaply available raw material

Two alternatives based competitive market

conditions – reduce the market price of

product or raise the market price

PRICE VARIABLES

Lowering price – too low price leads to

loss, same policy can be adopted by rival

producers/ competitors

Raising price – Reduce market demand

considerably

NON-PRICE VARIABLES

Not concerned with price

Product modification, effective

advertising and sales promotion

measures

Priority to non price variables for facing

competition and capturing market

NON-PRICE VARIABLES

Product differentiation –

Registered trade mark, copy right, patents right,

Change in appearance of the product i.e. colour,

packaging, etc.,

Provision of supplementary services

NON-PRICE VARIABLES

Selling costs –

Expenditure incurred on advertising, sales promotion,

discounts,

Incentive measures to sales force and so on.

Persuade customers to prefer firm’s products as against

the products of competitors

PRODUCT LIFE CYCLE & PRICING DECISIONS

Introduction stage

Rapid skimming strategy – High price and heavy

promotional expenses

Slow skimming strategy – High price and low

promotional expenses

Rapid penetrations strategy – Low price and heavy

promotional expenses

Slow penetration strategy – Low price and low

promotional expenses

PRODUCT LIFE CYCLE & PRICING DECISIONS

Growth Stage

Penetration pricing as increase in sales volume and

competition

Maturity stage

Pricing based on what consumers can bear and best

competitor’s offerings

Extended warranties, lowering of price

Declining stage

Low pricing