SAM GLOBAL UNIVERSITY, BHOPAL

M B A 2ND SEMESTER

MARKETING MANAGEMENT
PRICING METHOD AND STRATEGIES

BY PRAFULLA SHRIVASTAVA
PRICING METHOD AND STRATEGIES

• CONTENTS
• PRICING
• PRICING STRATEGIES
• PRICING METHOD
PRICING
Deciding how much to charge for your product requires more thought than
simply calculating your costs and adding a mark-up.
“How much the customer is willing to pay for the product has very little to do
with cost and has very much to do with how much they value the product or
service they’re buying,” says Eric Dolansky, Associate Professor of Marketing
at Brock University in St. Catharines, Ont.
Figuring out how much the customer values your product or service and
pricing it accordingly is called value-based pricing. It’s a technique Dolansky
believes more entrepreneurs should use.
PRICING
5 COMMON PRICING STRATEGIES
• Pricing a product is one of the most important aspects of marketing strategy.
Generally, pricing strategies include the following five strategies.
• Cost-plus pricing—simply calculating your costs and adding a mark-up
• Competitive pricing—setting a price based on what the competition charges
• Value-based pricing—setting a price based on how much the customer believes
what you’re selling is worth
• Price skimming—setting a high price and lowering it as the market evolves
• Penetration pricing—setting a low price to enter a competitive market and raising
it later
PRICING
VALUE-BASED PRICE
Dolansky provides the following advice for entrepreneurs who want to determine a
value-based price.
Pick a product that is comparable and find out what the customer pays for it.
Find all of the ways that the product is different from the comparable product.
Place a financial value on all of these differences, add everything that is positive
about the product and subtract any negatives to come up with a potential price.
Make sure the value to the customer is higher than the costs.
Demonstrate to customers why the price will be acceptable, which includes talking
to them.
If there is an established market, the current price range will help educate about
the customers’ price expectations.
PRICING METHOD
The Pricing Methods are the ways in
which the price of goods and
services can be calculated by
considering all the factors such as
the product/service, competition,
target audience, product’s life cycle,
firm’s vision of expansion, etc.
influencing the pricing strategy as a
whole.
The pricing methods can be broadly
classified into two parts:
1.Cost Oriented Pricing Method
2.Market Oriented Pricing Method
PRICING METHOD
Cost-Oriented Pricing Method: Many firms consider the Cost of Production as a
base for calculating the price of the finished goods. Cost-oriented pricing method
covers the following ways of pricing:
Cost-Plus Pricing: It is one of the simplest pricing method wherein the
manufacturer calculates the cost of production incurred and add a certain
percentage of markup to it to realize the selling price. The markup is the
percentage of profit calculated on total cost i.e. fixed and variable cost. E.g. If the
Cost of Production of product-A is Rs 500 with a markup (the amount added to the
cost price of goods to cover overheads and profit) of 25% on total cost, the selling
price will be calculated as Selling Price= cost of production + Cost of Production x
Markup Percentage/100 Selling Price=500+500 x 0.25= 625
Thus, a firm earns a profit of Rs 125 (Profit=Selling price- Cost price)
PRICING METHOD
Markup pricing- This pricing method is the variation of cost-plus pricing
wherein the percentage of markup is calculated on the selling price.E.g. If
the unit cost of a chocolate is Rs 16 and producer wants to earn the markup
of 20% on sales, then mark up price will be:- Markup Price= Unit Cost/ 1-
desired return on sales Markup Price= 16/1-0.20 = 20
Thus, the producer will charge Rs 20 for one chocolate and will earn a profit
of Rs 4 per unit.
Target-Return pricing– In this kind of pricing method the firm set the price to
yield a required Rate of Return on Investment (ROI) from the sale of goods
and services. E.g. If soap manufacturer invested Rs 1,00,000 in the business
and expects 20% ROI i.e. Rs 20,000, the target return price is given by: Target
return price= Unit Cost + (Desired Return x capital invested)/ unit salesTarget
Return Price=16 + (0.20 x 100000)/5000Target Return Price= Rs 20
PRICING METHOD
Market-Oriented Pricing Method
Under this method price is calculated on the basis of market conditions. Following are the
methods under this group:
Perceived-Value Pricing: In this pricing method, the manufacturer decides the price on the
basis of customer’s perception of the goods and services taking into consideration all the
elements such as advertising, promotional tools, additional benefits, product quality, the
channel of distribution, etc. that influence the customer’s perception.E.g. Customer buy
Sony products despite less price products available in the market, this is because Sony
company follows the perceived pricing policy wherein the customer is willing to pay extra
for better quality and durability of the product.
Value Pricing: Under this pricing method companies design the low priced products and
maintain the high-quality offering. Here the prices are not kept low, but the product is re-
engineered to reduce the cost of production and maintain the quality
simultaneously.E.g. Tata Nano is the best example of value pricing, despite several Tata
cars, the company designed a car with necessary features at a low price and lived up to its
quality.
PRICING METHOD
Going-Rate Pricing- In this pricing method, the firms consider the competitor’s price as a
base in determining the price of its own offerings. Generally, the prices are more or less
same as that of the competitor and the price war gets over among the firms.E.g. In
Oligopolistic Industry such as steel, paper, fertilizer, etc. the price charged is same.
E.g. In Oligopolistic Industry such as steel, paper, fertilizer, etc. the price charged is same.

Auction Type pricing: This type of pricing method is growing popular with the more usage
of internet. Several online sites such as eBay, Quikr, OLX, etc. provides a platform to
customers where they buy or sell the commodities.

•
PRICING METHOD
There are three types of auctions
1. English Auctions-There is one seller and many buyers. The seller puts the item on sites such
as Yahoo and bidders raise the price until the top best price is reached.
2. Dutch Auctions– There may be one seller and many buyers or one buyer and many sellers. In
the first case, the top best price is announced and then slowly it comes down that suit the
bidder whereas in the second kind buyer announces the product he wants to buy then
potential sellers competes by offering the lowest price.
3. Sealed-Bid Auctions: This kind of method is very common in the case of Government or
industrial purchases, wherein tenders are floated in the market, and potential suppliers submit
their bids in a closed envelope, not disclosing the bid to anyone.
Differential Pricing: This pricing method is adopted when different prices have to be charged
from the different group of customers. The prices can also vary with respect to time, area, and
product form.E.g. The best example of differential pricing is Mineral Water.The price of Mineral
Water varies in hotels, railway stations, retail stores.
Thus, the companies can adopt either of these pricing methods depending on the type of a
product it is offering and the ultimate objective for which the pricing is being done.