PRICING STRATEGIES

What do the following words have in common? Fare, dues, tuition, interest, rent, and fee.
The answer is that each of these is a term used to describe what one must pay to acquire
benefits from another party. More commonly, most people simply use the word price to
indicate what it costs to acquire a product.
The pricing decision is a critical one for most marketers, yet the amount of attention
given to this key area is often much less than is given to other marketing decisions. ne
reason for the lack of attention is that many believe price setting is a mechanical process
requiring the marketer to utili!e financial tools, such as spreadsheets, to build their case
for setting price levels. While financial tools are widely used to assist in setting price,
marketers must consider many other factors when arriving at the price for which their
product will sell.
. For some marketers more time is spent agoni!ing over price than any other marketing
decision. "n this tutorial we look at why price is important and what factors influence the
pricing decision.
What is Price?
"n general terms price is a component of an e#change or transaction that takes place
between two parties and refers to what must be given up by one party $i.e., buyer% in
order to obtain something offered by another party $i.e., seller%. &et this view of price
provides a somewhat limited e#planation of what price means to participants in the
transaction. "n fact, price means different things to different participants in an e#change'
(uyers) *iew + For those making a purchase, such as final customers, price refers
to what must be given up to obtain benefits. "n most cases what is given up is
financial consideration $e.g., money% in e#change for acquiring access to a good
or service. (ut financial consideration is not always what the buyer gives up.
,ometimes in a barter situation a buyer may acquire a product by giving up their
own product. For instance, two farmers may e#change cattle for crops. -lso, as
we will discuss below, buyers may also give up other things to acquire the
benefits of a product that are not direct financial payments $e.g., time to learn to
use the product%.
,ellers) *iew . To sellers in a transaction, price reflects the revenue generated for
each product sold and, thus, is an important factor in determining profit. For
marketing organi!ations price also serves as a marketing tool and is a key element
in marketing promotions. For e#ample, most retailers highlight product pricing in
their advertising campaigns.
/rice is commonly confused with the notion of cost as in 0" paid a high cost for buying
my new plasma television1. Technically, though, these are different concepts. /rice is
what a buyer pays to acquire products from a seller. 2ost concerns the seller)s
investment $e.g., manufacturing e#pense% in the product being e#changed with a buyer.
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For marketing organi!ations seeking to make a profit the hope is that price will e#ceed
cost so the organi!ation can see financial gain from the transaction.
Finally, while product pricing is a main topic for discussion when a company is
e#amining its overall profitability, pricing decisions are not limited to for.profit
companies. 4ot.for.profit organi!ations, such as charities, educational institutions and
industry trade groups, also set prices, though it is often not as apparent . For instance,
charities seeking to raise money may set different 0target1 levels for donations that
reward donors with increases in status $e.g., name in newsletter%, gifts or other benefits.
While a charitable organi!ation may not call it a price in their promotional material, in
reality these donations are equivalent to price setting since donors are required to give a
contribution in order to obtain something of value.
Price vs. Value
For most customers price by itself is not the key factor when a purchase is being
considered. This is because most customers compare the entire marketing offering and
do not simply make their purchase decision based solely on a product)s price. "n essence
when a purchase situation arises price is one of several variables customers evaluate
when they mentally assess a product)s overall value.
value refers to the perception of benefits received for what someone must give up. ,ince
price often reflects an important part of what someone gives up, a customer)s perceived
value of a product will be affected by a marketer)s pricing decision. -ny easy way to see
this is to view value as a calculation'
*alue 5 perceived benefits received
perceived price paid
For the buyer value of a product will change as perceived price paid and6or perceived
benefits received change. (ut the price paid in a transaction is not only financial it can
also involve other things that a buyer may be giving up. For e#ample, in addition to
paying money a customer may have to spend time learning to use a product, pay to have
an old product removed, close down current operations while a product is installed or
incur other e#penses. 7owever, for the purpose of this tutorial we will limit our
discussion to how the marketer sets the financial price of a transaction.
Importance of Pricin
When marketers talk about what they do as part of their responsibilities for marketing
products, the tasks associated with setting price are often not at the top of the list.
Marketers are much more likely to discuss their activities related to promotion, product
development, market research and other tasks that are viewed as the more interesting and
e#citing parts of the 8ob.
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&et pricing decisions can have important consequences for the marketing organi!ation
and the attention given by the marketer to pricing is 8ust as important as the attention
given to more recogni!able marketing activities. ,ome reasons pricing is important
include'
Most Fle#ible Marketing Mi# *ariable + For marketers price is the most
ad8ustable of all marketing decisions. :nlike product and distribution decisions,
which can take months or years to change, or some forms of promotion which can
be time consuming to alter $e.g., television advertisement%, price can be changed
very rapidly. The fle#ibility of pricing decisions is particularly important in times
when the marketer seeks to quickly stimulate demand or respond to competitor
price actions. For instance, a marketer can agree to a field salesperson)s request
to lower price for a potential prospect during a phone conversation. ;ikewise a
marketer in charge of online operations can raise prices on hot selling products
with the click of a few website buttons.
,etting the <ight /rice + /ricing decisions made hastily without sufficient
research, analysis, and strategic evaluation can lead to the marketing organi!ation
losing revenue. /rices set too low may mean the company is missing out on
additional profits that could be earned if the target market is willing to spend more
to acquire the product. -dditionally, attempts to raise an initially low priced
product to a higher price may be met by customer resistance as they may feel the
marketer is attempting to take advantage of their customers. /rices set too high
can also impact revenue as it prevents interested customers from purchasing the
product. ,etting the right price level often takes considerable market knowledge
and, especially with new products, testing of different pricing options.
Trigger of First "mpressions . ften times customers) perception of a product is
formed as soon as they learn the price, such as when a product is first seen when
walking down the aisle of a store. While the final decision to make a purchase
may be based on the value offered by the entire marketing offering $i.e., entire
product%, it is possible the customer will not evaluate a marketer)s product at all
based on price alone. "t is important for marketers to know if customers are more
likely to dismiss a product when all they know is its price. "f so, pricing may
become the most important of all marketing decisions if it can be shown that
customers are avoiding learning more about the product because of the price.
"mportant /art of ,ales /romotion + Many times price ad8ustments are part of
sales promotions that lower price for a short term to stimulate interest in the
product marketers must guard against the temptation to ad8ust prices too
frequently since continually increasing and decreasing price can lead customers to
be conditioned to anticipate price reductions and, consequently, withhold
purchase until the price reduction occurs again.
!actors Affectin Pricin "ecision
For the remainder of this tutorial we look at factors that affect how marketers set price.
The final price for a product may be influenced by many factors which can be
categori!ed into two main groups'
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"nternal Factors . When setting price, marketers must take into consideration
several factors which are the result of company decisions and actions. To a large
e#tent these factors are controllable by the company and, if necessary, can be
altered. 7owever, while the organi!ation may have control over these factors
making a quick change is not always realistic. For instance, product pricing may
depend heavily on the productivity of a manufacturing facility $e.g., how much
can be produced within a certain period of time%. The marketer knows that
increasing productivity can reduce the cost of producing each product and thus
allow the marketer to potentially lower the product)s price. (ut increasing
productivity may require ma8or changes at the manufacturing facility that will
take time $not to mention be costly% and will not translate into lower price
products for a considerable period of time.
>#ternal Factors . There are a number of influencing factors which are not
controlled by the company but will impact pricing decisions. :nderstanding these
factors requires the marketer conduct research to monitor what is happening in
each market the company serves since the effect of these factors can vary by
market.
(elow we provide a detailed discussion of both internal and e#ternal factors.
Internal !actors
The pricing decision can be affected by factors that are controlled by the marketing
organi!ation. These factors include'
Compan# an$ %ar&etin '()ectives
Marketing decisions are guided by the overall ob8ectives of the company. While we will
discuss this in more detail when we cover marketing strategy in a later tutorial, for now it
is important to understand that all marketing decisions, including price, work to help
achieve company ob8ectives.
2orporate ob8ectives can be wide.ranging and include different ob8ectives for different
functional areas $e.g., ob8ectives for production, human resources, etc%. While pricing
decisions are influenced by many types of ob8ectives set up for the marketing functional
area, there are four key ob8ectives in which price plays a central role. "n most situations
only one of these ob8ectives will be followed, though the marketer may have different
ob8ectives for different products. The four main marketing ob8ectives affecting price
include'
<eturn on "nvestment $<"% + - firm may set as a marketing ob8ective the
requirement that all products attain a certain percentage return on the
organi!ation)s spending on marketing the product. This level of return along with
an estimate of sales will help determine appropriate pricing levels needed to meet
the <" ob8ective.
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2ash Flow + Firms may seek to set prices at a level that will insure that sales
revenue will at least cover product production and marketing costs. This is most
likely to occur with new products where the organi!ational ob8ectives allow a new
product to simply meet its e#penses while efforts are made to establish the
product in the market. This ob8ective allows the marketer to worry less about
product profitability and instead directs energies to building a market for the
product.
Market ,hare + The pricing decision may be important when the firm has an
ob8ective of gaining a hold in a new market or retaining a certain percent of an
e#isting market. For new products under this ob8ective the price is set artificially
low in order to capture a si!eable portion of the market and will be increased as
the product becomes more accepted by the target market $we will discuss this
marketing strategy in further detail in our ne#t tutorial%. For e#isting products,
firms may use price decisions to insure they retain market share in instances
where there is a high level of market competition and competitors who are willing
to compete on price.
Ma#imi!e /rofits + lder products that appeal to a market that is no longer
growing may have a company ob8ective requiring the price be set at a level that
optimi!es profits. This is often the case when the marketer has little incentive to
introduce improvements to the product $e.g., demand for product is declining% and
will continue to sell the same product at a price premium for as long as some in
the market is willing to buy.
%ar&etin Strate#
Marketing strategy concerns the decisions marketers make to help the company satisfy its
target market and attain its business and marketing ob8ectives. /rice, of course, is one of
the key marketing mi# decisions and since all marketing mi# decisions must work
together, the final price will be impacted by how other marketing decisions are made.
For instance, marketers selling high quality products would be e#pected to price their
products in a range that will add to the perception of the product being at a high.level.
"t should be noted that not all companies view price as a key selling feature. ,ome firms,
for e#ample those seeking to be viewed as market leaders in product quality, will
deemphasi!e price and concentrate on a strategy that highlights non.price benefits $e.g.,
quality, durability, service, etc.%. ,uch non.price competition can help the company avoid
potential price wars that often break out between competitive firms that follow a market
share ob8ective and use price as a key selling feature.
Costs
For many for.profit companies, the starting point for setting a product)s price is to first
determine how much it will cost to get the product to their customers. bviously,
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whatever price customers pay must e#ceed the cost of producing a good or delivering a
service otherwise the company will lose money.
When analy!ing cost, the marketer will consider all costs needed to get the product to
market including those associated with production, marketing, distribution and company
administration $e.g., office e#pense%. These costs can be divided into two main
categories'
Fi#ed 2osts . -lso referred to as overhead costs, these represent costs the
marketing organi!ation incurs that are not affected by level of production or
sales. For e#ample, for a manufacturer of writing instruments that has 8ust built a
new production facility, whether they produce one pen or one million they will
still need to pay the monthly mortgage for the building. From the marketing side,
fi#ed costs may also e#ist in the form of e#penditure for fielding a sales force,
carrying out an advertising campaign and paying a service to host the company)s
website. These costs are fi#ed because there is a level of commitment to spending
that is largely not affected by production or sales levels.
*ariable 2osts + These costs are directly associated with the production and sales
of products and, consequently, may change as the level of production or sales
changes. Typically variable costs are evaluated on a per.unit basis since the cost
is directly associated with individual items. Most variable costs involve costs of
items that are either components of the product $e.g., parts, packaging% or are
directly associated with creating the product $e.g., electricity to run an assembly
line%. 7owever, there are also marketing variable costs such as coupons, which
are likely to cost the company more as sales increase $i.e., customers using the
coupon%. *ariable costs, especially for tangible products, tend to decline as more
units are produced. This is due to the producing company)s ability to purchase
product components for lower prices since component suppliers often provide
discounted pricing for large quantity purchases.
Aetermining individual unit cost can be a complicated process. While variable costs are
often determined on a per.unit basis, applying fi#ed costs to individual products is less
straightforward. For e#ample, if a company manufactures five different products in one
manufacturing plant how would it distribute the plant)s fi#ed costs $e.g., mortgage,
production workers) cost% over the five products? "n general, a company will assign fi#ed
cost to individual products if the company can clearly associate the cost with the product,
such as assigning the cost of operating production machines based on how much time it
takes to produce each item. -lternatively, if it is too difficult to associate to specific
products the company may simply divide the total fi#ed cost by production of each item
and assign it on percentage basis.
E*ternal %ar&et !actors
The pricing decision can be affected by factors that are not directly controlled by the
marketing organi!ation. These factors include'
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Elasticit# of "eman$
Marketers should never rest on their marketing decisions. They must continually use
market research and their own 8udgment to determine whether marketing decisions need
to be ad8usted. When it comes to ad8usting price, the marketer must understand what
effect a change in price is likely to have on target market demand for a product.
:nderstanding how price changes impact the market requires the marketer have a firm
understanding of the concept economists call elasticity of demand, which relates to how
purchase quantity changes as prices change. >lasticity is evaluated under the assumption
that no other changes are being made $i.e., 0all things being equal1% and only price is
ad8usted. The logic is to see how price by itself will effect overall demand. bviously,
the chance of nothing else changing in the market but the price of one product is often
unrealistic. For e#ample, competitors may react to the marketer)s price change by
changing the price on their product. Aespite this, elasticity analysis does serve as a
useful tool for estimating market reaction.
>lasticity deals with three types of demand scenarios'
>lastic Aemand + /roducts are considered to e#ist in a market that e#hibits elastic
demand when a certain percentage change in price results in a larger and opposite
percentage change in demand. For e#ample, if the price of a product increases
$decreases% by 3CD, the demand for the product is likely to decline $rise% by
greater than 3CD.
"nelastic Aemand + /roducts are considered to e#ists in an inelastic market when
a certain percentage change in price results in a smaller and opposite percentage
change in demand. For e#ample, if the price of a product increases $decreases% by
3CD, the demand for the product is likely to decline $rise% by less than 3CD.
:nitary Aemand + This demand occurs when a percentage change in price results
in an equal and opposite percentage change in demand. For e#ample, if the price
of a product increases $decreases% by 3CD, the demand for the product is likely to
decline $rise% by 3CD.
For marketers the important issue with elasticity of demand is to understand how it
impacts company revenue. "n general the following scenarios apply to making price
changes for a given type of market demand'
For elastic markets + increasing price lowers total revenue while decreasing price
increases total revenue.
For inelastic markets + increasing price raises total revenue while decreasing price
lowers total revenue.
For unitary markets + there is no change in revenue when price is changed.
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Customer an$ Channel Partner E*pectations
/ossibly the most obvious e#ternal factor that influences price setting are the e#pectations
of customers and channel partners. -s we discussed, when it comes to making a
purchase decision customers assess the overall 0value1 of a product much more than they
assess the price. When deciding on a price marketers need to conduct customer research
to determine what 0price points1 are acceptable. /ricing beyond these price points could
discourage customers from purchasing.
Firms within the marketer)s channels of distribution also must be considered when
determining price. Aistribution partners e#pect to receive financial compensation for
their efforts, which usually means they will receive a percentage of the final selling
price. This percentage or margin between what they pay the marketer to acquire the
product and the price they charge their customers must be sufficient for the distributor to
cover their costs and also earn a desired profit.
Competitive an$ Relate$ Pro$ucts
Marketers will undoubtedly look to market competitors for indications of how price
should be set. For many marketers of consumer products researching competitive pricing
is relatively easy, particularly when "nternet search tools are used. /rice analysis can be
somewhat more complicated for products sold to the business market since final price
may be affected by a number of factors including if competitors allow customers to
negotiate their final price.
-nalysis of competition will include pricing by direct competitors, related products and
primary products.
Airect 2ompetitor /ricing + -lmost all marketing decisions, including pricing,
will include an evaluation of competitors) offerings. The impact of this
information on the actual setting of price will depend on the competitive nature of
the market. For instance, products that dominate markets and are viewed as
market leaders may not be heavily influenced by competitor pricing since they are
in a commanding position to set prices as they see fit. n the other hand in
markets where a clear leader does not e#ist, the pricing of competitive products
will be carefully considered. Marketers must not only research competitive prices
but must also pay close attention to how these companies will respond to the
marketer)s pricing decisions. For instance, in highly competitive industries, such
as gasoline or airline travel, competitors may respond quickly to competitors)
price ad8ustments thus reducing the effect of such changes.
<elated /roduct /ricing . /roducts that offer new ways for solving customer
needs may look to pricing of products that customers are currently using even
though these other products may not appear to be direct competitors. For
e#ample, a marketer of a new online golf instruction service that allows customers
to access golf instruction via their computer may look at prices charged by local
golf professionals for in.person instruction to gauge where to set their price.
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While on the surface online golf instruction may not be a direct competitor to a
golf instructor, marketers for the online service can use the cost of in.person
instruction as a reference point for setting price.
/rimary /roduct /ricing . marketers may sell products viewed as complementary
to a primary product. For e#ample, (luetooth headsets are considered
complementary to the primary product cellphones. The pricing of complementary
products may be affected by pricing changes made to the primary product since
customers may compare the price for complementary products based on the
primary product price. For e#ample, companies that sell accessory products for
the -pple i/od may do so at a cost that is only 3CD of the purchase price of the
i/od. 7owever, if -pple were to dramatically drop the price, for instance by
@CD, the accessory at its present price would now be 9CD of the of i/od price.
This may be perceived by the market as a doubling of the accessory)s price. To
maintain its perceived value the accessory marketer may need to respond to the
i/od price drop by also lowering the price of the accessory.
Marketers must be aware of regulations that impact how price is set in the markets in
which their products are sold. These regulations are primarily government enacted
meaning that there may be legal ramifications if the rules are not followed. /rice
regulations can come from any level of government and vary widely in their
requirements. For instance, in some industries, government regulation may set price
ceilings $how high price may be set% while in other industries there may be price floors
$how low price may be set%. -dditional areas of potential regulation include' deceptive
pricing, price discrimination, predatory pricing and price fi#ing.
Finally, when selling beyond their home market, marketers must recogni!e that local
regulations may make pricing decisions different for each market. This is particularly a
concern when selling to international markets where failure to consider regulations can
lead to severe penalties. 2onsequently marketers must have a clear understanding of
regulations in each market they serve.
There are also additional legal concerns when it comes to price which we will discuss in a
future tutorial.
Government Reulation
Marketers must be aware of regulations that impact how price is set in the markets in
which their products are sold. These regulations are primarily government enacted
meaning that there may be legal ramifications if the rules are not followed. /rice
regulations can come from any level of government and vary widely in their
requirements. For instance, in some industries, government regulation may set price
ceilings $how high price may be set% while in other industries there may be price floors
$how low price may be set%. -dditional areas of potential regulation include' deceptive
pricing, price discrimination, predatory pricing and price fi#ing.
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Finally, when selling beyond their home market, marketers must recogni!e that local
regulations may make pricing decisions different for each market. This is particularly a
concern when selling to international markets where failure to consider regulations can
lead to severe penalties. 2onsequently marketers must have a clear understanding of
regulations in each market they serve.
There are also additional legal concerns when it comes to price which we will discuss in a
future tutorial.
Settin Price
The central point of this tutorial is a five.step process for setting price. We want to
emphasi!e that while the process serves as a useful guide for making price decisions, not
all marketers follow this step.by.step approach. -s we will see many marketers may
choose to bypass ,teps = and ? altogether. -dditionally it is important to understand that
finding the right price is often a trial.and.error e#ercise where continual testing is
needed.
;ike all other marketing decisions, market research is critical to determining the optimal
selling price. 2onsequently, the process laid out here is intended to open the marketer)s
eyes to the options to consider when setting price and is in no way presented as a guide
for setting the 0perfect1 price.
Steps in the Price Settin Process
We view price setting as a series of decisions the marketer makes in order to determine
the price direct and indirect customers pay to acquire the product. Airect customers are
those who purchase products directly from the marketer. For e#ample, consider the direct
pricing decisions that take place when a new novel is sold'
/ublisher of the book must decide at what price they will charge their immediate
customers in the channel of distribution such as online booksellers $e.g.,
-ma!on.com%.
(ooksellers must decide at what price they will sell the book to their immediate
customers which are typically final consumers $e.g., website shopper%.
-s we see with the bookseller e#ample, many companies also sell indirectly to the final
customer through a network of resellers such as retailers. For marketers selling through
resellers the pricing decision is complicated by resellers) need to earn a profit and the
marketer)s need to have some control over the product)s price to the final customer. "n
these cases setting price involves more than only worrying about what the direct
customer is willing pay since the marketer must also evaluate pricing to indirect
customers $e.g., resellers) customers%. 2learly sales can be dramatically different than
what the marketer forecasts if the selling price to the final customer differs significantly
from what the marketer e#pects. For instance, if the marketing organi!ation has
forecasted to sell 3,CCC,CCC novels if the price to the final customer is one price and
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resellers decide to raise the price 9@D higher than that price the marketer)s sales may be
much lower then forecasted.
With an understanding that marketers must consider many factors% when setting price, we
now turn to the process by which price is set. We present this as a five.step approach. -s
we noted earlier, while not all marketers follow these steps, what is presented does cover
the methods used by many marketers.
The steps we cover include'
3. >#amine 2ompany and Marketing b8ectives
9. Aetermine an "nitial /rice
=. ,et ,tandard /rice -d8ustments
?. Aetermine /romotional /ricing
@. ,tate wnership and /ayment ptions
Step +, E*amine Compan# an$ %ar&etin '()ectives
-s we discussed, marketing decisions including price are driven by the ob8ectives set by
the management of the organi!ation. These ob8ectives come at two levels. First, the
overall ob8ectives of the company guide all decisions for all functional areas $e.g.,
marketing, production, human resources, finance, etc.%. Huided by these ob8ectives the
marketing department will set its own ob8ectives which may include return on
investment, cash flow, market share and ma#imi!e profits to name a few.
/ricing decisions like all other marketing decisions will be used to help the department
meet its ob8ectives. For instance, if the marketing ob8ective is to build market share it is
likely the marketer will set the product price at a level that is at or below the price of
similar products offered by competitors.
-lso, the price setting process looks to whether the decisions made are in line with the
decisions made for the other marketing decisions $i.e., target market, product,
distribution, promotion%. Thus, if a company with a strong brand name targets high.end
consumers with a high quality, full.featured product, the pricing decision would follow
the marketer)s desire to have the product be considered a high.end product. "n this case
the price would be set high relative to competitors) products that do not offer as many
features or do not have an equally strong brand name.
Step -, "etermine an Initial Price
With the ob8ectives in ,tep 3 providing guidance for setting price, the marketer ne#t
begins the task of determining an initial price level. We say initial because in many
industries this step involves setting a starting point from which further changes may be
made before the customer pays the final price.
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,ometimes called list price or published price, marketers will often use this as a
promotional or negotiating tool as they move through the other price setting steps. For
companies selling to consumers, this price also leads to a pro8ection of the recommended
selling price at the retail level often called the manufacturer)s suggested retail price
$M,</%. The M,</ may or may not be the final price for which products are sold. For
strong brands that are highly sought by consumers the M,</ may in fact be the price at
which the product will be sold. (ut in many other cases, as we will see, the price setting
process results in the price being different based on ad8ustments made by the marketer
and others in the channel of distributions.
,peaking of distribution channels, some marketers will utili!e multiple channel partners
to handle product distribution. When resellers are involved marketers must recogni!e
that all members of the channel will seek to profit when a sale is made. "f a marketer
seeks to sell the product at a certain retail price $e.g., M,</% then the price charged to the
first channel member to handle the product can potentially influence the final selling
price. To see how this can cause problems, assume a marketer sets an M,</ of $:,%
I3.GG for a product that sells through a distribution channel. This channel consists of
wholesalers, who must pay the marketer I3.FG to purchase the product, and retailers who
in turn buy the product from wholesalers. "n this e#ample it is unlikely the retailer will
sell the product at the M,</ since the wholesaler will add to the I3.FG purchase price
and most likely raise the price charged to the retailer to a point that is higher than the
M,</. The retailer in turn will add to their purchase price when selling to consumers. "n
this scenario it is possible the final price to the consumer will be closer to I9.GG than the
I3.GG M,</. -s this e#ample shows marketers must take care in setting the initial price
so that all channel partners feel it is worth their effort to handle the product.
Marketers have at their disposal several approaches for setting the initial price which
include'
2ost /ricing
Market /ricing
2ompetitive /ricing
(id /ricing
Cost Pricin
:nder cost pricing the marketer primarily looks at production costs as the key factor in
determining the initial price. This method offers the advantage of being easy to
implement as long as costs are known. (ut one ma8or disadvantage is that it does not
take into consideration the target market)s demand for the product. This could present
ma8or problems if the product is operating in a highly competitive market where
competitors frequently alter their prices.
There are several types of cost pricing including'
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%ar&up Pricin
This pricing method, often utili!ed by resellers who acquire products from suppliers, uses
a percentage increase on top of product cost to arrive at an initial price. - ma8or general
retailer, such as Walmart, may apply a set percentage for each product category $e.g.,
women)s clothing, automotive, garden supplies, etc.% making the pricing consistent for all
like.products. -lternatively, the predetermined percentage may be a number that is
identified with the marketing ob8ectives $e.g., required 9CD <"%.
For resellers that purchase thousands of products $e.g., retailers% the simplicity inherent in
markup pricing makes it a more attractive pricing option than more time.consuming
methods. 7owever, the advantage of ease of use is sometimes offset by the disadvantage
that products may not always be optimally priced resulting in products that are priced too
high or too low given the demand for the product.
<esellers differ in how they use markup pricing with some using the Markup.on.2ost
method and others using the Markup.on.,elling./rice method. We will demonstrate each
using an item that costs a reseller $:,% I@C to purchase from a supplier and sells to
customers for $:,% IB@.
Markup.on.2ost + :sing this method, markup is reflected as a percentage by
which initial price is set above product cost as reflected in this formula'
Markup -mount 5 Markup /ercentage
"tem 2ost
I3@ 5 =CD
I@C
The calculation for setting initial price is determined by simply multiplying the
cost of each item by a predetermined percentage then adding the result to the cost'
"tem 2ost J $"tem 2ost # Markup /ercentage% 5 /rice
I@C J $@C # .=C 5 I3@% 5 IB@

Markup.on.,elling./rice + Many resellers, and in particular retailers, discuss their
markup not in terms of Markup.on.2ost but as a reflection of price. That is, the
markup is viewed as a percentage of the selling price and not as a percentage of
cost as it is with the Markup.on.2ost method. For e#ample, using the same
information as was used in the markup on cost, the markup on selling price
reflected in this formula'
Markup -mount 5 Markup /ercentage
,elling /rice
3=
I3@ 5 9=D
IB@
The calculation for setting initial price using Markup.on.,elling./rice is'
"tem 2ost 5 /rice
$3.CC + Markup /ercentage%
I@C 5 IB@
$3.CC + .9=%
So .h# $o some use %ar&up/on/Cost .hile others use %ar&up/on/Sellin/Price?
'ne ans.er is that it is a tra$itional .a# for resellers in certain in$ustries
to $iscuss ho. the# arrive at price 0e..1 2We onl# ma&e 34 of the price of
the pro$uct.56. 7ut man# feel the reason is that %ar&up/on/Sellin/Price
serves as an ai$ to compan# promotion (ecause the amount of mone# a
reseller ma&es is in percentae terms al.a#s lo.er .hen calculate$ usin
%ar&up/on/Sellin/Price than it is .ith %ar&up/on/Cost. !or e*ample1 in
the %ar&up/on/Cost e*ample .here the mar&up is 894 the ross profit is
:+3 0:;3/:396. If the reseller usin %ar&up/on/Sellin/Price receive$ a
ross profit of :+3 their mar&up .oul$ onl# (e -84 0:39<=+.99/.-8> ? :;36.
Conse@uentl#1 a retailerAs a$vertisement ma# sa#, 2We %a&e Bittle1 7ut
'ur Customers Save A Bot5 an$ (ac& this up (# sa#in the# onl# ma&e a
small percentae on each sale. When in realit# ho. much the# reall# ma&e
in monetar# terms ma# (e e@ual to another retailer .ho uses %ar&up/on/
Cost an$ reports a hiher mar&up percentae. Cost/Plus Pricin
"n the same way markup pricing arrives at price by adding a certain percentage to the
product)s cost, cost.plus pricing also adds to the cost by using a fi#ed monetary amount
rather than percentage. For instance, a contractor hired to renovate a homeowner)s
bathroom will estimate the cost of doing the 8ob by adding their total labor cost to the
cost of the materials used in the renovation. The homeowner)s selection of ceramic tile
to be used in the bathroom is likely to have little effect on the labor needed to install it
whether it is a low.end, low priced tile or a high.end, premium priced tile. -ssuming
most material in the bathroom pro8ect are standard si!es and configuration, any change in
the total price for the renovation is a result of changes in material costs while labor costs
are constant.
7rea&even Pricin
(reakeven pricing is associated with breakeven analysis, which is a forecasting tool used
by marketers to determine how many products must be sold before the company starts
reali!ing a profit. ;ike the markup method, breakeven pricing does not directly consider
market demand when determining price, however it does indicate the minimum level of
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demand that is needed before a product will show a profit. From this the marketer can
then assess whether the product can realistically achieve these levels.
The formula for determining breakeven takes into consideration both variable and fi#ed
costs as well as price, and is calculated as follows'
Fi#ed 2ost 5 K of :nits to (reakeven
/rice + *ariable 2ost /er :nit
For e#ample, assume a company operates a single.product manufacturing plant that has a
total fi#ed cost $e.g., purchase of equipment, mortgage, etc.% per year of $:,% I=,CCC,CCC
and the variable cost $e.g., raw materials, labor, electricity, etc.% is I?@.CC per unit. "f the
company sells the product directly to customers for I39C, it will require the company to
sell ?C,CCC units to breakeven.
I=,CCC,CCC 5 ?C,CCC units
I39C . I?@
-gain we must emphasi!e that marketers must determine whether the demand $i.e.,
number of units needed to breakeven% is realistically attainable. ,imply plugging in a
number for price without knowing how the market will respond to that figure means that
this method has little value. $4ote' - common mistake when performing this analysis is
to report the breakeven in a monetary value such a breakeven in dollars $e.g., I?C,CCC%.
The calculation presented above is a measure of units that need to be sold. 2learly it is
easy to turn this into a revenue breakeven analysis by multiplying the units needed by the
selling price. "n our e#ample, ?C,CCC units # I39C 5 I?,FCC,CCC.%
%ar&et Pricin
:nder the market pricing method cost is not the main factor driving price decisionsL
rather initial price is based on analysis of market research in which customer e#pectations
are measured. The main goal is to learn what customers in an organi!ation)s target
market are likely to perceive as an acceptable price. f course this price should also help
the organi!ation meet its marketing ob8ectives.
Market pricing is one of the most common methods for setting price, and the one that
seems most logical given marketing)s focus on satisfying customers. ,o if this is the
most logical approach why don)t all companies follow it? The main reason is that using
the market pricing approach requires a strong market research effort to measure customer
reaction. For many marketers it is not feasible to spend the time and money it takes to do
this right. -dditionally for some products, especially new high.tech products, customers
are not always knowledgeable about the product to know what an acceptable price level
should be. 2onsequently, some marketers may forego market pricing in favor of other
approaches.
3@
For those marketers who use market pricing, options include'
(ackward /ricing
/sychological /ricing
/rice ;ining
7ac&.ar$ Pricin
"n some marketing organi!ations the price the market is willing to pay for a product is an
important determinant of many other marketing decisions. This is likely to occur when
the market has a clear perception of what it believes is an acceptable level of pricing. For
e#ample, customers may question a product that carries a price tag that is double that of a
competitor)s offerings but is perceived to offer only minor improvements compared to
other products. "n these markets it is important to undertake research to learn whether
customers have mentally established a price range or reference price for products in a
certain product category. The marketer can learn this by surveying customers with such
questions as' 07ow much do you think these types of products should cost you?1
"n situations where a price range is ingrained in the market, the marketer may need to use
this price as the starting point for many decisions and work backwards to develop
product, promotion and distribution plans. For instance, assume a company sells
products through retailers. "f the market is willing to pay $:,%I3GG for a product but is
resistant to pricing that is higher, the marketer will work backwards factoring out the
profit margin retailers are likely to want $e.g., I?C% and as well as removing the
marketer)s profit $e.g., IEC%. From this, the product cost will remain $I3GG .I?C.IEC5
IFG%. The marketer must then decide whether they can create a product with sufficient
features and benefits to satisfy customers) needs at this cost level.
Ps#choloical Pricin
For many years researchers have investigated customers) response to product pricing.
,ome of the results point to several interesting psychological effects price may have on
customers) buying behavior and on their perception of individual products. We stress that
certain pricing tactics 0may1 have a psychological effect since the results of some studies
have suggested otherwise. (ut enough studies have shown an effect that this topic is
worthy of discussion.
dd.>ven /ricing . ne effect dubbed 0odd.even1 pricing relates to whole
number pricing where customers may perceive a significant difference in product
price when pricing is slightly below a whole number value. For e#ample, a
product priced at $:,% I9GG.G@ may be perceived as offering more value than a
product priced at I=CC.CC. This effect can also be used to influence potential
customers who receive product information from others. Many times a buyer will
pass along the price as being lower than it is either because they recall it being
lower than the even number or they want to impress others with their success in
obtaining a good value. For instance, in our e#ample a buyer who pays I9GG.G@
3B
may tell a friend they paid 0a little more than I9CC1 for the product when in fact it
was much closer to I=CC.
/restige /ricing . -nother psychological effect, called prestige pricing, points to a
strong correlation between perceived product quality and price. The higher the
price the more likely customers are to perceive it has being higher quality
compared to a lower priced product. $-lthough there is point at which customers
will begin to question the value of the product if the price is too high.% "n fact, the
less a customer knows about a product the more likely they are to 8udge the
product as being of higher quality based on only knowing the price. /restige
pricing can also work with odd.even pricing as marketers, looking to present an
image of high quality, may choose to price products at even levels $e.g., I3C
rather than IG.GG%.
Price Binin
The difference in the 0needs.set1 between customers often leads marketers to reali!ation
that the overall market is really made up of a collection smaller market segments. These
segments may seek similar products but with different sets of product features, which are
presented in the form of different models $e.g., different quality of basketball sneakers% or
service options $e.g., different hotel room options%.
/rice lining or product line pricing is a method that primarily uses price to create the
separation between the different models. With this approach, even if customers possess
little knowledge about a set of products, customers may perceive they are different based
on price alone. The key is whether the prices for all products in the group are perceived
as representing distinct price points $i.e., enough separation between each%. For instance,
a marketer may sell a base model, an upgraded model and a delu#e model each at a
different price. "f the differences in features for each model is not readily apparent to a
customer, such as differences that are inside the product and not easily viewed $e.g.,
difference between laptop computers%, then price lining will help the customer recogni!e
that differences do e#ist as long as the prices are noticeably different.
/rice lining can also be effective as a method for increasing profitability. "n many cases
the cost to the marketer for adding different features to create different models or service
options does not alone 8ustify a big price difference. For instance, an upgraded model
may cost 3CD more to produce than a base model but using the price lining method the
upgraded product price may be 9CD higher and thus more profitable than the base
model. The increase in profitability offered by price lining is one reason marketers
introduce multiple models, since it allows the company to not only satisfy the needs of
different segments but also presents an option for a customer to 0buy up1 to a higher
priced and more profitable model.
Competitive Pricin
how competitors price their products can influence the marketer)s pricing decision.
2learly when setting price it makes sense to look at the price of competitive offerings.
3E
For some, competitor)s price serves as an important reference point from which they set
their price. "n some industries, particularly those in which there are a few dominant
competitors and many small companies, the top companies are in the position of holding
price leadership roles where they are often the first in the industry to change price.
,maller companies must then assume a price follower role and react once the big
companies ad8ust their price.
When basing pricing decisions on how competitors are setting their price, firms may
follow one of the following approaches'
(elow 2ompetition /ricing . - marketer attempting to reach ob8ectives that
require high sales levels $e.g., market share ob8ective% may monitor the market to
insure their price remains below competitors.
-bove 2ompetition /ricing . Marketers using this approach are likely to be
perceived as market leaders in terms of product features, brand image or other
characteristics that support a price that is higher than what competitors offer.
/arity /ricing . - simple method for setting the initial price is to price the product
at the same level competitors price their product.
7i$ Pricin
4ot all selling situations allow the marketer to have advanced knowledge of the prices
offered by competitors. While the "nternet has made researching competitor pricing a
relatively routine e#ercise, this is not the case in markets where bid pricing occurs. (id
pricing typically requires a marketer to submit a price to a potential buyer that is sealed or
unseen by competitors. "t is not until all bids are obtained and unsealed that the marketer
is informed of the price listed by competitors.
(id pricing occurs in several industries though it is a standard requirement when selling
to local, national and international governments. "n these situations the marketer)s
pricing strategy depends on the pro8ected winning bid price, which is generally the lowest
price. 7owever, price alone is only the deciding factor if the bidder meets certain
qualifications. The fact that marketers often operate in the dark in terms of available
competitor research, makes this type pricing one of the most challenging of all pricing
setting methods.
Step 8, Set Stan$ar$ Price A$)ustments
With the first round of pricing decisions now complete, the marketer)s ne#t step is to
consider whether there are benefits to making ad8ustments to the list or published price.
For our purposes we will consider two levels of price ad8ustments + standard and
promotional. The first level ad8ustments are those we label as 0standard1 since these are
consistently part of the marketer)s pricing program and not ad8ustments that appear only
occasionally as part of special promotions $see ,tep ?' Aetermine /romotional /ricing%.
3F
"n most cases standard ad8ustments are made to reduce the list price in an effort to either
stimulate interest in the product or to indirectly pay channel partners for the services they
offer when handling the product. "n some circumstances the ad8ustment goes the other
way and leads to price increases in order cover additional costs incurred when selling to
different markets.
"t should be noted that many companies do not make ad8ustments to their list price,
particularly those selling directly to final customers. There are two key reasons for this.
First, the product is in high demand and therefore the marketer sees little reason to lower
the price. ,econd, the marketer believes the product holds sufficient value for customers
at its current list price and the marketer feels reducing the price may actually lead buyers
to question the quality of the product $e.g., 07ow can they offer all those features for such
a low price? ,omething must be wrong with it.1%. "n such cases holding fast to the list
price allows the marketer to maintain some control over the product)s perceived image.
For firms that do make standard price ad8ustments, options include'
Muantity Aiscounts
Trade -llowances
,pecial ,egment /ricing
Heographic /ricing
Cuantit# "iscounts
This ad8ustment offers buyers an incentive of lower per.unit pricing as more products are
purchased. Most quantity or volume discounts are triggered when a buyer reaches certain
purchase levels. For instance, a buyer may pay the list price when they purchase between
3.GG units but receive a @D discount off the list price when the purchase e#ceeds 3CC
units.
ptions for offering price ad8ustments based on quantity ordered include'
Aiscounts at Time of /urchase + The most common quantity discounts e#ist when
a buyer places an order that e#ceeds a certain minimum level. While quantity
discounts are used by marketers to stimulate higher purchase levels, the rational
for using these often rests in the cost of product shipment. ,hipping costs tend to
decrease per item shipped. Why? Think about a large truck carrying product. "n
most cases the e#penses $e.g., truck driver e#pense, fuel, road tolls, etc.% required
to move a truck from one point to another does not radically change as more
product is shipped in the truck trailer $i.e., container%. "n other words, the total
shipping cost is only a little higher if 3,CCC items $assuming all can fit in a trailer%
are carried in the truck compared to hauling 8ust 3C items. 2onsequently, the
transportation cost per item drops as more are ordered thus allowing the supplier
to offer lower prices for higher quantity.
Aiscounts on 2umulative /urchases + This method allows the buyer to receive a
discount as more products are purchased over time. For instance, if a buyer
3G
regularly purchases from a supplier they may see a discount once the buyer has
reached predetermined monetary or quantity levels. The key reason to use this
ad8ustment is to create an incentive for buyers to remain loyal and purchase again.
Tra$e Allo.ances
Manufacturers who rely on channel partners to distribute their products $e.g., retailers,
wholesalers% offer discounts off of list price called trade allowances. These discounts
function as an indirect form of payment for a channel member)s work in helping to
market the product $e.g., keep product stocked, talk to customers about the product,
provide feedback to the manufacturer, etc.%.
Essentiall# the $ifference (et.een the tra$e $iscounte$ price pai$ (# the reseller
an$ the price the reseller chares its customer .ill (e the resellerAs profit.
!or e*ample1 letAs assume the ma&er of snac& pro$ucts sells a pro$uct to
retailers that carries a state$ %SRP of 0DS6 :-.E3 (ut offers resellers a tra$e
allo.ance price of :+.E3. If the retailer in$ee$ sells the pro$uct for the
%SRP1 the retailer .ill realiFe a 884 mar&up on sellin price 0:+.E3<0+/.886 ?
:-.E36. '(viousl# this percentae .ill (e $ifferent if the retailer sells the
pro$uct at a price that is $ifferent than the %SRP1 (ut the important point to
un$erstan$ is that mar&eters must factor in .hat resellerAs e*pect to earn
.hen the# are settin tra$e $iscounts. This Special Sement Pricin
"n some industries special classes of customers within a target market are offered pricing
that differs from the rest of the market. The main reasons for doing this include' building
future demand by appealing to new or younger customersL improving the brand)s image
as being sensitive to customer)s needsL and rewarding long time customers with price
breaks.
For instance, many companies including movie theaters, fitness facilities and
pharmaceutical firms offer lower prices to senior citi!ens. ,ome marketers offer non.
profit customers lower prices compared to that charged to for.profit firms. ther
industries may offer lower prices to students or children.
-nother e#ample used by service firms is to offer pricing differences based on
convenience and comfort en8oyed by customers when e#periencing the service such as
seat location at a sporting or entertainment event.
Georaphic Pricin
/roducts requiring marketers to pay higher costs that are affected by geographic area in
which a product is sold may result in ad8ustments to compensate for the higher e#pense.
The most likely cause for charging a different price rests with the cost of transporting a
product from the supplier)s distribution location to the buyer)s place of business. "f the
supplier is incurring all costs for shipping then they may charge a higher price for
products in order to cover the e#tra transportation costs. For instance, shipping products
9C
by air to 7awaii may cost a ;os -ngeles, 2alifornia manufacturer a much higher
transportation cost than a shipment made to ,an Aiego.
Transportation e#pense is not the only cost that may raise a product)s price. ,pecial ta#es
or tariffs may be imposed on certain products by local, regional or international
governments which a seller passes along in the form of higher prices.
amount needs to be sufficient to entice the reseller to agree to handle and possibly
promote the product.
Step G, "etermine Promotional Pricin
The final price may be further ad8usted through promotional pricing. :nlike standard
ad8ustments, which are often permanently part of a marketer)s pricing strategy and may
include either a decrease or increase in price, promotional pricing is a temporary
ad8ustment that only involves price reductions. "n most cases this means the marketer is
selling the product at levels that significantly reduce the profit they make per unit sold.
-s one would e#pect, the main ob8ective of promotional pricing is to stimulate product
demand. (ut, marketers should be careful not to overuse promotional programs that
temporarily reduce selling price. "f promotional pricing is used too frequently customers
may become conditioned to anticipate the reduction. This results in buyers withholding
purchases until the product is again offered at a lower price. ,ince promotional pricing
often means the marketing organi!ation is making very little profit off of each item sold,
consistently selling at a low price could 8eopardi!e the company)s ability to meet their
financial ob8ectives.
The options for promotional pricing include'
Markdowns
;oss ;eaders
,ales /romotions
(undle /ricing
Aynamic /ricing
%ar&$o.ns
The most common method for stimulating customer interest using price is the
promotional markdown method, which offers the product at a price that is lower than the
product)s normal selling price. There are several types of markdowns including'
Temporary Markdown + /ossibly the most familiar pricing method marketers use
to generate sales is to offer a temporary markdown or 0sale) pricing. These
markdowns are normally for a specified period of time the conclusion of which
will result in the product being raised back to the normal selling price.
93
/ermanent Markdown + :nlike the temporary markdown where the price will
eventually be raised back to a higher price, the permanent markdown is intended
to move the product out of inventory. This type of markdown is used to remove
old products that' are perishable and close to being out of date $e.g., donuts%L are
an older model and must be sold to make room for new modelsL or are products
that the marketer no longer wishes to sell.
,easonal + /roducts that are primarily sold during a particular time of the year,
such as clothing, gardening products, sporting goods and holiday.specific items,
may see price reductions at the conclusion of its prime selling season.
Boss Bea$ers
-n important type of pricing program used primarily by retailers is the loss leader. :nder
this method a product is intentionally sold at or below the cost the retailer pays to acquire
the product from suppliers. The idea is that offering such a low price will entice a high
level of customer traffic to visit a retailer)s store or website. The e#pectation is that
customers will easily make up for the profit lost on the loss leader item by purchasing
other items that are not following loss leader pricing. For instance, a convenience store
may advertise a very low price for cups of coffee in order to generate traffic to the store
with the hope that customers will purchase regularly priced products to go along with the
coffee purchase.
Marketers should beware that some governmental agencies view loss leaders as a form of
predatory pricing and thus consider it illegal. /redatory pricing occurs when an
organi!ation is deliberately selling products at or below cost with the intention of driving
competitors out of business. f course, this differs from our discussion which considers
loss leader pricing as a form of promotion and not a form of anti.competitor activity. "n
the :.,. several state governments have passed laws under the heading :nfair ,ales -ct,
which prohibits the selling of certain products below cost. The main intention of these
laws is to protect small firms from below.cost pricing activities of larger companies.
,ome states place this restriction on specific product categories $e.g., gasoline, tobacco%
but klahoma places this restriction on most products and goes as far as requiring the
pricing of products be at least BD above cost.
Sales Promotions
marketers may offer several types of pricing promotions to simulate demand. While we
have already discussed 0sale1 pricing as a technique to build customer interest, there are
several other sales promotions that are designed to lower price. These include rebates,
coupons, trade.in, and loyalty programs.
7un$le Pricin
-nother pricing ad8ustment designed to increase sales is to offer discounted pricing when
customers purchase several different products at the same time. Termed bundle pricing,
the technique is often used to sell products that are complementary to a main product.
99
For buyers, the overall cost of the purchase shows a savings compared to purchasing each
product individually. For e#ample, a camera retailer may offer a discounted price when
customers purchase both a digital camera and a how.to photography A*A that is lower
than if both items were purchased separately. "n this e#ample the retailer may promote
this as' 0(uy both the digital camera and the how.to photography A*A and save 9@D.1
(undle pricing is also used by marketers as a technique that avoids making price
ad8ustments on a main product for fear that doing so could affect the product)s perceived
quality level $see our discussion above under ,tep =' ,et ,tandard /rice -d8ustments%.
<ather, the marketer may choose to offer ad8ustments on other related or complementary
products. "n our e#ample the message changes to' 0(uy the digital camera and you can
get the how.to photography A*A for @CD less.1 With this approach the marketer is
presenting a price ad8ustment without the perception of it lowering the price of the main
product.
"#namic Pricin
The concept of dynamic pricing has received a great deal of attention in recent years due
to its prevalent use by "nternet retailers. (ut the basic idea of dynamic pricing has been
around since the dawn commerce. >ssentially dynamic pricing allows for the point.of.
sale $i.e., at the time and place of purchase% price ad8ustments to take place for customers
meeting certain criteria established by the seller. The most common and oldest form of
dynamic pricing is hagglingL the give.and.take that takes place between buyer and seller
as they settle on a price. While the word haggling may con8ure up visions of transactions
taking place among vendors and customers in a street market, the concept is widely used
in business markets as well where it carries the more reserved label of negotiated pricing.
-dvances in computer hardware and software present a new dimension for the use of
dynamic pricing. :nlike haggling, where the seller makes price ad8ustments based on a
person.to.person discussion with a buyer, dynamic pricing uses sophisticated computer
technology to ad8ust price. "t achieves this by combining customer data $e.g., who they
are, how they buy% with pre.programmed price offerings that are aimed at customers
meeting certain criteria. For e#ample, dynamic pricing is used in retail stores where
customers) use of loyalty cards triggers the store)s computer to access customer
information. "f customers) characteristics match requirements in the software program
they may be offered a special deal such as 3CD off if they also purchase another product.
Aynamic pricing is also widely used in airline ticket purchasing where type of customer
$e.g., business vs. leisure traveler% and date of purchase can affect pricing.
n the "nternet, marketers may use dynamic pricing to entice first time visitors to make a
purchase by offering a one.time discount. This is accomplished by comparing
information stored in the marketer)s computer database with identifier information
gathered as the person is visiting a website. ne way this is done is for a website to leave
small data files called 0cookies1 on a visitor)s computer when they first access the
marketer)s website. - cookie can reside on the visitors computer for some time and
allows the marketer to monitor the user)s behavior on the site such as how often they
9=
visit, how long they spend on the site, what webpages they access and much more. The
marketer can then program special software, often called campaign management
software, to send visitors a special offer such as a discount. For instance, the marketer
may have a discount offered if the visitor has come to the site at least five times in the last
si# months but has never purchased.
Step 3, State '.nership an$ Pa#ment 'ptions
With the price decided, the final step for the marketer is to determine in what form and in
what timeframe customers will make payment. -s one would e#pect payment is most
often in a monetary form though in certain situations the payment may be part of a barter
arrangement in which products or services are e#changed.
!orm of Pa#ment
The monetary payment decision can be a comple# one. First marketers must decide in
what form payments will be accepted. These options include cashL check, money orders,
credit card, online payment systems $e.g., /ay/al% or, for international purchases, bank
drafts, letters of credit, and international reply coupons, to name a few.
Timeframe of Pa#ment
ne final pricing decision considers when payment will be made. Many marketers find
promotional value in offering options to customers for the date when payment is due.
,uch options include'
"mmediate /ayment in Full + <equires the customer make full payment at the
time the product is acquired.
"mmediate /artial /ayment + <equires the customer make a certain amount or
percentage of payment at the time the product is acquired. This may be in the
form of a down payment. ,ubsequent payments occur either in one lump sum or
at agreed intervals $e.g., once per month% through an installment plan.
!uture Pa#ment H Provi$es the (u#er .ith the opportunit# to ac@uire use of the
pro$uct .ith pa#ment occurrin some time in the future. !uture pa#ment
ma# re@uire either pa#ment in fu'ther Consi$erations
marketers must consider many factors when making a pricing decision. We conclude our
discussion of pricing by suggesting several other issues that can impact how price is set.
These include'
wnership ptions
>arly /ayment "ncentives
2urrency 2onsiderations
-uction /ricing
9?
'.nership 'ptions
-n important decision faced by marketers as they are formulating their marketing
strategy deals with who will have ownership of the product $i.e., holds legal title% once an
e#change has taken place. The options available include'
(uyer wns /roduct utright + The most common ownership option is for the
buyer to make payment and then obtain full ownership.
(uyer 7as <ight to :se but Aoes 4ot 7ave wnership + Many products,
especially those labeled as services, permit customers to make payment in
e#change for the right to use a product but not to own it. This is seen in the form
of usage, rental or lease payment for such goods and services as' mobile phone
services, manufacturing equipment and "nternet access. "t should be noted that
under some lease or rental plans there may be an option for customers to buy the
product outright $e.g., car lease% though this often requires a final payment.
Earl# Pa#ment Incentives
For many years marketers operating primarily in the business market offered incentives
to encourage their customers to pay early. Typically, business customers are given a
certain period of time, normally =C or BC days, before payment is due. To encourage
customers to pay earlier, and thus allow the seller to obtain the money quicker, marketers
have offered early payment discounts often referred to as 0cash terms1. This discount is
e#pressed in a form that indicates how much discount is being offered and in what
timeframe. For e#ample, the cash terms 963C net =C indicates that if the buyer makes
payment within 3C days of the date of the bill then they can take a 9D discount off some
or all of the items on the invoice, otherwise the full amount is due in =C days.
While this incentive remains widely used, its effectiveness in getting customers to pay
early has greatly diminished. "nstead, many customers, especially large volume buyers,
simply remove the discount from the bill)s total and then pay within the required 0net1
timeframe $or laterN%. For this reason many companies are discontinuing offering this
discount.
'ther Consi$erations
marketers must consider many factors when making a pricing decision. We conclude our
discussion of pricing by suggesting several other issues that can impact how price is set.
These include'
wnership ptions
>arly /ayment "ncentives
2urrency 2onsiderations
-uction /ricing
9@
'.nership 'ptions
-n important decision faced by marketers as they are formulating their marketing
strategy deals with who will have ownership of the product $i.e., holds legal title% once an
e#change has taken place. The options available include'
(uyer wns /roduct utright + The most common ownership option is for the
buyer to make payment and then obtain full ownership.
7u#er Ias Riht to Dse (ut "oes Not Iave '.nership H %an# pro$ucts1 especiall#
those la(ele$ as services1 permit customers to ma&e pa#ment in e*chane for
the riht to use a pro$uct (ut not to o.n it. This is seen in the form of usae1
rental or lease pa#ment for such oo$s an$ services as, mo(ile phone services1
manufacturin e@uipment an$ Internet access. It shoul$ (e note$ that un$er
some lease or rental plans there ma# (e an option for customers to (u# the
pro$uct outriht 0e..1 car lease6 thouh th'ther Consi$erations
marketers must consider many factors when making a pricing decision. We conclude our
discussion of pricing by suggesting several other issues that can impact how price is set.
These include'
wnership ptions
>arly /ayment "ncentives
2urrency 2onsiderations
-uction /ricing
'.nership 'ptions
-n important decision faced by marketers as they are formulating their marketing
strategy deals with who will have ownership of the product $i.e., holds legal title% once an
e#change has taken place. The options available include'
(uyer wns /roduct utright + The most common ownership option is for the
buyer to make payment and then obtain full ownership.
(uyer 7as <ight to :se but Aoes 4ot 7ave wnership + Many products,
especially those labeled as services, permit customers to make payment in
e#change for the right to use a product but not to own it. This is seen in the form
of usage, rental or lease payment for such goods and services as' mobile phone
services, manufacturing equipment and "nternet access. "t should be noted that
under some lease or rental plans there may be an option for customers to buy the
product outright $e.g., car lease% though this often requires a final payment.
Earl# Pa#ment Incentives
For many years marketers operating primarily in the business market offered incentives
to encourage their customers to pay early. Typically, business customers are given a
9B
certain period of time, normally =C or BC days, before payment is due. To encourage
customers to pay earlier, and thus allow the seller to obtain the money quicker, marketers
have offered early payment discounts often referred to as 0cash terms1. This discount is
e#pressed in a form that indicates how much discount is being offered and in what
timeframe. For e#ample, the cash terms 963C net =C indicates that if the buyer makes
payment within 3C days of the date of the bill then they can take a 9D discount off some
or all of the items on the invoice, otherwise the full amount is due in =C days.
While this incentive remains .i$el# use$1 its effectiveness in ettin customers to
pa# earl# has reatl# $iminishe$. Instea$1 man# customers1 especiall# lare
volume (u#ers1 simpl# remove the $iscount from the (illAs total an$ then pa#
.ithin the re@uire$ 2net5 timeframe 0or laterJ6. !or this reason man#
companies are $iscontinuin offerin this $iscount. Currenc# Consi$erations
/roduct pricing can be dramatically altered by international monetary e#change rates. -
company that desires to be a low.price market leader may find this strategy works in their
home market but currency differences may move their product)s price to a mid.price level
in other countries. This could dramatically impact the perceived value of the product by
customers in these markets. -ny marketer selling internationally must be very aware of
the price their product takes on in foreign countries once the price has been converted
into the local currency.
Auction Pricin
ne pricing approach that does not fit neatly into the price setting process we)ve
described is the auction pricing model. -uction pricing is the reverse of bid pricing,
which we discussed earlier, since it is the buyer who in large part sets the final price.
This pricing method has been around for hundreds of years, but today it is most well
known for its use in the auction marketplace business models such as e(ay and business.
to.business marketplaces. While marketers selling through auctions do not have control
over final price, it is possible to control the minimum price by establishing a price floor
or reserve price. "n this way the product is only sold if someone)s bid is at least equal to
the floor price.
Currenc# Consi$erations
/roduct pricing can be dramatically altered by international monetary e#change rates. -
company that desires to be a low.price market leader may find this strategy works in their
home market but currency differences may move their product)s price to a mid.price level
in other countries. This could dramatically impact the perceived value of the product by
customers in these markets. -ny marketer selling internationally must be very aware of
the price their product takes on in foreign countries once the price has been converted
into the local currency.
9E
Auction Pricin
ne pricing approach that does not fit neatly into the price setting process we)ve
described is the auction pricing model. -uction pricing is the reverse of bid pricing,
which we discussed earlier, since it is the buyer who in large part sets the final price.
This pricing method has been around for hundreds of years, but today it is most well
known for its use in the auction marketplace business models such as e(ay and business.
to.business marketplaces. While marketers selling through auctions do not have control
over final price, it is possible to control the minimum price by establishing a price floor
or reserve price. "n this way the product is only sold if someone)s bid is at least equal to
the floor price.
9F
M-4H F<T"
")m personally quite thrilled with the start 2reative land -sia has been able to make on an
iconic brand such as Frooti with Owhy grow up.) "t)s even more gratifying when seniors
from the industry call up proactively and appreciate the work. -nd in some
cases,selflessly suggest ideas on how one can build on the campaign.The e#ercise in a
nutshell' The revamp has been a G.month e#ercise. We started with an e#tensive study of
the market, the society and a keen understanding of the brandL its history and its
strengths.
(rief' <evamp (rand Frooti. Make it contemporary and youthful.
(ackground' Frooti is "ndia)s legendary and iconic mango drink. "t has been around for
over two and a half decades now. /retty much what 4ike or McAonalds or Huinness or
"kea is to the world, Frooti is to "ndia. There)s not one person in "ndia who hasn)t had a
Frooti. (y sheer numbers and its depth of distribution in "ndia and availability in more
than 9C countries, Frooti is perhaps one of the largest selling mango drinks in the world.
Auring the brand study, here are a few things we reali!ed. When Frooti came into
e#istence over 9 decades ago, it came in as a really contemporary and youthful drink.
Frooti brought Tetra /ak into "ndia. "t was cool to have a Frooti. >ven the imagery in
Frooti communication was way ahead of anything else the "ndian society was e#posed to.
Who can forget classic Frooti commercials in early FCs with pretty girls in mini skirts,
hula.hoop, use of 2H, people diving into a pool of Frooti, etc., -ll these, "ndia hadn)t
seen before. We reali!ed being cool wasn)t alien to Frooti, it was 8ust about reinstating
the cool factor. <elevantly. 7owever, there was a little something we had to tackle going
further. ver the years Frooti was blessed with a lot of child and adolescent loyalists.
There have seldom been birthday parties without a Frooti. 2an we without alienating
them create a similar cult following with youth? With about BCD of "ndia being a part of
that segment. We were aware that frooti had made attempts in the past. Aigen *erma by
>verest and (indass campaign by Hrey, were both tried. While they did create an initial
bu!!, they lacked a long term strategy or longevity perhaps. We concluded. ,o, the
e#ercise was essentially to arrive at a strategic idea that)s much sharper and a thought or a
philosophy Frooti can own and reinvent itself for years.
-rriving at the idea'
There are three parts arriving at the idea'
The young' What)s cool and contemporary with the young? &oung "ndia is much more
confident than it ever was. "t)s much more aware and unabashed. "t)s not about how good
looking, or rich, or intelligent you are. "t)s all about how interesting you are. /eople don)t
ape anymore, they)d rather adapt something they like and reinterpret it to suit their own.
-lternate is the new popular. The young and youthful are constantly hunting for fresh
new everything. /resent is in. /ast is stale. Future is out. >veryone)s e#ploring and
e#perimenting and e#periencing. -nd while they are, and like to be a part of a
community, they)d like the space to e#press their own individuality and eccentricities.
Pey words6phrases' riginality, 4ot stale, Fresh community, eccentricity and
unabashedness.
The Mango' "t was really important for us to study the mango fruit. "t)s the soul of
Frooti. >veryone knows Mango Frooti Fresh n Quicy. &ou hum one part and someone else
will complete the other. ;ast year, soon after Frooti started working with us, we did a
9G
commercial reinforcing Frooti as the the mango to every "ndian. This was a tactical
e#ercise and to buy time for the revamp. /retty much to add to confusion of Maa!a and
,lice trying hard to be a mango.
7ere)s what we understand of the mango. While it is the king of all fruits and all that
blah, deep inside, the mango is a quaint and quirky fruit. "t looks funny, lopsided and
asymmetrical. -nd, quite unlike most other fruits. &ou can)t really eat it with a fork and a
knife. "t)s fruit you)d like to get dirty with, steal and even crave for. " haven)t heard of too
many people stealing bananas or pineapples as kids. -nd then of course there)s the
mango seed, the best part of the mango. &ou have to suck on it, squee!e and get your
hands dirty. $-nd for god)s sake there can)t be a se#ual innuendo to mango eating. That)s
mistaking it for a strawberry.%
(eneath all the garb and responsibility mango has to shoulder, it is a sweet child.like fruit
and you can)t behave like an adult and en8oy a mango. ,eriously.
Pey words' 2hild like, quirky, lopsided
The (rand Frooti' $<efer to background%
Pey Words' "conic, 2ult, Mango, fresh n 8uicy, childhood,
The idea'
We had to find a voice for Frooti that was well within its values and yet so cool and
contemporary that people in their heads said, wow " didn)t look at Frooti like that, and
not that isn)t frooti.Auring our various brainstorming sessions, debates, discussions $at
2reative land we callthem Freethinking $TM% sessions% and thinking e#ercises, we were
really impressed with the 8ob OFresh n 8uicy) had done for years. We 8ointly decided to
give it a raise and a promotion. From 8ust a baseline, a slogan or a product descriptor we
promoted OFresh n Quicy) to the brand philosophy. "t was documented and agreed upon
that Frooti will never be stale, it will always stay fresh On) 8uicy as a brand. We got a buy
in from everyone in the team. We pledged to keep pushing with everything, the product,
its communication, its packaging, its contests,offersR everything.
Then during one of the subsequent sessions we struck gold with the theme + Owhy grow
up.) "t sounded the most promising bet for the brand because one, it embodies the spirit of
mango. - fruit that is the soul of Frooti.Two, today the society is unabashed,
eccentricities are adored, take our e#.pre! -bdul Palam, he was adored for his child.like
spontaneity. - boss in or a college professor who will be most likely admired by the
younger audience is the one who is not a straight8acket. -nd three, of course it turns the
associations of Frooti with children and childhood on its head, and to its advantage.
The youth today is really confident and unabashed about the way they are. ,o, we didn)t
use Owhy grow up) as a question. We didn)t have a point to prove, we wanted to make
astatement.
The Owhy grow up) campaign
The why grow up campaign sets up a long.term strategy and vision for the brand. "t is
sharp, it is in keeping with the contemporary values of what a mango drink can embody.
"t is e#tremely youthful. ver a period of time it will manifest itself in every aspect of the
brand and will be supported through various communication channels and media.
Work so far'
"dentity'
=C
The Frooti logo has been carefully tweaked to look a little more contemporary while
retaining its classic character. The complete metamorphosis will take a little while.
The packaging'
"t)s brighter, cleaner and has a new visual identity. We have created the
Mango >moticons fondly known as Mangoticons. We have launched with = new pack
designs with three new mangoticons by the ne#t season, we)ll have 9@ mangoticons in the
market. The Mangoticons will assume more significance as we go on. &ou will see, it will
unfold.
2ommunication'
The why grow up campaign will be culmination of various media
conventional and alternate. The web, ,ocial media, ambient installations, in.premise
stunts S spectaculars and with a huge thrust on :ser Henerated 2ontent $:H2%. The first
big piece of communication with the Owhy grow up) theme is a T* commercial. 7ere
we)ve portrayed mango drink lovers across age groups en8oying the drink the way it is
truly en8oyed, without inhibitions and with contentious slurps. The Owhy grow up strategy
will constantly reinvent itself over the years and promises to bring in cutting edge
communication year after year on the brand. -part from the youth and e#ternal market,
2reativeland is also creating internal communication in the form of workshops to brand
partners, media agency, sales etc., as this is a completely new way of thinking on Frooti.
The film has been directed by /rakash *arma of 4irvana Film, a good friend and an
ama!ingly mature filmmaker. 2ouldn)t have thought of a better guy to do this. - great
eye and a keen understanding of the sub8ect. The film was edited at *7M ,ingapore. -nd
the sound design was done by >van from The Hunnery. What an e#tra.ordinary
person,he)s a Oone man magic troupe)N My team at 2reativeland who are e#ceptional and
")m e#tremely proud of. -nd the marketing team at /arle -gro who ")m thankful to for
trusting me and my team with such a huge decision.
=3
Mango Frooti
,ay ThelloT to the most passionate member of our family, Mango Frooti.
The Mr. ,een.it.all in the family, this popular fresh UnU 8uicy mango drink has been around
since 3GF@. "t has also been rated as "ndiaUs Most Trusted Fruit (everage (randV. Mango
Frooti has this unique ability to change with the times, and to adapt to the diverse
preferences of consumers across ages. From its golden.day Tetra/ak to the most recent
triangular.shaped packaging, every pioneering move has made it more endearing to its
evergrowing
fan club.
Frooti, or Mango Frooti, as it is popularly called, is the largest.selling mango drink in
"ndia. "t is the flagship product of and the most successful drink offered by /arle -gro
"ndia /vt. ;td. Frooti was launched in 3GF@ in Tetra/ak packages. "t is also now available
in />T bottles and rectangular shaped packs. Frooti is e#ported to the :.,.-.,
2anada,:.P., :.-.>., ,audi -rabia, Malaysia, Maldives, ,ingapore, Thailand, 4ew
Wealand,-ustralia, Mo!ambique, 2ongo, Hhana, Malawi, Wambia, 4igeria,
Tan!ania,Qapan etc.
Mango Frooti
2ompany /arle -gro /vt. ;td.
Founded 3GF@
-ddress ff W.>. 7ighway, -ndheri >ast, Mumbai,
"ndia
"ngredients
The drink contains mango pulp, water, sugar, citric acid, ascorbic acid, and approved
colouring and flavouring.
7istory
Frooti was launched in a green rectangular Tetra/ak as a ready.to.serve mango
drink.-lthough it wasn)t the first mango drink, Frooti quickly acquired a large market
share.The packaging played a ma8or role behind its success, since it could be carried
easily and conveniently. Frooti also provided a refreshing mango taste that translated into
a huge demand for itself. The tagline 0Mango Frooti, Fresh and Quicy1, helped the brand
strengthen and consolidate its position as the leader.
(rand 2ommunication
ver the years the brand has e#perienced a series of repositioning. From the original
tagline 0Mango Frooti, Fresh and Quicy1 to 0Quice :p your ;ife1. >ventually, the original
tagline. 0Mango Frooti, Fresh and Quicy1 was reinstalled. The present ad campaigns
focus on reaffirming Frooti)s leading position across "ndia in a confident manner.
/ackaging
To ensure convenience, Frooti is offered in si!e variants' 3 litre, 9@C ml and 9CC ml
Tetra/aks. - consumer study revealed that the consumers needed a recap bottle that
didn)t e#ist in the mango drink segment. /arle -gro considered the consumer
=9
requirement strongly and launched Frooti in a new hygienic hotfill />T bottle, making it
the first mango drink to be offered in the />T bottles.
(rand update ' Frooti
Frooti has come out with a new campaign this summer. The brand had gone in
for a complete makeover. The packaging and the positioning has changed. "nfact
Frooti for the past few years has been trying to catch hold of a consistent theme.
"t had earlier moved away from the T FreshU4UQuicy T positioning . From there
onwards, the brand was on a sticky wicket and was not quite settling on a
positioning. "t had the (indaas positioning and later T Frooti. another name for
Mango T theme. (ut the brand was not quite stable on those platforms.
The ne w Frooti has a new modern packaging. The choice of
colors and the logo has been tweaked to make the brand more contemporary.
4ow the packaging is lot more neat and cool.
What is more stiking is the change in the positioning of Frooti. ;ast year , the
brand tried to pitch itself as an alternative to mango. 4ow the brand is trying to
be more radical and a little mad.
Watch the new T*2 here ' Mango Frooti
The new campaign is based on a simple consumer observation. Most of us which
drink Frooti Tetrapack will try to chase the last drop of Frooti. This habit has
been continuing for generations. ;ast day " saw my daughter trying her best to
capture those evasive last drops trapped inside the pack. Pnowingly or
unknowingly we make funny sounds using the straw when indulging with Frooti.
-nd we all had the habit of breaking those packs for that sound. The agency had
tried to capture all these in the new communication.
The brand also has adopted a new baseline T Why Hrow :pT. " think this
positioning is a powerful idea which can be sustained for many years provided
the creatives are able think fresh.>ven in the new avatar, the brand is retaining
the old famous tagline T Fresh 4 Quicy T which is good since Frooti has a very
strong association with that tagline.
-nother interesting move by the brand is the creation of Mango.emoticons . The
brand will now be using mangoticons in its communication which is a really
smart idea. The brand using emoticons can further strengthen the association of
Mango and Frooti.
-lso this mangoticons can generate instant recall with the brand. ,o even a 3
second splash of this emoticons in the T* screen can give the same effect of a =C
second ad. The brand currently have = emoticons and according to the agency , it
is planning to increase it to 9@ by ne#t year. " hope that Frooti uses this emoticons
==
beyond the product package. "t is a powerful brand element which can be an asset
to Frooti.<egarding the new campaign, although the idea is good, " frankly did not get
theidea the first time . " liked the U Why Hrow :pU Tagline but not the ad. may bebecause
" did not like the look of the main character in the ad. ,omewhere down
the line, the ad lost the T 2oolT factor .
=?