Pricing generally means the process of determining what a company will receive in exchange
for their products. Pricing factors are manufacturing
cost, market place, competition, market condition, quality of product etc...
Pricing is a fundamental aspect of financial
modeling and is one of the four Ps of the marketing mix. The other three aspects
are product, promotion, and place.
Price is the only revenue generating element amongst the four Ps, the rest
being cost centers.
1.1 Pricing
objectives
The
pricing objectives are available for useful consideration. What we are selecting
will guide our choice of pricing strategy. The needs to have a firm
understanding of product features and the market to decide which pricing
objective to be employed. The choice of an objective does not tie for all time.
Whenever business and market take changes, the adjusting of pricing objective
may be necessary.
Pricing
objectives are usually selecting with business and financial goals in mind.
Elements of business plan can guide to choices of a pricing objective and
strategies. Consideration to the business mission statement and plans for the
future. If one of the business goal is to become a leader in terms of the
market share that product has, then it want to consider the quantity
maximization pricing objective as opposed to the survival pricing objective.
On
the other hand, profit margin maximization may be the most appropriate pricing
objective if business plan calls for growth in production in the near future
since business needs funding for facilities and labor. Some objectives, such as
partial cost recovery will be used when market conditions unfavorable, first
entering a market, or when the business is in its hard times.The firm's
pricing objectives must be identified in order to determine the optimal
pricing. Common objectives include the following:
1.2 Current profit
maximization - seeks to
maximize current profit, taking into account revenue and costs. Current profit
maximization may not be the best objective if it results in lower long-term
profits.
1.3 Current revenue
maximization - seeks to maximize current revenue with no regard to profit
margins. The underlying objective often is to maximize long-term profits by
increasing market share and lowering costs.
1.1.3 Maximize
quantity - seeks to
maximize the number of units sold or the number of customers served in order to
decrease long-term costs as predicted by the experience curve.
1.4 Maximize profit margin - attempts to maximize the unit
profit margin, recognizing that quantities will be low.
1.5 Quality leadership - use price to signal high quality
in an attempt to position the product as the quality leader.
The
pricing objective depends on many factors including production cost, existence
of economies of scale, barriers to entry, product differentiation, rate of
product diffusion, the firm's resources, and the product's anticipated price
elasticity of demand.
After selecting a pricing objective you will need to
determine a pricing strategy. This will assist you when it comes time to
actually price your products. As with the pricing objectives, numerous pricing
strategies are available from which to choose. Certain strategies work well
with certain objectives, so make sure you have taken our time selecting an
objective. Careful selection of a pricing objective should lead you to the
appropriate strategies. If the pricing strategy you choose seems to contradict your
chosen pricing objective, then you should revisit the questions posed in the
introduction and your marketing plan. As a reminder, the diagram at the end of
this publication illustrates which pricing strategies work well with each of
the pricing objectives previously discussed.
Additionally, different pricing strategies can be
used at different times to fit with changes in marketing strategies, market
conditions, and product life cycles. For example, if you’re working under a
status quo pricing objective with competitive pricing as your strategy due to
poor market conditions, and a year later you feel that the market has improved,
you may wish to change to a profit margin maximization objective using a
premium pricing strategy.
Partial
cost recovery - an organization that has other revenue sources may
seek only partial cost recovery.
Survival -
in situations such as market decline and overcapacity, the goal may be to
select a price that will cover costs and permit the firm to remain in the
market. In this case, survival may take a priority over profits, so this
objective is considered temporary.
Pricing
is an indispensable part of industrial marketing strategy. It must be carefully
interrelated to the firm’s products, distribution and communications
strategies. The industrial marketing manager has the challenging responsibility
of blending the various elements of marketing mix to ensure that the total
offering is not only responsive to the needs of the market, but also provides a
returns consistent with the firms project objective. This is not an easy task.
2 Concept of cost and pricing
The total cost of an article or product
is made up of variable expenses which are incurred per unit, its share of the
fixed expenses such as factory, godown, office and selling. Thus the total cost
would be made up of fixed cost and variable cost. The selling price of the
product would be determined by the profit margin or markup to be added to the
total cost of the product. From the cost per unit, the records of constant
expenses are excluded and, only variable expenses are recorded, then the system
becomes marginal costing. Under marginal costing fixed cost are not added to
cost unit but are written off against profits in the period which they arise.
The difference between selling price and variable cost is called contribution.
Therefore,
Selling
price = Fixed price+ variable cost + Markup or Profit
Selling
Price = Total cost + Markup or Profit
Selling
Price – Total cost = Markup or Profit
Selling
Price – (Fixed cost + Variable Cost) = Profit
(Selling
Price – Variable Costs) – Fixed Cost = Profit
Profit
= Contribution – Fixed Cost
The price of any product or service will
be determined by cost, demand and competitive situation. Cost is internal to a
great extent and can be computed precisely except in situations due to
fluctuation of foreign exchange, raw material and utility prices where as
demand is not controllable and depends upon external considerations. Following
idea are very relevant for computing cost:
Average
Total Cost: This is basically total cost per
unit arrived at by dividing total cost by the number of unit sold.
Marginal
Cost: This indicate the changes in total cost
resulting from producing an additional unit.
Marginal
Revenue: This represents average revenue per
unit sold calculated by dividing total revenue by number of revenue sold.
Average
Revenue: This represents average revenue per
unit sold calculated by dividing total revenue by the amount of revenue sold.
Price
Elasticity of demand: This is a measure of
responsiveness of quantity sold to price changes. Demand is elastic when total
revenue increases in response to reduction in price; demand is inelastic when
total revenue decreases in response to price reduction.
2.1 Cost Volume Profit analysis
The Cost Volume Profit Analysis helps in
finding out the relation ship of cost and revenue output. It enables a study of
the general effect to the level of output upon income and expenses and
therefore upon profits. The analysis is usually presented on a break even
chart. It helps in the understanding the behavior of profits in relation to
output. Such understanding, among other things, is significant in planning the
financial structure of the company: the level of the break even point and the
rapidity with which profit change in relation to output.
The
CVP Analysis is used to answer many of the questions faced by the management.
As profits are affected by interplay of costs, volume and selling prices,
management must have at its disposal analysis that can allow.
2.1.1 Use of break even analysis
In
fact break even analysis is an important strategy of sales and financial
management tool for control. The simplicity of these charts is one of their
greate values. As they are easy to understand, they constitute a helpful
mechanism for showing the top management the problems inherent in
volume-cost-profit relationship. They are extremely useful in planning devices.
By focusing attention on marginal income, break even studies avoid the
controversial problems of locating fixed costs which do not change with volume
or price variations.
In planning short term studies, the
cost volume profit studies helps in determining the nature and magnitude of
sales efforts and establishing volume requirements. Marginal Income analysis, a
by product of break even analysis, places emphasis on cost differential and
these, rather than total cost are influential in deciding an alternative cause
of action.
2.2
Return on investment pricing
A
widely used method of setting price in the industrial market is return on
investment pricing it also known as target return or capital asset pricing. To
understand written on investment pricing , it is helpful to examine the return
on investment which refers to the amount of profit earned to the dollars
invested by the firm during a finite time period, usually one year. It is
expressed as
This
simple equation can also developed using the two equations “ profit margin and
investment turn over”
Where
this two equations are multiplied, we have
Profit
margin * Investment turnover = Return on Investment
3
PRICING STRATEGIES
Price is the exchange value of a good as well
as service. Every item is worth only if someone is willing to pay for it. In a
primitive society, the exchange value may be determined by trading a good for
some other commodity. A shirt may be worth ten kilo gram wheat, five mangoes
may be worth for one jackfruit. More advanced societies use money for exchange.
But in either case, the price of a good or service is its exchange value. Pricing
strategy deals with the multitude of factors that influence the setting of a
price.
Pricing
strategy must be conceived in relation to over all business objectives and
marketing strategy. The successes of any business depend on a blend of long run
profit, survival objectives. Price, because of its influence on unit sales
volume and profit margin, affects long run profit objectives. By contributing a
positive cash flow, price helps to finance growth objective. Maintaining
profitability through sound pricing practices is necessary to ensure the firms
survival over time. It should be recognized, however that a diversified firms
with multiple product line can have several pricing strategies in operation at
one time. They must be consistent with one another as well as with over all
marketing strategy.
The
price must be viewed as a part product offering, because from the buying firms
perspective it is a cost that must be weighed against product quality, delivery
and supplier service. From the sellers point of view the charged determines the
profitability of the product and provides the margin necessary to support other
aspects of the product offering, such as post purchase service and technical
assistance.
To the industrial buyer price is only the
determinant of the economic impact that a product will have on the firm. Buyers
are concerned with the “evaluated” price of the product, that is, the total
cost of owning and using the product. Such cost includes, in addition to
sellers price, transportation charges, the cost of installing capital
equipment, inventory carrying cost for parts a material, possible obsolescence
(due to engineering process changes), order processing cost and less apparent
cost such as production interruption caused by product failure, late delivery,
poor technical support. This distinction
between cost and price is important and should not be over looked by the
industrial marketer. Price merely measures the amount of the customer’s capital
investment; cost is reflection of product efficiency. A high price may be
offset by cost saving in the use of a product, while a low price may lead to
higher operating expense, short product life expectancy and other increased
cost.
3.1 Factors influencing pricing strategy
There
is no simplistic approach to the industrial pricing decision. Rather, this
decision hinges on multiple factors and considerations must given to the
interaction of customer demand, the nature of derived demand, competition, cost
and profit relationship, the market reaction to and perception of price and
government regulation. Each of these dimensions is independently and jointly
significant in pricing decision.
3.1.1 Customer Demand
The
demand for virtually all industrial products is derived from the demand and
production of some consumer end product. As a result, industrial buyers are
more concerned with whom to buy from and why than weather or not to buy. In
return, the industrial marketer usually worries more about influencing the more
immediate industrial demand than about stimulating demand in the consumer
market. How ever the industrial market is diverse and complex. A single product
may be used in many different application and have varying usage levels across
individual firms and market segment. The important of the products to buyer’s
end product may also vary. For this reasons, potential demand, sensitivity to
price and potential profitability differ across market segment. In setting
price to influence demand, therefore, industrial marketers must understand how
product are used, recognize the potential customer benefit, examining the cost
of owning and using the product and determining the product value from the
customer perspective.
3.1.2 The Nature of Derived Demand
Derived
demand means that sales to original equipment manufacture ultimately depends on
the level of customer demand for products that the original equipment
manufactures makes. Total quantity demanded by the original equipment
manufactures for component parts, raw material, capital equipment, ancillary
services will increase only as a result of increased purchases by end product
users. Because of the relatively distant relationship between an industrial
suppliers and ultimate consumers there was a direct relationship between price
and quantity demanded in the consumer market becomes an indirect and often
reversed relationship. For the suppliers, a number of non price contingencies
can work to reverse the theoretical price or quantity relationship.
3.1.3 Competition
Existing
and potential competition inevitably effects pricing strategy by setting an
upper limit. Research indicates that “competitive level pricing” is regarded by
the majority of firms as the most important pricing strategy. The amount of
latitude a firm has in its pricing decision depends largely on the degree to
which it can differentiate its products in the minds of buyers. Price is only
one elements of the buyers cost for benefit analysis. A product that is
differentiated by its functional design, the suppliers reputation for
dependable service or technical innovation can command a higher price.
Pricing
strategy is also influenced by the reaction of competitors to pricing decision.
In contemplating price changes, there fore, competitive responses must be
considered. Price reductions on products that are relatively undifferentiated
are generally met immediately by all suppliers, resulting little shift in
market share.
3.1.4 Cost and Profit Relationship
While
competition sets the upper limits on price, costs set the lower limits. There
fore it makes little sense to develop the pricing strategy without considering
the cost involved. However many organization set prices based on their cost
alone, adding some acceptable increment for profit. Such an approach does have
advanced advantages. That is it is relatively simple to calculate, for a low
cost producer cost plus pricing can be a very competitive strategy. The trade
off for such simplicity, however may lost profits- profit that is sacrificed
due to the difference between what customers are charged and what they would be
willing to pay. Cost plus pricing fail to consider the consumers perception of
value, the degree of differentiation from competition and the interaction of
volume and profit. Since cost vary over time and fluctuate with volume, they
must consider in relation to demand, competition and market share objectives of
the firm. Marketing, production and distribution cost are all relevant to the
pricing decision.
The important strategies are as follows:
Skimming Price Strategy
Penetration Pricing Strategy
Flexible Pricing Strategy
3.2 Skimming price strategy
A
skimming price policy tries to sell the top of a market-the top of the demand
curve- at a high price before aiming more price – sensitive customers. Skimming
may maximize profits in the market introduction stage, especially if there is
little competition. A skimming policy is more attractive if demand is quit in
elastic, at least at the upper price ranges.
A
skimming policy usually involves a slow reduction in price over time. It is
important to realize that as price is reduced, new target markets are probably
being sought. So as the price level step down the demand curve, new place and
promotion policies may be needed too. Skimming is also useful when you don’t
know very much about the shape of the demand curve. It’s safer to start with a
high price that customers can refuse and then reduce it if necessary.
Attempts
to "skim the cream" off the top of the market by setting a high price
and selling to those customers who are less price sensitive. Skimming is a
strategy used to pursue the objective of profit margin maximization.
3.2.1 Skimming is most appropriate when:
·
Demand is expected to be relatively
inelastic; that is, the customers are not highly price sensitive.
·
Large cost savings are not expected
at high volumes, or it is difficult to predict the cost savings that would be
achieved at high volume.
·
The company does not have the
resources to finance the large capital expenditures necessary for high volume
production with initially low profit margins.
3.2.2
Conditions Favoring Price Skimming
·
Product has strong
patent protection or other barriers to market entry.
·
Genuine product
innovation that is likely to represent substantial value to potential users.
·
Buyers who are willing
to pay a premium to enjoy the product benefits.
·
A relatively short life
span, so that a quick recovery of investment is essential.
·
Potential competitors
are relatively week or distant in time.
·
Uncertainty concerning
the market price sensitivity. Should the initial price prove to be in error,
the firm can always lower priced, where as a low price may be difficult to
price.
3.2.3
Case study
Skimming
Pricing Strategy- Polaroid & Hewlett Packard
Polaroid:
Introduced its camera to take ‘instant picture’, it initially set a high price.
It had patents that excluded competitors. The high priced camera was sold
mainly to professional photographers and serious amateurs at camera stores.
Soon, Polaroid introduced other models with fewer features. These were soled at
lower prices and appealed to more price-sensitive market segments. Finally,
before its patents ran out, Polaroid introduced a low cost camera sold through
departmental stores and discount stores. This is very typical of skimming. It
involves changing prices through a series of marketing strategies over the
course of the product life cycle.
Hewlett Packard: The Pricing Strategy
followed by Hewlett Packard with the introduction of its laser printer for
personal computers is characteristics of a skimming pricing strategy. The
Introductory price for the printer was set high. On average at $4000. It was
initially targeted at business users for whom the benefits of high quality
printing, speed and high levels of usage were greatest. The printers were
distributed on a selective basis, using dealers personnel trained in the
technical aspects of the product, who could provide expertise and support to
the user. The high price was sustainable as there was no other comparable
product in the market.
When competitors began to offer
substitute prnters, HP lowered the price and augmented the product with
additional features. At this stage, its pricing strategy was also supported by
other elements of the marketing mix, such as increase advertising and wider
distribution through mail- order, thus bringing in new segment of the markets.
3.3 Penetration pricing strategy
A penetration pricing policy is to sell
the whole market at one low price. Such an approach might be wise when the
elite market – those who willing to pay a high price is small. This is the case
when the whole demand curve is fairly elastic. A penetration policy is even
more attractive if selling larger quantities results in lower cost, because of
economies of scale. Penetration pricing may be wise if the firm expect strong
competition very soon after introduction. A low penetration price may be called
“ stay out” price. It discourages competitors from entering t\he market.
When the personal computers became
popular, companies like Apple Computers and Borland international came out with
a complete programming language of lotus, MS Dos, Data base and Window Quapro
etc..including a text book – for a reasonable sum of money. Business customers
had paid huge amount for similar systems for main frame computers. Computer
companies felt that it could sell hundreds of thousands of customers and earn
large total profit by offering a low price that would attract individual users
as well as business firms. A lower price helped Borland penetrate the market
early. IBM, Microsoft and other big companies have not been able or willing to
compete directly with Borland.
Pursues the
objective of quantity maximization by means of a low price.
3.3.1 It is most appropriate when:
·
Demand is expected to be highly
elastic; that is, customers are price sensitive and the quantity demanded will
increase significantly as price declines.
·
Large decreases in cost are
expected as cumulative volume increases.
·
The product is of the nature of
something that can gain mass appeal fairly quickly.
·
There is a threat of impending
competition.
3.3.2
Conditions Favoring to Penetration Pricing Policy
·
The market appears to
be highly price sensitive.
·
Unit cost of production
and distribution fall with accumulated output.
·
Strong potential
competitors exist who are seeking new profitable ventures.
·
The firms primary goals
is significant market share rather than maximized short term profit.
·
The product has hidden
or suitable benefits that will become obvious only after use.
·
The sale of
complimentary products will also increase.
3.3.3
Case study
The
result of the survey in 1993 of prices in discount stores in 6 US cities
revealed that Wal Mart offered the most competitive non sales promotion prices.
The survey found that when a Wal Mart entered a new market where competition
already existed, it already adopted a penetration pricing strategy in order to
establish itself as a lower price retailer. When Wal Mart open a store in
Middletown, New York, it was found that prices on the items examined were about
20% lower than the two existing competitors, Caldor and Bradless. Similarly in
Las Vegas and Berlin, New Jersey, were Wal Mart had recently established
itself, prices were set lower than the competition in order to quickly gain a
share of the market. In the case of Berlin the total price a basket of items
was more than 9%, lower than the average price of the basket in competitor
shops.
In
many markets, Wal Mart is the price leader, setting the lowest prices and
forcing the other players to follow. One of the company’s major objectives is
to be the lowest prices retailer in the market where competition is present.
Wal Mart strives to achieve low prices through low operational cost and
stringent control on expenses.
In
general, Wal Mart continues to offer competitive prices in established prices
where it also competes with other discounters such as K- Mart, Target and
Smitty’s. However, in markets were competition is not so strong, Wal Mart
generally prices according to the market. The Wal Mart stores in the Sun city
centre in Ruskin, Tampa Bay, is located in a relatively wealthy area with no
strong immediate competition and was fount to have higher prices than other Wal
Mart store, competition was greater.
3.4 Flexible Pricing Strategy
In the past, the pricing structure of
most large industrial firms has been rather rigid. Price was established by
adding a traditional mark up to cost, by following the industrial leader or by
aiming for some pre determined return on investment. The need to adapt dynamic
environment has brought about flexibility in pricing and a willingness to cut
prices aggressively to hold market share. Smaller firms are not consistently
willing to play “follow the price leader”. Many smaller companies have
successfully under cut the price leader. Flexible pricing strategy, that is the
willingness to adjust prices or profit margin on specific products when market
condition change, is now common in industrial marketing. How ever price
flexibility does not always mean a change in list prices
4 Pricing strategy in developing
countries
In developing countries the price trend
not to be used as a major competitive tool. This is because the demand is
usually greater than the supply and the typical consideration of such aspects
as the availability of substitutes are largely irrelevant. Consequently, whilst
price is still valuable for international markets, within the domestic market
the material on pricing objectives and strategies are vague and not always
relevant. However, has always, generalization are difficult since not only will
the perspective of marketer affect the pricing strategies but also the size and
wealth of countries will have a significant bearing, since it will influence
the industrialization policy, which in turn will affect the extend of
protectionism domestically and competitiveness internationally.
The indigenous marketer in developing
countries normally seeks short-term high profits. This is more obvious as one
progress further along the distribution channel. Using a cost plus approach, he
tends to use a market skimming strategy and gives insufficient consideration to
lower prices in order to promote higher volumes. This is, to a large extent,
understandable in many instances where demand tends to be inelastic,
competition is minimal and where countries (particularly large rich ones) tend
to reinforce this by the domestic through high protective tariffs. Money from
oil in many countries has also added inflationary pressures and given rise to
imbalance in market forces. The indigenous manufacturer usually loses control
of prices early, since he is often usually in response to uncontrollable
factors such as cost of raw materials, inflation, changes in the exchange rate
and government interference. Only in the successful outward- looking small poor
countries such as Hong Kong and Singapore, do the market forces and efficient
distribution systems allow replication of the developed countries’ pricing
strategies.
In most developing countries, the
Government plays many roles with significant consequences. Firstly, it often
attempts to control prices, particularly of basic drugs, essential commodities
and foodstuffs. Secondly, it may be the major purchaser, creating something of
a monopoly. Thirdly, through its policy on foreign exchange restrictions and
barter, it may cause further distortion in domestic markets. As a marketer in
its own right, it tends to see pricing as distinct from other marketing mix
elements and therefore not to use it to best effect. Nor does this always
accurately estimate demand correctly. This is particularly true when selling
agricultural produce in international markets, but is also typical within
countries where high- protein, low-cost basic foods have been distributed
through government channels in order to aid the poorest people but where th
middle income groups have benefitted the most.
The multinational marketer has greater
scope for using pricing competitively than the indigenous marketer, since some
distribution channels may well be owned and controlled by the multinational.
However, through its intangible marketing advantages such as ‘prestige’
associated with being foreign and using sophisticated technology, it also has
the opportunity to inflate prices on many products, knowing that there is a
captive market for them. Indeed, multinationals are often the price leaders
with their brand dominating the market, the local competitors (if existent)
producing inferior products at lower prices.
The imperfections in developing
countries’ markets, promoted by supply and demand conditions, the dominant
position of multinational companies, typical trading practice and many attempts
by the Government ot redress the balance in favor of consumers, have resulted
in many malpractices like illegal trade practices, hoarding and smuggling.
There are some countries in the Afro-Asian block with a thriving black market
where smuggling has been estimated by one senior Government official to account
for 15 to 25 percent of all goods sold. Local industry is constantly unable to
meet the demand. The result is smuggling of foreign-label prestigious goods.
And even whe4n a foreign label has been indigenized, the manufacturers find it
difficult to compete with the smugglers goods. One of the few exceptions is Max
Factor, who struck back, level pegging their prices with the smugglers pricewise
and drove them out of the market. Who struck back by and eventually drove
countries like India, Pakistan, Bangladesh, Turkey, Argentina and Mexico, such
problems are quite prominent and despite many laws, it has not been possible to
curb such practices.
In other areas where smuggling is less
possible, a black market flourishes just as successfully. Despite efforts to
increase direct sales to users and reputable distributors, there is an active
black market. On a smaller scale, speculative hoarding by intermediaries of
foodstuffs and other basic products contributes to an unstable price structure.
Many governments, such as Saudi Arabia,
have introduced measures dating back to 1975 to control prices, limiting
businessmen to a mark-up of 15 percent on imported goods and imposing stiff
penalties for hoarding. Nevertheless, these imperfections remain in most
developing countries and result in very different framework within which to set
price than that is typical of the developed countries. Apart from the multinational
marketer who continues to hold most of the high cards, the indigenous and
governmental marketers still give insufficient emphasis to pricing, seeing it
as distinct from other marketing mix elements and thus failing to relate to it
to the brand image, advertising or stage of the product in the life cycle.
Whilst this may not matter in the domestic market, especially when protected
and an import substitution policy adopted, internationally it is likely to be
fatal.
Thus, while pricing, consideration may
become more important domestically once supply and demand are more in balance
and government influences are reduced, they are relevant immediately for the
developing country marketer exporting to the developed world or to richer urban
markets of other developing countries. Here he must decide whether a skimming
price policy is relevant or whether to price slightly above or below the
competition. A stable pricing policy (that is, one unaffected by outside
conditions) or a pricing policy to achieve the highest profit contribution over
the entire range is other possibilities. Although there are likely to be more
costs to take into account in the form of tariff barriers, physical and
commercial risk, longer payment periods, counter-trade deals and the unexpected,
the acceptance of a local price and thus the need for marginal costing is often
more important than the typical cost –plus approach which might be suitable at
home.
5
Pricing decision analysis
The industrial marketer cannot make
intelligent price decisions without analyzing cost in relation to projected
sales volume and long term profit goals. Also the marketer must study the needs
and positional strength of the customers, as well as the strength and weakness
of competition and develop strategic approaches in the important areas of
negotiation and bidding. A program might also be devised to offer leasing in
addition to outright sale.
6 How companies
price
Companies do their pricing in different ways. In
small companies prices are often set by the boss. In large companies, pricing is handled by
division and product line managers. Even here, top management sets general
pricing objectives and policies and often approves the prices proposed by lower
level of management. In industries were pricing is a key factor, company will
often establish a pricing department to set or assist others in determining
appropriate pricing. This department report to the marketing department, to the
finance department, or top management. Others who exert an influence on pricing
include sales managers, production managers, finance managers and accountants.
Executive complain that pricing is a big headache
and one that is getting worse by the day. Many companies do not handling
pricing well, and throw up their hands at “strategies” like this, “We
determining our cost and take our industries traditional margin”. Other common
mistakes are, pricing is not revised often enough to categorize on market
changes, price is set independently of the rest of the marketing mix rather
than as an intrinsic element of market positioning strategy and price is not
varied enough for different product items, market segment, distribution channel
and purchase occasion.
Others have different attitude, they use price as a
key strategic tools. This power prices have discovered the highly leveraged
effects of price on the bottom line. They customize prices and offering based
on segment value and cost.
6.1 Reference
Prices: consumers may have fairly good knowledge of
the range of prices involved, surprisingly few can recall specific prices of
product accurately. When examining products how ever consumers often employ
reference prices. In considering an observed price, consumers often compare it
to an internal reference price or an external frame of reference such as a
posted regular retail price.
6.2 Price
Quality inferences:
Many consumers use price3 as an indicator of quality. Image pricing is
especially effective with ego sensitive product such as perfumes and expensive
car.
6.3 Price Cues: consumer’s perception of prices is also
effected by alternative pricing strategies. Many sellers believe that prices
should end in odd number. Many customers see a stereo amplifier priced at 299
instead of 300 as a price in the range rather than 300 ranges. Many researches
have shown that consumers tend to process prices in a left to right manner
rather than by rounding. Price encoding in this fashion is important if there
is a mental price break at the higher, rounder price. Prices that end with zero
and five are also common in the market place as they are thought to be easier
for consumers to posses and retrieve from memory.
6.4 Setting the Price
A firm must set
a price for the first day time when it develop a new products, when it is
introduces its regular product into a new distribution channel or geographical
area and when it enters bids on new contract work. The firm must decide where
to position it product on quality entries and price.
6.5 Selecting the pricing objective
The company
first decides where it wants to position its market offering. The clearer firms
objectives, easier it is to set price. A company can peruse any of five major
objectives through pricing: survival, maximum current profit, maximum cur
market share, and maximum market skimming or product quality leadership.
Survival:
Company’s peruse as their major objective if they are plagued with over
capacity, intense competition or changing consumers wants. Pricing covers
variable cost and some fixed cost. Survival is a short run objective in the
long run, the firm must learn hoe to add value or face extinction.
Maximum current
profit: many companies try to set a price that will maximize current profits.
They estimates the demand and cost associated with alternative prices and
choose the price that produce maximum current profit, cash flow or rate of
return on investment. This strategy assumes that the firm has knowledge of its
demand and cost functions in reality, this are difficult to estimate.
Maximum market
share: some companies want to maximize their market share. They believe that a
higher sales volume will lead lower unit cost and higher long run profit. They
sets the lowest price assuming the market is price sensitive. The following
conditions favor setting a low price, the market is highly price sensitive and
low price stimulates market growth, production and distribution cost falls with
accumulated production experience and a low price discourages actual and
potential competition.
6.6 Maximum Market Skimming
In market
skimming prices start high and are slowly lowered over time. Sony is a frequent
practitioner of market skimming pricing. Market skimming makes sense under the following
conditions, a sufficient number of buyers have a current demand, the unit cost
of producing a small volume are not so high that they cancel the advantage of
charging what the traffic will bear, the high initial price does not attract
more competitors to the market, the high price communicate the image of
superior products.
6.7 Product Quality Leadership
A company might
aim to the product quality leader in the market. Many brands strive to be
affordable luxuries products or services characterized by high level of
perceived quality, taste and status with a price just high enough not to be out
of consumers reach.
6.8 Determining demand
Each price will
lead to a different level of demand and there for have different impact on a
companies marketing objectives. The relation between alternative prices and the
resulting current demand is captured in a demand curve. In the normal case,
demand and price are inversely related: the higher the price, the lower the
demand. In the case of prestige goods, the demand curve sometimes slopes
upward. A perfume company raised its price and sold more perfume rather than
less, some consumers take the higher price to signify a better product. If the
price is too high, the level of demand may fall.
Price
sensitivity: the demand curve shows the market’s probable purchase quantity at
alternative prices. It sums the reactions of many individuals who have
different price sensitivities. The first step in estimating demand is to
under4stand what affects price sensitivities. The first step in estimating
demand is to understand what affects price sensitivity. Customers are most
prices sensitive to products that cost a lot or are bought frequently. They are
less prices sensitive to low-cost items or items they buy infrequently. They are
also less price sensitive when price is
only a small part of the total cost of obtaining, operating and servicing the
product over its lifetime. A seller can charge a higher price than competitors
and still get the business if the company can convince the customer that it
offer the lowest total cost ownership.
6.9 Estimating Demand Curve
Most companies
make some attempt to measure their demand curves using several different
methods like statistical analysis, price
experiments, surveys etc..In measuring the price – demand relationship, the
market researcher must control for various factors that will influence the
demand. The competitors response will make a difference. Also, if the company
changes other marketing – mix factors besides price, the effect of the price
change itself will be hard to isolate.
6.10 Estimating
costs
Demand sets a
ceiling on the price the company can charge for its product. Costs sets the
floor. The company wants to charge a price that covers its cost of producing,
distributing and selling the product, including a fair return for its effort
and risk. Yet, when companies price products to cover full costs, the net
results is always profitability.
6.11 Analyzing competitors costs, prices and offers
Within the range
of possible prices determined by market demand and company costs, the firm must
take competitors costs, prices and possible price reactions into account. The
firm should first consider the nearest competitors, their worth to the customer
should be evaluated and added to the competitors price. If the competitors
offer contains some features not offered by the firm, their worth to the
customer should be evaluated and subtracted from the firms price. Now the firm
can decide whether it can charge more, the same, or less than the competitors.
But competitors can change their prices in reaction to the price set by the
firm.
6.12 Selecting a pricing method
The company is
ready to select the price after finishing the above said steps. Costs sets the
floor to the price. Competitors price and the price of substitutes provide an
orienting point. Customers assessment of unique features establishes the price
ceiling. Companies select a pricing method that that includes one or more of
these three considerations.
6.13 Selecting the final price
Pricing methods
narrow the range from which the company must select its final price. In
selecting that price, the company must consider additional factors, including
the impact of other marketing activities, company pricing policies, gain – and
–risk sharing pricing, and the impact of price on other parties.
