71 Pricing Decisions
71.1 Why Pricing is Critical
Price is the only element of the marketing mix that generates revenue — the other three (Product, Place, Promotion) generate cost. Pricing is also the most flexible element: prices can be changed in a day; products and channels cannot (kotler2021?).
(This topic was covered in detail in topic 26 — Pricing Strategies — for Business Economics. Here we revisit the same material from the marketing-management perspective, with emphasis on strategic pricing in marketing.)
71.2 Pricing Objectives
| Objective | Working content |
|---|---|
| Survival | Cover variable costs and stay in business |
| Maximum profit | The textbook MR = MC outcome |
| Maximum market share | Penetration pricing |
| Quality leadership / Skimming | Premium price signals premium quality |
| Status-quo / Competitive parity | Match competitors |
| Social / Regulatory | Affordability of essential goods |
71.3 Factors Affecting Price
| Family | Factor |
|---|---|
| Internal | Cost of production; objectives; product life-cycle stage; differentiation; channel decisions |
| External | Demand and elasticity; competition; legal and regulatory environment; macroeconomic conditions; consumer perceptions |
71.4 Three Approaches to Pricing
| Approach | Working content |
|---|---|
| Cost-based pricing | Cost-plus, mark-up, target-return, marginal-cost, break-even, full-cost |
| Demand-based pricing | Perceived value, value-based, discriminatory, what-traffic-can-bear |
| Competition-based pricing | Going-rate, sealed-bid, premium / discount-to-leader |
71.5 Cost-Based Pricing
| Method | Formula |
|---|---|
| Cost-plus | Price = Unit cost + Mark-up % |
| Target-return | Price = Cost + (Desired return × Capital) ÷ Expected sales |
| Break-even | Price at which TR = TC |
| Marginal-cost | Price = AVC + contribution margin |
| Full-cost | Price = Average total cost + planned profit margin |
71.6 Demand-Based Pricing
| Method | Working content |
|---|---|
| Perceived-value pricing | Price set on the buyer’s perception, not the firm’s cost |
| Value-based pricing | Price set close to the economic value the buyer derives |
| Discriminatory / differential | Different prices to different buyers (Pigou’s three degrees) |
| Going-rate pricing | Match industry leader or industry average |
71.7 Competition-Based Pricing
| Method | Working content |
|---|---|
| Going-rate | Match industry leader / average |
| Sealed-bid | Bid below expected lowest competing bid, above firm’s cost |
| Premium / discount to leader | Set deliberate premium or discount |
71.8 New-Product Pricing — Skimming vs Penetration
| Dimension | Skimming | Penetration |
|---|---|---|
| Initial price | High | Low |
| Customer | Innovators / less price-sensitive | Mass market |
| Trajectory | Reduce as new segments enter | Possibly raise after share built |
| Suitable for | Inelastic, premium image, patent | Elastic, mass market, scale economies |
| Examples | Apple iPhone, premium pharma | Reliance Jio, Xiaomi, mass FMCG |
71.9 Product-Mix Pricing
| Strategy | Working content |
|---|---|
| Product-line pricing | Step prices across a line at quality / feature levels |
| Optional-product pricing | Base price low; charge for accessories |
| Captive-product / razor-blade | Base low, captive consumable high |
| By-product pricing | Recover cost on a by-product to lower main price |
| Product-bundle pricing | Bundle several items at a single (lower) price |
71.10 Price-Adjustment Strategies
| Strategy | Working content |
|---|---|
| Discounts and allowances | Cash, quantity, trade, seasonal, trade-in |
| Discriminatory pricing | By customer segment, location, time, version |
| Promotional pricing | Loss leader, festival, cash rebate |
| Geographical pricing | FOB origin, uniform delivered, zone, freight absorption |
| Psychological pricing | Odd / charm, prestige, decoy, reference |
| Dynamic / surge pricing | Algorithmic, demand-based |
71.11 Pricing Strategies in Indian Practice
Indian firms commonly combine cost-based and competition-based methods, with extensive use of psychological pricing (₹999 instead of ₹1,000) and bundling (telecom packs, FMCG combos). FMCG firms target unit-of-purchase pricing — small ₹5 / ₹10 sachets to widen reach.
The Maximum Retail Price (MRP) regime under the Legal Metrology Act 2009 requires every pre-packaged commodity to display its MRP; selling above MRP is prohibited. The Drugs (Prices Control) Order (DPCO) 2013 caps prices of essential medicines.
71.12 Pricing Decision Process
| Step | Action |
|---|---|
| 1 | Set pricing objective |
| 2 | Determine demand and elasticity |
| 3 | Estimate costs |
| 4 | Analyse competitor prices |
| 5 | Select pricing method |
| 6 | Set the final price |
71.13 Exam-Pattern MCQs
Q1. Which of the following is not one of the three classical families of pricing methods?
A. Cost-based B. Demand-based C. Competition-based D. Inventory-based
Answer: D. Inventory-based pricing is not a recognised family.
Q2. Match each pricing method with its formula or content:
| Method | Formula / Content | ||
|---|---|---|---|
| (i) | Cost-plus | (a) | Price = Cost + (Desired return × Capital) ÷ Expected sales |
| (ii) | Target-return | (b) | Price = Cost + Mark-up % |
| (iii) | Value-based | (c) | Price set close to the economic value the buyer derives |
| (iv) | Going-rate | (d) | Match industry leader or industry average |
A. (i)-(b), (ii)-(a), (iii)-(c), (iv)-(d) 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)
Answer: A.
Q3. A new luxury watch is priced at ₹5,00,000 to target affluent early adopters. This is an example of:
A. Penetration pricing B. Skimming pricing C. Loss-leader pricing D. Captive pricing
Answer: B. High initial price for innovators / premium segment = skimming.
Q4. Match each strategy with its example:
| Strategy | Example | ||
|---|---|---|---|
| (i) | Bundle pricing | (a) | Surge pricing on a ride-hailing app |
| (ii) | Promotional pricing | (b) | ₹999 instead of ₹1,000 |
| (iii) | Psychological / odd | (c) | Loss-leader weekly grocery offer |
| (iv) | Dynamic | (d) | Combo of cable + internet + phone |
A. (i)-(d), (ii)-(c), (iii)-(b), (iv)-(a) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(a), (iv)-(b) D. (i)-(b), (ii)-(a), (iii)-(d), (iv)-(c)
Answer: A.
Q5. A firm prices an inkjet printer at near cost while charging a high margin on cartridges only it makes. This is:
A. Penetration pricing B. Captive-product (razor-blade) pricing C. Skimming pricing D. Bundle pricing
Answer: B. Razor-blade pricing.
Q6. Selling above the printed Maximum Retail Price in India is governed by:
A. Companies Act 2013 B. Legal Metrology Act 2009 C. RBI Master Direction D. SEBI Regulations
Answer: B. Legal Metrology Act 2009 prohibits sale above MRP on pre-packaged commodities.
Q7. Arrange the steps of the pricing decision process in correct order:
- Estimate costs
- Set pricing objective
- Determine demand and elasticity
- Analyse competitor prices
A. (ii), (iii), (i), (iv) B. (i), (ii), (iii), (iv) C. (iii), (iv), (i), (ii) D. (iv), (iii), (ii), (i)
Answer: A. Objective → Demand → Costs → Competition → Method → Final price.
Q8. Match each adjustment strategy with its content:
| Strategy | Content | ||
|---|---|---|---|
| (i) | Discriminatory | (a) | Loss-leader weekly grocery offer |
| (ii) | Geographical | (b) | Different prices by customer segment |
| (iii) | Promotional | (c) | FOB origin, uniform delivered, zone |
| (iv) | Psychological | (d) | Odd / charm, prestige, decoy |
A. (i)-(b), (ii)-(c), (iii)-(a), (iv)-(d) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(a), (iii)-(c), (iv)-(b)
Answer: A.
- Pricing — only revenue-generating element of the mix; most flexible.
- Six objectives: survival, max profit, market share, quality leadership, parity, social/regulatory.
- Three families of methods: cost-based, demand-based, competition-based.
- Cost-based: cost-plus, target-return, break-even, marginal, full-cost.
- Demand-based: perceived-value, value-based, discriminatory, what-traffic-can-bear.
- Competition-based: going-rate, sealed-bid, premium-to-leader.
- New-product: Skimming vs Penetration.
- Mix pricing: product-line, optional, captive (razor-blade), by-product, bundle.
- Adjustments: discounts, discriminatory, promotional, geographical, psychological, dynamic.
- Indian rules: MRP under Legal Metrology Act 2009; DPCO 2013; Competition Act 2002 prohibits predatory pricing; Income-Tax Sec. 92 transfer pricing.
- 6-step process: Objective → Demand → Costs → Competition → Method → Final price.