Pricing

Pricing objectives should flow from and be consistent with

corporate and marketing objectives and the overall company mission these
objectives should be started explicitly because they directly affect pricing
policies and the methods used to be set)

Objectives

Profit Oriented profit goals may be set for the short or long term.
Accompany may select one of two profit –oriented goals for its pricing
policy

To achieve a target returns

The pricing objective of marking as much as money as possible is

probably followed more than any other goal. The trouble with this goal is
that some people profit maximization has an ugly connotation suggesting
profiteering, high prices and monopoly.
E.g. Pizza hut

To maximize profit

A profit maximization objective seeks to achieve as much profit

as possible.
It might be stated as desire to earn a high return an investment or more sonly
to change “what the method will bear”
E.g.
Pizza expert
Pizza hut
Pizza next
McDonalds
 Sale Oriented
In some companies management‟s pricing is focused on sales volume.
The pricing goal may be to increase sales volume or to maintain or
increase the firm's market share

To Increase Sale Volume

This pricing goal of increasing sales volume. The pricing goal may
be to increase volume or to maintain or increase the firm's market share.

To maintain or increase

Most industries today are not growing much if tall and have excess
production capacity. Many firms need added and to utilize their production
capacity more fully and, in turn, gain economics of scale and better profits

Market share
Many organizations seek to gain same specific share % of a market
. The advantage of a market-share price object is that its force a manager to
pay attention to the performance of the competitions. It is usually easier to
measure an argumentation market share than to determine if profit is
buying maximized since market share is a relation measure it is often the
preferred measurement of an argument competitive

E.g.
McDonald,
Coca-Cola
Pepsi
 Status quo oriented
To stabilize oriented

Price stabilized often is the goal in industries where

The product is highly standardized (such as steel or bulk chemicals.

One large firm. Such as Phelps Dogs in the copper industry.

Historically has acted as a leader in setting their prices.

To meet competent:

Firm that adopt status quo pricing goals to avoid price competition
are not necessarily passive in their marketing. Quite the contrary! Typically,
these companies compete aggressively using other marketing-mix elements-
product. Distribution and especially portion. This approach called nonprime
competition

Pricing Decisions:

Pricing policies can be established in three ways:

• Cost-orientated (the costs involved in manufacturing the product and

then adds on a percentage of the cost as a mark-up in order to set the price)
• Demand-orientated (High demand means high prices – low demand
means low prices)
• Competitor-orientated (pricing is usually found where a group of
organizations is selling the same product i.e. petrol, finance, etc.

Customers are happy to pay and accepted the product as the

“market price”.
Individual firm cannot increase the price and decrease, consequently, loss
of customer and loss of revenue.)
 Factors to Consider When Setting Prices

Internal Factors Affecting Pricing Decisions

Marketing Objectives

Survival
Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business
Current Profit Maximization
Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI
Market Share Leadership
Low as Possible Prices to Become the Market Share Leader
Product Quality Leadership
High Prices to Cover Higher Performance Quality
 Marketing Mix Strategy

Product Design & Quality

Non price Factor
Promotion
Distribution
Cost
Total Cost = Fixed Cost + Variable Cost

Total Costs
Sum of the Fixed and Variable Costs for a Given Level of Production
Fixed Costs (Overhead)
Costs that don‟t vary with sales or production levels.
E.g. Executive Salaries, Rent
Variable Costs
Costs that do vary directly with the level of production
E.g. Raw materials

Costs Considerations

“Cost Per Unit at Different Levels of Production per Period”

 External Factors Affecting Pricing Decision
Market & Demand Factor
Competitor’s Cost, Price & Offers
Other External Factors
Economic Conditions
Reseller Needs
Govt. Actions
Social Actions

Market & Demand Factor

 Competition-Based Pricing

And the Rest of the Factors which are mentioned before

Economic Conditions
Reseller Needs
Govt. Actions
Social Actions
 Pricing Strategies

Setting the price steps between various products in a product line, based on cost
differences between the products, customer evaluations of the different
features and the competitors‟ pricing

Importance of Setting Prices

 Setting the proper price point is instrumental in attracting your target

customer.
Some customers are willing to pay more for a product as long as they feel they are getting
value for their Money.
Most customers however are price-sensitive and are always seeking the lowest possible
price.
 Price Determination Process

Skimming pricing strategy

“Involves the use of a high price relative to competitive offerings”

 High price, Low volumes

 Skim the profit from the market
Suitable for products that have short life cycles or which will face competition at some
point in the future (e.g. after a patent runs out)

Examples include: Play station, jewellery, digital technology, new DVDs, etc.

Advantages of Market Skimming

• 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

Penetration Pricing
“Price set to „penetrate the market”

 Low‟ price to secure high volumes

Typical in mass market products – chocolate bars, food stuffs, household goods,
etc.
 Suitable for products with long anticipated life cycles
 May be useful if launching into a new market
Example: Telenor – To attract New Corporate Clients

Advantages of Penetration Pricing

• It can result in fast diffusion and adoption. This can achieve high
market penetration rates quickly. This can take the competition by
surprise, not giving them time to react.
• It can create goodwill among the early adopter’s segment. This can
create more trade through word of mouth.
• It creates cost control and cost reduction pressures from the start, leading
to greater efficiency.
• It discourages the entry of competitors. Low prices act as a barrier to
entry (see: porter 5 forces analysis).
• It can be based on marginal cost pricing, which is economically efficient.
 Value Pricing
“Price Based on Consumer Perception”

• Value based pricing, or Value optimized pricing is a business strategy. It

sets selling prices on the perceived value to the customer, rather than on the
actual cost of the product, the market price, competitors prices, or the
historical price
• The goal of value-based pricing is to align price with value delivered. Price
for any individual customer can be customized to reflect the specific value
delivered. Examples could include metrics such as number of users,
number of annual transactions, size of revenues, cost savings, or other
measurements. Value based pricing typically enables companies to become
more competitive and more profitable than using simpler pricing methods.

Price set in accordance with customer perceptions about the value of the
product/service
Examples include Value menus at Fast Food Restaurants

Going Rate (Price Leadership)

“Based on Limited Competition”

In case of price leader, rivals have difficulty in competing on price – too

high and they lose market share, too low and the price leader would match
price and force smaller rival out of market
May follow pricing leads of rivals especially where those rivals have a clear
dominance of market share
Where competition is limited, „going rate‟ pricing may be applicable –
banks, petrol, supermarkets, electrical goods – find very similar prices in
all outlets
 Psychological Pricing
“Used to play on consumer perceptions”

To get a customer to respond on an emotional, rather than rational

basis Links with value pricing – high value goods priced according to
what consumers THINK should be the price
Example: Rs.99 not Rs.100 „price point perspective

Captive product pricing

“Products that complement others”

e.g Gillette razors (low price) and blades (high price)

Product-bundle pricing
“Sellers combine several products at the same price”

E.g. software, books, CDs.

Promotional pricing
• BOGOF e.g. toothpaste, soups, etc

Geographical pricing
“Different prices for customers in different parts of the world”

E.g. include shipping costs

Pricing variations
“off-peak‟ pricing, early booking discounts, etc”

E.g. cash back‟ incentive for expensive goods

Premium pricing
“Uses a high price, but gives a good product/service exchange”

E.g. 5 Star Hotels

 Ten ways to „increase‟ prices without increasing price
“By Dr Winkler P”

• Revise the discount structure

• Change the minimum order size
• Charge for delivery and special services
• Invoice for repairs on serviced equipment
• Charge for engineering, installation
• Charge for overtime on rushed orders
• Collect interest on overdue accounts
• Produce less of the lower margin models in the line
• Write penalty clauses into contracts
• Change the physical characteristics of the product
 myphone - Mobile
Idea Generation
New product that we are going to launch is a myphone. The idea behind this
product is that people are very much technology conscious. In Bangladesh mobile
market, myphone mobile is a unique player based on its business model and strategy.
Creating a brand and promoting it to specific customer segment with proper marketing
has been the key success factor for myphone mobile across the globe.

Market Research

As per latest research from our Market Monitor program for Q3 2016 (Jul-Sep), Bangladesh

mobile phone market declined 4% YoY for the first time. However, the smartphone sub-segment
saw a strong 20% growth highlighting a rapid decline in feature phone demand (-10% YoY) during
the quarter. After a weak first quarter the sell-in picked up in second quarter, the growth continued
in the third quarter.

Counterpoint Senior Analyst SuJeong Lim, noted, “Although Bangladesh mobile phone market is
driven by feature phones, smartphone percent share of the total shipments has been growing every
quarter. The smartphones as a share of total mobile phones is estimated to rise from 28% to almost
50% by the end of 2017.

Market segmentation and Targeting

“Dividing a market into smaller group of buyers distinct characteristics
or behavior who might require separate products or marketing mix”

We are dividing the market geographically, psychographic ally

and demographically.
 Geographically
We are dividing the market into major and small cities. Initially, we are
targeting only the big cities like

Dhaka
Chittagong
Rajsahi
Khulna
Borishal

Demographic Segmentation
We are dividing consumers into 3 classes on the basis of their Income.

Upper Class
Middle Class
Lower Class

But we are targeting the only the upper and middle class

Psychographic Segmentation
We are dividing consumers into these groups:

Innovators
Thinkers
Achievers

These all will buy our product.

Marketing Mix
Now we discuss in terms of marketing mix ----- the set of controllable marketing
tools i.e. product, price, place and promotion, which are blended to produce the desired
response in the target market.

Product
Brand Name
“myphone” mobile
Quality
It is of high quality and smart technology
 Features

Sensors Fingerprint (rear-mounted), accelerometer, gyro, proximity, compass, barometer

Messaging SMS(threaded view), MMS, Email, Push Email, IM
Browser HTML5
  - Fast battery charging
- ANT+ support
- MP4/WMV/H.265 player
- MP3/WAV/WMA/eAAC+/FLAC player
- Photo/video editor
- Document viewer

Packaging

Mobile phones arrive in the shops in stylish boxes / packaging. This is usually manufactured
from card with the insert being made from either lower quality, recycled card or vacuum
formed hi-density polystyrene. Usually the packages are cuboids in shape as this means that
they can be transported and stacked on shelves easily, efficiently using space.

Price
We offered in price range of Tk. 5,000/- to Tk. 60,000/-

Place
Initially, we will make this product available at all mobile stores and local
mobile stores. Once the product gets off to a good start availability will be increased
to other cities.

Promotion
There will be extensive promotion for the product. All our promotion efforts will
be to persuade people to buy anti-bacterial detergent powder.

We will not have to spend money on creating awareness of the importance of

germ prevention, because the general awareness has been created by anti-bacterial soap
industry.
We will mainly use 3 media type.

1. Electronic Media
2. Print Media
3. Outdoor media
 Electronic Media
We will make persuasive commercials and infomercials about our product in
Doctors will be shown explaining importance of Germ-free towels and clothing and
hence the importance of “Anti Germ” as an anti-bacterial detergent. These Ads will be
presented on TV, RADIO and INTERNET.

Print Media
Ads would be placed especially on women digests and weekly magazines in
which details of the benefits of the product for consumers will be discussed persuasively.

Out-door Media
The portraits from the TV ad will be placed on bill boards on
centralized locations.

Pricing Strategies

Penetration Pricing:
 
This pricing strategy is followed by companies with the intention to maximize their market share. They believe
that a higher sales volume will lead to lower unit costs & higher long-run profit. Example: China Mobile
Phones in Bangladesh. This is one of the fastest growing industries in Bangladesh. China mobile phones are
cheap and offer the same features as a expensive mobile from some other well-known manufacturers.

A few samples of Chinese mobiles are shown above. Only problem that exist for the Chinese mobile phones is
that consumer generally have a low quality perception associated with them and hence, do not trust their
quality. However, they are well-suited to people who want to enjoy features of a high end mobile without
having budget for the same.

Perceived value Pricing:

In this case the pricing is done based on the customer’s perception about the company and its product.
Perceived value is made up of several elements such as buyer’s image of product performance, the channel
deliverables, warranty, quality and even softer attributes such as supplier’s reputation.
 
Example : A good example for this kind of pricing is Apple iPhones. They are offered in price range of Tk.
65,000/- to Tk. 1,00, 000/-.Their price is set based on image of brand apple & customer affinity towards it.
Comparable mobiles phones from other manufacturers like Sony Ericson, Nokia are offered at relatively
cheaper price. For example, comparable x series mobiles from Nokia are offered at prices below Tk. 30,000.
 –
MI is offered for Rs. 20,000/- & all other brands are available for prices below it. Apple can set higher prices
since; it feels that its customers will be ready to pay for it based on its perceived value.
 Promotional Pricing:

1. Special Event Pricing:
 
In this case special prices are offered during special occasions like festivals to increase the sales.
 
Example:

Last EID (September, 2016) Samsung offered discounts on Samsung Omnia mobile phone. Their market price
at that time was Tk. 33,990/- whereas their discounted price for Diwali was Tk. 31,990/-.

2. Low-Interest financing:

Company can offer low interest financing to customer. This will reduce the burden of initial cost to the
customer.

4. Psychological Discounting:

This is done to make the customer believe that product is priced cheaply or some cases just break the price
barrier that customer has in his mind.
 NEW PRODUCT FAILURE
In this era of tight competition from domestic and global firms the
firm who don't come out with new products are putting themselves at great
risk because their existing products are prone to changing customer needs,
shorter product life cycles, new technologies and increased competition.

Despite years of research and huge capital being pumped in to

understanding the consumer, making a launch successful is still a difficult
task. The new product largely depends on the product quality and the
marketing tactics of the firm, there are many occasions were the product
failed miserably even after using the best technology and quality the
reason is that the new product is not worth for the customers. The prime
factor for the new product success is - customer value. Value is what the
customer thinks is value.
The major reasons for product failure are:

Faulty product idea

The product often fail because faulty of product idea. A good idea
can revolutionize the market but a bad idea may prove bitter to the firm or it
may backfire

Eg: Polar industries in 1991 launched "COOL CATS" fan -decorated

with cartoon characters meant primarily for children. The fan was priced at
premium; the idea was that children's were increasingly becoming
influencers in purchase decisions and to attract the kids with the cartoon
creatures and to position the product exclusively for kids. The product
failed miserably in spite of its huge advertising budget because when the
fan was put on it didn't have any color effect and the customer did not
justify its premium price.

Distribution related problems

The new product fails if the product is unable to meet the channel
requirements. While developing the product the channel requirements
must be given adequate consideration.
Eg: when NESTLE launched its new chocolates the product and promotion
was ok but the product failed in the distribution side because the company
stipulated the product to be stored in refrigerators.

The product faced two problems in the distribution

side because it meant excluding a number of retail outlets
as they didn't have this facility and secondly the chocolate
was not picked by the customers as it was not seen upfront
in the retail shops. Finally Nestle had to reformulate the
product according to channel requirements.

Poor timing of launch

Too early or late entry into the market is a common

cause of failure. Kinetic Merlin was launched in pune in
1991.It was a 3 in 1 set consisting of a color television, a
stereo with detachable speakers and a home computer.
The product was targeted at the Indian consumers who are
fond of sophisticated gadgets to immediately adopt such
an innovative idea but in reality the idea was too
advanced for the customers to digest at that time because
they were not exposed to such type of products before.
Improper Positioning

Positioning means putting the product into the

predetermined orbit
Improper positioning may affect the product success.

Eg: Titan Tanishq introduced their 18 carat

jewellery and the product was positioned at elite segment
but there was a contradiction as to why these elite
segment should go in for a low carat gold because the
norms for gold in India at that time was 22 carat. The
product failed miserably in retrospect Titan had to
introduce 22-carat jewellery
Some “Other Reasons” for product failure are:
Lack of differential advantage
Poor planning
Technical problems in the product
Competitors fighting back harder than expected
Poor market research
The watchwords for new product success are

“RIGHT PRODUCT TO THE RIGHT CUSTOMER AT RIGHT TIME”