Marketing Management - Pricing Decision

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Pricing is a process to determine what manufactures receive in exchange of the product. Pricing depends on various factors like manufacturing cost, raw material cost, profit margin etc.

Pricing Decision

Objectives of Pricing

The main objectives of pricing can be learnt from the following points −

  • Maximization of profit in short run

  • Optimization of profit in the long run

  • Maximum return on investment

  • Decreasing sales turnover

  • Fulfill sales target value

  • Obtain target market share

  • Penetration in market

  • Introduction in new markets

  • Obtain profit in whole product line irrespective of individual product profit targets

  • Tackle competition

  • Recover investments faster

  • Stable product price

  • Affordable pricing to target larger consumer group

  • Pricing product or services that simulate economic development

Pricing objective is to price the product such that maximum profit can be extracted from it.

Factors Influencing Pricing

Pricing of a product is influenced by various factors as price involves many variables. Factors can be categorized into two, depending on the variables influencing the price.

Internal Factors

The following are the factors that influence the increase and decrease in the price of a product internally −

  • Marketing objectives of company

  • Consumer’s expectation from company by past pricing

  • Product features

  • Position of product in product cycle

  • Rate of product using pattern of demand

  • Production and advertisement cost

  • Uniqueness of the product

  • Production line composition of the company

  • Price elasticity as per sales of product

Internal factors that influence pricing depend on the cost of manufacturing of the product, which includes fixed cost like labor charges, rent price, etc., and variable costs like overhead, electric charges, etc.

External Factors

The following are the external factors that have an impact on the increase and decrease in the price of a product −

  • Open or closed market

  • Consumer behavior for given product

  • Major customer negotiation

  • Variation in the price of supplies

  • Market opponent product pricing

  • Consideration of social condition

  • Price restricted as per any governing authority

External factors that influence price depend on elements like competition in market, consumer flexibility to purchase, government rules and regulation, etc.

Pricing Methods

Let us now discuss the various pricing methods −

Cost plus Pricing

Cost plus pricing can be defined as the cost of production per unit of product plus profit margin decided by the management.

Step 1 − (Calculation of average variable cost)

Step 2 − (Calculation of average fixed cost), i.e.,

$$AFC=\frac{Total Fixed Cost}{Units Of Output Products}$$

or,

$$AFC=\frac{Total Fixed Cost}{Expected Unit Sales}$$

Step 3 − (Determination of the desired profit margin)

Selling Price = Unit total cost + Desired unit profit

i.e., Selling Price = AVC + AFC + Mark up

i.e.,

$$Selling Price=\frac{Unit Total Cos}{1-(Desired Profit Margin}$$

These are the steps one needs to follow to calculate cost plus pricing.

Break Even Analysis

It is a point when the investment and revenue of an enterprise is equal; after this point an enterprise gains profit.

Prices Based on Marginal analysis

In this method, additional cost of that activity is compared to additional profit and the price is calculated according to margin cost. Thus, the cost and price is evaluated and as per the result, the price is decided so as to maximize the profit.

Pricing Strategies

Let us now understand the various pricing strategies −

Skimming Pricing

In this method, a new product is introduced in the market with high price, concentrating on upper segment of the market who are not price sensitive, and the result is skimmed.

Penetration Pricing

In penetration pricing, a product is introduced in the market with a low initial price. The price is kept low to increase target consumer. Using this strategy, more consumers can be penetrated or reached.

Discounts and Allowances

Discounts are provided in order to increase the demand of product in the market. The main points to be considered to offer discounts are as follows −

  • Discount in quantity
  • Discount in trade
  • Discount in cash
  • Other discounts like seasonal, promotional, etc.

Geographic Pricing Strategies

Geographic pricing strategy is used to price product as per its geographical location. As the distance increases from the point of production, the cost of the product increases.

The main points to be considered under this are as follows −

  • Point of production pricing strategy
  • Uniform delivery pricing strategy
  • Zone delivery pricing strategy
  • Freight absorption pricing strategy

Special Pricing Strategies

Special pricing strategy is mostly used for the promotion of the product. In this strategy, pricing is changed for a short interval of time. These strategies can be lined up as follows −

  • One price strategy
  • Flexible price strategy
  • Flat rate pricing strategy
  • Single price strategy
  • Odd pricing
  • Leader pricing
  • High low pricing
  • Resale price maintenance
  • Everyday low pricing
  • Price lining
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