Pricing

Kamal K. Gupta
Assistant Professor
Ajay Kumar Garg Institute of Management
Ghaziabad
 Consumer Psychology and Pricing

• Reference prices
• Price-Quality inferences
• Price Cues
 Process of setting the Price
1. Selecting the pricing objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’ costs, prices
and offers
5. Selecting a pricing method
6. Selecting the final price
1. Selecting the pricing objective
• Survival
• Maximum current profit
• Maximum market share
• Maximum market skimming
• Product-quality leadership
• Other objectives
2. Determining demand
• Price sensitivity
• Estimating Demand curves
– Statistical analysis
– Price experiments
– surveys
• Price elasticity of demand
Factors affecting price sensitivity
• Unique value effect
• Substitute awareness effect
• Difficult comparison effect
• Total expenditure effect
• End benefit effect
• Shared cost effect
• Price-Quality effect
• Inventory effect
 Demand would be less elastic if:
• There are few or no substitutes /
competitors
• Buyers not readily notice the higher price
• Buyers’ are slow to change their buying
habits
• Buyers think the higher prices are
justified
 3. Estimating costs
• Types of costs and levels of
production
• Accumulated production
• Activity-based cost accounting
• Target costing
4. Analyzing competitors’ Costs
Prices and Offers
• Reaction pattern
• Competitors’ pricing strategy
5. Selecting a pricing method
• Mark-up pricing
• Target return pricing
• Perceived value pricing
• Going rate pricing
• Sealed-bid pricing
 Mark-up pricing
• To add some standard mark-up to the cost
of the product

Unit Cost = VC + FC/Unit Sales

Mark-Up Price = Unit Cost

(1-Desired Return on Sales)
 Target return pricing
• The firm decides the price that would
yield its targeted return on investment

TRP = Unit Cost + [ Desired Return X Invested Capital]

Unit Sales
 Perceived value pricing
• Buyers’ perception of value, not the
seller’s cost as the key to pricing.
 Going rate pricing
• The firm bases its price largely on
competitors’ prices, with less attention
paid to its own costs and demand.
• This pricing method is suitable where
costs are difficult to measure or
competitive response is uncertain.
 6. Selecting the final price
• Considerations
– The influence of other marketing mix
variable
– Company’s pricing policies
– Impact of price on the other parties
 Adapting the Price
• Geographical pricing
• Promotional pricing
• Discriminatory pricing
• Product-mix pricing