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TABLE OF CONTENTS TOPICS PAGES
INTRODUCTION ………………………………………………………………..3 PRICING INTRODUCTION ………………………………………………………3 IMPORTANCE OF PRICING …………………………………………………….4 SOME OF THE MORE COMMON OBJECTIVES OF PRICING………………..5 FACTORES EFFECTING DEMAND……………………………………………. 6 SETTING PRICING POLICY …………………………………………………… 6 PRICING INFLUENCES ON PRICING POLICY……………………………….. 10 PRODUCT PRICING STRATEGY ……………………………………………… 11 NEW PRODUCT PRICING STRATEGIES …………………………………….. 12 PRODUCT MIX PRICING STRATEGIES ……………………………………… 14 PRICE ADJUSTMENT STRATEGIES …………………………………………. 14 SETTING THE PRICE …………………………………………………………. 16 FACTORES EFFECTING PRICING DECISION ………………………………..17 INITIATING AND RESPONDING TO PRICE CHANGES …………………….19 PRICING STRATEGY OF SURF EXCEL………………………………………..20 PRICING STRATEGY OF JAZZ………………………………………………….21 PRICING STRATEGY OF PEPSI…………………………………………………22 REFRENCES ………………………………………………………………………23
INTRODUCTION Narrowly, price is the amount of money charged for a product or service. Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the
product or service. Dynamic Pricing: charging different prices depending on individual customers and situations.
Price is the one element of the marketing mix that produce revenue ; the other element produce cost, prices are the easiest marketing mix element to adjust ; product features, channels and even promotion take more time .price also communicating to the market the company’s intended value positioning of its product or brand. Today companies are wrestling with a number of difficult pricing tasks • How to respect to aggressive price cutters • How to price the same product when it goes through different channels • How to price the same product in different countries • How to price on improved product while still selling the previous version Many companies do not handle pricing well. They make these common mistakes; price is to costoriented ; price is not revised often enough to capitalize on market changes; price is set independent of the rest of the marketing mix rather than as an intrinsic element of marketing positioning strategy; and price is not varied enough for different product item ,market segmentation , distribution channels, and purchase occasions. Companies do their pricing in a variety of ways. In small companies, price is often set by the boss. In larger companies, pricing is handling by division and product line managers. Even here, top management sets general objectives and policies and often approve the prices proposed by lower level of management.
Setting the right price is an important part of effective marketing. It is the only part of the marketing mix that generates revenue (product, promotion and place are all about marketing costs). Price is also the marketing variable that can be changed most quickly, perhaps in response to a competitor price change. Put simply, price is the amount of money or goods for which a thing is bought or sold. The price of a product may be seen as a financial expression of the value of that product. For a consumer, price is the monetary expression of the value to be enjoyed/benefits of purchasing a product, as compared with other available items. The concept of value can therefore be expressed as: (Perceived) VALUE = (perceived) BENEFITS – (perceived) COSTS A customer’s motivation to purchase a product comes firstly from a need and a want: e.g.
• Need: "I need to eat • Want: I would like to go out for a meal tonight") The second motivation comes from a perception of the value of a product in satisfying that need/want (e.g. "I really fancy a McDonalds"). The perception of the value of a product varies from customer to customer, because perceptions of benefits and costs vary. Perceived benefits are often largely dependent on personal taste (e.g. spicy versus sweet, or green versus blue). In order to obtain the maximum possible value from the available market, businesses try to ‘segment’ the market – that is to divide up the market into groups of consumers whose preferences are broadly similar – and to adapt their products to attract these customers. In general, a products perceived value may be increased in one of two ways – either by: (1) Increasing the benefits that the product will deliver, or, (2) Reducing the cost. For consumers, the PRICE of a product is the most obvious indicator of cost - hence the need to get product pricing right.
IMPORTANCE 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. Some reasons pricing is important include: • Most Flexible Marketing Mix Variable – For marketers price is the most adjustable of all marketing decisions. Unlike product and distribution decisions, which can take months or years to change, or some forms of promotion which can be time consuming to alter (e.g., television advertisement), price can be changed very rapidly. The flexibility of pricing decisions is particularly important in times when the marketer seeks to quickly stimulate demand or respond to competitor price actions. For instance, a marketer can agree to a field salesperson’s request to lower price for a potential prospect during a phone conversation. Likewise a marketer in charge of online operations can raise prices on hot selling products with the click of a few website buttons. • Setting the Right Price – Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can lead to the marketing organization losing revenue. Prices set too low may mean the company is missing out on additional profits that could be earned if the target market is willing to spend more to acquire the product. Additionally, attempts to raise an initially low priced product to a higher price may be met by customer resistance as they may feel the marketer is attempting to take advantage of their customers. Prices set too high can also impact revenue as it prevents interested customers from purchasing the product. Setting the right price level often takes
considerable market knowledge and, especially with new products, testing of different pricing options. • Trigger of First Impressions - Often times customers’ perception of a product is formed as soon as they learn the price, such as when a product is first seen when walking down the aisle of a store. While the final decision to make a purchase may be based on the value offered by the entire marketing offering (i.e., entire product), it is possible the customer will not evaluate a marketer’s product at all based on price alone. It is important for marketers to know if customers are more likely to dismiss a product when all they know is its price. If so, pricing may become the most important of all marketing decisions if it can be shown that customers are avoiding learning more about the product because of the price. • Important Part of Sales Promotion – Many times price adjustments is part of sales promotions that lower price for a short term to stimulate interest in the product. However, as we noted in our discussion of promotional pricing in Part: 15: Sales Promotion tutorial, marketers must guard against the temptation to adjust prices too frequently since continually increasing and decreasing price can lead customers to be conditioned to anticipate price reductions and, consequently, withhold purchase until the price reduction occurs again.
Some of the more common pricing objectives are:
Maximize long-run profit Maximize short-run profit Increase sales volume (quantity) Increase dollar sales Increase market share Obtain a target rate of return on investment (ROI) Obtain a target rate of return on sales Stabilize market or stabilize market price: an objective to stabilize price means that the marketing manager attempts to keep prices stable in the marketplace and to compete on nonprime considerations. Stabilization of margin is basically a cost-plus approach in which the manager attempts to maintain the same margin regardless of changes in cost. Company growth Maintain price leadership Desensitize customers to price Discourage new entrants into the industry Match competitors prices Encourage the exit of marginal firms from the industry Survival Avoid government investigation or intervention Obtain or maintain the loyalty and enthusiasm of distributors and other sales personnel Enhance the image of the firm, brand, or product Be perceived as “fair” by customers and potential customers Create interest and excitement about a product Discourage competitors from cutting prices Use price to make the product “visible" Build store traffic Help prepare for the sale of the business (harvesting)
Social, ethical, or ideological objectives Get competitive advantage
FACTORS EFFECTING DEMAND
Consider the factors affecting the demand for a product that are (1) Within the control of a business and (2) Outside the control of a business: Factors within a businesses’ control include: • Price (assuming an imperfect market – i.e. not perfect competition) • Product research and development • Advertising & sales promotion • Training and organization of the sales force • Effectiveness of distribution (e.g. access to retail outlets; trained distributor agents) • Quality of after-sales service (e.g. which affects demand from repeat-business) Factors outside the control of business include: • The price of substitute goods and services • The price of complementary goods and services • Consumers’ disposable income • Consumer tastes and fashions
Price is, therefore, a critically important element of the choices available to businesses in trying to attract demand for their products
SETTING PRICING POLICY STEP 1: SELECTING THE PRICING OBJECTIVES:
The company first decides where it wants to position it market offering. The clearer a firm’s objectives, the easer is to set price. A company can pursue any of five major objectives through pricing: survival, maximum current profit, maximum market share, maximum market skimming, or product quality leadership.
Company purchase survival as their major objective if they are plagued with over capacity, intense competition, or change in consumer wants. As long as prices cover variable costs and some fixed costs, a company stays in business. Survival is a short run objective; in the long run, a firm must learn how to add value or face extinction. Many companies try to set prices that will maximize current profits. They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or Rate of return on investment. This strategy assumes that the firm has knowledge of its demand and cost functions; in reality, these are difficult to estimate. In emphasizing current performance, a company may sacrifice long run performance by ignoring the effects of other marketing mix variables, competitors’ reactions, and legal restraints on price. Some companies want to maximize their market share. They believe that a higher sales volume will lead to lower cost and higher long run profit they set the lowest price assuming the market is price sensitive. It often happens that companies unwilling a new technology favor setting high prices to “skim “the market. Sony is a frequent practitioner of market skimming pricing. When Sony introduced the world’s first high definition television (HD-TV) to the Japanese market in 1990, the high-tech sales cost $43000.This television were purchased by customers who could afford to pay a high price for the new technology. Sony rapidly reduced the price over the next three years to attract new buyers, and by 1993a 28-inch H-D tv cost Japanese buyers just over $6000.In 2001 a customer cold buy a 40-inch H-D TV for about $2000.A price many could afford. In this way, Sony skimmed the maximum amount of revenue from the various segments of the markets.
STEP 2: DETERMING DEMAND:
Each price will lead to different level of demand and therefore have a differ impact on a company’s marketing objectives. The relation between alternative prices and the resulting current demand is captured in demand curve. In the normal case, demand and price are inversely related; the higher the price, the lower the demand. In this case of prestige goods the demand curve sometimes slopes upward. Perfume Company raised its price and sold more perfumes rather than less! Some customer takes the higher price to signify a better product. However if the price is too high, the level of demand may fall. On the other hand, the impact of internet has been to increase customers’ price sensitivity. In buying a specific book online, for e.g. , a customer can compare the price offered by over 2 dozen online book stores by just taking mysimon.com. These prices can differ by as much as 20 percent. The internet increases the opportunity for price sensitive buyers to find and favor lower-price sites. At the same time, many buyers are not that price sensitive. McKinsey conducted a study and found that 89 percent of internet customers visit only 1 book site, 84 percent visited only 1 toy site, and 81 percent visited only 1 music site, which indicates that there is a less price comparison shopping taking place on the internet that is possible. Companies need to understand the price sensitivity of their customers and prospects and their trade-offs peoples are willing to make between price and product’s characteristics.
STEP 3: ESTIMATING COSTS:
Demand sets a ceiling of a price on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its cost of production, distributing, and selling the product, including a fair return for its efforts and risks.
TYPES OF COSTS AND LEVELS OF PRODUCTION: A company’s costs take two firms, fixed and variable. Fixed costs (also known as over head) are costs that do not vary with production or sales revenue. Accompany must pay bills each month for rent , heat, and trust, salaries, and so on , regardless of output . Variable costs vary directly with the level of production. For example, each hand calculator produced by Texas Instruments involves a cost of plastic, macro-processing chips, packaging, and the like. These costs tend to be constant per unit produced; they are called variable because their total varies with the number of unit produced. Total cost consists of the sum of the fixed and variable costs for any given level of production. Average costs is the cost per unit at that level of production; if is equal to total cost divided by production. Management wants to charge a price that will at least cover a total production cost at a given level of production. ACCUMULATED PRODUCTION: Suppose TI runs a plant that produces three thousand hand calculators per day. As TI gains experience producing hand calculators, its methods improve. Workers learn shortcuts, materials flow more smoothly, and procurement costs falls. The result shows, in that average cost falls with the accumulated production experience. DIFFERENTIATED MARKETING OFFERS: Today’s companies try to adopt their offers and terms to different buyers. Thus a manufacturer will negotiate different terms with different retail chains. One retailer may want daily delivery (to keep stock lower) while an other may accept twice a week delivery in order to get a lower price. The manufacturer’s costs will differ with each chain, and so will its profits. TARGET COSTING Costs change with production sale and experience. They can also change as a result of concentrated efforts by designers, engineers and purchasing agents to reduce them.
STEP 4: ANALYZING COMPETITORS COSTS, PRICES, &OFFERS:
Within the range of possible prices determined by market demand and company’s costs, a firm must take the competitor’s costs, prices, and possible price reactions into account. The firm should first consider the nearest competitor’s price. If the firm offers contains positive differentiation features not offered by the nearest competitors, their worth to the customer should be evaluated and added to the competitor’s price. If the competitor’s offers contains some features not offered by the firm, their worth o the customer should be evaluated and subtracted from the firm’s price. Now the firm can decide whether it can charge more, the same, unless than the competitor. A firm must be aware, however, that competitors can change their prices in reaction to the price set by the firm.
STEP 5: SELECTING THE PRICING METHOD:
Given the three cs- the customers’ demand schedule, the cost function, the competitors’ prices- a company is now ready to select a price. Companies select a pricing method that includes one or more of various considerations. We will examine seven price setting methods: mark-up pricing, target return pricing, perceive value pricing, value pricing, going rate pricing, action type pricing and group pricing.
MARK-UP PRICING: The most elementary pricing method is to add a standard mark-up to the product’s cost. Construction companies submit job bids by estimating the total project cost and adding a standard mark-up for profit. Suppose a toaster manufacture has a following cost and sale expectation Variable cost per unit …………….. Fixed cost ………………. Expected unit sales ……………. The manufacturer’s unit cost is given by: Unit cost= variable cost + fixed cost =$10+ $300,000 =$16 Unit sales 50,000 Now assume the manufacturer wants to earn a 20 % markup on sales. The manufacturer’s markup price is given by: Markup price = unit cost (1-desired return on sales) = $16 1-0.2 =$20 $10 300,000 50,000
TARGET-RETURN PRICING: In target return pricing the firm determines the price that would yield its target rate of return on investment (ROI). Target pricing is used to general motors, which price its automobiles to achieve a 15-20 percent ROI. PERCIVED-VALUE PRICING: In increasing number of companies based their price on the customer’s perceived value. They must deliver the value promised by their value proposition, and the customer must perceived this value. They use the other marketing mix elements, such as advertising and sales force, to communicate and enhance perceive value in buyer’s mind. VALUE-PRICING: In recent years, several companies have adopted value pricing, in which they win loyal customers by charging a fairly low price for a high quality offering. Among the best practitioners of value pricing are WALL-MART, IKEA, and SOUTH-WEST airlines. GOING RATE-PRICING: In going rate pricing, the firm basis its price largely on competitors prices. The firm might charge the same, more, or less than major competitors. In oligopolistic industries that sell a commodity such as steel, paper, or fertilizers, firms normally charge the same price. ACTION TYPE PRICING: Is growing more popular, especially with the growth of the internet. There are over 2000 electronic market places selling everything from pigs to use vehicles to cargo to chemicals. One major use of actions is to dispose of excess inventories or to use good. Company needs to be aware of the three major types of actions and their separate pricing procedures
*ENGLISH ACTIONS (ascending bids) *DUTCH ACTIONS (descending bids) *SEALED BIDS ACTIONS
GROUP PRICING: The internet is facilitating methods where by consumers are business buyers can join groups to buy at a lower price. Consumer can go to volumebuy.com to buy electronics, computers, subscriptions, and another item.
STEP 6: SELECTING THE FINAL PRICE:
Pricing method narrow the range from which the company must select its final price. In selecting that price, the company must consider additional factors including physiological pricing, gain and risk sharing pricing, the influence of other marketing mix-elements on price, company pricing policy and the impact of price on other parties. PHYSIOLOGICAL PRICING: Many customers use price as an indicator of quality. Image pricing is especially effective with egosensitive products such as perfumes and expensive cars. GAIN-RISK-SHARING PRICING: Buyer may resist accepting a seller’s proposals because of the high perceive level of a risk. The seller has the option of offering to absorb part or all of the risk if he does not deliver the full promised value. THE INFLUENCE OF OTHER MARKETING MIXES ELEMENTS: The final price must take into account the brand’s quality and advertising relating to competition. *Brands with average relative quality but high relative advertising budgets were able to charge premium prices. IMPACT OF PRICING ON OTHER PARTIES: Management must also consider he reaction of other parties to the contemplated price. How will distributors and dealers feel about it? Will the sales force be willing to sale at that price? How will competitors react? Will supplier raise their prices when they see the company’s price? Will the government intervene and prevent this price from being charged?
PRICING-INFLUENCES ON PRICING POLICY
The factors that businesses must consider in determining pricing policy can be summarized in four categories: (1)
In order to make a profit, a business should ensure that its products are priced above their total average cost. In the short-term, it may be acceptable to price below total cost if this price exceeds the marginal cost of production – so that the sale still produces a positive contribution to fixed costs.
If the business is a monopolist, then it can set any price. At the other extreme, if a firm operates under conditions of perfect competition, it has no choice and must accept the market price. The reality is usually somewhere in between. In such cases the chosen price needs to be very carefully considered relative to those of close competitors.
Consideration of customer expectations about price must be addressed. Ideally, a business should attempt to quantify its demand curve to estimate what volume of sales will be achieved at given prices
(4) Business Objectives
Possible pricing objectives include: • To maximize profits • To achieve a target return on investment • To achieve a target sales figure • To achieve a target market share • To match the competition, rather than lead the market
PRODUCT PRICING STRATEGIES
Developing a pricing strategy perplexes many CEOs, marketing and sales executives, and brand managers. It's not surprising really: real businesses don't always follow the pricing strategy models that business schools and books on pricing strategy present. But there are a few basic guidelines that can help take some of the mystery out of the process of establishing a successful pricing strategy. We consider that there are four basic components to a successful pricing strategy:
1. Costs. Focus on your current and future, not historical, costs to determine the cost basis for your
2. Price Sensitivity. The price sensitivities of buyers shift based on a number of factors and your
pricing strategy must shift with them.
3. Competition. Pay attention to them, but don't copy them . . . when it comes to pricing strategy
they may have no idea what they're doing.
4. Product Lifecycle. How you price, and what value you provide for that price, will change as you
move through the product lifecycle.
Pricing before you build
Establishing a pricing strategy is an activity that should be completed before you start product development. The only way to accurately determine how much money you can afford to spend on development, support, promotion and the other costs associated with a product is to analyze how much of that product you will sell, and at what price. That's the heart of a successful pricing strategy.
Use the Right Costs
A successful pricing strategy is your means of making a profit today, not of recovering costs spent a year ago. Don't use the cost of developing your current product as the basis for its price. Instead, use the current costs of developing your new products as the basis of the price of your current product.
Raise Price to Exploit a Reticence to Switch
Once the customer is yours, the situation switches in your favor. One of the resistance factors your sales force encounters on a new sale is reticence to switch. An existing customer is still unwilling to learn something new, only now they're afraid to switch FROM you, not TO you. They would much prefer to add the functionality of your product enhancements instead of learning how to use something new. For you, price sensitivity is much lower as comfort and ease factors increase. So you might raise your update pricing accordingly.
Study the Competition
Study the competition, but don't react and don't copy them, since they're likely making mistakes anyway. Let them guide you in terms of where you set your boundaries, and in terms of counter offensives you can launch to deal with obvious bonehead pricing on their part. And remember this as well: any move you make can be countered by them just as easily. Don't get caught in a no-win price war--which may hurt your product, their product and devalue your marketplace.
Align with the Product Life Cycle
How high or low you set your price is also going to be driven by where your product is in its life cycle. In general, the farther along you go toward the Decline phase the lower your price should be, since your market will be (a) saturated with product and (b) have increased price sensitivity as their knowledge of the products increases. One technique to consider is unbundling support, training and services from the product itself, which will allow you to lower price without discounting. Strategic pricing is the effective, proactive use of product pricing to drive sales and profits, and to help establish the parameters for product development. Used wisely it is a clearly powerful tool for successful marketing strategies.
NEW PRODUCT-PRICING STRATEGY
Pricing strategies usually change as the product passes through its life cycle. The introductory stage is especially challenging. Companies bringing out new product face the challenge of setting prices for the first time.
1 ) Market-skimming pricing
The practice of ‘price skimming’ involves charging a relatively high price for a short time where a new, innovative, or much-improved product is launched onto a market. The objective with skimming is to “skim” off customers who are willing to pay more to have the product sooner; prices are lowered later when demand from the “early adopters” falls. The success of a price-skimming strategy is largely dependent on the inelasticity of demand for the product either by the market as a whole, or by certain market segments. High prices can be enjoyed in the short term where demand is relatively inelastic. In the short term the supplier benefits from ‘monopoly profits’, but as profitability increases, competing suppliers are likely to be attracted to the market (depending on the barriers to entry in the market) and the price will fall as competition increases. The main objective of employing a price-skimming strategy is, therefore, to benefit from high short-term profits (due to the newness of the product) and from effective market segmentation. There are several advantages of price skimming • Where a highly innovative product is launched, research and development costs are likely to be high, as are the costs of introducing the product to the market via promotion, advertising etc. In such cases, the practice of price-skimming allows for some return on the set-up costs • By charging high prices initially, a company can build a high-quality image for its product. Charging initial high prices allows the firm the luxury of reducing them when the threat of competition arrives. By contrast, a lower initial price would be difficult to increase without risking the loss of sales volume • Skimming can be an effective strategy in segmenting the market. A firm can divide the market into a number of segments and reduce the price at different stages in each, thus acquiring maximum profit from each segment • Where a product is distributed via dealers, the practice of price-skimming is very popular, since high prices for the supplier are translated into high mark-ups for the dealer • For ‘conspicuous’ or ‘prestige goods’, the practice of price skimming can be particularly successful, since the buyer tends to be more ‘prestige’ conscious than price conscious. Similarly, where the quality differences between competing brands is perceived to be large, or for offerings where such differences are not easily judged, the skimming strategy can work well. An example of the latter would be for the manufacturers of ‘designer-label’ clothing.
2) Market-Penetration pricing
Penetration pricing involves the setting of lower, rather than higher prices in order to achieve a large, if not dominant market share. This strategy is most often used businesses wishing to enter a new market or build on a relatively small market share.
This will only be possible where demand for the product is believed to be highly elastic, i.e. demand is price-sensitive and either new buyer will be attracted, or existing buyers will buy more of the product as a result of a low price. A successful penetration pricing strategy may lead to large sales volumes/market shares and therefore lower costs per unit. The effects of economies of both scale and experience lead to lower production costs, which justify the use of penetration pricing strategies to gain market share. Penetration strategies are often used by businesses that need to use up spare resources (e.g. factory capacity). A penetration pricing strategy may also promote complimentary and captive products. The main product may be priced with a low mark-up to attract sales (it may even be a loss-leader). Customers are then sold accessories (which often only fit the manufacturer’s main product) which are sold at higher mark-ups. Before implementing a penetration pricing strategy, a supplier must be certain that it has the production and distribution capabilities to meet the anticipated increase in demand. The most obvious potential disadvantage of implementing a penetration pricing strategy is the likelihood of competing suppliers following suit by reducing their prices also, thus nullifying any advantage of the reduced price (if prices are sufficiently differentiated the impact of this disadvantage may be diminished). A second potential disadvantage is the impact of the reduced price on the image of the offering, particularly where buyers associate price with quality.
PRODUCT-MIX PRICING STRATEGIES
The strategy for setting the product’s price often has to be changed when the product is part of a product mix. In this case the firm looks for a set of prices that maximizes the profit on the total product mix. Pricing is difficult because the various products have related demand and cost and face different degrees of competition: Product Line: Setting price steps between product line items (for example. Honda Civic is implementing product line pricing strategy for their cars as they are offering different models of same line for different prices with different features) Optional Product: Pricing optional or accessory products (for example. If a person buys a new Nokia’s 6600 cell phone and if he also tends to pay extra amount of money for the memory card inside of it than it is optional pricing for that product…..or another example can be a person buying a personal computer and paying extra amount of money for the video card inside of it…) Captive Product: Pricing products that must be used with the main product (for example. Colgate offering its toothbrush along with its toothpaste….or Gillette offering set of additional blades with its razors) By-Product: Pricing low value by product to get rid of them (for example. Many companies obtain soap during the refining process of cooking oils and then manufactures beauty soaps and sells it along with the cooking oils as their by-products…. As Unilever is obtains Lux through Dalda) Product Bundle: Pricing bundles of products sold together (for example Nescafe is offering its coffee along with its cup for 100 rupees thus their offer is similar to product bundle…besides that different combo deals of KFC which includes different offerings under one state is also an example of product bundle pricing)
PRICE ADJUSTMENT STRATEGIES
A company usually adjusts their basic prices to account for various customers’ differences and changing situations. Here we examine the six price adjustment strategies.
1) Discount & Allowance: reduced prices to reward customer responses such as paying early or
promoting the product. (For example. Different seasonal or occasional offers of Nike or Chen one offering certain discount on different range of shopping)
2) Discriminatory: adjusting prices to allow for differences in customers, products, and locations (for
example. Price of Pepsi in Pearl Continental Hotel as it is much higher than its actual value in the hotel just because of the segment and environmental change in this case the cost is the same but according to the segment pricing is different)
3) Psychological: adjusting prices for psychological effects. Ex: $299 vs. $300 (for example. English
toothpaste reduced its prices from 12 to 10 just to attract their customers and increase their sales in this way they implemented physiological pricing strategy besides that different offers in the market pricing like just 99 rupees or 999 rupees in various stores is also physiological pricing strategy.)
4) Value: adjusting prices to offer the right combination of quality and service at a fair price. (For
example a person shopping in Zainab market might seek value and quality at fair price. This process helps to deliver value and satisfaction to customers.)
5) Promotional: temporarily reducing prices to increase short-run sales. (For example. Pepsi reduces its
prices during the month of Ramadan and also offers different schemes and similarly Warid Zem offers nights free offers to their customers)
6) Geographical: adjusting prices to account for geographic location of customer. (For example. DHL
charges different rates according to the destination) *FOB Origin Pricing: Geographical pricing strategy in which goods are placed free on board a career, the customer pays the freight from the factory to the destination. (For example. A person buying a compact disc from abroad in which he have to pay the transport expense for bringing it in access) *Uniform Delivered Pricing: A geographical pricing strategy in which the company charges the same price plus frightened to all customers, regardless of their location.( for example . every customer have to pay a similar and specified amount of money to Nike if they are transacting from abroad) *Zone Pricing: A geographical pricing strategy in which the company sets up to or more zones. All customers within a zone pay the same total price; the more distant zone, the higher the price.( for example. If Adidas is transacting with its customers from abroad regions then they will charge freight according to the distance of the region and as the distance will increase freight charges will also increase.) *Basing Point Pricing: A geographical pricing strategy in which the seller designs some city as a basing point and charges all customers the freight cost from that city to the customer. ( for example. Dell computers established their basing point in India and then delivers their products in the Asian regions charging freight from that region)
7) International: adjusting prices in international markets. (For example. Prices of Levi’s or Nike might not be same in dolmen mall and in international stores…it will be definitely differ according to the environmental offerings.)
SETTING THE PRICE
A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters bids on new contract work. The firm must decide where to position its product on quality and price. In some markets, such as the auto markets, as many as eight price points can be found.
Ultimate Gold standard Luxury Special need Middle Price alone
Rolls-Royce Mercedes Benz Audi Volvo Buick Kia
Figure 16.1 shows nine price quality strategies. The diagonal strategies 1,5,and 9 can all co-exit in the same market; that is , one firm offer a high quality product at a high price , another offers an average quality product at an average price and still another offers a low quality product at a low price. All three competitors can co-exit as long as the market consists of three groups of buyers: those who insist on quality, those who insist on price, and those who balance the too. Strategies 2,3and 6 are ways to attack the diagonal positions. Strategy to say’s “Our product has the same high quality as product 1 but we charge less”. Strategy 3 says the same thing and offers and even greater saving. If quality-sensitive customers believe these competitors, they will sensibly buy from them and save money (unless firm earns 1’s product has acquirable snob appeal. Positioning strategies 4,7and 8 amount to over-pricing the product in relation to its quality. The customer will feel “taken “and will probably complain or spread bad words of mouth about the company.
PHILIP KOTLER HAVE IDENTIFIED 9 PRICE QUALITY STRATEGIES: NINE PRICE QUALITY STRATEGIES: PRICE HIGH MEDIAM LOW
1. PREMIUM STRATEGY
3.SUPER- VALUE STRATEGY
4.OVERCHARGING STRATEGY 7. RIP-OFF STRATEGY
6. GOOD-VALUE STRATEGY
8. FALSE-ECONOMY STRATEGY
FACTORES AFFECTING PRICING DECISION
For the remainder of this tutorial we look at factors that affect how marketers set price. The final price for a product may be influenced by many factors which can be categorized into two main groups: • Internal Factors - When setting price, marketers must take into consideration several factors which are the result of company decisions and actions. To a large extent these factors are controllable by the company and, if necessary, can be altered. However, while the organization may have control
over these factors making a quick change is not always realistic. For instance, product pricing may depend heavily on the productivity of a manufacturing facility (e.g., how much can be produced within a certain period of time). The marketer knows that increasing productivity can reduce the cost of producing each product and thus allow the marketer to potentially lower the product’s price. But increasing productivity may require major changes at the manufacturing facility that will take time (not to mention be costly) and will not translate into lower price products for a considerable period of time. • External Factors - There are a number of influencing factors which are not controlled by the company but will impact pricing decisions. Understanding these factors requires the marketer conduct research to monitor what is happening in each market the company serves since the effect of these factors can vary by market. •
Pricing in Different Types of Markets
Many buyers and sellers where each has little effect on the going market price
Many buyers and sellers who trade over a range of prices
Few sellers who are sensitive to each other’s pricing/marketing strategies
Market consists of a single seller
• • Adding a standard markup to the cost of the product. Popular because: – Sellers more certain about cost than demand – Simplifies pricing – When all sellers use, prices are similar and competition is minimized – Some feel it is more fair to both buyers and sellers
Competition-Based Pricing • Going-Rate Pricing:
– Firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand.
• Sealed-Bid Pricing:
– Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.
INITIATING AND RESPONDING TO PRICE CHANGES:
Companies often face situations where they may need to cut or raise prices.
INITIATING PRICE CUTS:
Several circumstances might lead a firm to cut prices one is exceed plant capacity: the firm needs additional business and cannot generate it throw increased sales efforts, a product importance, or other majors. It may resort to aggressive pricing, but in initiating a price cut, the company may trigger a price war. Another circumstance is declining market share. A general motor, for examples, cuts its subcompact car prices by 10 percent on the west coast when Japanese competition kept making in roads. Price cutting strategy involves possible traps: *Low quality trap: Customer will assume that the quality is low
*Shallow-pocket trap: The higher price competitors may cut their prices and may have longer staying power because of deeper cash reserves.
INITIATING PRICE INCREASES:
A successful price increase can raise profit considerably for example: if the company’s profit margin is 3 percent of sales, 1 percent price increase will increase profit by 33 percent if sales volume is unaffected. A major circumstance provoking price increases is cost inflation .rising cost unmatched by productivity gains squeeze profit margin and lead companies to regular rounds of price increases. Companies often raise their price by more than the cost increases ,in anticipation of further inflation or government price control, in a practice called anticipatory pricing.
REACTION TO PRICE CHANGES:
Any price change can provoke a response from customers, competitors, distributors, suppliers and even government. CUSTOMER REACTION: Customer often question the motivation behind price changes, a price cut can be interpreted in different ways : The item is about to be replaced by a new model ; the item is faulty and is not selling well ; the firm is in financial trouble ; the price will come down even further ; the quality has been reduced. The price increase, which could normally deter sales, may carry some positive meaning to customers: the item is “hot” and represents and usually good values. COMPETITORS REACTION: Competitors are most likely to react with the number of firms are few, the product is homo-genius and buyers are highly informed.
RESPONDING TO COMPETITORS PRICE CHANGES:
How should a firm respond to a price cut initiated by a competitor? In markets characterized by high product homogeneity, the firm should search for ways to enhance its augmented products. Market leaders frequently face aggressive price cutting by smaller firms trying to built market share. Using price, FUJI attracts KODAK, BIC attract GILLETE, and COMPAQ attract IBM. Brand leaders also face lower priced private-store brands. The brand leader can respond in several ways: • • • Maintain price: A leader might maintain its price and profit margins, believing that (1) it would lost too much profit if it reduces its price (2) it would not lost much market share, and (3) it could regain market share when necessary. Maintaining price and add value: The leader could improve its products and services, communication. The firm may find it cheaper to maintain price and spend money to improve perceived quality then to cut price and operate at a lower margin. Reduced price: A leader might drop its price to match the competitors price. It might do so because (1) its cost falls with volume ,(2) it would lost market share because the market is price sensitive, (3) it would be hard to rebuild market share once it is lost. This action will cut profit in the short-run.
PRICING STRATEGY OF “SURF EXCEL”
PRICE 10Rs 70Rs 120Rs
QUANTITY 35 grams 1/5 Kg (500 grams) 1Kg (1000 grams)
It targets upper class of consumers and markets and its segmentation if or high and potential markets. It is a product of Unilever. It is available in different sizes and quantities in the market for different prices. Its competitors in its upper-class segments are Ariel which is a product of P&G and Brite Total which is a product of Colgate-Palmolive (Laksons group). Its market-oriented statement is “Daagh NHI to seekhna NHI” The company has offered 1kg of Surf excel in the market for 120 rupees. Besides that it is also available in the market in sachets pricing from 5-10 rupees and in ½ kg for about 70 rupees. It is a quality oriented product providing value to their customers. In 2005 Unilever adopted one of the price-adjustment strategies which was discount & allowance pricing as they offered 1kg of Surf Excel for 105 rupees. Through this strategy promotional pricing strategy also came in progress as their product was promoted through it and the sales increased rapidly. But as its competitors also reacted for this change through customizing their offerings and price cuts Surf Excel was finally focused towards price increases. Besides that Surf Excel pricing strategy have also been to provide value and recently the company improvised their strategy as they focused toward more promotion through campaigns. Beside that the company has also implemented product line pricing strategy as their offerings are in different quantities along with different prices in the market for Surf Excel. Several offers have also been introduced by Ariel and Brite in the market using Promotional, discount, and psychological pricing strategies and for that Surf Excel have also responded efficiently through its strategies.
PRICING STRATEGY OF “JAZZ”
2.12 Paisa 2.88 Paisa 1.00 Rs 1.25 Rs
JAZZ TO JAZZ JAZZ TO OTHER NETWORK JAZZ TO JAZZ JAZZ TO OTHER NETWORK
CALL RATES CALL RATES SMS RATES SMS RATES
It is well known brand of Mobilink. Previously Mobilink was offering Jazz connection for about 3000 rupees 5 years ago. Its market oriented statement is “Aur Sunao” But through the passage of time \now Mobilink is offering Jazz connections for about 100 rupees. In 2002 Ufone which is one of the leading competitor of Jazz introduced it’s prepay connection for about 2500 rupees. In 2005 Telenor came into existence in Pakistani market and offered its connections for about 500 rupees. Then in 2005 Warid also entered the market offering its connections for 250 rupees. In this way price war started between these telecom brands in the market. Previously it was Jazz’s oligopoly as they offered their prices. In 2005 Jazz offered a cellphone+connection+prepaid card implementing a product-bundle pricing strategy for creating more attention and attraction. The major shift in the pricing strategy came in when they started 30.second operations using the promotional pricing strategy. In the early days Jazz was offering its sim-cards for a high-price using captive-product pricing strategy as its sim-card is a main product that must be used along with the cell phone. Initially Jazz’s call rates and sms charges were also reduced using discount and allowance strategy and initially directing towards promotional strategy as the competition between cellular brands in the market grew faster. Recently Jazz introduced its offerings of 0.99 per minute call rates in their “happy hour package” which represents their operations with the promotional as well as psychological pricing of their services. Through its happy hour package they are also operating with promotional strategy as they are engaged in continuous promotion through their offerings. Besides that Jazz adopted segmented pricing strategy as they were charging different call rated from one city to another but its competitors have emerged tremendously they have responded efficiently towards their actions through cutting their pricing mainly applying promotional and psychological strategy. As Ufone, Telenor and Zem are offering great offers of call rates and sms rates, day by day Jazz in also responding efficiently through its strategic pricing offers.
PRICING STRATEGY OF “PEPSI”
In Pakistan Pepsi cola is being operated by Pakistan Beverages. Pepsi is available in the majority of stores, outlets, restaurants, and hotels. It has a huge market of customers. Basically it is segmented for the younger generation of Pakistan but because of its customized offerings it is being consumed by different age groups in our society. The company has offered Pepsi in different quantities and prices in our market. Its market oriented statement is “Dare for more”
PRICES 12 Rs 20Rs 20 Rs 40Rs 55 Rs
QUANTITY 250ml 300ml 500ml 1.5 lit 2.25lit
In our society Pepsi often reduces its prices during the holy month of Ramadan and at the time of Eid. In this way they adopt promotional pricing strategy. Even if you notice on their offerings they are using product-line pricing strategy as they are offering different quantities with different amount of money. In different sectors Pepsi have also adopted segmented pricing strategy as its prices are much higher in luxurious hotels and other sectors. Its main competitor is Coca-cola when it comes to soft-drinks. Coca-cola have also made various efforts through different pricing strategies and offerings but Pepsi have also responded effectively towards their actions through initiating price cuts at the right time for example. In the month of Ramadan whenever Coca-cola reduces their prices Pepsi also responds through price cuts and then eventually after that period it rises its prices. However buyer’s reactions have not been much affected the company in the long-run. Pepsi have always operated their sales through promotional and phsycologilical pricing strategy and the great example for this can be their recently offered deal which is 2.25 litre of pepsi in 55rupees.
REFERENCES: www.google.com www.wikipedia.com www.yahoo.com www.bcg.com
www.tutor2u.com www.echeats.com www.knowthat.com BOOKS: Principles of marketing (Gary Armstrong and Philip Kotler 10th edition) Marketing Management (Philip Kotler 11th edition)
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