Pricing Decisions: Strategies, Methods & Real-World Impact

1. What is Pricing? Why Does It Matter?

Pricing is the process of determining the value of a product/service that customers are willing to pay. It is one of the 4Ps of marketing (alongside Product, Place, Promotion) and directly impacts:

• Revenue and profitability (higher prices = more profit per unit, but lower sales volume).
• Customer perception (price signals quality; e.g., Rolex vs. Timex).
• Market position (premium vs. budget positioning).
• Competitive advantage (e.g., Daraz’s discounts vs. local shops’ fixed prices).

1.1 Pricing Objectives

Companies set prices to achieve specific goals. Common objectives include:

Worked Example: Nabil Bank’s Loan Pricing Nabil Bank offers home loans at 8–10% interest (vs. competitors at 9–12%). Their pricing objective is profit + customer retention because:

• Lower interest attracts more borrowers (sales-oriented).
• Long-term relationships lead to other banking services (customer-oriented).
• Competitive edge against NMB and Global IME.

2. Factors Influencing Pricing Decisions

Pricing is not arbitrary—it depends on internal and external factors:

2.1 Internal Factors (Company-Controlled)

2.2 External Factors (Market-Driven)

Real-World Tie-In: Daraz’s Dynamic Pricing Daraz adjusts prices in real-time based on:

• Demand (e.g., laptops spike during exam season).
• Inventory (discounts on slow-moving items).
• Competitors (matching or undercutting local shops). Result: Customers pay different prices for the same product at different times.

3. Pricing Methods

Companies use different approaches to set prices. The choice depends on the product, market, and goals.

3.1 Cost-Based Pricing

Definition: Price is set based on production/distribution costs + desired profit margin.

Formula: $$\text{Price}=\text{Cost}+(\text{Profit Margin}\times \text{Cost})$$ or $$\text{Price}=\text{Cost}+\text{Fixed Markup (\% or ₹)}$$

Example: Local Bakery in Kathmandu

• Cost of 1 loaf of bread: ₹50
• Desired profit margin: 50%
• Selling price: ₹50 + (50% × ₹50) = ₹75

Advantages: ✅ Simple to calculate. ✅ Ensures profitability.

Disadvantages: ❌ Ignores customer demand (may price too high/low). ❌ Competitors may undercut (e.g., Pathao vs. local taxi drivers).

3.2 Demand-Based Pricing

Definition: Price is set based on what customers are willing to pay (not just costs).

Key Concept: Price Elasticity of Demand

• Elastic Demand: Customers are sensitive to price changes (e.g., fast food, generic medicines).
  • Example: If Daraz raises phone prices by 10%, sales may drop by 20%.
• Inelastic Demand: Customers won’t switch even if prices rise (e.g., insulin, NTC internet in rural areas).
  • Example: NTC can raise broadband prices slightly without losing many customers.

Methods:

Worked Example: NTC’s Internet Pricing NTC charges ₹1,200/month for 100 Mbps in Kathmandu but ₹800 in Pokhara because:

• Demand is lower in Pokhara (more elastic).
• Competition is higher (SmartCell offers similar plans).
• Cost of infrastructure is lower (fewer customers → lower per-unit cost).

3.3 Competition-Based Pricing

Definition: Price is set relative to competitors to gain or hold market share.

Strategies:

Case Study: Khalti vs. eSewa Transaction Fees

Why?

• Khalti uses penetration pricing to grow user base.
• eSewa uses premium pricing because it’s the market leader.

4. Pricing Strategies

Companies use long-term pricing approaches to achieve specific goals.

4.1 New Product Pricing Strategies

flowchart TD
  A["New Product Pricing"] --> B["Skimming"]
  A --> C["Penetration"]
  A --> D["Neutral"]

  B --> B1["High initial price\n→ Gradually lower\n*Example:* Apple iPhone in Nepal"]
  C --> C1["Low initial price\n→ Gain market share\n*Example:* Xiaomi phones"]
  D --> D1["Price similar to competitors\n*Example:* Local SIM cards"]

Worked Example: Xiaomi in Nepal

• Skimming: Launched Mi 11 at ₹80,000 (high because of demand).
• Penetration: Later introduced Mi 10T at ₹35,000 to attract budget buyers.

4.2 Psychological Pricing

Definition: Tricks customers into perceiving a better deal than reality.

Techniques:

Real-World Example: Daraz’s "₹999" Deals

• Customers see ₹999 instead of ₹1,000 and perceive it as a discount.
• Result: Higher conversion rates (more sales).

4.3 Discount and Allowance Pricing

Companies offer temporary reductions to boost sales.

Worked Example: Nabil Bank’s Loan Discounts

• First-time borrowers: 0.5% lower interest rate.
• Referral discounts: Get ₹5,000 off if you refer a friend.
• Why? Encourages new customers and word-of-mouth marketing.

5. Ethical and Legal Considerations in Pricing

Pricing must follow laws and ethical norms to avoid backlash.

5.1 Price Fixing (Illegal)

• Definition: Companies collude to set prices (e.g., all petrol pumps in Kathmandu charging the same).
• Example: In 2018, Nepal Oil Corporation (NOC) was accused of fixing fuel prices.
• Penalty: Heavy fines or jail time.

5.2 Predatory Pricing (Anti-Competitive)

• Definition: Selling below cost to drive competitors out of business.
• Example: If Pathao offered free rides for a year to eliminate local taxis, it would be predatory.
• Legal Risk: Violates Nepal’s Competition Act (2015).

5.3 Price Discrimination (Ethical Issue)

• Definition: Charging different prices to different customers without justification.
• Example:
  • Legal: Student discounts (₹500 vs. ₹1,000 for movie tickets).
  • Illegal: Charging foreign tourists more for the same hotel room (unless justified by services).
• Ethical Concern: Can lead to customer resentment.

6. Pricing in the Nepali Context

6.1 Challenges in Nepal

6.2 Case Study: Nabil Bank’s Loan Pricing Strategy

Problem: Many Nepalis struggle with high loan interest rates (10–15%). Solution: Nabil Bank introduced:

• Flexible EMI options (lower monthly payments).
• Lower interest for women borrowers (8% vs. 10% for men).
• Collateral-free loans (₹5 lakh max at 9%). Result: ✅ Increased customer trust. ✅ Higher loan disbursement (more profit). ✅ Socially responsible (helps underserved groups).

7. Contemporary Pricing Trends

7.1 Dynamic Pricing (AI-Driven)

• How it works: Prices change in real-time based on demand, location, and customer data.
• Example:
  • Pathao: ₹80 at 2 PM vs. ₹120 at 10 PM.
  • Daraz: Laptop prices drop as stock decreases.
• Tools Used: AI algorithms (like those used by Amazon and Uber).

7.2 Subscription Pricing

• How it works: Customers pay recurring fees for access (instead of one-time purchases).
• Examples in Nepal:
  • NTC/SmartCell: Monthly internet plans.
  • Khalti/eSewa: Free transactions (but earn via merchant fees).
• Advantage: Steady revenue for businesses.

7.3 Freemium Model

• How it works: Basic service is free, but premium features cost money.
• Examples:
  • WhatsApp: Free calls, but businesses pay for API access.
  • Duolingo: Free lessons, but ad-free version costs ₹50/month.

In the Real World

1. Nabil Bank’s Loan Pricing

   • Idea Used: Cost-based + customer-oriented pricing.
   • How? They calculate risk-based interest rates (higher for business loans, lower for education loans) while keeping EMIs affordable.
   • Impact: More people take loans, increasing bank profits.

2. Daraz’s Dynamic Pricing

   • Idea Used: Demand-based + competition-based pricing.
   • How? Uses AI to adjust prices hourly based on:
     • Stock levels (discounts when inventory is high).
     • Competitor prices (matches or undercuts local shops).
   • Impact: Higher sales volume, even if margins are thin.

3. Pathao’s Surge Pricing

   • Idea Used: Psychological + dynamic pricing.
   • How? During peak hours (7–9 PM), prices double (e.g., ₹50 → ₹100).
   • Why? Encourages off-peak rides and balances supply-demand.
   • Customer Reaction: Mixed—some accept it, others use competitors.

Exam Tip

How This Unit is Tested

1. Definitions & Concepts (20%)

   • Expect short-answer questions on:
     • Cost-based vs. demand-based pricing.
     • Skimming vs. penetration pricing.
     • Price elasticity (elastic vs. inelastic).
   • Example Question: "Differentiate between psychological pricing and premium pricing with Nepali examples."

2. Worked Examples (30%)

   • You’ll be given scenarios and asked to:
     • Calculate markup price (cost-based).
     • Determine elasticity (demand-based).
     • Suggest a pricing strategy for a new product.
   • Example Question: "A local bakery sells bread at ₹60 (cost: ₹40). If they want a 40% profit margin, what should the new price be? If demand drops by 30% when price rises to ₹70, is demand elastic or inelastic?"

3. Case Studies (30%)

   • Descriptive questions on:
     • Nepali companies (Nabil Bank, Daraz, NTC).
     • Global examples (Apple, Amazon).
   • Example Question: "How does Daraz use dynamic pricing? Discuss its advantages and ethical concerns."

4. Comparative Tables (20%)

   • You may be asked to compare pricing methods in a table.
   • Example Question: "Prepare a comparison table for cost-based, demand-based, and competition-based pricing with Nepali examples."

How to Score Full Marks

✅ Use real examples (Nepal-based where possible). ✅ Show calculations for pricing formulas (e.g., markup, elasticity). ✅ Link theory to practice (e.g., "Like Nabil Bank, companies should balance profit and customer affordability"). ✅ Draw diagrams for pricing strategies (e.g., skimming vs. penetration). ✅ Discuss ethical/legal aspects (e.g., "Predatory pricing is illegal under Nepal’s Competition Act").

Quick Revision Checklist

Before the exam, ensure you can:

• Explain 3 pricing methods (cost, demand, competition) with examples.
• Calculate markup price and elasticity.
• Differentiate skimming vs. penetration pricing.
• Describe 2 psychological pricing techniques (charm pricing, decoy effect).
• Analyze a Nepali company’s pricing strategy (e.g., Nabil Bank, Daraz).
• Discuss ethical concerns in pricing (e.g., price fixing, discrimination).