Pricing – One of the 4P’s of marketing mix

Price is the second major element of marketing mix. Price is the only one that generates
revenue, while other elements incur cost. Price is the amount of money paid for a product by the consumer and charged by the manufacturer. Prices can be determined by negotiation between the parties or by the forces of demand and supply.
There could be a system of fixed prices or dynamic prices.
Fixed pricing: Where the price of the product is same for all buyers.
Dynamic pricing: Where the price of the product may be different for different buyers on the basis of bid offer by the buyer and acceptance of the bid by the seller.

accounts-1238594_640.jpg

Objectives served through pricing:

Various objectives are served by pricing of products tha include:

  1. Profit earning: Through pricing, the firms can optimize their profits.
  2. Survival through fixation of prices firms ensure their long term survival by covering the cost and also earning some profit.
  3. Market share: Pricing can be used to increase the market share or retain the existing market share.
  4. Cash flows: Pricing of products result in revenue enhancement and cash flows for a firm.
  5. Status quo: To meet competition and stabilize the demand, a firm may maintain status quo, as far as prices are concerned.
  6. Product quality: For improvement in quality, the firms have to incur additional cost and for that purpose, they have to fix higher prices.
  7. Communicating image: Prices also communicate the image of a product. Banks charge different prices for their products. They pay interest, levy interest and recover services for various products.

Methods of Pricing:

For determining the price of the various products under various situations, three methods are used which include cost based pricing, value based pricing and competition based pricing.

  1. Cost based pricing: A pricing method in which a fixed sum or a percentage of the total cost is added (as income or profit) to the cost of the product to arrive at its selling price.
  2. Value based pricing: Pricing method based on the perceived worth of good or service to its intended customers.
  3. Competition based pricing: A pricing method in which a seller uses prices of competing products as a benchmark instead of considering own costs or the customer demand.

Pricing Strategies:

Pricing should adapt to factors like geographical location, market segment and economic conditions. Companies should remain flexible towards pricing policy and change as per market dynamics. Companies should also not react blindly to price change by competition rather should focus on analyzing the underlying motives.

Banks fix the prices of their product not on a single consideration but for a no of considerations. Many times they are forced to offer similar prices to the customer, for instance, in case of deposits.

  • Geographical pricing: Different prices for customers in different regions.
  • Psychological pricing: Fixing a price range say economy range and premium range
  • Promotional pricing: To stimulate early purchase by offering incentives.
  • Discriminatory pricing: Different prices for different buyers
  • Product-mix pricing: Pricing as a package with the objective of optimizing the profits for the entire mix.
  • Market skimming pricing: Price is initially kept higher and later on reduced to attract more buyers. Eg. Iphone
  • Market penetration pricing: When the price is kept lower in the beginning to attract a large market share, this is called Market penetration pricing

Bank Pricing:

Interest Cost and Service Cost have to be considered while pricing a bank product.
Factors impacting bank pricing – Risk and Return, Monetary Policy, Capital Adequacy and Cost Benefit analysis.
Fair pricing of Credit: Fair pricing of credit is very critical for both lenders and borrowers as it has a direct bearing on the earnings and profits of the lending bank.

Objectives of fair pricing of credit:

Pricing of credit is regulated by RBI in terms of the powers vested with it under Section 21 of the Banking Regulation Act 1949. It ensures flexibility to the lenders, Effectiveness to the monetary policy, Protection to customers from unfair practices

The MCLR methodology for fixing interest rates for advances was introduced by the Reserve Bank of India with effect from April 1, 2016. The marginal cost of funds based lending rate (MCLR) refers to the minimum interest rate of a bank below which it cannot lend. It is an internal benchmark or reference rate for the bank. MCLR actually describes the method by which the minimum interest rate for loans is determined by a bank on the basis of marginal cost or the additional or incremental cost of arranging one more rupee to the prospective borrower.

Reasons for introducing MCLR

RBI decided to shift from base rate to MCLR because the rates based on marginal cost of funds are more sensitive to changes in the policy rates. This is very essential for the effective implementation of monetary policy.  Thus, MCLR aims

  • To improve the transmission of policy rates into the lending rates of banks.
  • To bring transparency in the methodology followed by banks for determining interest rates on advances.
  • To ensure availability of bank credit at interest rates which are fair to borrowers as well as banks.
  • To enable banks to become more competitive and enhance their long run value and contribution to economic growth.

For instant updates and materials do join my
Best Books for your preperation
Download free ebooks for your preperation