72  Pricing decisions: Factors affecting price determination; Pricing policies and strategies

72.1 Concept and Importance of Pricing

Pricing is “the act of setting a monetary value at which a product or service is exchanged”. It is the only element of the marketing mix that generates revenue — the rest are costs. Price signals quality, positions the brand, recovers cost, and drives demand. Kotler’s Six-step pricing procedure: Select objective → Determine demand → Estimate cost → Analyse competitors → Select method → Select final price.

72.2 Factors Affecting Price

72.2.1 Internal Factors

TipInternal Pricing Factors
  • Marketing objectives — survival, current profit max, market-share leadership, quality leadership.
  • Marketing mix strategy — must align.
  • Costs — floor of price.
  • Organisational considerations — who decides price.
  • Product life cycle stage.
  • Product differentiation.

72.2.2 External Factors

TipExternal Pricing Factors
  • Nature of market and demand — competition type, price elasticity.
  • Customer perception of value — ceiling of price.
  • Competition — costs, prices, offers.
  • Economic conditions — boom, recession, inflation.
  • Government regulation — MRP rules, MRTP / Competition Act, GST, anti-profiteering.
  • Channel members — margins, allowances.
  • Society — ethics, social responsibility.

72.3 Pricing Objectives

TipSix Pricing Objectives (Kotler)
  • Survival — short-term, cover variable cost.
  • Maximum current profit.
  • Maximum market share — penetration pricing.
  • Maximum market skimming — cream the market.
  • Product quality leadership — premium pricing.
  • Other — partial cost recovery (non-profits), social pricing.

72.4 Pricing Methods (How is price set?)

72.4.1 Cost-Based Methods

TipCost-based Methods
  • Mark-up / Cost-plus pricing — Price = Cost + Mark-up. Most common in retail.
  • Target-return pricing — set price for desired ROI (e.g., GM uses 15-20 % on capital).
  • Break-even pricing — recover total cost.
  • Marginal cost pricing — price ≥ marginal cost (short-term).

72.4.2 Buyer-Based Methods

  • Perceived-value pricing — based on customer’s value perception.
  • Value pricing — high quality at fair price (EDLP — Everyday Low Pricing).

72.4.3 Competition-Based Methods

  • Going-rate pricing — match competitors.
  • Sealed-bid pricing — bidding (tenders).
  • Auction pricing — English / Dutch / Vickrey.

72.5 Pricing Strategies

72.5.1 New Product Strategies

TipNew Product Strategies
Strategy Use case
Market skimming Premium, novelty, niche — Apple iPhone
Market penetration Mass-market, build share — Reliance Jio entry
Two-part pricing Razor & blades — fixed + variable
Captive product Cheap printer, costly cartridges

72.5.2 Product-Mix Pricing

TipProduct-Mix Strategies
  • Product-line pricing — different price points for line.
  • Optional-feature pricing — base + options.
  • Captive-product pricing — printer + ink.
  • Two-part pricing — fixed + per-unit (telecom).
  • By-product pricing.
  • Product-bundling pricing — combo / Big Mac meal.

72.5.3 Price-Adjustment Strategies

TipPrice-Adjustment Strategies
  • Discount and allowance pricing — cash, quantity, functional, seasonal, trade-in, promotional allowance.
  • Segmented (differential) pricing — by customer, location, time, version.
  • Psychological pricing — ₹999 instead of ₹1000; prestige pricing.
  • Promotional pricing — loss leaders, special events.
  • Geographical pricing — FOB, uniform delivered, zone, basing-point, freight-absorption.
  • Dynamic pricing — Uber surge, e-commerce.
  • International pricing.

72.5.4 Government-Controlled Pricing in India

TipGovernment Influence
  • Petroleum — earlier APM, now market-based.
  • Pharma — Drug Price Control Order (DPCO) by NPPA.
  • MSP — Minimum Support Price for crops.
  • Anti-profiteering under GST (NAA, now CCI).
  • Legal Metrology Act — MRP printing rules.

72.6 Price Elasticity Considerations

TipDemand Elasticity & Pricing
  • Inelastic demand — raise prices freely (essentials, brand-loyal segments, no substitute).
  • Elastic demand — small increase → large fall in demand; price cautiously.
  • Cross-elasticity — substitutes vs complements.
  • Income elasticity — luxury vs necessity.

72.7 Pricing in Indian Context

TipPricing — Indian Twists
  • MRP (Maximum Retail Price) — printed on all packaged commodities; inclusive of all taxes (Legal Metrology Rules 2011).
  • MSP — for 22 crops by CACP recommendation.
  • Issue price — PDS / FCI grains.
  • GST — 5 slabs (0, 5, 12, 18, 28) + cess.
  • Customs duty + Anti-dumping affects imports.
  • Predatory & deep-discount pricing — flagged in e-commerce FDI rules; CCI investigates.

flowchart TB
  P[Pricing] --> O[Objectives<br/>Survival → Quality leader]
  P --> M[Methods<br/>Cost · Buyer · Competition]
  P --> S[Strategies<br/>Skimming · Penetration · Bundling · Dynamic]
  P --> R[Regulation<br/>MRP · MSP · DPCO · GST · CCI]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

NoteDistractor warning

PYQ trap: Skimming = high price (novelty); Penetration = low price (capture share). Two-part pricing common in telecom; Captive-product pricing common in printers/blades. MSP announced by Govt on CACP recommendation.

72.8 Practice Questions

Q 01FloorEasy

The floor of price is usually:

  • ACustomer value
  • BCost
  • CCompetitor price
  • DGovernment price
View solution
Correct Option: B
**Cost** = floor; customer value = ceiling.
Q 02SkimmingEasy

Apple's iPhone launch typifies:

  • ASkimming
  • BPenetration
  • CEDLP
  • DPredatory
View solution
Correct Option: A
**Skimming** — premium pricing for early adopters.
Q 03PenetrationEasy

Reliance Jio's launch tariff is an example of:

  • ASkimming
  • BPenetration
  • CGoing-rate
  • DCost-plus
View solution
Correct Option: B
**Penetration** — low price to capture share.
Q 04CaptiveMedium

"Cheap printer, expensive cartridge" is:

  • ACaptive-product pricing
  • BBundle pricing
  • CPenetration
  • DSkimming
View solution
Correct Option: A
**Captive product** — Gillette razor-blade model.
Q 05PsychEasy

Selling at ₹999 instead of ₹1000 is:

  • APredatory pricing
  • BPsychological pricing
  • CGeographic pricing
  • DGoing-rate pricing
View solution
Correct Option: B
**Psychological / odd-pricing**.
Q 06EDLPMedium

EDLP — Every Day Low Pricing — is associated with:

  • AApple
  • BWalmart
  • CRolex
  • DTata
View solution
Correct Option: B
**Walmart** — pioneer of EDLP / value pricing.
Q 07FOBHard

FOB pricing is a:

  • APsychological strategy
  • BGeographical pricing — buyer pays freight
  • CBundling
  • DSkimming
View solution
Correct Option: B
**Free On Board origin** — buyer bears freight.
Q 08MRPMedium

MRP printing on packaged goods is governed by:

  • ASEBI Act
  • BLegal Metrology (Packaged Commodities) Rules 2011
  • CCompanies Act
  • DGST Act 2017
View solution
Correct Option: B
**Legal Metrology Rules 2011**.
Q 09MSPMedium

MSP is announced on recommendation of:

  • AFCI
  • BCACP
  • CNABARD
  • DFAO
View solution
Correct Option: B
**Commission for Agricultural Costs and Prices (CACP)**.
Q 10BundlingMedium

McDonald's combo meal is example of:

  • ACaptive pricing
  • BProduct-bundling pricing
  • CSkimming
  • DPenetration
View solution
Correct Option: B
**Bundling**.
Q 11Mark-upMedium

Mark-up pricing means:

  • ACost + fixed % margin
  • BCustomer-value based
  • CCompetitor matching
  • DAuction
View solution
Correct Option: A
**Cost-plus / Mark-up pricing**.
Q 12DemandHard

Customer value is usually the:

  • AFloor of price
  • BCeiling of price
  • CMid-point
  • DAverage price
View solution
Correct Option: B
**Ceiling** = maximum value perception.
Q 13SealedMedium

Sealed-bid pricing is commonly used in:

  • ARetail FMCG
  • BGovernment tenders
  • CE-commerce
  • DServices
View solution
Correct Option: B
**Government & B2B tenders** — sealed bid.
Q 14DynamicMedium

Uber's surge pricing is an example of:

  • ADynamic pricing
  • BCost-plus
  • CSkimming
  • DPromotional
View solution
Correct Option: A
**Dynamic / real-time pricing**.
Q 15Six stepsHard

Kotler's 6-step pricing procedure begins with:

  • ACost estimation
  • BSelecting pricing objective
  • CDetermining demand
  • DCompetitor analysis
View solution
Correct Option: B
**Select objective** first.
Q 16DiscountMedium

Discount given to dealers for storage and selling is:

  • ACash discount
  • BQuantity discount
  • CTrade/Functional discount
  • DSeasonal discount
View solution
Correct Option: C
**Trade / Functional discount** — for distribution function.
Q 17DPCOHard

Drug Price Control Order (DPCO) is administered by:

  • ACCI
  • BNPPA
  • CFSSAI
  • DIRDAI
View solution
Correct Option: B
**NPPA** — National Pharmaceutical Pricing Authority.
Q 18PredatoryHard

Predatory pricing — below cost to drive out rivals — is investigated by:

  • ASEBI
  • BCCI
  • CIRDAI
  • DRBI
View solution
Correct Option: B
**CCI** under Competition Act 2002.
Q 19Two-partMedium

A monthly rental + per-minute call charge is:

  • ATwo-part pricing
  • BCaptive pricing
  • CBundling
  • DEDLP
View solution
Correct Option: A
**Two-part pricing**.
Q 20MatchMedium

Match strategy with example:

Strategy Example
(i) Skimming (a) Jio entry
(ii) Penetration (b) iPhone launch
(iii) Captive (c) McD combo
(iv) Bundle (d) Razor & blades
  • A(i)-(b), (ii)-(a), (iii)-(d), (iv)-(c)
  • B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
  • C(i)-(c), (ii)-(d), (iii)-(a), (iv)-(b)
  • D(i)-(d), (ii)-(c), (iii)-(b), (iv)-(a)
View solution
Correct Option: A
Skim-iPhone, Pen-Jio, Captive-Razor&Blades, Bundle-McD.

72.9 Quick Recall

ImportantQuick recall
  • Pricing = only revenue-generating P.
  • Floor = cost; Ceiling = customer value perception.
  • Kotler 6 steps: Objective → Demand → Cost → Competitor → Method → Final price.
  • Methods: Cost-plus, Target return, Break-even, Perceived value, Going-rate, Sealed bid, Auction.
  • New-product strategies: Skimming (Apple) vs Penetration (Jio); Two-part (telecom); Captive (printer-ink).
  • Mix: Product-line, Optional, Captive, Two-part, By-product, Bundle.
  • Adjustments: Discount, Allowances, Segmented, Psychological, Promotional, Geographic, Dynamic, International.
  • India: MRP (Legal Metrology 2011), MSP (CACP), DPCO (NPPA), MSP for 22 crops, Predatory pricing → CCI.