Aspects of Pricing (Unit 2) 59 | | Aspects of Pricing 2.1.1. Meaning and Definition of Price and Pricing The only component of marketing mix that generates returns is called price, however, others only generate costs. Price can be easily altered, whereas, other product aspects like channel obligations and product attributes cannot be changed so easily. Therefore, price is the most flexible component of the marketing mix. For a manufacturer, price is that amount of money (or in case of barter trade, goods or services) which he will receive from the buyer for his product. For a customer, price is something he sacrifices for owning the product or service and therefore, it displays his perception for the product value. It can conceptually be defined as: paca Quantityof moneyreceivedby theseller Quantity of goodsand servicesrendered/receivedby thebuyer As per this equation, the numerator as well as the denominator is crucial while taking price decisions. A product’s price is based on the seller’s decision regarding its monetary worth to the buyer. The method used to convert the worth of alproduct or a unit of service into quantitative form (ie., rupees and paisa) at a given time for customers is called ‘pricing’. ‘According to Prof. K.C. Kite, “Pricing is a managerial task that involves establishing pricing objectives, identifying the factors governing the price, ascertaining their relevance and significance, determining the product value in monetary terms and formulation of price policies and the strategies, implementing them and controlling them for the best results”. Pricing can, therefore, be defined as the task of deciding the monetary value of an idea, a product or a service by the marketing manager before he sells it to his target customers. In particular, pricing is the process of formulating objectives, deciding the flexibility that is available, devising strategies, setting prices, and implementing and controlling the above elements, Pricing is one of the strongest marketing instruments that the Company possesses. Pricing decision is an important aspect of a marketing plan. Thus, marketers need to take exact and premeditated pricing decisions. 2.1.2. Objectives of Pricing Theve always exists 2 motive behind pricing a product or service, may it be revenue, survival, or any other competitive advantage. Following are some of the pricing objectives: a 1) Profit ‘Maximisation: The basic aim of a pricing decision is to increase the profits of the firm. The pricing, policy thus must be made in a way that it ean help the firm achieve to maximum profits, ‘Objectives of Pricing ProfiMaximisntion Paice Sunil Femecomton —_ F{_[—nanng Tasos ee Tanai Profit Margin of Middlemen Mobilisation of Resources = Toa gaiyiawm} Scanned with CamScanner(MBA Second Semester (Marketing Management) SPPU prices remain as stable as possible. When a pricing policy is stable, a) Pace BSG: edd that 5 aa ) Price Stability: It must be ensured that re tn can be done by taking ints it gains customer confidence and enhances the reputation of the compan, account long-term and short-term elements. 3) Facing Competition: Another objective of price decision ‘The competitive situation must be Kept in mind while fin times, management prices its product very low as compared possibilities of competition. 4) Achieving a Target-return: The reputed and well set-up investment (either for the product quality or for the company’ 1 z 4 price in uch a manner s0 as to achieve the desired rate of retum on investment. Different producls may have different target retums, but they must all be associated with one final targeted rate of return, 5) Capturing the Market: Capturing the market is also an important objective of pricing. When a big organisation introduces its product in the markt, it fixes the price ofits produet lower than its competior®, ‘This is done keeping in mind the competitive structure of the market and with the aim to capture a big market share. 6) Firm’s Wellbeing in the Long-run: The prime objective of certain organisations is to set the price of their product in a manner that best suits the organisation in the long-run. While doing this, the economic situation and market conditions must be kept in mind. 1) Profit Margin of Middlemen: The product must be priced with the aim of providing the middlemen a reasonable retumn on the sale of a product. If this does not happen, they will not take relevant interest in facilitating the product's sales. 8) Mobilisation of Resources: Another objective relating to pricing is the mobilisation of appropriate resources for the growth and development of the organisation. Therefore, organisations aim to price its products in such a manner that it can acquire enough resources. 9) Survival: Survival strategy is preferred by firms dealing with it’s over capacity, extreme and fresh competition or varying consumer behaviour. It is also an important objective of pricing in certain organisations. It helps companies sail through rough waters and is hence a short-term objective. The company prefers this strategy until the price is more than variable costs and some of the fixed costs are trieved. However, the company must strive to add value in the long-term. 10) Product-Quality Leadership: To achieve product- is i luct-quality leadership is al: icit Recaps Firms producing products that are better in ‘nalty than the citar Seavey i bec product-quality leaders inthe market. They price their products hi the othe enanced guy, celibiiy, product experence and oft sich evens, le oes we ek ae product values. They convince the price sensitive customers ‘hewlett tre losgain, ‘The pat of tepectance bre tet ner fan reins ea see enti in use price asa strategic tool. IFan organisation has a product tat is better then the seo ae i mmpetitor’s, it itknown inthe market and charge higher price for it Then, it will be able to earn more pron is to handle the market competition effectively. alising the prices of products and services. At to its competitors in order to discourage all the firms aim to set a specific rate of return on *s/brand’s name). They calculate the product’s i 2.1.3. Factors Influencing Pricing Decisions ‘There are numerous factors that affect pricing decisions. The pricing policies objectives. The factors affecting pricing decisions can be categorised as follows: nt Tine with pricing Factors Influencing Pricing Decisions St Tnteral Factors [[Extemat Factors] Marking Objectives Compatton Coats, Prices, and Otters | Marketing Mix Soateies eonomie Conditions Cons "Goverment Controls and Subsidies ‘= Orsanisational Considerations 1) Lacie Factors: Following are the internal factors influencing pricing decisions: i) Marketing Objectives rm devise both specific as well as general objectives. Survival, market share ship, current profit maximisation and product quality leadership are some of the general Scanned with CamScannerpeso Ping (UB 2) é a ij res of the firm. ow i the mare no tis, st ‘pre P aual odes lower than its competitor to prevent their entry in . € equal to i : example of specific objective: Puce Ca 0 its competitor so that market is stl loyal interest be the ment intecvention. Marketers can decrease the prices to increase the eustor waunely. Can He A He Product or attract traffic into the retail outlet. A single product, if priced appropriately: can help to increase the sales of other prodvets in the product line of the company. Fea ee ntie een erally influenced by marketing objectives at various levels, 1s ct mix strategies of an organisation are very significant in aven is* ‘rice’ é 7 ne marketing mix tool that the firm uses to accomplish its objectives is. ‘price’. While taking price decisions, the product design, promotion decisions and * to create a reliable and valuable marketing program. Pricing ions that are made for other marketing mix variables. technique, which is a powerful developing and pricing its v I strategic tool. For example, target costing was exercised by P&G while ‘ery thriving electric toothbrush named ‘Crest Spin Brush’. Hence, the entire marketing mix must be taken into consideration by marketers while setting the prices. If price is not used as a factor while positioning a product, decisions regarding quality, distribution and promotion have a strong impact on price. In case, positioning is done on the basis of price, then the decisions made regarding all the other marketing mix elements will be impacted by price. Although marketers may use price as an element for positioning, still they must keep in mind that customers seldom base their purchase solely on price. They look for products that provide them benefits worth the price they are paying for. il) Costs: This is the base of the price that is charged by the firm. Firms intend to charge a price that can retrieve its production, distribution and sales cost and also provide a reasonable rate of return against risks and efforts. Costs incurred by a company play an important role while strategising pricing, Various companies like Wal-Mart, Southwest Airlines and Union Carbide strive to be the industry's “low cost manufacturers”. When costs are low, it becomes easier for the firms to set a lower price, which ends up in increased profits and sales. iv) Organisational Considerations: Decisions regarding who would set prices of products and services in the organisation is very important. Pricing is managed in different ways. In firms that are stnal in size, 1op management, in place of sales or marketing department, sets the prices of the products. Whereas, in bigger firms, product line managers or divisional managers handle pricing. Sales people working in industrial markets, have the authority to bargain with the customers within a specified price range. All the same, the Bricing policies and objectives are finalised by the top management who usually approves the prices that ate suggested by the lower management or sales force, Certsin industries like steel, aerospace, oil companies, railroads, etc., have pricing as the main element. They have a separate pricing department (which directly reports to the top management or the marketing department), which finalises prices for their produets or assists other departments in deciding the same. Sales managers, finance managers, production managers, accountants, etc., are the other people who can influence pricing decisions, 2) External Factors: Following are the extemal factors that influence pricing decisions: Competitor's Costs, Prices and Offers: An organisation's pricing policy is strongly influenced by the Costs and prices as well as discounts and offers of the current competitors. If someone is planning to Purchase a Sony digital camera, he will compare the prices and value that Sony is offering with the Value and prices of similar products offered by other brands like Nikon, Kodak, etc. The pricing Strategy that the company implements also impacts the type of competition it encounters. For example, in the case of Sony, if it pursues a high-price, high-margin strategy, competition may increase, Whereas, a low-price and a low-margin strategy might reduce competition or drive the Sompetitors out of the market. Thus, Sony must benchmark its cost and value against that of the ‘Competitor. This benchmark can then be used while setting its own pricing. Scanned with CamScanner@ » MBA Second Semester (Marketing Management) SPPU ii) Economie Conditions: A company’s pricing strategies are also influenced by prevailing economic conditions. Economic conditions like recession, boom, inflation, interest rates, etc., have an effect on pricing decisions, since both the cost incurred in production and what the consumer perceives about the value and price of the product, are influenced by them. The company should also analyse the impact of its price on different members present in its environment and the manner in which resellers respond to different prices. Prices must be set in such a way that resellers carn sufficient profits, get necessary support and can sell the product easily. iii) Government Controls and Subsidies: With the intervention of the government, the freedom of the companies to adjust prices and maintain margins is restricted. As a form of control, the government can also ask the importers to deposit cash required in advance. As per this requirement, the company needs to lash out funds as non-interest bearing deposits for the amount of time it intends to import its products. These requirements motivate the company to reduce the prices of the imported products as lower prices account for smaller deposits. The subsidies that the government provides also compel companies to strategically use sourcing in order to become price competitive. 2.1.4. Methods of Pricing Cost consideration and consumer situation are the two fundamentals that impact price decisions. Unfortunately, there are many firms that do not have comprehensible pricing methods. Below mentioned are the general pricing methods: ‘Methods of Pricing Price>Costs: In the first condition, price of the is s Ly product is kept lesser than the above the cost of production, xy maintaining the price b) Price>Value>Costs: In this conditi Price Value>Costs: In this condition, vale offered to customers through product is more than its of production. In order to maintain a significant level of profit compani i Gost of prod panies set price more than c) Price>Costs>Value: Sometimes, cost of is _ Sometimes, production is more than product. Profitability is maintained in this condition by seting the price shove the pees one @) Price=Value>Costs: A condition may also occur, where production cost is over thay at offered. A reasonable amount of profit is generated by setting the price eqwal othe valve cite ii) Affordability-based Pricing: The basic commodities that are used by ev: fie canes Priced using this method of pricing. The prices are set in such a manner hat the rooghe fee section of the society are able to purchase and consume the prod poe mane —aged involved has no impact on the price, but many times, some aspect of state sober noe eee cost ‘apne inom , spect of state subsidy is considered while }) Prestige-based Pricing: Customers do i " is prest Perel ne, ur oh ft tein er 2 wi i to purchase 2 particular product. This is also termed as ‘psychological pricing. nn? EY intend eee, ee Scanned with CamScanner 4asses jy) Market and Demand-based Pricing icing (Unit 2) of Pricing 7 Figure 2.1: depicts a demand curve that describes ‘prestige pricing’ ing’. eee iiiminaaai x An effective a ainin"s f femaciy hl i pricing understands the way, @ custom ely the ae teed hishher willingness to pay a particular price for a particular product. ‘aust comprehend the ala i is balanced against the benefits associated with it. Hence, the marketer tion between demand of a product and its price, before setting the final price. Pricing in‘Different Types of Markets a) bers Pure Competition: In this situation, multiple buyers and sellers are engaged in trade of similar commodities like wheat, rice, garments, banking, ete. Here, the prevailing market price is not much affected by the sellers or buyers. At prevalent market price, buyers generally Buy a much as they require, therefore, sellers avoid charging more than the prevalent price. Sellers also avoid charging less than the prevalent market price as they can sell as much as they want at this price. Itis very easy for new players to enter the market in ease of price and profit being increased. b) Under Monopolistic Competition: Under this condition, no single prevailing market price is present. Different buyers and sellers are engaged in tade of differentiated commodities with Tifferent prices. Sellers offer variety of differentiation in commodities for different customer Segments. Differentiation lies within the style, features, quality, or the services associated with the Se@tmodities. In order to make their offers noticeable, they spontaneously utilise branding, promotion and personal selling activities. As the difference between the products of different sellers js easily recognised, buyers pay different prices for each of them. ©) Under Oligopolistic Competition: Under this condition, only few key sellers are available in the tnarket with similar or dissimilar commodities. Marketing and pricing policies of one seller majorly ffect the marketing and pricing policies of other sellers I is not easy for new players fo Eniey this srarket, therefore, only few sellers compete inthis market. They are highly responsive fo changes in strategies and actions of each other. For example, reduction in prices 08 automobile parts would guickly attract the buyers. This action is counteracted by other sellers by way of reducing their prices or providing additional services. Under Pure Monopoly: Under this condition, a single seller supplies commodities to different buyers. It may be of any type like a government, private regulated, or private non-regulated monopoly. Each monopoly has different pricing policy. Ina government monopoly, the prices are veroohined by government itself. Government, in case of a regulated monopoly, allows the company to fix prices for its products ensuring a good return. Company is free to determine the price for its products (it may be highest pris ‘what the traffic can bear) in case of non-regulated Fronopoly. Although, generally. they avoid charging full price due to certain factors like to “i the entry of new competitors, or to follow government regulations. penetrate the market, to avoi according to the cyclical changes in the economic events ‘cle-based pricing”. According to time series data analysis, Cycle-based Pricing: Pricing commodities flied as business cycles/trade cycles. The given over time is called as ‘cyclical pricing’ oF ‘ey cyclical variations within the economic event & figure highlights the different phases of business cycle. Economie T- Trough (price ‘Activity decrease) E- Expansion B.- Boom (price increase) R- Recession ‘Years igure 2.2: Basiness Cycles and Cscial Pricing Scanned with CamScannersment) SPPU ss MBA Second Semester (Marketing Man activity or national output in relation to full employment ‘The poir* hightighting the lowest economic Ne the ol an of full employment) is known as trough, level (ie. the total amount of commodities produced in case f r Under such conditions, prices are lowered by the company. The phase reflecting the rise oF national output is known as expansion. The point, at which national output is maximum in relation te the Full employment level, is known as boom or peak. This situation is characterised by high prices. The next phase in the business cycle is recession, which is characterised by poor national output. 2.1.5. Role and Importance of Pricing Following points highlight the role and importance of pricing: i | 1). More Flexible Marketing Mix Variable: Out of all the marketing decisions, pricing is the most clastic one for the marketers. This flexibility is especially important when the firm intends to promptly increase the demand of his product or act in response to a price action taken by the competitor. ; 2) Fixing the Right Price: If pricing decisions are taken in hurry and the required research. strategie evaluation and analysis are not undertaken, the organisation is prone to lose revenue. A lot of market kmowledge is needed to set the exact price level. Specifically, when the product is new, various pricing options need to be tested. 3) Trigger of First Impressions: P of the market offering as a whole (.., entire product). The customer might not 1 price. In such a case, pricing might become the most crucial element while making deci marketer can establish that the customers are not showing interest in the product due to its price. 4) Important Aspect of Sales Promotion: At times, as a feature of sales promotion, marketers opt for price adjustments. They decrease the price of their product for a small duration to enhance the customer's interest in the product. Price adjustments must not be done very frequently as this may result in customers getting used to anticipating a reduction in price and withholding purchase until the prices are reduced again. 5) Supply and Demand: Demand and supply ate inversely proportional to each other. When one rises, the other falls. Items like gas, food, etc., that are always in demand experience this more. If the business regularly reviews the demand and supply of the products and services, it can adjust its prices consequently. 6) Position: In simple words, the way the target market perceives a firm's offerings, as compared to firms selling similar product or service, define its position. There are firms, whose products or services are perceived to be of a high quatity, and can hence charge more for their offerings. 7) Sales Volumes: The most prominent impact of pricing on business is an increase or decrease in the volume of sales. Price elasticity and how consumers react to a change in price are studied by economists. 8) Loss Leaders: In order to attract customers, certain firms use cost pricing or below cost pricing strategy. In this way, they drive customers to spend somewhere else the saved money. 2.2. .SETTING THE PRICE: PRICING PROCEDURE 2.2.1. Introduction . ‘One of the most challenging decisions that marketers make is decisions relat at i n ‘ s ed to pri the profitability of the organisation and once set, prices cannot be easily changed, ANSON On pene i planned by the accountant, the decision to pay the same is taken by the customer. Practically, pricing decision iy being financial aspect of the orgnisition, must be made onthe basis of the findings regarding ecipetion target market, product content, distribution, and positioning, Pri slow He | see mae, Positioning. Prices can be set by following the below ‘The customer may finally decide upon purchasing the product on the basi t not judge a product only by its ns as the /—~ 2.2.2. Setting Pricing Objectives | Identifying the pricing objective is the foremost step towards pricing. Deciding target is ; requisites of selecting pricing objectives. Ifthe objectives are clear, it beccines cae = cote ek Theace te firm is facing intense competition, having over capacity or dealing with varying consumer needs, survival becomes di. main objective. By designing price, which balances variable as well as some portion of fixed costs attached with the production of goods and services, the organisation is able to remain in business. Survival is considered to be a short- term objective. The firm must find out ways to increase its value, otherwise the situation of extinction tnay. arise, Scanned with CamScanner“Aspects of Pricing (Unit 2) = Various Finis Price their products in order to maximise their current profits. They look for altemative prices and assess the TORE associated with it. Once this is done, they select the price that delivers maximum, cash flow. eunem Prat Or rate of return on investment. It is assumed in this strategy that the firm is aware of its cost and demand functions, which are difficult to evaluate in reality. Increased market share is also a pricing objective for several Organisations, [___ S#=sting Pricing Objective As per these organisations, if the sales volume is high, the unit costs will ty become low resulting in higher long-term profits. They assume that the Dem ‘ket is price sensitive and ke : y e ‘Determining Demand market is pr and keeping that in view, set the price at lowest level. Setting low price would be effective in such conditions. Market is + immensely price sensitive and that is why, market growth is increased if Betmaline Coe prices are low. Gathered production experience reduces the production as L well as distribution costs, Potential and actual competition deereases due to alow price. Firms that are introducing a latest technology believe in setting | *#lysing Competitor Pricing the price high in order to “skim” the market. For example, Sony practices ‘market skimming” pricing strategy on a regular basis. Irrespective of the specific objective, profits will be higher for companies which use pricing as their strategic tool as compared to those who allow cost or market te decide about their prices. ‘Selecting Pricing Method Various pricing objectives have been discussed in this Unit under the heading Objectives of Pricing. 223. Determining Demand Once the objectives are identified, the firm decides the demand. The level of demand is different for each price. Hence, it will impact the marketing objectives of the firm differently. Generally, demand is inversely proportional to price, i.e., demand decreases with the increase in price. At times, for prestige goods, the demand curve has an upward inclination, For example, when a perfume company increases its prices, more of its goods get sold. Sometimes, higher prices depict better quality products for some consumers. Yet, if the prices are too high, demand for the product decreases. Demand curve displays the relationship between-alternate prices and the subsequent current demand. Demand for a particular product can be determined by observing following elements: i 1) Price Sensitivity: Price sensitivity is impacted by the following nine factors: i) Unique Value Effect: In case of products that are unique, the buyers become less price-sensitive. ii) Substitute-Awareness Effect: If the buyers are not much aware of the alternatives, they become less price-sensitive, iii) Difficult-Comparison Effect: When buyers are not able to compare the features of the substitutes easily, they become less price-sensitive. | ‘ iv) Total Expenditure Effect: If the expenditure, ie., a share of their total income is low, buyers become less price-sensitive. ; v) End-Benefit Effect: If the cost of the end product is higher than the expenditure, the buyers become less price-sensitive. ‘i ; vi) Shared-Cost Effect: If some of the cost is tolerated by the other entity, buyers become less price- sensitive, & dite ie vii) Sunk-Investment Effect: If there are some previously bought assets that are used in combination with the product, the buyer becomes less price-sensitive. = : viii) Price-Quality Effect: Buyers become less price-sensitive in case of prestigious, special or high quality ducts, ixy Inventory Effect Ifthe buyers are notable to store the product, they become less price-sensitive. 2) Estimating Demand Curves: There are various methods that a company can use for measuring the demand curve: a Ms 4) In the first method, past prices, quantities sold and other such factors are statistically analysed and their relationships are studied. __ Scanned with CamScannerMBA Second Semester (Marketing Management) SPPU 6 pri farious products ii) Im the second method, price experiments are performed. For example, the prices of various P sold at a discount store are changed and the results are monitored. ; alte ii) In the third method, buyers are questioned about the number of units they, plan to purchase at ditsren proposed prices. 3) Price Elasticity of Demand: Price elasticity of dei ‘ap quantity demanded with respect to change in price. The following form smand or PED is the reaction in the form of change in nula is used to calculate it: PED = SChange in Demand/"eChange in Price 2.2.4. Estimating Costs sie thosigh dem ‘The price a company can set for its products is given a ceiling through deman f aoe ‘The company may intend to price its product so that it can balance iy production ling 7 wel ie tribution le inst its risks and efforts. Costs are di 3 : a ee this eat seman constant irrespective ofthe revenue cared from production 1) Overhead or Fixed Costs: This cost remains constant land. and sales, For example, the amount of goods produced has no impact on the cost of fand. : 2) Variable Costs: This cost changes with the quantity of goods produced. For example, with the amount o goods produced the cost of raw material changes. .d. The floor is provided by cost, When fixed and vasiable costs ata particular level of production are added, it gives the total cost. On the other hand, per unit cost at @ particular level of production gives the average cost. Gathered production experience reduces the average cost. This denotes the learning or experience curve. In the currént scenario, companies strive to modify their terms and offers, as per different buyers’ choices. Companies need to take up activity based costing (ABC) in order to calculate the actual profitability of handling different customers. Issues that need to be reflected upon are: 1). Since several activities are executed in an organisation, costs are incurred. 2) Since the organisation produces and sells goods, it performs these activities. 3) In activity based costing, the costs that are not directly credited to a specific product are related to the activities due to which those costs become necessary. 4) Then the accumulated costs incurred in performing the activities are attributed to the products due to which the activities become necessary. 2.2.5. Analysing Competitor’s Pricing Next crucial step that needs to be taken while setting prices is the analysis of competitors” costs, offers and prices. In addition, the company should also consider the competitors" price responses to market changes, which lie within the array of prices decided on the basis of company costs and market demand. . As the ceiling and floor to pricing are set by the demand and cost i 5 pri i : 8 emand and cost respectively, competitor's price give the mid- Bela dat mst be analysed while sting the prices. Marketers need to send out compazon buyers in the et to collect price lists of competitors for comparing and buying competitors’ ices i order to judge their pricing as well as product quality, Tree aeheeee nL Marketers also need to know the customer perception about the price and quality of the product or service of the competitors. Prices are kept almost same to that of the major competitor in case of products and services bein, similar otherwise sales would be down, In case of an inferior product or service, the product must be priced lesser than that ofthe competitor. The competitors might even alter their prices as a response to the firm’s, oe 2.2.6. Selecting Pricing Method The company needs to decide upon three elements called the 3 Cs whil i 1) Cost-based Price: This lays down the floor for pricing. sires 2) Competitor-based Price: This gives the orientation framework for pricing. 3) Customer Demand-based Price: This lays down the ceiling for pricing. Various pricing methods have been discussed in this Unit under the heading Methods of Pricing. Scanned with CamScanner| | _Aspests of Pricing (Unit 2) o 2.2.7. Selecting Final Price fter selecting the suital i eae eat ices ve au ible pricing. methods t becomes easier for the organisation to finalise the price. aonintag its pelos: factors that the organisation needs to take into account while chologica ‘icing: Pri * 0 Dn poliy ail cceort sets as quality indicator for certain customers. Generally, the perceptions Triced high, are believed to products interac in consumer buying activity. Products like cars, which are rawing dally, pies kone ei igh quality and vice versa. When customers have alternative details eens renee its importance as quality indicator, In case of lack of this information, price . ucial quality indicator. If Mercedes Benz costs %5 lacs only, customers will not ee it < be prestigious. When a buyer aims to buy a product, he has a reference price in his mind which he gathers by observing the current prices, past prices or the perspectives of buying. These reference prices are frequently influenced by the sellers. 2) Company’s Pricing Policies: The prices should fall in line with the pricing policies of the company. Several companies have a separate department that takes care of pricing policies and develops or approves pricing decisions. Here, the main purpose is to make sure that the prices, which appear fair to the customers and are profitable to the organisation, are quoted by their sales people. 3) Impact of Price on Other Parties: The management needs to analyse how other parties are going to react to the final price. What are the responses of the dealers and distributors concerning it? Are the sales people ready to sell the product at that price? How will the competitors respond? Will the company's prices cause the suppliers raise their prices? Will the goverment interfere and stop the organisation from charging this price? 4) Influence of Other Marketing Mix Elements: The quality and adv considered in comparison to competition. When the relationship between relative price, quality was studied, the following findings were revealed: i) Premium prices were charged by brands providing average relative quality with the help of a high relative budget for advertising. For a product that was known to the consumers, they willingly paid higher prices as compared to the ones that were unknown. ii) Highest prices were charged by brands providing high relative quality wit the help of high relative advertising budget. On the other hand, lowest prices were charged by brands, providing low quality in presence of low advertising budget. iii) In the later stages of the product life cycle, the fi advertising and high prices in case of leading brands. 2.3. ADAPTING THE PRICE: eu cia ertising of the brand must be advertising and im witnessed a positive relation between high 2.3.1. Introduction , 3 ific pricing structure, indicating various variables over a single price, Firms generally prefer to prepare a speci 1 ingle pei ‘Therefore, after deciding the method of pricing, the requisite pric® of the specific goods or services is finalised with the help of various pricing policies or customised pricing ‘approaches. These include differential pricing, geographical pricing, promotional pricing, product mix pricing psychological pricing, new-product pricing, and ce allowances and discounts, The explanation of these pricing SeIsB=S'S given below: Pricing Strategies | ‘New Product Pricing | Product-Mix Pricing ‘Geographical Pricing L_____—_———— Trice Discounts, Allowances I_f and Rebates Payehelogical Pricing z Lf Promodonat Pricing Direct Pscng || LJ Bb) _ transfer Pricing eee Scanned with CamScanner70 [MBA Second Semester (Marketing Management) SPPU 2.3.2. New Product Pricing if New product pricing involves critical decision making. Lot of variability is involved in the pricing of new products. The level of newness of the product determines the level of difficulty involved in its pricing, The pricing decision becomes complicated if the idea behind the product is unconventional or novel Huge risk/uncertainty is associated with pricing of new products in comparison to mature or already available products. dentifying consumer anticipations about prices, with the help of suitable marketing research (involving test market and/or surveys), is very essential for new product pricing. Test market enables the marketers to depict the level of demand generated through different prices. This technique helps to evaluate the preliminary graph ‘of demand with changes in the price structure, to level up marginal revenue and marginal costs. ‘The two different new product pricing methods suitable for different marketing objectives and market situations are skimming and penetration pricing, which are as follows: 1) Price Skimming: Price skimming can be defined as a product pricing strategy where a consumer will pay the highest initial price demanded by a firm. Once the demand of the initial consumers is fulfilled, it reduces the price of the product to interest other customers who have a price sensitive approach while making purchase decisions. Thus, ‘skimming’ term is derived from skimming of the creamy layer of customer segments because later the prices are lowered for attracting other customers. Price skimming is ‘one of the methods selected by firms who intend to launch new product in the market. Here, the launch price of the product is kept high, which is gradually decreased within a given time period to recoup the value of the product in a faster way. For example, mobile phones having new and improved attributes are Iaunched at high prices, which are gradually decreased by the company after a certain period, One more ‘example can be of newly launched 3D televisions available at high prices. 2) Penetration Pricing: It is a strategy used to enter the market at the initial level by offering the products at ‘quite low prices. This gradually helps in expanding the market share. The prices are kept so low which does not allow the manufacturer to make any profits. This decision is not illogical or unjustifiable. When price for a new product is kept low (generally lower than the proposed market price), to grab the attention of customers, it is called ‘penetration pricing’. The main motive of penetration pricing is to compel customers to buy the low-priced new product. This strategy is useful to introduce a new product in the market and functions as the most suitable option, in case of introduction of a product with minor variations in the market. Its also suitable in markets which have price elastic demands. Hence, it is learned that a low priced Product (in comparison to similar products available in the market) acts as a competitive advantage. 2.3.3. Product-Mix Pricing A relatively different pricing strategy should be utilised for pricing products, whi i . which are a part of the product mix. A combination of prices suitable for the entire mix is selected by the company to ensure the increased revenues. Due to presence of inter-relationships between demand and cost of different products and different levels of competition, this produet-mix pricing i i ocuetai c are as follows: : Pricing is very challenging. Different product-mix pricing strategies 1) Product Line Pricing: Generally, product lines are launched by the organisations Products and therefore, pricing is also designed according to the product line. Most of the markeres implement well-planned price ideas for the products in their product-line. For example, a gent's snpack cutlet can offer suits at three different prices, each costing %800, £1500 and £4500 respectively The consumers will identify the quality of the suts-as low, medium and high as per the three aifferer’ price levels-It is the responsibility of the salesman to rationalise the variable price steacture by proving the deemed ‘difference of quality between the products. The prime objective of pricing a prot lines wo increase the profits to the optimum levels. in place of single 2) Optional-Produet Pricing: Besides the main product, a firm can also supply alternative or subsidiary products, added traits and many more services. A person, who wants to purchase a four-wheeler, can place an order for other related products such as light dimmers, defogeers, warranty extension, electric window controls, ete. The automobile organisations should tackle the tricky issue of pricing by pre- determining the components which should form a part of the principal offering and those which should be considered as alternatives. Scanned with CamScanner1g (Usit 2) n popes of PO Captive Product Pricing: The use of certain types of products is incomplete without a captive OF supplementary product. For example, razor producing companies maintain low prices of razors, but increase the cost of razor blades to retrieve the cost price of razors. Similarly, producers of cameras increase the cost of films and keep the price of camera low. Moreover, the telecommunication service provider can gift mobile phone free to the customer who promises to purchase the telecommunication services for the ext two years. ‘Two-Part Pricing: A pricing strategy, consisting of two separate parts including a fixed and a siuctuating charge (based on usage of the product), is frequently used by service providing firms. The telephone subscribers have to pay a fixed monthly minimum charge, in addition to costs incurred due to usage over and above the minimum limit. An entry fee is paid by customers visiting an amusement park and an additional cost has to be paid for rides above the minimum limit. The same issue also arises in this pricing, as in case of captive-product pricing. Service providers face a lot of problems in determining the level of charge for basic service as well as for variable service consumption. The fixed charge is kept low to encourage the consumers to buy the services. Variable consumption charge is the only source of profit in this pricing. 5) By-Product Pricing: In any production process (like production of chemicals, petroleum products, or meat), along with the main product, there are some side products which are developed. These side products ate called ‘by-products’. The appropriate value of these by-products should be decided if they are useful to a certain market segment. This value helps in determining the price of such by-products. The manufacturer can offer the primary products at reduced prices with the help of profits eared from these secondary by- products, in case the company is facing extensive competition in the market. 6) Product Bundling Pricing: Generally a ‘package’ of products and attributes associated with those products ae offered by the firm. When a company sells products only in the form of packages or bundles, it is called ‘pure bundling’. In case the company seils products individually as well as in the form of bundles, it is termed as ‘mixed bundling’. The company charges less in case of a mixed pack, than the products which are offered individually. For example, the price of option package offered by a car manufacturer is lower than individual prices of such options. 7) Premium Pricing: A company uses premium pricing for its different alternative products (having heterogeneous demand), which are developed through joint economies of scale. Nowadays televisions of various models with new and improved characteristics are available in the market, Some of them are offered with HD display and others without it. Both the products are substitute to each other as they satisfy the common need of the buyers. Television manufacturing companies set higher prices for televisions with HD display and vice versa. 8) Image Pricing: Image pricing is used in case of customers being able to understand the quality of a product. by observing the cost of substitute models or products offered by the competitors. Generally, companies change their product prices according to the prices of same product lines offered by different brands. Companies manufacturing toilet soaps, cosmetics, perfumes, textiles, etc., make use of this pricing strategy. 4) 23.4. Geograph Under the geographical pricing technique, a company adopts different strategies to enter different markets at the sane time, for the sake of maintaining economies of scale. It may enter a market by offering the product at a Cos lower than the competition or follow a penetration strategy to enter the other market. Tor example, text books are made available at low prices by the publishers in Asian nations since such nations Ne lower average wages. The low pricing strategy is called as ‘second market discounting’. Using the ditional production capacity, a company can offer its products at a very low price under second market iscounting (which is a division of differential pricing technique). Hence, a company using geographical pricing ™ethod may demand a high price in the first market, a discounted amount in the second market and offer the Sime product for a penetrative price in some other market. Payment mode is a matter of concern for this pricing strategy. This becomes. critical when customers do not “ary adequate amount of cash to pay-off their expenses. Generally, consumers seek to exchange other items inst the one purchased by them. Itis called as counter trading, Scanned with CamScannera MIA Second Semester (Marketing Management) SPPU ‘There are various types of counter trading: | : , 1) Barter: Exchanging goods without using money and any intermediary is called “barter system 7 2) Compensation Deal: Here out of the total amount payable to the seller, a certain amount is paid in cash and the remainder is paid through any item, : ; ee 3) Buyback Arrangement: In this type, in exchange to the supplied plant, machinery, technolOey, OF equipment to a foreign country, a seller receives products manufactured with the help of those equip machinery as partial payment and the remainder through cash. 4) Offset: In the above case, if the seller accepts the whole due amount ‘major part of the amount in that foreign country within a specified span of time, cash and approves to employ a s termed as ‘offset’. 2.3.5. Price Discounts, Allowances, and Rebates . ‘The concept of giving discounts on products or services can be a beneficial plan of aevion #2 counteract the competitive environment. Discounting, though being a segment of the marketing plan, should be dilgenily Maas, tnd formulated, to avoid any risk, Discounting is a regular event in several companies which makes the usus catalogue or price lists almost insignificant. Tis does not mean that discounting is problematic UI the company fs felting the desired return. It can be a matter of concem, when organisations get trapped in a problematic framewor of quantity, cash and other discounts, resulting in nothing other than poor profit margin only. Rebating involves the partial cash refund of reimbursement to consumers for their expense on purchases. It is tax-free, as according to the IRS (Internal Revenue Service) rebate is not an income, but a decrease in the total ‘amount payable for the purchases made by the customer. Offering rebates is quite beneficial for producers as it increases the sales and prominence of the firm in the market, prompts the potential buyers to buy offered products and helps to seek the attention of retailers, who give additional space to display these products in the ‘outlet and thus promote the scheme. Therefore, this rebating is helpful in leveraging with retailers as well as building brand loyalty (leading to repeat purchasing) within consumers. Such benefits are not one-time incentive, but are generated in the long-run. Seasonal industries involving manufacturers of small batteries frequently use rebating strategies. ‘The methods most often used for discounting and rebating are explained below: 1) Quantity Discounts: A purchaser is said to get a ‘quantity discount’ when he/she acquires many units of an item (or buys more than a particular amount) and the price charged is comparatively lower. Quantity discount can take place in two forms, ic., cumulative quantity discount and non-cumulative quantity discount..The discount incurred on list price of total number of items purchased within a particular period, is called ‘cumulative quantity discount’. It is implemented to build customer loyalty. Whereas, a discount incurred on list price of a single order (not the total number of orders) placed within a particular period, is cailed ‘non-cumulative quantity discount’. Its implemented to encourage large-size orders, . 2) Cash Discounts: When a consumer, a marketing intermediat i is r ng jary or any organisational buyer, is give discount on price, for immediately paying the bill for the goods purchased, itis called ‘cach digcoust™, The holding or inventory cost and ali the billing expenses of the seller are retrieved by i and thus, it rescues the seller from incurring any bad debts. y the immediate payment 3) Functional Discounts: Functional discounts are the disc i istributi intermediaries like wholesalers or retailers which carry out certain tak or active eng oe manufacturer. It is a discount provided for compensating the task of activity perierned te the intermediaries. It is given on the basic price of the product. Functional discounts, alee collesrac inte discounts’, may differ to a great extent from one distribution channel to another, and are deerme ee the service or function performed by the middlemen, sae are eterrained by 4) Seasonal Discounts: Seasonal discounts are the discounts provid om led to bi i Products. With this, the product storage activity is taal buyers. This aes ae continue a constant and sound production schedule throughout the year, precnects 0 5) Promotional Allowance: When a dealer is paid for promoting or advertising the products of a producer i is called as ‘promotional or trade allowance’, This allowance aids the promotion of the product and ale acts as a pricing mechanism. Promotional allowance acts as a functional discount in’ case of wicks mechanism. For example, a producer may contribute towards the ex by the retailer for the producer’s goods. in case of pricing ‘penses for an advertising campaign run Scanned with CamScanner‘of Pricing (Unit 2) aspents a ero-Percent Financing: Dema 6 E 2000. At thet ti 74 hele and automobiles decreased during the mid and end phase Out being chan ane UP with an innovative concept of ze70 per cent financing, and fast etount gn interest, could get their new car financed. This concept extra cont ih Was observed in the carsales figures, The only drawback of of over B1,99,995 on every car sold during this scheme. 13.6. Psychological Pricing price of a product creates an opinion about th exablh pee structure which will draw 4 the qualit en ner sy ins acta produc, when the customers can analyse and determine it by previous iam customer does not RE. Personally. But price can become a crcil indicator of quality of a product ee is another facet of paychological ert knowledge or skill-set to determine the quality. ‘Reference “al pricing. It i i ¥ Pistomers assume While judging a pro sae eine: It a a perception sbout the price of 2 product, which the received enormous Fesponse this tactic was the burden of product. Psychological pricing is a technique used to the customer's attention, Price is not the only factor to ‘This perception may be formed by evaluating current buying ci i i i 7 ying circumstances, recalling former price structure or present day prices. These perceptions can be utilised while forming the new cost structure. The various kinds of psychological pricing are odd-even pricing, reference pricing, and prestige pricing, which are described below: 1) Odd-Even Pricing: The price of the product ending with an odd or even digit is termed as ‘odd-even pricing’. 2) Reference Pri customers. 3) Prestige Pricing: Creating an image of quality products, by offering high priced items, is called ‘prestige pricing’. The price of a product is formulated on the basis of comments and references of the 23.7. Promotional Pricing Various forms of promotional pricing are utilised by organisations. Supermarkets and departmental stores come up with strategies, where certain products are offered at lowest rates, which compel the customers to come and. purchase not only those products but also other products with normal price range. Various pricing methods are practiced by organisations to make the products move faster and increase sales. These are described below: 1) Loss Leader Strategy: When a retailer slashes down the prices of produets offered by very popular brand tc induce consumers to visit the outlet, itis called as ‘loss leader strategy’. Departmental stores and super tharts practice this technique to increase the number of visitors to the store. It is beneficial, as revenues made by the low pricing are more than the original cost. 2) Special-Event Pricing: Sellers design attractive prices for different commodities in a particular season, Which improves their sales. given by companies selling consumer goods or automotive 3) Cash Rebates: Cash rebates are often anies 0 companies to inspire customers to buy more products within a given Hine period to increase the sales of goods offered by such companies. It results in increased sales, leading to clear inventories, without any deduction in list price. 4) Low-Interest Financing: Low-interest financing and purchase more products. Automobile sector 5° zero-interest financing has been offered by automakers. : sce automobile companies and financial institutions, extend the duration 9) Longer Payment Terms: Seton avons, which ulimately reduces the monthly instalment for a eusen e i nes Oy on the monly instalments t0 be pad, as they have to determine s. Generally, Whether they can afford it or not. Warranties and Service Contract the purchased product. Offering Promoting sales. Psychol ji ing: Originall; logical Discounting: Ore Offering the same product at ‘considerably red schemes are made available to induce customers to invest, the biggest example to implement this strategy and even § jority of companies provide warranty and service contracts with Se benefit free or by charging low-prices, is very helpful in y fixing the price of a product above its normal range and eventually is called as ‘psychological discounting’. 2 juced rates, 1S Scanned with CamScanner“ MBA Second Semester (Marketing Management) SPPU Companies should be very careful while implementing promotional pricing strategies as ions ee 7 ‘ zero-sum game. In case, the promotional pricing strategy becomes successful, competitors “Ol0 oe unknowingly diminish their own value in the market. On the other hand, if this srategy [, (8 Boy invested gets wasted. This invested money could have been better uiised in other marketing So improving product or service quality or designing effective advertising strategy to enhance the p . 2.3.8. Differentiated Pricing . ow: wal A firm offering the same product with different prices throughout various market segments 18 Ly to 938 “differential pricing strategy’. The firm presumes that each market segment has a distinct search cost SUUC tune as well as perceived value of the product or there is no communication between different mavket segments. ‘can also be said that a firm is inspired to use this strategy due to significant diversity in the market. ‘The basic cost of a product is modified to suit variance in products, areas, consumers, ete. When a prouat ie sold at different prices, which do not show any corresponding difference in cost structure, it is said fo create ‘price discrimination’. Mainly three degrees of price discrimination are found in the market, i.e. Fist degree, second degree, and third degree price discrimination, First-degree price discrimination includes charging different prices from different customers based on their level of demand for a particular product or item, Second-degree price discrimination includes charging comparatively less prices from customers buying products in bulk. In third-degree price discrimination, different classes of customers are offered products at different prices, as per the situations given below: ‘ 1) Customer-Segment Pricing: Different classes of buyers are offered the same product or service at different prices. For example, an entry fee charged at museums is different in case of senior citizens and student visitors as compared to general public. 2) Product-Form Pricing: Prices of different variants or forms of a particular product are different. However, these prices are not in accordance with the costs of such variants. 3) Image Pricing: Image differences help a firm to sell the same product in different price categories. For example, a producer selling perfumes can sell the same perfume in two different bottles with distinct product name and identity at separate prices of 250 and 11200 each. 4) Channel Pricing: Different prices are set for selling through different distribution channels. For example, the popular brand Coca Cola charges differently for the same product in a fast-food outlet, vending machine located at different locations or in a fine-dine restaurant. 5) Location Pricing: A product is charged differenti in various areas despite the fact thatthe costs incurred at each area are identical. For example, cinema theatres located at various locations cost di same movie as per liking of the audience. a coc: Sitteretly oe the 6) Time Pricing: Prices of the same product differ as per the hour, necessities provided by authorities differ from the particular time ‘Products which remain unsold ate offered at low costs by airlines becomes expired. The early entrants in a restaurant are charged less for day or season, The prices of basic of the day, weekdays or weekends. and hotel owners before the product their expenses. ‘ 2.3.9. Transfer Pricing A transfer price is a value used fo calculate the price of goods or services that a profit center offers to other i (0 evaluate managerial quality witht izati Sera esse rm yw ap centers. In such eases, tis necessary to determine the monetary values, called the exchange mae eee transaction wll take place in order to accurately distibute costs and revenues. The transfer price nen tat's will be soure of revene for the transfer division / estze, whereas the division to whichithe move woe will be a cost item. Therefore, for the successful implementation of transpay i alus : 7 rene Wil be net nt sparency, there is a need to evaluate Many businesses have the issue of selling goods and services that are distributed to the s: divisions / units; such pricing i referred to as intracompany," intradivisional of transfer pricing. lik the wets of intra-corporate purchase transactions exchanged goods and services. The proper basis for. a Soraany transfers also depends on the nature of companies, market conditions, and polices and regulations of state . ee s Scanned with CamScanner| | | | Aspects of Pricing (Unit 2) 75 ‘Transfer Pricing Objectives It is most important to specify the overall obj transfer pricing method. The main goals of intra-company transfer pricing are as follows: 1) Profitability: To foster a business attitude in those responsible for profit center performance. Profitability is the primary focus here, 2) Financial Resources Optimisation: Maximizing the distribution of financial resources to businesses. This is.a long-term goal, Asset distribution is based on the relative performance of different profit centers, which in turn is affected by policy of transfer pricing, 3) Quality Assessment: To allow the division's quality (profitability) to be measured by compensating it for the benefits provided to other divisions and charging it for the benefits received, 4) Motivate managers: Motivate managers to maximize their divisions ' profitability in the best interests of the organization as a whole, jectives of the company before taking a decision to adopt a specific 5) Minimize Tax: International groups may attempt to manipulate country-to-country transfer prices to minimize the total tax burden, 2.4. PRICING IN ONLINE MARKETING 2.4.1. Introduction Companies are now using direct marketing to provide custom pricing experience via the internet. Internet marketing allows the companies to understand complex pricing strategies and to modify these pricing strategies within a short time span according to their needs. The differentiation in prices is widely practiced as digital information goods are available in different forms. Finally, auctions in the internet has been realised through the interactivity. Thus, pricing strategies ranging from sophisticated yield management to well-known posted prices are involved in online marketing. There is no exact information regarding which pricing strategy is best suited with a particular product or in the particular market environment. Also, there are several benefits and limitations attached different each pricing strategies. There are two broad categories in which the online pricing strategies have been divided: 1) Fixed Pricing Strategy 2) Dynamic Pricing Strategy 2.4.2. Fixed Pricing ‘The pricing strategy in which the price of a product has been fixed by the seller and itis the choice of a buyer to take it or leave it. This type of strategy is mostly used by the retailer and is known as the fixed pricing strategy. Fixed pricing strategy is of different types namely: 1) Free Pricing 2) Premium Pricing Strategy 3) Freemium Pricing Strategy 2.4.2.1. Free Pricing Bargaining is loved by every customer and especially when there is something for free. There is a feason behind why businesses offer free products. The information that is available for free helps the marketers to create the market awareness and can also help in the sale of the products which are in connection with the free products, ‘There are several things offered by the marketer for free such as PCs, free internet connections, websites, free photo storage, free music, and free data storage. Moreover, network effects are also building through the extensively giving out of one’s software for free. For example, free version of WinZip is used by millions of customers with Windows in order to compress and share the files. However, there are limitations of the free pricing strategy. There are several businesses that have failed to convert potential website visiting customers into actual paying customers, The free pricing strategy of businesses attracts many customers who are sensitive towards the prices and have no intention to pay. AS soon as the businesses mention for the charges, these customers switch from one free service to another. There are several businesses that now charge for annual subscription who previously offered the free services. No great Success has bei witnessed by the piggyback pricing strategy. Scanned with CamScanner«MBA Second Semester (Marketing Management) SPPU 16 2.4.2.2, Premium Pricing Strategy ‘The pricing strategy in which the marketer set the v' ery high prices of the product in order to gain more profit at the high end of the market is defined as the premium pricing strategy. There are very few cases tn whic the premium pricing strategy works effectively. Premium pricing strategy will be effective for the mankelet © has a number of good status oriented consumers. Establishment of premium brand is al i me i requirement forthe success of premium pricing strategy. For example, the premium price charged by the ole ‘watch company for its watches. The customer pays these premium prices in order to ‘show their high stat is ng Suceess, "Conspicuous consumption” is the name given Veblen'to this type of customer consumption. Tt separates the exclusive and high-end customers from the other customers in the society. rategy for capturing the market where the target audience ‘e when there are very few quality products in the market, Hence, they may go for highly Companies can successfully use premium pricing st related quality and price of the market offering, In cas then the consumer assumes that high priced product is a high quality product. priced product so as to get premium product quality. : 2.4.2.3, Freemium Pricing = This strategy is made from the combination of ‘free’ and ‘premium’ pricing strategy and hence known as freemium pricing strategy. Freemium pricing is mostly used for the products that are available on digital platforms. In this pricing strategy, the customer has to pay premium prices for the additional services attached with the main product; however the'marketer offers the main product for free. The product that is offered for free is self-sufficient, and the additional services are only to enhance the functioning and experience of the main product. The marketer expects the fast adoption of the product by offering the free version, ‘The business model which is a combination of both free and priced goods is possible to anticipate. For example, the free concerts organised by the shopping malls with the hope that some of the attendees may purchase its products also. This business model is much more popular in the digital world. Many online ~ businesses offer both free and premium services. Since, the large numbers of consumers are attracted by the free services and some of the customers who expect more than the limited features free services are willing to pay the premium prices for these services. These premium prices paid by the customers are the source of revenue for the businesses. For example, there are many companies like Skype, Dropbox, etc., which uses freemium pricing for their services. . ° 2.4.3. Dynamic Pricing Dynamic pricing strategy can be defined as the strategy in which pricés are changed with time. Here different i aaiiion. of the product is reflected by the price variations made by the company over time. ‘or example, Airline industry has used the dynamic prices for number of years where t ith the minute, hours, and day due to its norm of seat availablity, Mes changes ‘Marketers can gain many advantages by offering the dynamic price i example, the online companies like ‘Amazon.com tae its datas to ident te neice, a oa seul she ro and promptly arranges the products according to the buyers behaviour and charge prices accordingly Tha vag ‘many direct marketers who monitor the costs, inventories and demand at a given time and chan eahee ine accordingly. For example, In order to attain the real-time balancing of demand and supply for eames product, Dell uses the dynamic pricing strategy. Dell actually maintains the demand to match wish the gauge uoting high prices when there is shortage of product supply or by quoting low prices in sase of cae eed YY the product. The different types of dynamic pricing strategies are: ee cam DY of 2.43.1. Surge Pricing = Surge pricing is.the case.of dynamic pricing strategy. The only di cing. . ifference e surge pricing is thatthe previous one involves the fluctuation in prices (re cam bige 2s Synamic pricing and the Tater one involves only the premium pricing, Uber is one of the examples of surge prieins rene ee prices charged by the Uber as a base rate when the demand for cabs are high, Pricing strategy. Surge “Equilibrium price’ is the fairest price for any product where demand and su .. ipply matches, As the supply of the product increases, the prices become low and when the consumer demand ene product price: ind increases, there is hike in Scanned with CamScannerAspects of Pricing (Unit 2) n ‘Surge pricing based on the above logic of faimess has been effectively used by Uber, which is one of the high profile rideshare corporation. In order to match the supply of drivers to the demand of the rider a particular time to adjust the prices of rides is the basic idea behind surge pricing. Uber increases its normal fare prices at the time when there are larger numbers of riders than the drivers, The company increases its fare prices on the basis of number of shortage of drivers. When surge pricing is applied, the drivers dispatch to pick the riders when the riders agreed to pay higher than the normal fare prices. 2.4.3.2. Auction Pricing In its traditional form, an auction is a resource allocation process based on a competitive bid system over a particular issue (.e., price) of a single clearly defined item, This process involves the set of rules known as auction rules through which the winner and the price to be paid by the winner are decided. Auctions may be regarded as market institutions with clear and open rules specifying the allocation of resources and prices based on bids from market agents. The bids specify the object's W2P (Web-to-print) of the bidders. It is more expensive and time-taking to perform the classical non-electronic auctions. Therefore, traditional auctions are generally carried out for huge quantity of similar goods (like flower auctions, stock exchange) or valuable goods (like real estate, fine arts.) The half of the reason for the success of electronic based auction is that it allows one to significantly reduce the per-item cost. The rate of repeated electronic auctions can be increased to millisecond intervals, thereby offering low resporise times to changes in supply demand. Based on the number of buyers and sellers, there are basically three types of classes into which auctions can be divided: 1) Forward Auctions: Forward auction, is the traditional auction where there is only one seller and the number of buyers is multiple. my ‘ 2) Reverse Auctions: This type of auction is popular in electronic markets where the numbers of sellers are multiple but the buyer is only one. 3) Exchanges: This is an exchange format where the number of buyers and sellers are multiple. Revenue maximisation is the basic purpose for which forward auctions are conducted whereas; reducing the purchase cost is the basic purpose of the:reverse auctions. The auction and mechanism design literature influence the fairness and effectiveness of auction mechanisms (welfare maximisation, Pareto optimality, etc.) In recent years, number of more sophisticated and well defined e-auction platforms, which allow combinatorial and multi-attribute auctions other than the B2B-and B2C auction platforms, has been developed for the purposes of research. For example, i-Bundler, The Michigan Internet AuctionBot and e-Mediator are few examples of this type of auction platform, : 2.4.3.3, Yield Management Yield management can be referred to as the pricing strategy in which the prices of the product are determined by the marketers in different markets, attracting the various segments for selling the maximum amount of products. It is different from the auctions where the prices are set by the bidders, For example, airlines use this Pricing strategy in order to fill the empty seats. They adjust the prices of empty seats every few minutes during the day in order to ensure that all the empty aitline seats are sold at some reasonable prices, Even this price can be less than the production cost. ae” There is the limited set of conditions under which yield management works. They are perishable product (at the time the plane takes off without its full capacity, an empty airline seat perishes.); rapidly changing market conditions; competitive markets; clearly defined market segments; and seasonal variations in demand. Normally, yield management techniques are only affordable by the large companies which have wide monitoring and database system. 2.43.4, Segmented Pricing “ ahs ; ‘The pricing strategy which uses the online features of mass customisation, to automatically set the prices on the basis of order size and timing, supply and demand of the product and various other pre-set decision factors is referred to as the segmented pricing. The company uses segmented pricing on-line to set prices for groups of consumers upto a one-person segment. For example, the advance purchaser of a flight receives a discount Whereas the customer who books the flight seven days before its departure receives no discount. Traditional ‘marketing is:the basis of segmented pricing. «As businesses obtain more and more digital behavioural data, Pricing based on consumer behaviour is becoming more common. Scanned with CamScanner8 2.4.3.5. Price Negotiation In ‘traditional way, the pricing strategy which is conducted a ¢ and through fax or mail Process (involving one buyer and one seller) can be referred to as negotiation-based pricing, Therefore, there is more complexity in the traditional price negotiations; they are difficult to manage and require more response time, The negotiation based pricing (NBP) process becomes more costly duc to its time taking bilateral negotiation process, The frequency of the (re)negotiation process has a strong influence on the demand-supply reaction dynamics of the NBP. | ‘The dynamics to the market tends to be in the mid-range as compared to the other methods of dynamic pricing because of the high cost of traditional negotiation process. Negotiating skills of the agents also affect the efficiency and fairness of the traditional NBP. Electronic negotiation table negoti agents, and decision and negotiation support system has been introduced in order to avoid such imi the traditional NBP. A higher level of process effectiveness and efficiency as well as high quality and fas ments is promised by electronic price negotiations. This will only happen when there is efficient negotiation protocol and the high frequency of the negotiation process. For example, SARDINE, sbah, RETSINA, Tete-h-Tete and COALA are some of the examples of electronic negotiation platforms. 2. INITIATING AND.RESPONDING TO PRICE CHANGES 2.5.1. Initiating Price Changes ‘As numerous organisations operate in the market, determining the prices of its products by an organisation is nota one-time activity. Every organisation needs to revise the prices of its products as a result of the competition it faces. Once the pricing strategies and structures are developed, there often occur situations where initiating price changes or responding to the prices changed by the competitors become necessary. The company might be interested in either increasing or decreasing the prices of its products in certain scenarios. In either case, it ‘becomes important for it to anticipate the possible manners in which the customers or competitors might react, 2.5.1.1. Initiating Price Cuts There might be numerous situations where it is necessary for an organisation to reduce the prices of its Products. Surplus capacity and deteriorating demand are the two such situations. Here, the organisation would cut down the prices of its products aggressively so that sales and market share ean be increased, As per the industries like automobile, airline, fast food, etc. situations like price wars may arise because of implying price cuts in industries with surplus capacity. This is so because competitors try not to lose their market share. By incorporating this strategy in its operations, Big Bazaar has become the leading re India, Following are the circumstances under which an organisation reduces its price: 1) Declining Market Share: The most inducing factor for cutting prices is the declining market share of a particular organisation, The organisation commences price cutting when its market share staris decreasing as Compared to that ofits competitors. For example, the prices of Pantene range of shampoos were slashed by 16% by P&G as a reaction to the reduction in prices of HUL's shampoos Sunsilk and Clinie Plus by 50%. Also HUL had to slash the prices of Wheel and Suef in the detergent sector since P&G had already reduced the prices of Tide and Ariel. All these decisions were made only to maintain the individual market shore 2) Market Domination: Another circumstance of factor responsible for price cuts is desire to attain market dominance. In order to dominate the market, organisations sometimes imply the strategy of price culs Significantly and become price leaders. Implying price reduction strategy results not only in markel dominance but also the disturbed market share of the competitors, For example, few years back, Hindustan ‘Times and Times of India underwent a price war in Delhi, chiefly to attain maximum share in the market. 3) Excess Production: The next circumstance leading to price reduction is excess production. When the level of production or supply of an organisation surpasses the actual demand, it needs to slash the prices of is products. For example, organisations manufacturing consumer durable product, often introduce major reductions in the prices of their products like TVs, refrigerators, or washing machines, as part of thei consumer promotion schemes. ' 4) Economic Downtrend: During economic recession, the prices of the products have to be reduced by the | organisations so as to match the buying power of consumers. Scanned with CamScanner 5Aspects of Pricing (Unit 2) 7 Price reduction is a strategic decision, which is taken only after the thorough analysis of its impact on the sale of the product. In case, such decisions are taken carelessly, many types of traps may arise. The major possible traps are as follows: 1) Low Quality Trap: Here, price reduction at massive level creates a doubtful perception in the mind of consumers about the quality of products offered by organisations. The consumers think that they are being offered low quality products by the organisations. 2) Shallow-Pockets Trap: An organisation may improve its market share through price reduction, but it does not guarantee market loyalty. The customers who were attracted due to low prices might move to other “organisations offering prices that are even lower, 3) Fragile Market Share Trap: As a financially strong organisation is capable of operating at low prices for significantly long duration, it (financially strong organisation) can give robust competition to financially less strong organisation and reduce its market share. 2.5.1.2. Imitating Price Increases Profits can be immensely improved with the help of an effective price increase. For example, if the profit margin of an organisation is 3 per cent of sales, an increase of 1 per cent in price will enhance profits by 33 per cent, if the volume of sales is constant. Immediate increase in the profits is the main advantage of price increases. Different kinds of factors or situations are responsible for price increases. Cost inflation is the prime reason behind price increase, Due to increased costs, the profit margin of organisations shrinks and it forces the organifations to increase the prices of their products so as to pass the increased costs to the customers and maintain the profit margin, Another reason leading to price increase is over demand, When the customer needs exceed the level of supply, organisations need to take several actions; increasing price is one of them. For example, worldwide oil and gas organisations frequently increase its prices so as to balance its demand. It is very essential for organisations to ensure that they are not perceived as price gouger by customers due to price increases. Prices are also increased in case of: 1) Possibility of inflation, 2) Possibility of modification in governmental policies or rules, ot 3) Release of a big banner or an immensely hyped movie. 25. Customers’ Actions to Prices Changes Price changes are not always recognised in a forthright manner by the customers. Generally it results in reduced sales, but the buyers might interpret a positive meaning of price increases. For example, if Titan increases the price of one of its latest models, customers may react in two ways — they may think either the quality is improved or Titan is only making profit. Generally the image and price of a brand are closely associated. Customers’ perception about the brand may adversely be affected due to such price changes (specially due to price cuts). Every element of the business environment, be it customers, suppliers, competitors, channel Partners, or even the government, responds to the price changes. In case of frequent buying or buying high-cost products, customers tend to be most price-sensitive. On the other hand, in case of low-cost products, which they buy occasionally, they hardly identify price increases. ‘Usually, a rise in price results in decreased sales volume, but at times, the customers may perceive that the goods are of better quality and high in demand, Alternatively, sales volume increases as a result of price cuts but customers might infer it negatively assuming that: 1) The quality of the product is low, 2) The sales volume of the product is low, 3)- The organisation promoting the product is in loss, 4) The product is in decline stage and new products will replace it soon, and 5) The product price might decrease further. 25, Competitors’ Actions to Price Changes ; : Any organisation that is thinking about price change needs to take into consideration the possible reactions of its target customers and competitors as well. In presence of certain factors like uniform product, well-informed buyers and striall number of players, the competitors definitely react to price changes. It is crucial for an Organisation to-guess the probable reaction of each of its competitors. Scanned with CamScanner80 MBA Second Semester (Marketing Management) SPP Analysing a single competitor is sufficient to draw-out the reactions of all the competitors, if all of them respond in a similar manner, Alternatively, individual analysis is required in case of reactions being different from different competitors due to disparity in their organisational size, policies or market share. In case the price change is followed by some competitors, it can be expected that rest will also follow it. In the markets where homogeneous products are largely present, organisations tend to reduce the prices or improve their product offerings in response to competitors’ price cuts | ate ‘Whereas, in case of markets with non-homogencous products, following points are considered by organisations: 1) Intention: They aim to find out the reason behind the price change initiated by the competitor. 2) Duration: They try to ensure if the price change is permanent or temporary. 3) Forecasting: They forecast the impact on profitability and market share in case of not responding to competitor's price change. 4) Counter Reaction: Finally, they need to think about the counter reaction they would get from their competitor, in response to their reaction. 2.5.2. Responding to Competitor’s Price Changes Assessing competitor's price change and responding to it is very essential for any organisation. If an organisation comes to know that one of the competitors has slashed its price and it might impact the profits and sales of the organisation, it may decide to maintain its present price and profit margin level. In another kind of response, the organisation might believe that changing price would not impact the market share or profitability much. ‘The organisation may decide to wait despite of taking any action in order to collect more information about the impact of price change of competitor on organisational profit and market share. However, if the organisation takes too much time to decide upon its action, it might make the competitor more confident and stronger with increase in sales. The most appropriate response changes as per the situation, {tis crucial for an organisation to take into account several factors like the quality sensitivity and price of the product, the stage of the product in the lifecycle, its significance in the portfolio of the organisation, the resources and intentions ofthe competitor, substitute opportunities, and the relation of cost with quantity. Has Competitor No Hold Current Price; < CatPacet——_ [-———>] Contnue to Monitor a Competitor's Price } ves ‘Wil Lower Pi Negatively affect Market Reduce Price ‘Shae td ros? ——— ve Raise Perceived i Value Cantus ecve ——— Action be taken? paredumainen ails, a Improve Quality and Increase Price Launch Low-Price “Fghng Brand” Figure 24: Assessing and Responding to Competitor Price Changes In case the manager finds any of the below mentioned cases, it i , it mi rice: 1)_A major amount of profit will be eroded by price cuts, nan ee 2). The image of the product as well as the organisation will be dispraced due to pr 2 i 0 3) Market share will not be disturbed much if the same price is naintsined. and 4) The market share loss because of not lowering ‘the price can be recovered without excessive expenditure or effort. Scanned with CamScannerAspects of Pricing (Unit 2) a ‘Yet there are times when retaining the same price might bounce back. The likely results are as follows: 1) It might give the attacker more confidence and motivation to disturb the organisation, 2) It might demotivate the sales team of the organisation, 3) Itmight result in more loss of market share than expected to the organisation, and 4) Itmight make the organisation feel that regaining the market share is more tough and costly than expected. Business organisations usually respond to the price changes incorporated by any competitor. This is because they operate in a competitive environment that is very tough and are hence bound to respond against any price changes incorporated by their competitors. Any of the below mentioned four responses can be made, in case the organisation decides to take any effective action: 1) Reduction in Price: In case the organisation is operating in a price sensitive market and it forecasts severe market share loss to the competitor, it decides to slash the price to meet the price of the competing organisation. The organisation’s profits would be reduced temporarily as a result of price cutting, In order to retain profit margins, some organisations may alter the product quality, services or promotions, along the rice cuts. Such actions may finally diminish the market share in the long-run. The quality must be ‘maintained by the organisations when they implement price cuts. 2) Increasing the Perceived Value: In another kind of response, the organisation focuses on enhancing the perceived value of its products instead of reducing the price. The organisation expresses the superiority of the value of its products over that of the low-price competitors’ through its improved communication strategies. Here, maintaining the price and investing money for improving the perceived value of the product seems more comfortable to the organisation than operating at lower profit margins due to price cuts. 3) Improving Quality and Increasing Price: Here, the organisation improves the quality of its products alongwith increasing its prices rather than implementing any price cuts. It does so to grab the position of high price-value for its brand. Improved quality reflects enhanced customer value that justifies the price increase. Higher price, in turn, safeguards higher margins for the organisation. 4) Launching a Low-Price “Fighting Brand”: The organisation might add a low-priced product to its product-line or build a separate low-price brand, i.e., a “fighting brand”. This becomes crucial when the market segment is price sensitive and would not be satisfied through higher quality explanations. 2.6.1. Multiple Choice Questions 1) Price of a shirt is £999. This is an example of ___ pricing policy. a) Rapid penetration b) Psychological ©) Cost plus @) Skimming 2) Prices are kept very high in__ pricing policy. ; a) Skimming b) Penetration ©) Both of above 4) None of these 3 pricing is a method in which the company charges a fairly low price for a high-quality offering. @) Markup ). Psychological d) Value ©) Perceived value 4) The price setting method most closely corresponding to the concept of product positioning is a) Markup ) Psychological ©) Target return 4d) Perceived value pricing. 5) Which of the following is not one of the general pricing approaches? 8) Competition-based ©) Coaaied ©) Penetration pricing ))Value-bas 6) Ifa firm wants to focus its marketing efforts on price competition, the firm’s long-run success will depend on having . ; 8) Lower price than its competitors ) Lower prices than it has historically charged ©) A promotional campaign for lower prices 4) A lower cost structure than its competitors a Scanned with CamScanner82 0) 8» 9) 10) Answer: yb Od 2.6.2. yy MBA Second Semester (Matktng Man, The situat called" Which a seller takes the maximum price which the customer is wiling 1 pay fog the i. 8) What the tate h fic ean © Skimming price Ny hy bear price Penetration price ae rk costs, Prices to break-even on production and marketing costs, cs aise their prices on buyers’ perceptions of value, not their own costs. 4} Citing jus he righ combination of gully and goed service at fie, price... : > Cotmpanies set prices te make » argc rot and to gl some valve fr els production 2 na efforts, , ; ‘What is value-based ® Companies set ») Companies Market. Penetration pric ©) Market conciliation pricing © Market development pricing A matket-skimming strategy Parc cover variable costs and some fted cos, asin the case of some automobile dst of ships that below total costs, is typical of which ofthe following pricing objectives? - 2) Curreat profit maximisation. ») Market share leadership ©) Product quality leadesship 9) Survival ; 2a 3d 4d de Da 8) b Hd 10) ¢ Very Short Answer Type Questions ‘What is pricing? 2) Explain transfer pricing. 3) Define premium pricing. 4) Briefly explain the surge pricing. 5) What do you mean by fixed prices? 2.6.3. Short Answer Type Questions 1) Highlight the objectives of pricing. Gi 2) What is meant by promotional and differentiated pricing? 3) List the external factors influencing pricing decision. 4) Write a note on free and freemium pricing. 5) Discuss the auction pricing. 2.6.4. Long Answer Type Questions 1) Give its role and importance. 2) State the various methods of pricing. 3) Give a brief deseription on setting the price — from setting pricing objectives to rare nyet 4) Elaborate on pricing in online marketing, . 5) Discuss in detat the different types of dynamic pricing 6) Mlustrate the various pricing strategies in detail cal 7) Elaborate on initiating and responding to price changes, Scanned with CamScanner