MBA Distance education learning/ Product Pricing Management

  Product Pricing Management

Q: Discuss Product Pricing in Detail?

Ans: We consider that there are four basic components to a successful Pricing Management

1. Costs. Focus on your current and future, not historical, costs to determine the cost basis for your Pricing Management
2. Price Sensitivity. When the sale of the product is easily affected by slight change in price is called price sensitivity
3. Competition. Pay attention to them, but don't copy them . . . when it comes to pricing strategy they may have no idea what they're doing.
4. Product Life cycle. How you price, and what value you provide for that price, will change as you move through the product life cycle.

Setting Price objectives

1) Survival: When the product is launched with less brand equity the price is usually kept low and the purpose is for the survival of the product in the market.

2) Maximum Current Profit: when the company wishes to make higher profits in the present situation rapid price skimming strategy is followed. Usually this strategy is adopted by product with high brand equity.

3) Maximum market skimming: it aims at making heavy profit from all the segment product is offered to.

4) Maximum sales Growth: in this the price is kept low so that customers buy a lot result in maximum sales growth.

5) Product Quality Leadership: The excusive example is services of Airtel which are sold with product quality leadership objective but with costlier.

Determining Demand

Price elasticity of demand

it is percentage change in quantity demanded by the percentage change in price of the same commodity.

In economics and business studies, the price elasticity of demand is a measure of the sensitivity of quantity demanded to changes in price.

In simpler words, demand for a product can be said to be very inelastic if consumers will pay almost any price for the product, and very elastic if consumers will only pay a certain price, or a narrow range of prices, for the product.

Inelastic demand means a producer can increase prices without much hurting demand for its product, and elastic demand means that consumers are sensitive to the price at which a product is sold and will not buy it if the price rises.

Estimating Costs : In order to set up price of the product it is essential to estimate the costs and with profit margin determining the final price.

Types of costs

a) variable costs: Variable costs are expenses for daily use like electricity costs, labor costs, office administration costs etc.

b) Fixed costs: The capital investment on fixes assets like land, machinery, investment on infrastructure etc.

Cost dynamics- the cost of production vary with production size, Product life cycle and marketing factors.

Analyzing competitor’s prices and Offers: to sustain a product on the market it is always made competitive through its marketing mix where price is an important concern.

Selection of pricing method: the available pricing methods are 1) Mark up Pricing: In this method the seller charges desired profit markup to the total costs. Like if the seller wishes to earn profit markup of 20% on product cost Rs. 16 than ha should charge Rs 20 to the customer so that Rs. 4 is the 20% profit margin on per unit sold.

2) Target Return Pricing : Usually firm tries to determine the price that would fetch the target rate of return on investment

Like General Motors aim to achieve 15 to 20 percent profit on investment.

3) Perceived value pricing: if the seller feels that his product gives better values to the customers as expected by the consumer he charges high price irrespective of cost of product. This pricing method is called perceived value pricing.

Influence of other marketing mix on price:

1. Company pricing policy has considerable influence on the price of the product. Like Public Sector Business Units have pricing policy they adhere to without much scope for cost of production.
2. Impact of pricing on other policies
3. Price discounts and allowance like Cash discounts, Quantity Discounts, seasonal discounts are offered to the customer for achieving marketing objectives.
4. Promotional pricing like cash rebates low interest financing and psychological discounting which stimulates the sale.