Different Pricing Policies for management - 1

Different Pricing Policies for management
Important pricing policies which business firms follow in practice are described below:
1. Skimming-the-cream Pricing : This refers to the policy of charging high prices in the initial stages of the life of a product. The initial high prices serve to skim the cream of the inelastic market and the initial investment is recovered quickly. The manufacturer sets high price of his product to obtain high immediate profits for fear of competition at a later stage. The skim-the-cream price is set as high as the market will bear. This pricing policy has the following merits
(1) In the initial stages of the introduction of a product demand is comparatively inelastic. In the later stages prices may be reduced to maintain market share as the demand becomes more sensitive to price.
(ii) During the introductory stage, promotional expenses are high. High initial price finances the cost of product development and introduction. The excessive profit resulting from high initial prices may be ploughed back into the business for building capacity to meet the increasing demand in future.
(iii) High initial price can be used as a technique of market segmentation. The initial high price captures the market segment that is relatively insensitive to. price. Subsequently, the price may. be reduced to attract more elastic segments of the market.
(iv) High initial price can be projected as the symbol of quality. It may be used to give a prestige image to the product. The objective is to sell to ‘classes’.
(v) A manufacturer may charge high prices in the initial stages in order to restrict the demand to the level which he can easily meet.
(vi) it serves as a strong hedge against a possible mistake in pricing. if an introductory price is too high it is easy to reduce it. But if it is too low it is very difficult to raise it.

Skimming-the-cream pricing policy is useful in the case of new and specialty products. But the policy may induce strong competition through the entry of new firms in the industry.

2. Penetrating Pricing : This pricing policy involves setting a low initial price to attract as many buyers as possible. Prices are fixed below the competitive level to maximize the market share and to make the brand popular quickly. The manufacturer seeks to sell to the ‘masses’. The policy results in higher sales volume during the initial stages of a product’s life-cycle. Many retailers use this policy by operating on the principle of low mark up and higher volume. Penetrating pricing is an aggressive pricing strategy and helps in developing brand preference among consumers. The policy may be used to discourage the entry of new firms and to obtain the economies of large scale operations.’
Penetrating pricing is useful under the following conditions:
(i) The demand for the product is highly elastic, i.e., sales volume varies in direct proportion with the price.
(ii) There is strong competition in the market. In other words, the possibility of substitutes is high and the entry of new firms is easy.
(iii) Production on a large scale is required to minimize the cost of production per unit, i.e., substantial economies of large scale exist.
(iv) Very few consumers can afford high price, i.e., the high income market is not adequate enough to permit skim-the-cream-pricing.
However, penetrating pricing becomes risky when it is difficult to raise prices in future, or when costs are underestimated. Very low price in the initial stages may be considered a sign of poor quality by some people. The firm may be deluged with demand which it cannot meet, This policy can be successful if there is a large potential demand that will respond to a low price and there are potential economies of scale.

3 Competitive Pricing : Competitive pricing implies selling a product at the going market rate. When the market is highly competitive and the product is not differentiated significantly from the competitive products, this policy is quite useful. Under perfect competition, prices are determined by the forces of demand and supply. Every firm tends to follow the current market prices because products are standardized, no firm has control over the market and buyers and sellers are well- informed about market conditions. it i also called ‘market level pricing’ or ‘going rate pricing’. In some cases, a popular or customary price level’ exists. Consumers become accustomed to paying the price and no seller tries to disturb the customary price. For instance, some soft drinks are being sold at five rupee only for years together in spite of a sharp increase in the general price level. Every manufacture’ attempts to adjust his cost to the customary price by changing the quantity or quality of the product or by reducing the services supplied along with it. Customary pricing or status quo pricing stabilizes the price, simplifies distribution and encourages non-price competition. However, it may make prices rigid and Out of line with market conditions.

4. Follow the Leader Pricing: In some industries, there are a few firms but one of them controls so large a share of the market that a change in its supply will affect the market price. Such a dominant firm acts as the price leader. The leader sets the price of the product and all other firms follow that price. There is hardly any price competition and the firms desiring to increase their turnover depend on advertising and other methods of promotion. This pricing policy is generally adopted under
-oligopoly in which small firms cannot dare to disturb the price set by the leader. They cannot cut prices as it would lead to immediate retaliatory action by the leader. Overcharging is not used because it is not possible to sell at a price higher than that charged by the leader. Every firm finds in its self-interest and in the interest of industry to charge the price at which the leading firm is selling the product. This policy is also known as price leadership or pattern pricing. When the leader fixes a high price to protect its small competitors, it is known as umbrella pricing.

5, Leader Pricing: Some popular products are sometimes sold at below cost to attract customers and to promote the sale of other goods. Such products are known as ‘loss leaders’ and the pricing policy involving the use of loss leaders is called leader pricing. Loss leaders are generally well-known or highly advertised products. They, are frequently purchased consumer items like bread, soaps, tooth paste, etc. A firm may cut prices temporarily on the leader items on the rationale that the customers who will come to buy the leader items will stay to buy other merchandise which are regularly priced. As result the firm can more than compensate the loss incurred on a few items by increasing its total sales and overall profits.

6. Price Lining : This refers to the policy of selling different qualities of a product at different prices.
Many retailers offer a good, better and best assortment of merchandise at different prices. For instance, a retailer of jeans may sell them at three prices: Rs. 500, Rs. 750 and Rs.1500. The three prices represent the economy choice, the medium quality and the superfine quality respectively, in this way, a line of prices is created. Price lining is beneficial to both sellers and buyers. It simplifies buying decision on the part of consumers and enables the sellers to plan their purchases and to maintain control over inventories. With price lining, a seller can compete at all levels in the market. The prices of individual products are often marked up or marked down to fit them into the accepted price line and to ensure an overall profit. The disadvantage of price lining is that it may be difficult to alter the price line when significant changes occur in the costs of production. To make price lining effective and manageable, the price line should not include too many or too few prices and such prices should neither be too close together or too far apart.

7. Price Discrimination Discrimination.pricing or charging what the traffic will bear means charging different prices from different customers according to their ability to pay. Business firms charge different prices for the same product by creating some differentiation in product features. The product sold to different people. may be differentiated through packing and after-sale service. The policy of price discrimination is popular among professionals like doctors and lawyers who render specialized services Business firms selling tangible products can use the policy of price discrimination provided they are able to divide the market into different segments according to the customer’s capacity to pay. But increasing interaction among market segments owing to improved means of transportation and communication has, reduced the possibility of price discrimination. Customers generally do not favour such a policy. Price discrimination may be successful when the elasticity of demand is different in different market segments. Price in the price conscious segment may be kept lower than in the quality conscious market. Public utilities charge. a higher rate for water and electricity supply from commercial users than from domestic consumers. A restaurant may sell the same meal at different prices in lounge and in the room. Similarly, different rates may be charged far morning and regular shows by a theater.

8. Keep Out Pricing: This pricing policy seeks to discourage the competitive firms to offer substitutes and to prevent the entry of new firms in the industry. It is a pre-emptive pricing policy involving the fixation of low prices. This policy can be adopted by big firms which have large resources at their command. Keep out pricing is a risky policy particularly when the price is fixed below the cost of the product. Once the price is fixed at a low level, it may not be possible to increase it later on. Therefore, it should be used in rare cases.

9. Fixed Price versus Variable Price Policy : An important decision is whether bargaining is to be allowed or not. In case of fixed price policy or single price policy, a product is sold at the same price per unit to all consumers irrespective of the amount of purchase. But under one price policy, the seller charges the same price from similar customers who purchase similar quantities of the product. However, the price may vary according to the quantity purchased. For instance, a product may be priced @ Rs. 9 per unit for purchase of one dozen or more units and @ Rs. 10 per unit when less than one dozen units are purchased. Convenience goods are generally sold through one price policy.

Under variable price policy, the same quantities of a product are sold to similar buyers at different prices. For example, a seller may charge a lower price from old customers and a higher price from new customers. The final price is determined through bargaining or negotiations between the seller and the buyer. Consumer durables like televisions, refrigerators and automobiles are often sold at negotiated or variable prices.

Fixed price policy builds customers’ confidence in the seller and saves the time of both as no bargaining is involved. Customers having weak bargaining power prefer fixed price policy. But buyers who have high bargaining power or can spare ugh time for haggling prefer variable price policy. Variable price policy also provides the flex iy required to deal with different types of customers or to meet special orders.

10. Psychological Pricing A seller has to decide whether to charge even price e.g. Re. 1/- or odd prices, e.g., 99 paise. Odd prices have a favourable psychological influence on the buyers. They give an impression of accurate pricing and provide an illusion of a bargain. For instance, a customer may happily pay Rs. 119.95 paisa for a pair of shoes and may not like to buy the same pair if it is priced at Rs 12O. The Bata Shoe Company and the publishers of paperbacks widely use the policy of odd pricing.

11. Unit,Pricing: This pricing policy is used to indicate the price rate per unit of a product contained in different package sizes having different quantities. For each product and its each package size, the attached label indicates the price of the particular package along with the price per unit of the product. Unit pricing facilitates price comparisons by buyers. It enables them to make economical purchase by reducing their dependence on brand loyalty. But unit pricing poses a challenge to manufacturers who may be forced to adopt standard package size in course of time.

12. Prestige or Premium Pricing : Rich buyers are not price conscious and are willing to pay a high price provided the product is of premium quality. When the product has unique features and is of superior quality, premium pricing policy can he adopted. This is an aggressive pricing strategy as it ensures higher profits and growth. Premium pricing policy is adopted in case of high end products such as designer watches. luxury cars, exclusive jewelery and so on.

13. Resale Price Maintenance (RPM) : Under this price policy a manufacturer fixes the minimum price below which his product would not be sold to the ultimate consumers or industrial users. Under the policy of resale price maintenance the. manufacturer of a.branded product enters into an agreement with the distributors of his product. In the agreement, the manufacturer specifies price. In this way the manufacturer places restrictions on the price at which the product shall be resold to buyers at every step in the marketing process. Resale price maintenance is possible in case of branded products only. The policy is commonly used in case of consumer goods like drugs, cigarettes, books, liquor, sports goods, toiletry preparations and electrical appliances. The main purpose of resale price maintenance is to protect the image of the product and of its manufactures. This policy may be defined through exclusive distribution. .