Pricing Process
Costs
→Value
→Competition
→Price
In This Article
Introduction
Pricing decisions are among the most critical choices managers make. Price directly affects revenue, profit margins, market positioning, and customer perception. Unlike other marketing mix elements, pricing decisions can be implemented quickly and have immediate impact on the bottom line.
Factors Affecting Pricing Decisions
Internal Factors
- Cost structure: Fixed costs, variable costs, break-even point
- Organizational objectives: Profit maximization, market share, survival
- Product life cycle stage: Introduction, growth, maturity, decline
- Product positioning: Premium, value, economy
External Factors
- Customer demand: Price elasticity, willingness to pay
- Competition: Competitor prices, market structure
- Economic conditions: Inflation, recession, purchasing power
- Legal/regulatory: Price controls, anti-dumping laws
Pricing Methods
| Method | Formula/Approach | Best For |
|---|---|---|
| Cost-Plus | Cost + Markup % | Simple, stable markets |
| Target Return | Cost + (Target ROI × Investment)/Sales | Capital-intensive industries |
| Value-Based | Price based on perceived value | Differentiated products |
| Competition-Based | Match or undercut competitors | Commodity markets |
| Demand-Based | Price based on demand curve | Dynamic markets |
Cost-Plus Pricing
Price = Unit Cost × (1 + Markup %)
Example: If unit cost = ₹100 and markup = 20%, Price = ₹100 × 1.20 = ₹120
Target Return Pricing
Price = Unit Cost + (Target Return × Invested Capital) / Expected Sales
Pricing Strategies
New Product Pricing
- Skimming: High initial price, reduce over time. Works with innovative products, inelastic demand.
- Penetration: Low initial price to gain market share quickly. Works in price-sensitive markets.
Product Mix Pricing
- Product line pricing: Price steps across product line
- Optional feature pricing: Base price + add-ons
- Captive product pricing: Low base, expensive consumables (razors/blades)
- Bundle pricing: Combine products at lower total price
Competitive Pricing
- Price leadership: Dominant firm sets price, others follow
- Price matching: Match competitor prices
- Predatory pricing: Below-cost pricing to eliminate competition (often illegal)
Psychological Pricing
- Odd-even pricing: ₹999 instead of ₹1000
- Prestige pricing: High price signals quality
- Reference pricing: Show "was ₹X, now ₹Y"
- Price anchoring: Show expensive option first
Conclusion
Key Takeaways
- Pricing affects revenue, profit, positioning, and perception
- Consider both internal factors (costs, objectives) and external factors (demand, competition)
- Cost-plus is simple but ignores demand; value-based captures willingness to pay
- Skimming for innovative products; penetration for market share
- Psychological pricing leverages cognitive biases
- Price is the only P that generates revenue—others generate costs