Pricing Decisions: Objectives, Factors and Strategies

A home baker in Pune has a new cake that costs her ₹300 to make. Rival bakeries charge ₹450 to ₹550 for similar cakes, and her regulars would pay up to ₹700. What she wants from the cake decides where in that range she prices it.

Price is the only element of the marketing mix that produces revenue; the others are costs. It is also the most flexible, since it can be changed quickly.

Who sets prices. In small firms, the owner. In large ones, division and product-line managers, within policies set by top management. Where pricing is critical, as in aerospace, railways and oil, firms often have a pricing department.

Pricing objectives. The objective is what the firm wants price to achieve. The last column shows where the baker might price under each one.

Other objectives include pricing low to discourage new entrants, pricing to keep the loyalty and support of channel members, pricing for a sales promotion, and pricing one product to help the sales of others.

Don't confuse a pricing objective with a pricing method. The objective is what the firm wants from price, such as market share. The method is how it calculates the figure, such as a mark-up on cost. One method can serve several objectives.

Where it breaks. The floor and ceiling are not fixed lines. A firm may price below full cost for a while, and each customer puts the ceiling at a different height. Maximum current profit needs demand and cost estimates that firms rarely have.

Costs set the floor, customer value the ceiling, competitors the range between.

A shopper sees a pressure cooker at ₹299 and wonders what is wrong with it; at ₹9,999 she walks past. The same buyer has a price below which she distrusts the quality, and one above which nothing seems worth it.

Consumer psychology. Economists traditionally treated consumers as ‘price takers’. Marketers know that buyers interpret prices in the light of past purchases, advertising, friends and family, and the point of sale. Decisions rest on how consumers perceive prices. Buyers may have a lower threshold, below which a price signals poor quality, and an upper threshold, above which the product seems not worth the money.

Two cost-based methods, worked. Take an illustrative mixer-grinder maker in Pune. Its variable cost is ₹1,000 a unit, fixed costs are ₹30 lakh a year, and it expects to sell 10,000 units.

Mark-up pricing. The firm wants a mark-up of 20% on the selling price:

Target-return pricing. The firm has invested ₹1 crore and wants a 20% return on it, that is ₹20 lakh a year:

Break-even. At ₹1,500, each unit leaves ₹500 over its variable cost, so the firm covers its fixed costs after ₹30,00,000 ÷ ₹500 = 6,000 units.

Don't confuse a mark-up on cost with a mark-up on price. 20% on the ₹1,300 cost gives ₹1,560; 20% of the selling price gives ₹1,625. Also keep target costing apart from cost-plus: cost-plus starts from cost and adds a margin, while target costing starts from the price and works back to the cost.

Where it breaks. Both formulas assume the firm sells the 10,000 units it expects; at 6,000 units and ₹1,500 it merely breaks even. Mark-up pricing ignores demand, perceived value and competition.

For exams. Know the six steps in order, the three Cs, and which methods are cost-, value- or competition-based.

Objective, demand, costs, competitors, method, final price.

A firm launching a smart-watch can start at ₹15,000 and cut the price each year, or start at ₹6,000 and try to sign up buyers fast. Each route suits a different market.

Don't confuse penetration with a launch offer. A common definition says penetration pricing means launching low and then raising the price. Penetration aims to win share with a low price; it does not require a later rise, and many penetration prices stay low. Nor is skimming the same as premium pricing: a premium price stays above rivals for good, while a skimming price is meant to come down.

Where it breaks. A skimming price shows rivals there is money to be made, and early buyers may resent the later cuts. A penetration price can start a price war, and buyers won only by price leave for a cheaper offer.

For exams. Expect the conditions for skimming and for penetration, and a strategy matched to an example.

Skim when buyers pay for novelty; penetrate when volume lowers cost.

A pressure-cooker maker in Delhi sells one model to a dealer next door, a distributor in Kochi, a hotel chain buying 500 units, and a shopper at a Diwali sale. One list price cannot serve all four.

Firms build a price structure that reflects differences in geography, segment, timing, order size, delivery and service, so they seldom earn the same profit on every unit. Kotler and Keller name four kinds of adaptation.

1. Geographical pricing, including countertrade when buyers cannot pay in cash.

2. Discounts and allowances. Take an illustrative bill of ₹1,00,000 to the Kochi distributor on terms of ‘2/10, net 30’. If it pays within 10 days, it deducts 2% and pays ₹98,000; otherwise the full ₹1,00,000 is due within 30 days.

3. Promotional pricing, to pull buyers in now.

4. Differentiated pricing, which is price discrimination in the sense defined above.

Don't confuse price discrimination with prices that differ because costs differ. Charging more to deliver to a distant town covers real freight; charging students less for the same museum visit does not reflect cost. Only the second is price discrimination. Also keep a functional discount, paid for work the channel does, apart from a quantity discount, paid for volume.

Where it breaks. Buyers in the low-price group may resell to the high-price group. Frequent discounts teach buyers to wait for the sale.

For exams. Name the four kinds and the four forms of countertrade. An offset is paid fully in cash; a buyback partly in products made with the seller's equipment.

Geography, discounts, promotions, differentiation.

A new mixer-grinder brand must decide whether to sell a sturdy machine at a low price, an ordinary one at an ordinary price, or a fancy one at a high price. Shoppers who cannot test the motor will judge it partly by its price.

When a firm enters a market or launches a product, it must decide where to place it on this price-quality map. Where buyers lack information about quality, they tend to take price as its signal.

How the zones behave. The diagonal strategies (1, 5 and 9) can coexist in one market, so long as there are buyers who want each. A premium mixer at ₹8,000 and an economy one at ₹2,000 can both sell, to different shoppers. Strategies 2, 3 and 6 attack the diagonal by offering more quality for the price. Strategies 4, 7 and 8 overprice the product for its quality; customers feel cheated and complain, so they are hard to sustain.

Don't confuse the super-value strategy with the economy strategy. Both charge a low price. Economy gives low quality for it and sits on the diagonal; super-value gives high quality for it and attacks the brands above.

Where it breaks. Price works as a quality signal mainly when buyers cannot judge quality themselves; reviews and experience weaken it. An attacking strategy survives only if the firm's costs let it give more for less. And quality here means quality as buyers perceive it.

For exams. Expect a cell named from its price and quality, or the reverse. Remember the pattern: diagonal coexists, above it attacks, below it overprices.

Price should match quality; more quality for the price attacks, less quality for the price fails.