Marketing Management - Pricing Decision
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.
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
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.
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
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.
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.
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 = TotalFixedCostUnitsOfOutputProducts AFC=TotalFixedCostUnitsOfOutputProducts
AFC = TotalFixedCostExpectedUnitSales AFC=TotalFixedCostExpectedUnitSales
Step 3 − (Determination of the desired profit margin)
Selling Price = Unit total cost + Desired unit profit
i.e., Selling Price = AVC + AFC + Mark up
SellingPrice = UnitTotalCos 1 −( DesiredProfitMargin SellingPrice=UnitTotalCos1−(DesiredProfitMargin
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.
Let us now understand the various pricing strategies −
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.
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
High low pricing
Resale price maintenance
Everyday low pricing