PRICING STRATEGY IN RURAL MARKET:

Price is a major element of the marketing mix. It is an important strategic issue because it is
related to product positioning.
Pricing is a determinant of the market demand for the product. But before any pricing decisions
are undertaken, it is important that the factors influencing price are understood. These factors can
be categorized as internal and external
Influencing factors:
These factors can be categorized as internal and external factors
a. Internal factors: The internal factors affecting price include cost and the company’s
pricing objectives.
1. cost factors
• Promotion as a cost factor.
• Credit based transactions increase costs.

External factor: This factor includes;

• Customers
• Suppliers
• Competitors
• Legal environment

PRICING OBJECTIVES:

1. Profit maximization in the long run.

2. Minimum returns on sales turn over.
3. Deeper penetration of the market.
4. Keeping up with the competition.
5. Increasing sales volume and market share.

PRICING STRATEGIES:
1. Optional product pricing
2. Captive product pricing
3. Product bundle pricing
4. Penetration pricing
5. Economy pricing
6. Value pricing
7. Coinage pricing
8. Psychological pricing
9. Discounts and allowances:
Cash discounts or bargaining benefits
Free gift
Schemes for retailers
 10. Discriminatory pricing:
• Customer segment pricing
• Product form pricing
• Location pricing

Optional product pricing: Optional product pricing is the pricing of optional or accessory
products along with the main product like a company selling tractors for a low sticker price but
charging high prices for serving and spare parts. Ex:L.G, Samsung, Onida, Videocon.

Captive product pricing: Captive product pricing is setting a price for products that must be
used along with the main product, such as blade for a razor and film for a camera. Ex: Sony,
Infinitum.

Product bundle pricing: Product bundle pricing is combining several products and offering the
bundle at a reduced price .Companies very commonly use this pricing strategy during periods of
inflation it helps to generate sales and attract customers in a highly competitive market , it is
mostly used in festival.

Penetration pricing: A penetration pricing policy involves setting prices of products relatively
low compared to those of similar products. This pricing policy is appropriate when demand is
elastic. Ex: Anchor white and Ajanta tooth pastes used this pricing to enter the crowded dental
cream market.

Economy pricing: Economy pricing is no-frills low price, the cost of marketing and
manufacturing are kept to a minimum. Regional and local manufacturers usually follow this
economy pricing strategy as they have limited investments to make on building brands and
developing channels. Ex: Nirma & Ghari.

Value pricing: When economic recession or increased competition forces a company to provide
value products and services to retain sales. Ex: Godrej No.1 soap placed their offering containing
rose, sandalwood, neem and other ingredients at a very economical price.

Coinage pricing: Prices are set of a coin value. Coinage price is directly proportionate to the
package size. These packs are small in size and are normally meant for one time
consumption(shampoo sachet)or days consumption(teabag)or a week’s consumption(bathing or
washing soap).

Psychological pricing: The price quality relationship refers to the idea that consumers tend to
equate product quality with the price charged. In the color TV segment LG at a higher price is
considered a better buy than Texla and Jolly brands particularly in R1 households.
Discounts and allowances: Cash discounts or bargaining benefits
a. Free gift
b. Schemes for retailers

Discriminatory pricing: Price discrimination exists when sales of identical goods or services
are transacted at different prices from the same supplier; different prices are charged on the basis
of different consumer groups, location, product form etc. Discriminatory pricing may take the
following norms:
a. Consumer segment pricing: Discriminatory pricing based on consumer segments. Ex:
Museum often charge low admission fee for students and senior citizens.
b. Product form pricing: Different versions of the same product are priced differently but
not proportionately to the increase incosts. Ex: Microsoft sold different versions of its
operating software windows XP at different price level. Windows vista home basic
version is sold at $200 and with some variations the same operating software windows
vista ultimate version is sold at $320.
c. Location pricing: Discriminatory pricing based on different locations, even though the
cost of offerings at each location is identical. Ex: Theatre charges different prices for
different audience preferences for different locations.
Pricing Methods in Rural Markets:

Much of pricing policy exists for perfect markets; it assumes that consumers
have full information, are spoilt for choice, have easy access to goods, and
that producers have flexible resources to increase supply and demand at will.
It also assumes that people will buy some quantities of goods no matter at
what price they are offered. These assumptions unfortunately do not work in
rural markets; neither do consumers have full information nor do producers
have flexible supply chains.

Pricing strategies come from economics. Students of economics learn about

the demand curve—more goods can be sold if prices are low—and managers
devise pricing policies based on costs, value, demand and competition.
Pricing strategy can help a company use pricing to achieve its goals, such as
achieving penetration, market share or profits. However, much of the pricing
theory fails in rural marketing.

This is because companies have to work around low purchasing power,

availability of local brands that are priced cheaply and price points that are
convenient for customers. That is why, prices for rural markets must fit market
conditions and satisfy the need for affordability. In addition, the pricing must
cover costs, which are quite high in rural markets.

Some of these methods are:

1. Cost-Based pricing.

2. Value-Based pricing.

3. Demand-Based pricing.

4. Competition-Based pricing.

1. Cost-Based Pricing:

Cost-based pricing policy rests on the principle of recovering all costs in

manufacturing and selling a product. It is a pricing method in which a fixed
sum or a percentage is added to the total cost of producing and selling a
product to arrive at its selling price. The company thus recovers the costs
incurred and achieves a profit as well. This method is simple and is based on
internal information from financial and accounting records to give a figure of
fixed costs (FC) and variable costs (VC).

Cost-based pricing can be represented as a simple equation:

Selling price = (FC + VC) + Mark-up

In rural markets, apart from FC and VC, the cost of selling and distribution
must be added. These are often hidden and difficult to calculate. They are
also very high, because economic modes of transport do not exist. As a result,
cost-based pricing method does not work in modern market conditions. It may
lead to high prices in weak, scattered markets, making the effort of selling
difficult. Moreover, in rural markets the challenge for companies and brands is
to establish themselves.

A purely cost-based pricing may lead to high prices that turn away rural
consumers. By bearing in mind the prices they can charge and the costs they
can pay, companies have to determine whether their costs will enable them to
compete in low-cost markets where customers are concerned primarily with
price, or find richer customers in the premium-price market in which they are
primarily concerned with quality and features.

2. Value-Based Pricing:

Value-based pricing is a method in which price is set on the basis of the value
perceived by the customer in buying and using a product. The perceived value
of a product is the sum of attributes and psychological value. Consumers
derive value from a product or service from their needs, preferences,
expectations and desires. The job of a manager is to find out from customers
and research the market to determine how value is placed on a product or
service.

Value-based pricing is a psychological pricing strategy. Value in the minds of

the consumer is achieved by creating desire by product attributes, advertising
or adding status to products. Value has to be communicated and this is not so
easy in rural markets. Much of communication and consumer engagement
has to be done directly by companies in the absence of mass media. Except
for high-end brands, rural consumers are more likely to be swayed by
functional benefits than by features that merely enhance aesthetics.
3. Demand-Based Pricing:

Demand-based pricing follows the classic demand curve taught in basic

economics classes; it simply means that if prices are low, demand will be high
and vice versa. Demand-based pricing focuses on the level of demand for a
product or service, not on the cost of materials or of making it. According to
this policy, companies try to assess demand at different prices, or the amount
of products or services they can sell at different prices.

Some companies, selling luxury or aspiration goods, limit supplies in order to

sell their products at high prices. Others, dealing with mass production goods,
use pricing policy to sell goods at low prices and hope to achieve volumes
because of that. Production and sales are based on these calculations.

However, it is quite difficult to estimate demand of any product based on

different price levels, more so in villages. Estimating demand in rural areas is
even more difficult than in urban areas, because a host of factors are at play,
many of which are simply not apparent.

4. Competition-Based Pricing:

Competition-based pricing is relatively simple, because the company sets its

prices by looking at prices of similar products offered by competitors. Prices of
competing products are used as a benchmark for setting prices.

Once prices of competitors are known, the company may decide any of
the following three strategies:

i. Pricing at Par with the Competition:

The company chooses to price its products exactly at the same price as
competitors. For instance, if a cold drink is being sold at Rs. 25 per bottle in a
market, a competing manufacture will also price its product at Rs. 25 per
bottle.

ii. Pricing above the Competition:

The company sets a price higher than its competitor by highlighting the
superiority of its products over those of others, hoping that customers would
like to buy their superior or longer lasting product.

iii. Pricing below the Competition:

The company prices its products lower than those offered by competitors
hoping that customers might like a cheaper product than other, more
expensive but similar products.

In competition-based pricing, the company does not consider its costs of

manufacturing and selling or the demand of the product, but only prices of
similar products.

Each of the mentioned strategies has advantages and disadvantages. For

instance, while pricing at par, the company must have a similar cost structure
as that or the competitor. If the costs are higher, competition-based pricing will
lead it to ruin. This method is fraught with another danger—if a company
prices its products at par with local brands, it will impact consumer perception
– consumers will perceive its products being of the same inferior quality as the
local brands.

While pricing above the competition, the company runs the risk that customers
may turn away from expensive products. Pricing below the competition carries
the risk of a price war—if the competitor also reduces prices, the company is
forced to reduce prices even further, which could lead to losses. In rural
markets, competitors are usually low-cost local brands. Pricing at par or below
the competition is almost impossible for big brands, which have higher costs.
Such brands have to compete on communicating value rather than price.
Innovative strategies have to be thought of rather than competing on price.

However, competition-based pricing policy is easy since competitor prices are

easy to find, allowing companies to set prices quickly and with little effort.

Pricing Strategies in Rural Markets:

The pricing strategies are summed up below:

Comparison of Pricing Strategies:

Cost-Based Pricing:

1. Definition – A pricing method in which a fixed sum or a percentage is added

to the total cost of producing and selling a product to arrive at its selling price.

2. Method – Cost-plus pricing, mark-up pricing.

3. Advantage – Easy availability of data.

4. Disadvantage – Does not vary with demand or volume.

Value-Based Pricing:

1. Definition – A pricing method in which price is set on the basis of the value
perceived by the customer in buying and using a product.

2. Method – Advertising and psychological value assigned to product

attributes by customers.

3. Advantage – Can contribute to high profit.

4. Disadvantage – Very difficult to assess psychological value.

Demand-Based Pricing:

1. Definition – A pricing method based on demand of a product at different

levels of price.

2. Method – Price sensitivity, price demand analysis.

3. Advantage – Caters to variable prices.

4. Disadvantage – Demand cannot be easily assessed.

Competition-Based Pricing:

1. Definition – A pricing method in which the seller uses prices of similar and
competing products as a benchmark of setting prices.

2. Method – Competitor prices of similar products.

3. Advantage – Very easy to implement.

4. Disadvantage – May lead to price wars.

New and Established Products:

Product pricing strategies frequently depend on the stage a product or service

is in its lifecycle; that is, new products often require different pricing strategies
than established products or mature products. For rural pricing, most products
will have to be treated as new products.
If the price is too high, volumes will not be achieved, whereas if the price is
too low, it becomes difficult to recover costs of selling and distribution in
remote areas. This means that rural pricing should enable companies to
recover their costs while, at the same time, keep their margins low through
creative pricing policies.

While product cycles in urban markets are shortening and companies have to
recover their investments quickly, in rural markets product cycles are relatively
longer and afford companies a chance to develop the markets. Companies
such as Jain Irrigation, ITC, Fabindia and many others have invested for the
long run and gained traction over the years.

When a company launches a new product, it follows one of two policies. One
is market skimming, meaning that prices are kept deliberately high as there
are no competitors, thus making the customers pay high price. In this case,
the company tries to make maximum profit in the initial phase. Many
technology-related products, for instance, follow the market skimming policy,
initially pricing their products highly but decreasing them later.

The opposite is market penetration, in which prices are initially kept low to
attract customers to get them hooked on to the product. Prices are increased
once the desired mass of customers has been achieved. A case in point is
that of SMS in India. When introduced, it was a free service, but the prices
were increased once people got used to it.

Factors Impacting Pricing in Rural Markets:

Companies devise their own price policies depending on their objectives.

Dealers are usually unwilling to stock low-price goods as they earn lower
commissions from them. In any case, most goods are sold at prices higher
than MRP printed prices to cover the cost of reaching remote areas. Hence,
customers have to really see value in the brands to pay those high prices.

Rural pricing has to keep the following factors in focus:

i. Low Purchasing Power:

A major problem in rural areas is the lack of purchasing power. The SECC
2011 data for rural India shows that more than half of rural households
depend on manual labour for livelihood and 75 percent of the rural population,
or 133.5 million families, earn less than Rs. 5,000 per month. This means that
for majority of the population, low prices are important.
ii. High Selling and Distribution Cost:

Activities such as salesmen travelling over long distances, sending small

quantities of goods and collecting small payments add to high sales and
distribution costs. Companies have to figure out how these costs can be
recovered.

iii. Gaining Consumer Acceptance:

Prices have to be set keeping in view consumer acceptance. Usually the

problem is in trying to sell high priced brands when similar unbranded
products are available at cheaper prices.

iv. Difficulty of Communicating Value:

High prices imply that the company is able to communicate value to the
customers. This is often a difficult task in villages and it depends on direct
selling.

v. Local Brands are Cheaper:

While in urban areas brands can use competition-based pricing, competition

in villages comes from unbranded or local brands, which offer reasonably
good quality. These products also have substantial loyalty. Companies have
to figure out ways to fight these products that are priced much cheaper than
bigger brands.

Innovative strategies have to be devised to keep prices at low level despite

the high costs of serving rural markets. Such strategies as that of Tata Tea,
which partnered with local people instead of going through dealers, or that of
Grameen Bank in Bangladesh, which was able to reduce call rates for rural
customers by buying air time in bulk from Grameen phone.

Because of the aforementioned reasons, marketing in rural areas can only

succeed if prices are made affordable. Many pricing methods like market
skimming will fail and innovative techniques will have to be devised to reach
such customers.

A Complicated Market:

Prices for different market segments are devised on the assumption that all
customers do not have the same needs, expectations and financial resources.
Segmentation is successful when a company knows the factors that motivate
particular segments to buy products. For rural markets, a company has to find
out customers who are mainly motivated by price or by functionality and utility.

Another important task is to find segments that are motivated by aspirations.

Many rural customers aspire to be like urban dwellers and are willing to spend
for achieving that. Though people in rural areas are willing to spend on
aspiration-motivated goods, the lack of formal banking channels and tougher
availability of loans means that spending power remains limited.

Rural pricing decisions are not easy because markets are imperfect. Many of
the pricing strategies do not work because of the unique nature of rural
markets. Innovative approaches are more likely to succeed than time-tested
methods used in urban markets.