Pricing:Objective,Pricing Method, Strategies

Pricing: Objective,Pricing Method, Strategies- Jaiib/DBF Paper 1 (Module D) Unit 4

Dear bankers,

As we all know that  is Pricing for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Pricing (Unit-4), SUPPORT SERVICES – MARKETING OF BANKING SERVICES/ PRODUCTS (Module D), Principle & Practice of Banking JAIIB Paper-1.

♦Important Of Pricing

  • When marketers talk about what they do as part of their responsibilities for marketing products, the tasks associated with setting price are often not at the top of the list. Marketers are much more likely to discuss their activities related to promotion, product development, market research and other tasks that are viewed as the more interesting and exciting parts of the job. Yet pricing decisions can have important consequences for the marketing organization and the attention given by the marketer to pricing is just as important as the attention given to more recognizable marketing activities.

♦Objective of Pricing

  • Maximum Profit
  • Survival
  • Market Share
  • Cash Flow
  • Status quo
  • Product Quality
  • Communication Image

Different Between Short Term Objective and Long- term Objective

Short Term Objective Long Term Objective
Profit Maximization Profit Optimization
Minimum return on sales turnover Minimum return on investment
Achieving a particular sales level Achieving a particular market share
Deeper penetration of the market Entering new market
Keeping parity with competition Providing commodities/services at prices that will stimulate economic development
Fast turnaround or early cash recovery Stabilizing prices and margins in the market

♦Factors Influencing Pricing

Internal Factors External Factors
Objectives of the firm-both corporate and marketing Market characteristics-pertaining to demand, customer, competition
Characteristics of the product Buyer’s behavior and bargaining power
Life cycle stage of the product Competitors policy
Usage characteristics- Use pattern, turnaround rate-  of the product Government controls and regulations
Price elasticity of the demand of the product Social considerations
Costs of manufacturing and marketing the product Bargaining power of suppliers
Composition of the product line of the firm Understanding with prices cartels

♦Pricing Methods

  • The Pricing Methods are the ways in which the price of goods and services can be calculated by considering all the factors such as the product/service, competition, target audience, product’s life cycle, firm’s vision of expansion, etc. influencing the pricing strategy as a whole.

The pricing methods can be broadly classified into two parts:

  • Cost Oriented Pricing Method
  • Market Oriented Pricing Method

Cost-Oriented Pricing Method:

Many firms consider the Cost of Production as a base for calculating the price of the finished goods. Cost-oriented pricing method covers the following ways of pricing:

  • Cost-Plus Pricing: It is one of the simplest pricing method wherein the manufacturer calculates the cost of production incurred and add a certain percentage of markup to it to realize the selling price. The markup is the percentage of profit calculated on total cost i.e. fixed and variable cost.

E.g. If the Cost of Production of product-A is Rs 500 with a markup of 25% on total cost, the selling price will be calculated asSelling Price= cost of production + Cost of Production x Markup Percentage/100

Selling Price=500+500 x 0.25= 625

Thus, a firm earns a profit of Rs 125 (Profit=Selling price- Cost price)

  • Markup pricing- This pricing method is the variation of cost plus pricing wherein the percentage of markup is calculated on the selling price.E.g. If the unit cost of a chocolate is Rs 16 and producer wants to earn the markup of 20% on sales then mark up price will be:

Markup Price= Unit Cost/ 1-desired return on sales

Markup Price= 16/1-0.20 = 20

Thus, the producer will charge Rs 20 for one chocolate and will earn a profit of Rs 4 per unit.

  • Target-Return pricing– In this kind of pricing method the firm set the price to yield a required Rate of Return on Investment (ROI) from the sale of goods and services.E.g. If soap manufacturer invested Rs 1,00,000 in the business and expects 20% ROI i.e. Rs 20,000, the target return price is given by:

Target return price= Unit Cost + (Desired Return x capital invested)/ unit salesTarget Return Price=16 + (0.20 x 100000)/5000Target Return Price= Rs 20

Thus, Manufacturer will earn 20% ROI provided that unit cost and sale unit is accurate. In case the sales do not reach 50,000 units then the manufacturer should prepare the break-even chart wherein different ROI’s can be calculated at different sales unit.

Market-Oriented Pricing Method

Under this method price is calculated on the basis of market conditions. Following are the methods under this group:

  • Perceived-Value Pricing: In this pricing method, the manufacturer decides the price on the basis of customer’s perception of the goods and services taking into consideration all the elements such as advertising, promotional tools, additional benefits, product quality, the channel of distribution, etc. that influence the customer’s perception.

E.g. Customer buy Sony products despite less price products available in the market, this is because Sony company follows the perceived pricing policy wherein the customer is willing to pay extra for better quality and durability of the product.

  • Value Pricing: Under this pricing method companies design the low priced products and maintain the high-quality offering. Here the prices are not kept low, but the product is re-engineered to reduce the cost of production and maintain the quality simultaneously.

E.g. Tata Nano is the best example of value pricing, despite several Tata cars, the company designed a car with necessary features at a low price and lived up to its quality.

  • Going-Rate Pricing- In this pricing method, the firms consider the competitor’s price as a base in determining the price of its own offerings. Generally, the prices are more or less same as that of the competitor and the price war gets over among the firms.

E.g. In Oligopolistic Industry such as steel, paper, fertilizer, etc. the price charged is same.

  • Auction Type pricing: This type of pricing method is growing popular with the more usage of internet. Several online sites such as eBay, Quikr, OLX, etc. provides a platform to customers where they buy or sell the commodities.
  • Differential Pricing: This pricing method is adopted when different prices have to be charged from the different group of customers. The prices can also vary with respect to time, area, and product form.

E.g. The best example of differential pricing is Mineral Water. The price of Mineral Water varies in hotels, railway stations, retail stores.

♦Pricing Strategies

  • Geographical Pricing: Geographical pricing, in marketing, is the practice of modifying a basic list price based on the geographical location of the buyer. It is intended to reflect the costs of shipping to different locations.
  • Psychological Pricing: Psychological pricing (also price ending, charm pricing) is a pricing and marketing strategy based on the theory that certain prices have a psychological impact. Retail prices are often expressed as “odd prices”: a little less than a round number, e.g. $19.99 or £2.98.
  • Discriminatory Pricing: Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets.
  • Market Skimming Pricing: A pricing approach in which the producer sets a high introductory price to attract buyers with a strong desire for the product and the resources to buy it, and then gradually reduces the price to attract the next and subsequent layers of the market.
  • Pricing Discounts and Allowances: The seller generally allows some discount to the buyer. It is usually expressed as a percentage of sale prices. A seller may allow either of the trade and cash discounts or both of them.
  • Promotion Pricing: Price promotions or promotional pricing is the sales promotion technique which involves reducing the price of a product or services in short term to attract more customers & increase the sales volume.
  • Product mix: The product mix is the collection of products and services that a company chooses to offer its market. Pricing strategies range from being the cost leader to being a high-value, luxury option for consumers.
  • Market penetration pricing: Market penetration pricing is a pricing strategy that sets a low initial price for a product. The goal is to quickly attract new customers based on the low cost. The strategy is most effective for increasing market share and sales volume while discouraging competition.

♦Bank Pricing

There are two major costs, which have to be considered while pricing bank products:

  • Interest Cost
  • Servicing Cost

Factors which impact in bank pricing:

  • Risk and return
  • Monetary Policy
  • Capital adequacy
  • Cost- benefit analysis

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