Unit 3

The Marketing Mix Element

PRICE
 Price

The amount of money, goods or services

that must be given to acquire ownership or use of a
product.
 Introduction on price
• Price is the one element of the marketing mix that
produces revenue; the other elements produce costs.
• Prices are perhaps the easiest element of the
marketing program to adjust; product features,
channels, and even communications take more time.
• Price also communicates to the market the
company’s intended value positioning of its product
or brand.
• A well-designed and marketed product can command
a price premium and reap big profits.
 Introduction on price
• Pricing decisions are clearly complex and difficult
• Marketers must take into account many factors in
making pricing decisions—the company, the
customers, the competition, and the marketing
environment.
• Pricing decisions must be consistent with the firm’s
marketing strategy and its target markets and
brand positioning.
 Introduction on price

• Price comes in many forms Rent, tuition, fares,

fees, rates, tolls, retainers, wages, and commissions
are all the price you pay for some good or service.
• Traditionally, price has operated as a major
determinant of buyer choice.
Bartering:
• One of the oldest way of acquiring goods.
• barter is a system of exchange where participants in
a transaction directly exchange goods or services for
other goods or services without using a medium of
exchange, such as money.
Renting:
• Renting, also known as hiring, is an agreement where
a payment is made for the temporary use of a good,
service or property owned by another.
 How Companies Price?
• In small companies, the boss often sets prices.
• In large companies, division and product line managers do.
Even here, top management sets general pricing objectives
and policies and approves lower management’s proposals.
• Where pricing is a key factor (aerospace, railroads, oil
companies), companies often establish a pricing department
to set or assist others in setting appropriate prices.
• For any organization, effectively designing and implementing
pricing strategies requires a thorough understanding of
consumer pricing psychology and a systematic approach to
setting, adapting, and changing prices.
 Consumer pricing psychology
• Many economists traditionally assumed that consumers
were “price takers” who accepted prices at face value or
as a given.
• consumers often actively process price information from
– prior purchasing experience,
– formal communications (advertising, sales calls, and
brochures),
– informal communications (friends, colleagues, or family
members),
– point-of-purchase or online resources, and other factors.
 Consumer pricing psychology
• Different people interpret prices in different ways
– Customers may have a lower price threshold, below
which prices signal inferior or unacceptable quality,
– and an upper price threshold, above which prices are
prohibitive and the product appears not worth the
money.
• Understanding how consumers arrive at their
perceptions of prices is an important marketing
priority.
 Consumer pricing psychology
• Reference Price:
– When examining products, consumers often employ
reference prices, comparing an observed price to an
internal reference price they remember.
• Price Quality Inference:
– Many consumers use price as an indicator of quality.
– Image Pricing - Especially effective with products such as
perfumes, expensive cars, and clothing.
• Price Cues / Price Endings :
– Many sellers believe prices should end in an odd number.
– Customers see an item priced at Rs. 199 as being in the Rs.
100 rather than the Rs. 200 range.
– Price cues are marketing tactics that persuade the
customers that the price offers good value than the
 Pricing objectives
1. Survival
• Companies pursue survival as their major objective if they are
plagued with overcapacity, intense competition, or changing
consumer wants.
• As long as prices cover variable costs and some fixed costs, the
company stays in business.
• Survival is a short-run objective; in the long run, the firm must
learn how to add value or face extinction.
2. Maximum Current Profit
• Many companies try to set a price that will maximize current
profits.
• In emphasizing current performance, the company may sacrifice
long-run performance by ignoring the effects of other marketing
variables, competitors’ reactions, and legal restraints on price.
 Pricing objectives
3. Maximum Market Share
• Some companies want to maximize their market share.
• They believe a higher sales volume will lead to lower unit costs and
higher long-run profit, so they set the lowest price, assuming the
market is price sensitive.
• Uses - market-penetration pricing.
4. Maximum Market Skimming
• Companies unveiling a new technology favor setting high prices to
maximize market skimming.
• Sony has been a frequent practitioner of market-skimming
pricing, in which prices start high and slowly drop over time.
• Ex - Sony introduced the world’s first high-definition television
(HDTV) to the Japanese market in 1990, it was priced at $43,000.
28-inch Sony HDTV$6,000 in 1993, but a 42-inch Sony LED
HDTV cost only $579 20 years later in 2013.
 Pricing objectives
5. Product-Quality Leadership
• A company might aim to be the product-quality leader in the
market.
• Many brands strive to be “affordable luxuries”—products or
services characterized by high levels of perceived quality,
taste, and status with a price just high enough not to be out of
consumers’ reach.
• Brands such as Starbucks, BMW have positioned
themselves as quality leaders in their categories, combining
quality, luxury, and premium prices with an intensely loyal
customer base.
 Factors affecting pricing decisions
Internal factors
• Overall Marketing Strategy
• Objectives
• Marketing Mix
• Organizational considerations
External factors
• Nature of the market and demand
• Economy
• Other environmental factors
 Factors affecting pricing decisions
1) Overall Marketing Strategy:
• Price is only one element of the company’s broader
marketing strategy.
• Thus, before setting price, the company must decide on its
overall marketing strategy for the P or S.
• If the company has selected its target market and
positioning carefully, then its marketing mix strategy,
including price, will be fairly straightforward.
 Factors affecting pricing decisions
1) Overall Marketing Strategy:
• E - Amazon positions its Kindle Fire tablet as offering the same and
prices it at 40 percent less than Apple’s iPads and Samsung’s Galaxy
tablets.
• It recently began targeting families with young children, positioning
the Kindle Fire as the “perfect family tablet,” with models priced as
low as $99, bundled with Kindle FreeTime, an all-in-one subscription
service starting at $2.99 per month that brings together books, games,
educational apps, movies, and TV shows for kids ages 3 through 8.
• Thus, pricing strategy is largely determined by decisions on market
positioning.
 Factors affecting pricing decisions
2) Company’s Objective:
• Pricing may play an important role in helping to accomplish
company objectives at many levels.
• A firm can set prices to attract new customers or profitably
retain existing ones.
• It can set prices low to prevent competition from entering the
market or set prices at competitors’ levels to stabilize the
market.
• It can price to keep the loyalty and support of resellers or
avoid government intervention.
• Prices can be reduced temporarily to create excitement for
a brand Or one product may be priced to help the sales of
other products in the company’s line.
 Factors affecting pricing decisions
3) Marketing Mix:
• Price decisions must be coordinated with product design,
distribution, and promotion decisions to form a consistent and
effective integrated marketing mix program.
• Decisions made for other marketing mix variables may
affect pricing decisions.
• Companies often position their products on price and then
tailor other marketing mix decisions to the prices they want to
charge.
• Here, price is a crucial product-positioning factor that defines
the product’s market, competition, and design. Many firms
support such price-positioning strategies with a technique
called target costing.
 Factors affecting pricing decisions
3) Marketing Mix:
• Target costing reverses the usual process of first designing a
new product, determining its cost, and then asking, “Can we
sell it for that?”
• Target costing starts with an ideal selling price based on
customer value considerations and then targets costs that will
ensure that the price is met.
 Factors affecting pricing decisions
4) Organizational Considerations:
• Management must decide who within the organization should set
prices.
• In small companies, prices are often set by top management.
• In large companies, pricing is typically handled by divisional or
product managers.
• In industrial markets, salespeople may be allowed to negotiate with
customers within certain price ranges. Even so, top management sets
the pricing objectives and policies, and they approve the prices
proposed by lower-level management or salespeople.
• In industries in which pricing is a key factor (airlines, aerospace,
steel, railroads, oil companies), companies often have pricing
departments to set the best prices or help others set them. These
departments report to the marketing department or top management.
 Factors affecting pricing decisions
5) The Market and Demand:
Pricing in Different Types of Markets:
Types of Markets Characteristics Examples
pure competition many buyers and sellers wheat, copper,
trading over a single market vegetables or financial
price (un-differentiated securities etc.,
products)
monopolistic market consists of many Ex – Soap industry
competition buyers and sellers trading
over a range of prices rather
than a single market price
( differentiated products)
oligopolistic competition market consists Ex – petroleum & gas,
of only a few large sellers. cement, aluminium etc.,
pure monopoly market is dominated by Ex – Indian Railways,
one seller Indian postal service
 Factors affecting pricing decisions
5) The Market and Demand:

• Demand is directly proportional to Price

Whenever Demand increases - prices will increase

Whenever Demand decreases - prices will decrease
 Factors affecting pricing decisions
6) The Economy:
• Economic conditions can have a strong impact on the firm’s pricing
strategies.
• Economic factors such as a boom or recession, inflation, and
interest rates affect pricing decisions.
• because they affect consumer spending, consumer perceptions of
the product’s price and value, and the company’s costs of
producing and selling a product.
 Factors affecting pricing decisions
7) Other External Factors:
• Resellers (distributor/wholesaler/retailer) reaction to various prices.
• Government Policies
• Social concerns - Environment
 Setting the Price
 A firm must set a price for the first time
 when it develops a new product,
 when it introduces its regular product into a new
distribution channel or geographical area.
 Having a range of price points allows a firm to cover more of
the market and to give any one consumer more choices.
 Most markets have three to five price points or tiers.
 Marriott Hotels (in 131 countries and
territories)
– Marriott Vacation Club—Vacation Villas (highest price)
– Marriott Marquis (high price)
– Marriott (high-medium price)
– Renaissance (medium-high price)
– Courtyard (medium price)
– Towne Place Suites (medium-low price) and
Marriott Vacation Club—Vacation Villas (highest price),
Marriott Marquis (high price)
Marriott (high-medium price)
Renaissance (medium-high price)
Courtyard (medium price)
Towne Place Suites (medium-low price)
Fairfield Inn (low price)
 CavinKare – Shampoo brands
• Chik – Re 1 –
Basic shampoo
• Karthika – Re1 –
Traditional
Shampoo
• Nyle – Re 2 –
Natural
Shampoo
• Meera – Rs 3 –
Traditional
Shampoo
Setting the Price
 1. Selecting the Pricing Objective
• The company first decides where it wants to position its
market offering.
• The clearer a firm’s objectives, the easier it is to set price.
• Five major objectives are:
– survival
– maximum current profit
– maximum market share
– Maximum market skimming
– product-quality leadership
 2. Determining Demand
• Each price will lead to a different level of demand and have
a different impact on a company’s marketing objectives.
• The normally inverse relationship between price and demand
is captured in a demand curve: The higher the price, the
lower the demand.
 3. Estimating Costs
• Costs set the floor.
• Demand sets a ceiling on the price the company can charge
for its product.
• The company wants to charge a price that covers its cost of
producing, distributing, and selling the product, including a
fair return for its effort and risk.
 3. Estimating Costs
Types of Costs:
• Fixed costs, also known as overhead, are costs that do not vary
with production level or sales revenue.
• A company must pay bills each month for rent, interest, salaries,
and so on, regardless of output.
• Variable costs vary directly with the level of production.
• For example, each tablet computer produced by Samsung incurs
the cost of plastic and glass, microprocessor chips and other
electronics, and packaging.
• These costs tend to be constant per unit produced, but they’re
called variable because their total varies with the number of units
produced.
• Total costs = Fixed Cost + Variable Cost
• Average cost is the cost per unit at that level of production; it
equals total costs divided by production.
 4. Analyzing Competitors’ Costs, Prices,
and Offers
• Within the range of possible prices identified by market
demand and company costs, the firm must take competitors’
costs, prices, and possible reactions into account.
• If the firm’s offer contains features not offered by the
nearest competitor, it should evaluate their worth to the
customer and add that value to the competitor’s price.
• If the competitor’s offer contains some features not offered by
the firm, the firm should subtract their value from its own
price.
• Now the firm can decide whether it can charge more, the
same, or less than the competitor.
 5. Selecting a Pricing Method
• Markup Pricing:
• The most elementary pricing method is to add a standard
markup to the product’s cost.
• Construction companies submit job bids by estimating the
total project cost and adding a standard markup for profit.
• Lawyers and accountants typically price by adding a
standard markup on their time and costs.
 5. Selecting a Pricing Method
• Target-Return Pricing:
• In target-return pricing, the firm determines the price that
yields its target rate of return on investment.
• Public utilities, which need to make a fair return on
investment, often use this method.
 5. Selecting a Pricing Method
• Perceived-Value Pricing:
Perceived value is made up of a host of inputs, such as
• the buyer’s image of the product performance, the channel
deliverables, the warranty quality, customer support, and
softer attributes such as the
• supplier’s reputation, trustworthiness, and esteem.
• Companies must deliver the value promised by their value
proposition, and the customer must perceive this value.
• Firms use the other marketing program elements, such as
advertising, sales force, and the Internet, to communicate and
enhance perceived value in buyers’ minds.
 5. Selecting a Pricing Method
• Value Pricing:
• Companies that adopt value pricing win loyal customers by
charging a fairly low price for a high-quality offering.
• Value pricing is thus not a matter of simply setting lower
prices; it is a matter of reengineering the company’s
operations to become a low-cost producer without
sacrificing quality to attract a large number of value-
conscious customers.
 5. Selecting a Pricing Method
• EDLP:
• A retailer using EveryDay Low Pricing (EDLP) charges a
constant low price (compared to competitor) with little or
no price promotion or special sales.
• Maintaining a consistent price over a period of time.
• Constant prices eliminate week-to-week price uncertainty and
the high-low pricing of promotion-oriented competitors.
 5. Selecting a Pricing Method
• Going-Rate Pricing:
• In going-rate pricing, the firm bases its price largely on
competitors’ prices.
• In oligopolistic industries that sell a commodity such as steel,
paper, or fertilizer, all firms normally charge the same price.
• Smaller firms “follow the leader” changing their prices when
the market leader’s prices change rather than when their own
demand or costs change.
 5. Selecting a Pricing Method
Auction-Type Pricing:
• English auctions (ascending bids) have one seller and many
buyers. On sites such as eBay, the seller puts up an item and
bidders raise their offer prices until the top price is reached. The
highest bidder gets the item.
• Dutch auctions (descending bids)
– one seller and many buyers – an auctioneer announces a high
price for a product and then slowly decreases the price until a
bidder accepts.
– one buyer and many sellers, the buyer announces something
he or she wants to buy, and potential sellers compete to offer
the lowest price.
• Sealed-bid auctions let would-be suppliers submit only one bid;
they cannot know the other bids. Governments often use this
method to procure supplies or to grant licenses.
 6. Selecting the Final Price
• Pricing methods narrow the range from which the
company must select its final price.
• In selecting that price, the company must consider
additional factors, including
– the impact of other marketing activities
– company pricing policies
– gain-and-risk-sharing pricing
– the impact of price on other parties
Pricing Strategies
 Pricing Strategies
• Perceived-Value Pricing or Customer value–based pricing
• Setting price based on buyers’ perceptions of value rather
than on the seller’s cost.
• Perceived value is made up of a host of inputs, such as the
buyer’s image of the product performance, the channel
deliverables, the warranty quality, customer support, and
• softer attributes such as the supplier’s reputation,
trustworthiness, and esteem.
• Companies must deliver the value promised by their value
proposition, and the customer must perceive this value.
 Pricing Strategies
• Value Pricing:
• Companies that adopt value pricing win loyal customers by
charging a fairly low price for a high-quality offering.
• Value pricing is thus not a matter of simply setting lower
prices; it is a matter of reengineering the company’s
operations to become a low-cost producer without sacrificing
quality to attract a large number of value-conscious
customers.
• Good-value pricing:
• Offering just the right combination of quality and good
service at a fair price.
 Pricing Strategies
• EDLP:
• A retailer using everyday low pricing (EDLP) charges a
constant low price (compared to competitor) with little or no
price promotion or special sales.
• Maintaining a consistent price over a period of time.
• Constant prices eliminate week-to-week price uncertainty and
the high-low pricing of promotion-oriented competitors.
 Pricing Strategies
• Value Added Pricing:
• Attaching value-added features and services to differentiate a
company’s offers and charging higher prices.
• Rather than cutting prices to match competitors, they add
quality, services, and value-added features to differentiate
their offers and thus support their higher prices.
 Pricing Strategies
• Cost-based pricing:
• Setting prices based on the costs of producing, distributing,
and selling the product plus a fair rate of return for effort and
risk.
• Fixed costs (overhead)
• Costs that do not vary with production or sales level.
• Variable costs
• Costs that vary directly with the level of production.
• Total costs
• The sum of the fixed and variable costs for any given level of
production.
 Pricing Strategies
• Markup Pricing or Cost-plus pricing :
• The most elementary pricing method is to add a standard
markup to the product’s cost.
• Construction companies submit job bids by estimating the
total project cost and adding a standard markup for profit.
• Lawyers and accountants typically price by adding a standard
markup on their time and costs.
 Pricing Strategies
• Target-Return Pricing or Break-even pricing:
• Setting price to break even on the costs of making and
marketing a product or setting price to make a target return.
• In target-return pricing, the firm determines the price that
yields its target rate of return on investment.
• Public utilities, which need to make a fair return on
investment, often use this method.
 Pricing Strategies
• Competition-based pricing:
• Setting prices based on competitors’ strategies, prices, costs,
and market offerings.
 Pricing Strategies
• Going-Rate Pricing:
• In going-rate pricing, the firm bases its price largely on
competitors’ prices.
• In oligopolistic industries that sell a commodity such as steel,
paper, or fertilizer, all firms normally charge the same price.
• Smaller firms “follow the leader,” changing their prices
when the market leader’s prices change rather than when their
own demand or costs change.
 Pricing Strategies
Auction-Type Pricing:
• English auctions (ascending bids) have one seller and many
buyers. On sites such as eBay , the seller puts up an item and
bidders raise their offer prices until the top price is reached.
The highest bidder gets the item.
• Dutch auctions (descending bids) feature one seller and many
buyers or one buyer and many sellers. In the first kind, an
auctioneer announces a high price for a product and then
slowly decreases the price until a bidder accepts. In the other,
the buyer announces something he or she wants to buy, and
potential sellers compete to offer the lowest price.
• Sealed-bid auctions let would-be suppliers submit only one
bid; they cannot know the other bids. Governments often use
this method to procure supplies or to grant licenses.
 Pricing Strategies
• Market-skimming pricing (price skimming):
• Setting a high price for a new product to skim maximum
revenues layer by layer from the segments willing to pay the
high price; the company makes fewer but more profitable
sales.
• Market-penetration pricing:
• Setting a low price for a new product in order to attract a
large number of buyers and a large market share.
 Pricing Strategies
• Product line pricing:
• Setting the price steps between various products in a product
line based on
 cost differences between the products,
 customer evaluations of different features, and
 competitors’ prices.
• Captive-product pricing:
• Setting a price for products that must be used along with a
main product
• Captive pricing happens when an accessory product is
necessary to purchase in order to use a core product.
• Example: blades for a razor and games for a videogame
console, refill cartridges for pens, toner cartridges for printers
 Pricing Strategies
• By-product pricing:
• Setting a price for by-products to help offset the costs of
disposing of them and help make the main product’s price
more competitive.
• If the by-product has little value, and is costly to dispose of, it
will probably not affect the pricing of the main product
 Pricing Strategies
• Product bundle pricing:
• Combining several products and offering the bundle at a
reduced price.
• For example: Instead of buying just one pencil during a single
purchase, your customer can be given an option to buy a
pencil, eraser and sharpener as a bundle, making them
purchase more than one product thereby increasing your average
order value.
• Typical examples of bundling include
– option packages on new automobiles
– value meals at restaurants
– shampoo and conditioner sets.
 Pricing Strategies
• Discount:
• A straight reduction in price on purchases during a stated period
of time or of larger quantities.
• Allowance:
• Promotional money paid by manufacturers to retailers in return
for an agreement to feature the manufacturer’s products in some
way.
• For example, trade-in allowances are price reductions given for
turning in an old item when buying a new one.
• Trade-in allowances are most common in the automobile industry,
• Promotional allowances are payments or price reductions that
reward dealers for participating in advertising and sales-support
programs.
 Pricing for industrial goods

• Write the pricing strategies