Marketing Aptitude Study Material – Pricing

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Pricing is the most crucial aspect of marketing management since it has significant economic and social implications. Price is the amount of money and/or other item with utility needed to acquire a product. The businessmen want to get the highest possible price for the products, he sells whereas the consumer wishes to pay the least possible price for his purchases.

Importance of Pricing in Business

• Price determines the demand of a product.
• Prices also help the business system in allocating its scarce resources economically.
• In a free market system, price mechanisms consider able impact upon the competitive strength of different firms.
• Price is very important element in determining both the revenue and profit of the enterprise.
• Pricing can regulate the competition in the market.
• Price affects the total sales, total revenue and the total profit of the organisation.

Factors Affecting Pricing Decisions
Pricing decisions can be affected by two factors which are as follows

1. Primary Factors
   • Demand of a product
   • Cost of a product
2. Secondary Factors
   • Characteristics of a product
   • Aims of the producer
   • Benefit perception
   • Marketing method
   • Characteristics of consumers
   • Business traditions
   • Economic and political environment
   • Governmental laws or regulations
   • Delivery route of the product
   • Market competiton

Discount
Sometimes companies offer different types of discount to boost the sales.

They are :

1. Cash discount
2. Seasonal discount
3. Trade discount
4. Quantity discount

Most companies will adjust their list price and give discounts and allowances for early payment, volume purchases and off-season buying.

Types of Pricing Policies
Pricing policies can be categorised as

1. Variable Policy: It is a marketing approach that permits different rates to be extended to different customers for the same goods or services. This pricing policy is applicable in retail trade.

2. One Price Policy: It is the pricing strategy in which the same price is offered to every customer who purchases the product under the same conditions. A one price policy may also mean that prices are set and cannot be negotiated by customers.

Different Ways of Price Policy
Different ways of price policy are as follows:

1. Based on Flexibility
   • One price policy flexibility
   • Price policy
2. Based on Characteristics
   • Predictory pricing policy
   • Value line price policy
   • Complete line pricing policy
   • Leader price policy
   • Market penetration pricing policy
   • Psychological price policy
   • Unit price policy
   • Loss leader pricing policy
3. Based on Price Level
   • Union competition pricing policy
   • Below the market price policy
   • Above the market price policy
4. Based on Geographical Ground
   • Some delivery pricing policy
   • Regional delivery pricing policy
   • Center-based pricing policy
   • Production center pricing policy

Process of Pricing
Steps in setting a pricing policy are:

Step 1 Selecting the pricing objective.
Step 2 Determining demand.
Step 3 Estimating costs.
Step 4 Analysing competitors costs, prices and offers.
Step 5 Selecting a pricing method.
Step 6 Selecting the final price.

Methods of Pricing
Methods of pricing are as follows:

1. Cost Plus Pricing Method: Under this method, set the price at production cost, including both cost of good and fixed costs at current volume, plus a certain profit margin.
   Per Unit Cost = Total Cost/Total Product Cost
2. Marginal Cost Method: Under this method, variable costs and semi-fixed costs are added in price of a product then the product will be purchased.
3. Market Penetration Method: Under this method, a product is widely promoted and its introductary price is kept  comparatively low. The strategy aims to encourage consumers to switch to the new product because of the lower price.
4. Fixed Cost: It is not related with the volume of production, e.g., interest, tax, rent, salaries, etc.
5. Variable Cost: It is related with the volume of production. e.g., wages, fuel, commission, etc.
6. Mark-up Method: Under this method, fixed amount of the sales value is added to the per unit cost of the product.
   Sales Value  = Average Cost per Unit/% of Anticipated Mark- up

Some Important Terms 

• Barter: The oldest form of exchange trading of products is known as barter. The buyer and seller directly exchange goods, with no money and no third party involved,
• Psychological Pricing: it is a pricing or marketing strategy based on the theory that certain prices have a psychological impact on the consumer.
• Prestige Goods: Items that are perceived as being very high quality and thus warrant a higher price based on the added value that the purchaser feels, he will obtain from the product.
• Fixed Assets: It is a term used in accounting for assets and property that cannot easily be converted into cash. Building, real estate, equipment and furniture are good examples of fixed assets.
• Monopoly Market: A type of market that features the traits of a monopoly like high price levels, supply constraints or excessive barriers to entry is known as monopoly market.
• Competition Based Pricing: This is used by a business firm that wants to price their products at or lower than their competition’s price.
• Market Penetration: It occurs when a company penetrates a market in which current or similar products already exist. The best way to achieve this by gaining competitor’s customers.
• Trade Discount: It is the amount by which a manufacturer reduces the retail price of a product when it sells to a reseller, rather than to the end customer. Trade discount is given to a purchaser for performing activities such as transporting, storing and selling.
• Fixed Costs: They are defined as expenses that do not change as a function of the activity of a business, within the relevant period, e.g., a retailed must pay rent and utility bills irrespective of sales.
• Time Pricing: Sometimes prices are varied by season, day or hour e.g.. commercial airlines charge higher fares during the festival season in India.
• Channel Pricing: Company fixes different prices for their products depending on the place from where consumer buys it. The price of the same cold drinks varies in a fine restaurant, a fast food restaurant or in an airport.

Tit-Bits

• Competition based approach is used to avoid the problem of over pricing and under pricing. .
• Value-based pricing is a setting price of a product on the buyer’s perception of value rather than on the seller’s cost.
• In market skimming pricing strategy, initially price is higher then it is reduced.
• The perception of price depends on a product’s actual price and consumer’s expectations regarding price.

Check your Skills

1. Price is

1. the value that is exchanged for products in a marketing transaction
2. always money paid in a marketing transaction
3. more important to buyers than sellers
4. usually the most inflexible marketing mix decision variable
5. None of the above

2. Fixed Price Policy is one where

1. price fixing is allowed by the government
2. different prices are charged to buyers based on the individual customers and situations
3. setting one price for all buyers is the norm
4. different prices are charged, based on barter or negotiation
5. Both ‘1’ and ‘2″

3. The oldest form of exchange trading of products is known as

1. credit
2. barter
3. purchasing
4. buying
5. None of the above

4. Price is a key element in the marketing mix because it relates directly to

1. the generation of total revenue
2. the size of the sales force
3. the speed of an exchange
4. brand image
5. quality controls

5. Dell used ……………. to enter in the personal computer market by selling high quality computer products through lower cost direct channels.

1. Market development pricing
2. Market penetration pricing
3. Market skimming pricing
4. Differentiation pricing
5. Both ‘1’ and ‘2’

6. If price is used to say something about the product other than in just economic terms, a pricing method is being used called

1. psychological pricing
2. value-based pricing
3. segmented pricing
4. promotional pricing
5. discount and allowance pricing

7. Costs that do not vary with production or sales levels are called

1. variable costs
2. fixed assets
3. independent costs
4. standard costs
5. All of the above

8. Setting price of a product based on the buyer’s perception of value rather than on the seller’s cost is known as  [SBI Clerk 2012]

1. value-based pricing
2. break even pricing
3. cost plus pricing
4. target profit pricing
5. None of the above

9. In market skimming pricing strategy,

1. initially price is high and is maintained high
2. initially price is higher and then it is reduced
3. initially price is lower and then it is increased
4. All of the above
5. None of the above

10. Which pricing approach is used to avoid the problem of over pricing and under pricing?

1. Competition based approach
2. Cost based approach
3. Buyer based approach
4. All of the above
5. None of the above

11. ‘Skimming price’ for the new product is called

1. low initial price
2. average price
3. high initial price
4. moderate price
5. All of these

12. Under monopoly market structure, the degree of freedom in pricing decision is

1. very low
2. very high
3. quite good
4. zero
5. All of these

13. A company must pay each month’s bill for rent, heat, interest and executive salaries. Such cost would most appropriately be labelled as

1. total costs
2. fixed costs
3. variable costs
4. dynamic costs
5. None of these

14. A firm that practices price competition engages in which one of the following strategies?

1. Beating or matching the prices of competitions
2. Setting prices only as low as the second lowest competitor
3. Competing in both price and product differentiation
4. Letting other firms cut price while it retains profitability
5. None of the above

15. Regulations of prices deemed particularly necessary for industries where

1. supply is excessively relative to demand
2. demand equals supply
3. technology provides market entry barriers
4. competition results in all service providers incurring losses
5. None of the above

16. The perception of price depends on

1. a product’s actual price and consumer’s expectations regarding price
2. a consumer’s expectation of price
3. a consumer’s analysis of competitive prices
4. a product’s actual price compared with the manufacturer’s suggested price

17. What type of discount is given to a purchaser for performing activities such as transporting, storing and selling?

1. Quantity discount
2. Trade discount
3. Cash discount
4. Geographic discount
5. Service discount

18. When a company adjust price levels, so that it can increase sales volume to levels that match the organisation’s expenses, it is said to employ a………pricing objective.

1. survival
2. cash flow
3. market share
4. return on investment
5. None of the above

19. The maximum selling price that a firm can sustain for a product is determined by

1. competitor’s prices
2. what it costs to produce competitor’s prices
3. competitive parity
4. what customers are prepared to pay for it
5. Both ‘1’ and ‘2’

20. In case of prestige goods, the demand is

1. not price sensitive till a level
2. price sensitive
3. not price sensitive
4. less price sensitive
5. None of the above

21. All of the following would be considered to be among the internal factors that affect price decisions, except

1. nature of the market and demand
2. competition
3. costs
4. environmental factors such as the economy and social concerns
5. None of the above

22. Which of the following factor (s) leads to less price sensitivity?

1. The product is more distinctive
2. Buyers are less aware of substitutes
3. Buyers cannot easily compare the quality of substitutes
4. The expenditure is a smaller part of the buyer’s total income
5. All of the above

23. A company’s costs take two forms-fixed and

1. variable
2. total
3. average
4. accumulated
5. None of these

24. When the seller receives some percentage of the payment in cash and the rest in products, it is known as

1. buy back arrangement
2. compensation deal
3. barter
4. offset
5. None of these

25. Coca-Cola carries a different price depending on whether the consumer purchases it in a fine restaurant, a fast food restaurant or in an airport. This is known as

1. location pricing
2. channel pricing
3. image pricing
4. customer segment pricing
5. None of the above

26. Many restaurants observe ‘Happy Hours’ during the leave time of the day. This is known as

1. time pricing
2. image pricing
3. customer profit pricing
4. location pricing
5. None of the above

27. In going rate pricing, the firm bases its price largely on…………….. prices.

1.  market
2. competitors’
3. actual product
4. customer segment
5. None of these

28. Sellers will establish special prices in certain seasons to draw in more customers. Organised retailers offer huge discounts during festivals like Deepawali, Christmas, etc. This is known as

1. special customer pricing
2. special event pricing
3. cash rebates
4. psychological discounting
5. None of the above

29. Indian railway charges a lower fare to senior citizens. It is an example of

1. product form pricing
2. customer segment pricing
3. image pricing
4. time pricing
5. None of the above

30. If carrier develops a new air conditioning compressor that lasts twice as long as existing compressors, but only uses half the electricity, it will probably establish its pricing based on

1. product quality
2. survival
3. cash flow
4. return on investment
5. market share

31. The customer’s perceived value is made up of

1. the buyer’s image of the product performance
2. the channel deliverables
3. the warranty quality
4. customer support and softer attributes
5. All of the above

32. Proper pricing is needed for [SBl Clerk 2008]

1. extra charges for extra services
2. levy of VAT
3. good customer service
4. putting burden on the customer
5. service with extra facilities.

Answer Key