Marketing Management Unit 3 Developing Market Strategies & the Offerings Chapter 12 – Price-Decision and Strategies Lesson 36 – Pricing Strategies Would it not be interesting to how organizations make strategies for pricing? Let us dig deeply into it and find out… The only time when price setting is not a problem is when you are a “price-taker” and have to set prices at the going rate, or else sell nothing at all. This normally only occurs under near-perfect market conditions, where products are almost identical. More usually, pricing decisions are among the most difficult that a business has to make.
In considering these decisions it is important to distin- guish between pricing strategy and tactics. Strategy is concerned with setting prices for the first time, either for a new product or for an existing product in a new market; tactics are about changing prices. Changes can be either self-initiated (to improve profitability or as a means of promotion) or in response to outside change (i. e. in costs or the prices of a competitor). Pricing strategy should be an integral part of the market- positioning decision, which in turn depends, to a great extent, on your overall business development strategy and marketing plans.
Companies usually do not set a single price, but rather a pricing structure that reflects variations in geographical demand’ and costs, market-segment requirements, purchase timing, order levels, deliv- ery frequency, guarantees, service contracts, and other factors As a result of discounts, allowances, and promotional support, a company rarely real-izes the same profit from each unit of a product that it sells. Here we will examine sev-eral price-adaptation strategies: geographical pricing, price dis- counts and allowances, promotional pricing, discriminatory pricing, and product-mix pricing.
WHAT ARE DIFFERENT PRICING STRATEGIES ? 380 16. 101G Marketing Management 1. Geographical pricing (cash. Counter trade. Barter) – Geographical pricing involves the’ company in deciding how to price its products to different. Customers in different locations and countries. For example, should the company charge higher prices to distant customers to cover the higher shipping costs or a lower price to win additional business? Another issue is how to get paid. This issue is critical when buyers lack sufficient hard currency to pay for their purchases.
Many buyers want to offer other items in payment, a practice known as counter trade. American compa- nies are often forced _o engage in counter trade if they want the business. Counter trade may account for 15 to 25 percent of world trade and takes several forms: barter, compensa-tion deals, buyback agreements, and offset. „Barter: The direct exchange of goods, with no money and no third party involved „Compensation deal: The seller receives some percentage of the payment in cash and the rest in products. A British aircraft manufacturer sold planes to Brazil for 70 percent cash and the rest in coffee. Buyback arrangement: The seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment. A US. Chemical company built a plant for an Indian company and accepted partial payment in cash and the remainder in chemicals manufactured at the plant. „Offset: The seller receives full payment in cash but agrees to spend a substantial amount of the money in that country within a stated time period. For example, PepsiCo sells its cola syrup to Russia for rubles and agrees to buy Russian vodka at a certain rate for sale in the United States. . Price discounts and allowances – The role of discount Offering discounts can be a useful tactic in response to aggressive competition by a competitor. However, discounting can be dangerous un- less carefully controlled and conceived as part of your overall marketing strategy. Discounting is common in many industries – in some it is so endemic as to render normal price lists practically meaningless. This is not to say that there is anything particularly wrong with price dis- counting provided that you are getting something specific that you want in return.
The trouble is that, all too often, companies get themselves embroiled in a complex structure of cash, quantity and other discounts, whilst getting absolutely nothing in return except a lower profit margin. Let us look briefly at the main types of discounts common today Cash and settlement discounts – These are intended to bring payments in faster. However, since such discounts need to be at least 2,5% per month to have any real effect, this means paying your customer an annual rate of interest of 30% just to get in money which is due to you anyway.
What is more, customers frequently take all the discounts on offer and still do not pay promptly, so that you lose both ways. Much better, we believe, is either to eliminate these discounts altogether and intro- duce an efficient credit control system, or change your terms of business so that you can impose a surcharge on overdue accounts instead. Whilst you may lose some business by doing this, these will probably be the worst payers anyway. If some customers will not pay you for months you are probably better off trying to win others who will
Quantity discounts – The trouble with these is that, when formalized on a published price list, they become an established part of your pricing structure and as a result their impact can be lost. If you are not very careful, although they may have helped you win the business to start with, in the long run the only effect they have is to spoil your profit margin. As a general rule, only publish the very minimum of quantity discounts – your very largest customers will probably try to negotiate something extra anyway.
Also keep quantity discounts small, so that you hold something in reserve for when your customers do something extra for you, such as offering you sole supply, or as part of a special promotion. 16. 101G 381 Marketing Management Promotional discounts – These are the best kind of discounts because they enable you to retain the power to be flexible. There may be times when you want to give an extra boost to sales – to shift an old product before launching an updated one for example. At times like these special offers or promotional discounts can be useful.
But try to think of unusual offers – a larger pack size for the same price or a “ five for the p [rice of four “ can often stimulate more interest than a straight percentage discount. They also make sure that the end user gets at least some of the benefit, which doesn’t always happen with other types of discounts. Two other points to remember are Make sure you retain control over your special promotions, with a specific objective, a beginning and an end point. Be sure to terminate them once they have outlived their usefulness. Ensure that your offers are linked to sales and not simply to orders.
Otherwise you may find that orders to you are up for a while, only to be followed by a barren period whilst your customer supplies the end user from his accumulated stocks. Clearly the role of discounts will vary from one type of business to another and not all of the com- ments above will apply to you. In part your ability to minimize discounts, or eliminate them altogether, will depend on the non-price benefits of your product. But, whatever business you are in, you should always ask yourself what your discounts are supposed to achieve, whether they are effective, and how long they are expected to last.
In general, keep standard discounts low to retain maximum flexibility and ensure that they are consistent with your overall marketing and pricing strategy. 3. Promotional Pricing – Companies can use several pricing techniques to stimulate early pur- chase: Loss-leader pricing: Supermarkets and department stores often drop the price on well- Known brands to stimulate additional store traffic. This pays if the revenue on the addi-tional sales compensates for the lower margins on the) boss-leader items.
Manufacturers of loss-leader brands typically object because this practice can dilute the brand image and bring complaints from retailers who charge the list price. Manufacturers have tried to restrain intermediaries from loss leader pricing through lobbying for retail-price -maintenance laws, but these laws have been revoked. Special-event pricing: Sellers will establish special prices in certain seasons to draw in more cus- tomers Cash rebates: Auto companies and other consumer-goods companies offer cash rebates to Encour- age purchase of the manufacturers’ products within a specified time period.
Rebates can help clear inventories without cutting the stated list price. Low-interest financing: Instead of cutting its price, the company can offer customers low- interest financing. Automakers have even announced no-interest financing to attract Customers. Longer payment terms: Sellers, especially mortgage banks and auto companies, stretch loans over longer periods and thus lower the monthly payments. Consumers often worry less about the cost (i. e. , the interest rate) of a loan and more about whether they can afford the monthly payment.
Warranties and service contracts: Companies can promote sales by adding a free or low- cost warranty or service contract. Psychological discounting: This strategy involves setting an artificially high price and then offering the product at substantial savings Promotional-pricing strategies are often a zero-sum game. If they work, competitors 382 16. 101G Marketing Management Copy them and they lose their effectiveness. If they do not work, they waste money that could have been put into other marketing tools, such as building up product quality and service or strengthening product image through advertising. . Discriminatory pricing – Companies often adjust their basic price to accommodate differences in customers, products, locations, and so on. Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs. In first- degree price discrimination, the seller charges a separate price to each customer depending on the intensity of his or her demand. In second-degree price discrim-ination, the seller charges less to buyers who buy a larger volume.
In third-degree price discrimination, the seller charges different amounts to different classes of buyers, as in the following cases: Customer-segment pricing: Different customer groups are charged different prices for the same product or service. For example, museums often charge a lower admission fee to students and senior citizens. Product-form pricing: Different versions of the product ‘are priced differently but not pro-portionately to their respective costs Image pricing: Some companies price the same product two different levels based on image differ- ences at.
A perfume manufacturer can put the perfume in one bottle, give it a name and image, and price it at Rest. 50. It can put the same perfume in another bot-tle with a different name and image and price it at Rs. 200. Channel pricing: Coca-Cola carries a different price depending on whether it is purchased ill a fine restaurant, a fast-food restaurant, or a vending machine. Location pricing: The same product is priced differently at different locations even though the cost of offering at each location is the same. A theater varies its seat prices according to audience preferences for different locations.
Time pricing: Prices are varied by season, day, or hour. Public utilities vary energy rates to commer- cial users by time of day and weekend versus weekday. Restaurants charge less to “early bird” customers. Hotels charge less’ on weekends. Hotels and airlines use yield pricing, by which they offer lower rates on unsold inventory just before it expires. Coca-Cola considered raising its vending machine soda prices on hot days using wireless technology, and lowering the price on cold days. However, customers so dis-liked the idea that Coke abandoned it. For price discrimination to work, certain conditions must exist.
First, the market must be segment able and the segments must show different intensities of demand. Second, members in the lower- price segment. Must not be able to resell the product to the higher-price segment. Third, competitors must not be able to undersell the firm in the higher-price segment. Fourth, the cost of segmenting and policing the market must not exceed the extra revenue derived from price discrimination. Fifth, the practice must not breed customer resentment and ill will. Sixth, the particular form of price discrimi- nation must not be illegal.
As a result of deregulation in several industries, competitors have increased their use of discrimina- tory pricing. Airlines charge different fares to passengers on the same flight, depending on the seat- ing class; the time of day (morning or night coach); the day of the week (workday or weekend); the season; the person’s company, past business, Of status (youth, military, senior citizen); and so on. Airlines are using yield pricing to cap-ture as much revenue as possible. Computer technology is making it easier for sellers to practice discriminatory pric-ing. For instance, 16. 101G 383
Marketing Management they can use software that monitors customers’ movements over the Web and allows them to cus- tomize offers and prices. New software applications, how-ever, are also allowing buyers to discrimi- nate between sellers by comparing prices instantaneously. 5. Product-mix pricing – Price-setting logic must be modified when, the product is part of a product mix. In this case, the firm searches for a set of prices that maximizes profits on the total mix. Pricing is difficult because the various products have demand and cost interrelationships and are subject to different degrees of competition.
We can distinguish six situations involv-ing product-mix pricing: product-line pricing, optional-feature pricing, captive-product pricing, two-part pricing, by-product pricing, and product-bundling pricing. Product line Pricing: Companies normally develop product lines rather than sin-gle products and introduce price steps. In many lines of trade, sellers use well-established price points for the products in their line. A men’s clothing store might carry men’s suits at three price levels: Rs800, Rs. 1500, and Rs. 4500. Customers will associate low-, average-, and high-quality suits with the three price points.
The seller’s task is to establish perceived-quality differences that justify the price differences. Optional-feature pricing ‘Many companies offer optional products, features, and services along with their main product. The automobile buyer can order electric window controls, defoggers, light dimmers, and an extended warranty. Pricing is a sticky problem; automobiles companies must decide which items to include in the price and which to offer as options. Restaurants face a similar pricing problem. Customers can often order liquor in addition to the meal. Many restaurants price their liquor high and their food low.
The food revenue covers costs, and the liquor produces the profit. This explains why servers often press hard to get customers to order drinks. Other restaurants price their liquor low and food high to draw in a drinking crowd. Captive-product pricing – Some products requires the use of ancillary, or captive, products. Manu- facturers of razors and cameras often price them low and set high markups on razor blades and film, respectively. A cellular service operator may give a cellular phone free if the person commits to buying two years of phone service.
Two-part pricing – Service firms often engage in two-part pricing, consisting of a fixed fee plus a variable usage fee. Telephone users pay a minimum monthly fee plus charges for calls beyond the minimum number. Amusement parks charge an admission fee plus fees for rides over a certain minimum. The service firm faces a problem sin1ilar to captive -product pricing-namely, how much to charge for the basic service and how much for the variable usage. The fixed fee should be low enough to induce purchase of the ser-vice; the profit can then be made on the usage fees.
By-product pricing – The production of certain goods- meats, petroleum prod-ucts, and other chemi- cals—often results in by-products. If the by-products have value to a customer group, they should be priced on their value. Any income earned on the by-products will make it easier for the company to charge a lower price on its main product if competition forces it to do so. Product-Bundling pricing – Sellers often bundle products and features. Pure bundling occurs when a firm only offers its products as a bundle. In mixed bundling, the seller offers goods both individually and in bun-dles.
When offering a mixed bundle, the seller normally charges less for the bundle than if the items were purchased separately. An auto manufacturer might offer an option package at less than the cost of buying all the options separately. A theater company will price a season subscription at less than the cost of buying all the performances sepa-rately. Because customers may not have planned to buy all the components, the savings on the price bundle must be substantial enough to induce them to buy the bundle. 384 16. 101G Marketing Management
Students here is something interesting for you …….. Point to remember 16. 101G 385 Marketing Management 386 16. 101G Marketing Management APPLICATION EXERCISE : Review the following article. Bring out the key points. Discuss your points of agreement and dis- agreement . *CASE HIGHLIGHT 2 – PRICING IN THE PACKAGE HOLIDAY MARKET This case highlight-considers how prices are set in the package holiday market and how price dis- crimination is used as part of the pricing strategies used Introduction – UK holidaymakers take some 36 million overseas holidays each year.
Of these, almost half are “packaged holidays” – where the consumer buys a complete package of accommo- dation, flight and other extras – all bundled into one price. This is a highly competitive market with a small number of large tour operators (including Thomson Holidays, Air tours, First Choice, JMC) battling hard for market share. Package holidays were devised partly as a way of achieving high sales volumes and reducing unit costs by allowing tour operators to purchase the different elements (flight, catering, accommodation etc) in bulk, passing some of the savings on to consumers.
Low margins require high asset utilization – Estimates of tour operating margins vary, but fairly low average figures – of the order of 5% (or around ? 22 on the typical holiday price of around ? 450) are widely assumed in the mainstream segment of the market. It should however be noted that vertically integrated holiday operators (where the tour operator also owns an airline and a travel agency) will normally also generate profit from consumers. Accordingly, the gross margins on the total operations of the integrated operators may be larger than those on their tour operation activities alone.
Tour operators need to operate at high levels of capacity utilization (figures of the order of 95% or more in terms of holidays sold) in order to maintain profitability. Matching capacity and demand is therefore critical to profitability, especially since package holidays are perishable goods – a given package loses all its value unless it is sold before its departure date. Perishable goods markets require highly flexible production and distribution systems so that supply and demand can be closely matched and ‘waste’ production minimized. But suppliers of package holidays are severely hampered in precisely aligning capacity and demand.
They need to ‘produce’ (i. e. contract for the necessary flights, accommodation etc) virtually the whole of what they expect to sell a long time before it is ‘consumed’ (i. e. when the consumer departs for the holiday destination, or at the earliest, when the consumer pays the bulk of the price – usually around 8 weeks before departure). Long-term management of capacity – Tour operators’ capacity plans, and the associated con- tracts with hoteliers and airlines, are typically fixed 12-18 months ahead of the holiday season. Some adjustments are possible after this date.
However, within about 12 months of departure date, once the booking season has begun (i. e. from about the summer of 2002 for departures in summer 2003) the scope for changes is severely limited. This is due to the inflexibility of many commitments with suppliers and the problems associated with changing dates, flights, hotels etc of customers who have already booked. Only by contracting for their expected needs well ahead of time, enabling suppliers to plan ahead, can tour operators obtain a sufficiently low price to attract an adequate volume of profitable sales.
Tour operators therefore need to encourage early bookings. These improve cash flow – a substantial deposit (usually around? 100 per person, equivalent to around 25% of a typical short-haul holiday price) is paid by consumers on booking; the balance is payable two months in advance of departure 16. 101G 387 Marketing Management (except, naturally, for ‘late’ bookings). Tour operators also reduce the risk of unsold holidays, and the consequent need for discounting, later on. Adding capacity is easier than reducing it during a season, although in some instances, e. . where a particular resort is proving especially popular, all suitable accommodation (and/or flights to the relevant airport) will already have been reserved, at least for the peak period. But it is generally difficult for tour operators to ‘unwind’ their contracts, especially those for air transport, without substantial penalties. The tour operator, accordingly, bears almost all of the risk of any contracted capacity remaining unsold. The price mechanism – Faced with this limited ability to reduce output in the short-term (i. e. nce the brochures are published and the selling season has started), tour operators can, for the most part, only try to match supply and demand via the price mechanism – in other words, by discounting once it becomes clear that sales of their holidays appear unlikely to match the supply that they have contracted. The fixed costs of tour operation (mainly, the cost of the airline seat and most of the accommodation and catering costs) make up a high proportion of total costs, so that relatively high levels of discount can be applied if necessary to clear unsold stock.
Reductions of up to 25% off the initial brochure price are available on some ‘late’ sales – although consumers will often in such cases be required to accept the operator’s choice of hotel, or even the resort, according to availability. Discounting of holidays during this ‘lattes’ part of the selling season is a similar phenomenon to that of ‘end of season stock clearance’ sales in other retail sectors (e. g. clothing). However the impact of discounting on ‘latest’ in a normal season should be seen in the context of the operator’s turnover for the season; it is effectively reduced by only about 5% (25% off 25% of holidays sold).
Discounts (or equivalent incentives such as ‘free child’ places or ‘free insurance’) for early purchase are also offered, but they are much less significant both as to the amount of the reduction (5-10% appears typical) and its impact on costs and turnover. About three-quarters of all package holidays typically are sold at or close to the brochure price. The fundamental rigidities in the market have important consequences for competition. They make suppliers closely dependent on each other from a strategic, as well as a short-term, viewpoint.
In particular, any decision by a tour operator to try to increase market share by increasing capacity (i. e. offering more holidays for sale) will lead to a fall in prices unless competitors reduce their share by an equivalent amount by cutting capacity. SUMMARY – Price – decisions and strategies Price is a major element in developing an effective marketing strategy because it is the only compo- nent of the marketing mix that directly generates revenue: all the others are costs. It is also the marketing mix variable that can be changed most quickly. Price setting can be cost-oriented, com- petitor-oriented or marketing oriented.
Despite the increased role of nonprime factors in modern marketing, price remains a critical element of the marketing mix. Price is the only one of the four Ps that produces rev-enue; the others produce costs. In setting pricing policy, a company follows a six-step pro-cedure. First, it selects its pricing objective. Second, it esti-mates the demand curve, the probable quantities that it will sell at each possible price. Third, it estimates how its costs vary at different levels of output, at different levels of accu-mulated production experience, and for differentiated mar-keting offers.
Fourth, it examines competitors’ costs, prices, and offers. Fifth, it selects a pricing method. Finally, it selects the final price. 388 16. 101G Marketing Management Companies do not usually set a single price, but rather a pricing structure that reflects variations in geographical demand and costs, market-segment requirements, purr- chase timing, order levels, and other factors. Several price adaptation strategies are available: (1) geographical pricing; (2) price discounts and allowances; (3) promotion. Pricing; (4) discriminatory ricing; and (5) product-m pric- ing, which includes setting prices for product lint optional features, captive products, two-part items, b products, and prod uct bundles. After developing pricing strategies, firms often L1ce situations in which they need to change prices. A pr! Decrease might be brought about by excess plant capacity declining market share, a desire to dominate the mark through lower costs, or economic recession. A pri. Increase might be brought about by cost inflation over demand EXCERCISES Multiple Choice 1. Many companies do not handle pricing well.
They make some common mistakes. Which of the following is not one of those mistakes? „Price is too cost oriented. „Price changes with demand. „Price is not revised often enough to capitalize on market changes „Price is not varied enough for different product items. 2. If the price is _______________ than the value received, the company will miss potential profits; if the price is ___________ than the value received, then the company will fail to harvest potential profits „Higher, lower „ The same as, lower „The same as, higher „Lower, higher 3.
When selecting the pricing objective, a company can pursue any of five major objectives. Which of the following is not one of those objectives? „Survival „Maximize the current profits „Maximize their market share „All of the above are objectives 4. Market skimming makes sense for a company if each of the following conditions is in place except which one? „A sufficient number of buyers have high current demand. „The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear. „The low price communicates the image of a superior product. The high initial price does not attract more competitors to the market. 5. Customers prefer to work with customers who are fewer prices sensitive. Each of the following is a factor associated with lower price sensitivity except which one? „The product is more distinctive. „Buyers are more aware of substitutes „Buyers cannot easily compare the quality of substitutes. „Buyers cannot store the product. 16. 101G 389 Marketing Management 6. Most companies make some attempt to measure their demand curves. Which of the following is one of the methods discussed? Statistically analyze prices, quantities sold, and other factors to estimate their relationships „Set the prices at one price and leave the price there to see how it affects customers „Analyze advertising costs „Avoid asking customers what their purchasing demands might be 7. If the price of a product goes up or down and demand hardly changes, this would be called what kind of demand „Elastic demand „Joint demand „Stretch demand „Inelastic demand 8. Which of the following is an example of a fixed cost that a business might incur in the production of a product? Materials included in the production of a product „The fluids used in the production of a product „Executive salaries „Hourly salaries 9. There are a number of risks involved in experience curve pricing. Which of the following is not a risk involved in experience curve pricing? „The pricing might give the product a cheap image „It assumes competitors are strong. „The strategy leads the company into building more plants to meet demand while a competitor innovates a lower cost technology and obtains lower costs than the market leader company „It assumes competitors are weak. 0. The process, used by the Japanese, where market research is conducted to establish a new product’s desired functions and price and then the company tries to build to that price, less their desired profit margin is called what? „Target costing „Goal costing „Level costing „Main costing ESSAY QUESTIONS „Describe under what conditions market skimming makes sense for a company. „Describe how the “three Cs” affect the setting of prices „What are some examples of counter trade associated with geographical pricing? 390 16. 101G Marketing Management Tutorial – J
Application Exercise – 1 Cadbury Schweppes Beverages India Ltd. Sold an estimated 2. 8 million cases of soft drinks in 1996 (2% market share). The company introduced Sport Cola, a cola drink at Rs. 6 for a 300 ml bottle at a time when Pepsi and Coke were selling at around Rs. 8 The Cola drink holds a major chunk of the soft drinks market. The company spends most of the advertising budget on its non-cola brands. Given the consumer segments for colas, the brand building strategies of leading brands in the cola market, What is the importance of pricing in the Cola market?
Explain the pricing strat- egy of Sport Cola. Application Exercise – 2 Madura Coats launched the Peter England brand covering around 100 towns ( five lakh plus out- lets). The company has three successful brands – Louis Philippe, Van Heusen and Allen Sally. Peter England was launched in the range of Rs. 355 to 455. The Indian market for readymade shirts is around 60 million and around a million are in the mid-priced segment. Peter England’s target consumer is urban males in the 25 plus age group in SEC A2, B and C households
Collect information on readymade shirt market to define low, medium and high price ranges. Explain how Peter England is associated with value pricing. Application Exercise – 3 The pen market in India is around Rs. 450 crores and 60 to 65% of the market belongs to ball pens. Growth is in the range of 20% every year. The Reynolds brand created a kind of revolution by bringing in an offering priced higher than a number of brands which existed at that time and also offered reliability and flow much superior to its competing brands. The brand is a leader.
Rotomac was a follower brand priced below Reynolds and it has become a Rs. 50 crore brand. The brand also provided a “secondary” differentiation by introducing a number of colors. Explain the pricing strategy of Rotomac and its relevance to this situation. Application Exercise – 4 The soap market in India has seen a proliferation of bands in recent times. There are various kinds of segments – economy value , premium, mid-price and super-premium. Dave have positioned itself as a moisturizing bar with a high premium in he soap market. Ponds also has a moisturizing cream based sop at a much lesser price.
Dove during its initial launch used attractive models to convey the proposition. In recent times, it is using a “common man” appeal ( the user in the TV commercial is a lady who looks like a regular consumer who says she does not have much time to care for her complexion and that Dove is effective). Ponds does not seem to have created a high visibility about its offering. Examine the pricing approach of Pond’s with an explanation on how it is relying on other marketing mix elements to support pricing ? Application Exercise – 5 American express has launched credit cards in India .
The target segment for these cards are consumers who can earn over Rs. 1 Lakh p. a. The interest rate on outstanding payment is 1. 99 per cent per month . The annual fee for the card is Rs. 995 . The company charges 1. 45 per cent as interest on outstandings for the first six months . There are also benefits like access to American Express membership Rewards Programme , free travel insurance and 24-hours customer services . Given your understanding of pricing methods , explain the pricing method used by American express and also explain the logic behind it. 16. 101G 391