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Pricing Decisions

Pricing Objectives Factors Affecting Pricing decisions Pricing strategies (or ) Pricing Policies & Methods

Pricing Objectives:
1. Profit Maximization 2. Assured minimum ROI 3. Ensure a specified Targeted sales volume or Market Share 4. Make entry into new markets or achieve deeper market penetration in existing market 5. Maintain price leadership or price parity with competitors 6. Launch a price war to check competitors activity 7. Improving cash flow through faster sales 8. Liquidation of accumulated inventory of products 9. Margin of profit to middlemen. 10. Ability to pay

Factors Influencing Pricing decisions

Internal Factors External Factors

Marketing Objectives Marketing Mix Costs Organizational Factors

Demand Competition Suppliers Government Economic Conditions

Internal Factors affecting Pricing Decisions

Marketing Objectives : A company has to first decide on its marketing objectives & strategies. A company may have several objectives such as maximizing profit, maximizing market share , market leadership , maximizing customer volume , maintaining an image etc. Pricing Policy should be established only after proper considerations of the objectives of the firm.

Marketing Mix :
Pricing decisions must be coordinated with other elements of the marketing mix. Any decision made for any other variable in the marketing mix could affect pricing decision. Ex : If a large number of retailers are planned for distribution of products , large retailer margin have to be built into the price.

Costs :
The most important factor in pricing decisions is the cost of production. Most companies wants to charge a price that both covers all its costs and gives a rate of return. While marketing a product a firm has to decide what prices are realistic , considering current demand and competition. Organizational Factors : Pricing decisions are handled differently in different companies. In small companies top management takes the decision , whereas in large companies the divisional or product line managers in marketing function decide pricing.

External factors affecting Pricing Decisions

Demand : The market demand for a product or service has a big impact on pricing. The price demand relationship will vary according to the nature of the markets, i.e., Pure competition , monopolistic competition , oligopolistic competition etc. Competition :

The activities of competitors , their costs and their prices will also influence pricing decisions. The companies pricing strategy will vary according to the nature of the competition.
Suppliers : Suppliers of raw materials and other goods can have a significant effect on the price of a product.

Economic conditions : Economic conditions such as boom or recession , inflation and interest rates affect pricing due to its effect on cost of production and consumer perception.
Government : Pricing decisions are affected by the price control by the government through enactment of legislation

Pricing strategies (or ) Pricing Policies & Methods

Cost based Pricing Demand based Pricing Competition oriented Pricing Value Pricing Product Line Pricing Tender Pricing Affordability based pricing Differentiated pricing Psychological pricing

Cost based Pricing :

The commonly used methods are Markup pricing or Cost Plus pricing Absorption cost pricing or Full cost pricing Target Rate of Return pricing Marginal cost pricing Markup Pricing or Cost plus pricing : In this method the marketer estimates the total cost for producing the product And then adds a markup or margin .The markups will vary for different markets and products. Absorption cost pricing or Full cost pricing : It is based on the estimated unit cost of the product at normal level of production and sales. Variable and fixed cost of production , selling and administration costs are all added to get the total cost. The selling price is arrived at by adding the required margin to the total cost.

Target Rate of Return pricing : Under this method first the rate of return desired by the firm on the amount of capital invested is determined. The amount of profit desired by the enterprise is calculated. This amount of profit is added to the cost of production and thus the price per unit of the product is determined.
Marginal cost pricing : The aim of marginal cost pricing is to maximize contribution towards fixed cost. It aims at realizing all the direct variable costs of the product , plus part of the fixed costs.

Demand based pricing