Price/Pricing Strategy

One of the 4Ps

Marketing
Successful companies are due to
Customer focus
Heavy commitments to marketing
Share absolute dedication to sensing, servicing and satisfying needs of customers in
a well defined target market
Marketing is delivery of customer satisfaction at a profit
Goal of marketing is to attract new customers by offering superior value and keep
current customers by delivering satisfaction
Marketing is not only telling and selling but satisfying customers needs
Selling occurs only after the product is produced
But marketing starts long before a company has a product
It does its home work to assess needs, volumes, longevity, and how profitable it
will be
It continues throughout products life
Marketing Mix (4 Ps)






The marketing mix principles are controllable variables which have to be carefully
managed and must meet the needs of the defined target group. All elements of
the mix are Linked and must support each other.
Product
Price
Promotion
Place
Marketing Mix Strategy/Role of Price
in it
It is the only mix, which generates a turnover for the organization.
It is also flexible unlike product features and channel communication

The remaining 3ps are the variable cost for the organization.
It costs to produce and design a product,
it costs to distribute a product
It costs to promote it.

Price decisions must be coordinated with other marketing mix tools like product design, distribution, promotion to form a package

Pricing is difficult and must reflect supply and demand relationship.
Pricing a product too high or too low could mean a loss of sales for the organization.

Problems
Cut prices
Too cost oriented rather than customer- value oriented
Not revised often enough to reflect market changes

Marketing Mix strategy/Role of Price in
it
Companies often decide pricing and then
have other marketing mix decisions
Best strategy is not to charge the lowest
price but rather to differentiate marketing
offer to make it worth a higher price
Arrow ,Guess, Nike, Adidas, Mango
(premium brands)
Park Avenue, Spykar, STOP, Bata, Cambridge,
Perfumes- Hugo Boss, Issey miyake, Gucci,
Trend
Historically, it was negotiation- the barter
Then fixed price policies
But influence of internet is now resulting in
dynamic pricing
Airlines, hotels, purchase of any item can be
negotiated on the net
Auctions of airline tickets, and various consumer
products
How Price affects
Fierce and fast changing pricing environment
Difficult to raise prices and often pressure to slash prices
It is affecting everything from Consumer durables, autos, hotels, phone services,
banking services, chemicals, steel, aluminum etc.
Cutting prices not always the best answer
Lost profits and damaging price wars
Signals to customers that price is more important than brand
Companies should sell value not price by convincing customers that paying a
higher price for the companys brand is justified by the greater value it delivers
The challenge is to find the price that will let the company make a fair profit by
harvesting the customer value it creates

Different Names for Prices in Services
Price all around us
Rent for property
Fees for education or consultancy
Fare for Airlines, Railways, Taxi
Interest rates in Bank or other loans
Salary for Executives
Wages for Workers
Premium in insurance
Commission in advertising
Toll in road or bridge use
Admission ticket in museums, or cinema halls


How do you define Price

In simple words, Price is amount of money
charged for product/ services


Comprehensively, sum of all values that
Consumers exchange for the benefits of
having or using product/ services

Factors to consider when setting prices
Pricing decisions
Internal Factors
Marketing objectives
Marketing Mix strategy
Costs
External Factors
Nature of market and
demand
Competition
Other environmental factors
Internal Factors
Marketing objectives
Decide strategy for the product
How are you positioning your product in the market? Is pricing going to
be a key part of that positioning?
If you're running a discount store (Dollar Store), you're always going to
be trying to keep your prices as low as possible (or at least lower than
your competitors). Also Low cost Airlines. Low price examples- Zenith
computers vs HP or Sony

On the other hand, if you're positioning your product as an exclusive
luxury product, a price that's too low may actually hurt your image. (
Mont Blanc Pens)
Positioning-(Toyota-Lexus), Plasma TV( Sony)

PRICE & POSITIONING-Internal Factors
Price is a crucial product positioning factor
Starts with deciding target cost and work back to designing product
This is called Target costing
Example Swatch- buyers wanted low-cost fashion accessory that also
keeps time. Reliability, precision, durability were expectations and low
costs
It developed a revolutionary automated process for mass producing
new watches
The pricing has to be consistent with the positioning. People really
do hold strongly to the idea that you get what you pay for.


COSTS
Calculate the fixed and variable costs associated with your product or service.
How much is the "cost of goods", i.e., a cost associated with each item sold or
service delivered, and how much is "fixed overhead", i.e., it doesn't change
unless your company changes dramatically in size.
Costs at different levels of production
Remember that your gross margin (price minus cost of goods) has to amply cover
your fixed overhead in order for you to turn a profit. Many under-estimate this
and it gets them into trouble.

Airlines fixed cost dominate, Flight crew (7%), Fuel(15%), maintenance
(10%) are fixed costs. If they fly with few passengers, they can only save the
above, but what about the rest ?

Demand Curve- The external factor
How will your pricing affect demand? You're going to have to do some
basic market research to find this out, even if it's informal. Get 10 people
to answer a simple questionnaire, asking them, "Would you buy this
product/service at X price? Y price? Z price?" For a larger venture, you'll
want to do something more formal, of course -- perhaps hire a market
research firm. But even a sole practitioner can chart a basic curve that
says that at X price, X' percentage will buy, at Y price, Y' will buy, and at Z
price Z' will buy.

Pricing in different types of market- the
external factor
- Pure Competition market
Many buyers and sellers. No single buyer or seller has much
effect on the going market price
Seller cannot charge more than the going price because buyers
can get as much as they want from another source. Nor sellers
will charge less
In such a market, marketing, marketing research, product
development, pricing advertising and sales promotion play little
or no role( gold, steel, wheat, sugar etc)




Monopolistic competition

Many buyers and sellers
Range of prices rather than a single price
This due to sellers can differentiate their offers to buyers
Physical products vary in quality, features, styles or service
Sellers create quasi-monopoly for its products
Offers to different segments and freely use branding, availability,
advertising, and personal selling

Oligopolistic competition

Few sellers that are highly sensitive to each
others pricing and marketing strategies
Steel/aluminium or cars/computers
Difficult for new sellers to enter the market
Each seller is alert to competitors strategies and
moves.
Never sure whether it will gain anything
permanent through price cut
Pure monopoly

Market is of one seller
May be government or a power company or a
company like Microsoft selling Windows
Pricing handled differently
Can keep prices below cost (social cause)
Petrol or diesel prices
Competition- an external factor
Their costs, prices and offers
Cannon camera, and hosts of choices like Minolta, Nikon, Pentax
are considered by the customer
If Canon follows high-price, high margin strategy, it may attract
competition
Need to benchmark its costs against competitors costs to learn
whether it is operating at a cost advantage or a disadvantage
Need to learn the price and quality of each competitor

ENVIRONMENTAL FACTORS
Are there any legal or other constraints on pricing?
For example, recent ruling on builders about rate per carpet
area should be charged and not on super-built area
Also, what possible actions might your competitors take? Will
too low a price from you trigger a price war? Find out what
external factors may affect your pricing
Economic factors like the interest rates, income tax rates,
import duties, local charges can impact prices

Common Company Objectives
Survival excess capacity
Current profit maximization
Market share maximization
Product quality leadership

Canon/Sharp for low priced faxes
Xerox for high-end
Ford with Limited edition
Retail chain sometimes set prices to prevent competition from entering
market or set prices at competitors levels to stabilize market
Prices are also kept for loyalty and support of resellers
Can be reduced temporarily to create excitement for a product or draw
more customers into retail stores( Big Bazar sales for 2 days? Also barter
old items.
So pricing may play an important role in helping accomplish companys
objectives at many levels


Main goals in pricing
Profit oriented to
To achieve target return on investment or net sales
Maximize profit
Sales oriented to
Increase sales
Maintain or increase market share
Status oriented to
Stablize prices
Meet competition
Pricing Objectives
Short-term profit maximization
cash flow is the overriding consideration.
It's also common among smaller companies hoping
to attract venture funding by demonstrating
profitability as soon as possible.

Pricing Objectives
.
Short-term revenue maximization
Maximize long-term profits by increasing market share and lowering costs
through economy of scale.
Example
newly public company, revenues are considered more important than profits in building
investor confidence.
Higher revenues at a slim profit, or even a loss, show that the company is building market
share and will likely reach profitability. Amazon.com, for example, posted record-
breaking revenues for several years before ever showing a profit, and its market
capitalization reflected the high investor confidence those revenues generated.

Opportunities exist during festival season, marriage season, holiday season

Pricing Objectives
Maximize quantity
May be to focus on reducing long-term costs by achieving economies of
scale.
Maximize market penetration - particularly appropriate when you expect
to have a lot repeat customers.


Examples are when old car/mobile models are to be discontinued and
new models introduced
Pricing Objectives
Maximize profit margin
This strategy is most appropriate when the number of sales is
either expected to be very low or sporadic and unpredictable.

Examples include custom jewelry, art, hand-made
automobiles and other luxury items.

Pricing Objectives

Differentiation
At one extreme, being the low-cost leader is a
form of differentiation from the competition.

At the other end, a high price signals high
quality and/or a high level of service.

Some people really do order lobster just because
it's the most expensive thing on the menu.



Pricing Objectives
Survival
such as a price war
market decline or
market saturation

you must temporarily set a price that will
cover costs and allow you to continue
operations.

Models for calculating Price
Cost-plus pricing
Production cost, including both cost of goods and fixed
costs at your current volume, plus a certain profit
margin.

You decide that you want to operate at a 20% markup,
so you add $10 (20% x $50) to the cost and come up
with a price of $60 per unit.

So long as you have your costs calculated correctly and
have accurately predicted your sales volume, you will
always be operating at a profit.

Calculating price- Target return pricing

Set your price to achieve a target return-on-investment (ROI).
For example, let's use the same situation as above, and
assume that you have $10,000 invested in the company.
Your expected sales volume is 1,000 units in the first year.
You want to recoup all your investment in the first year, so you
need to make $10,000 profit on 1,000 units, or $10 profit per
unit, giving you again a price of $60 per unit.

Calculating price- Value-based pricing
Price your product based on the value it creates for the
customer.
Usually the most profitable form of pricing, if you can achieve
it.
The most extreme variation on this is "pay for performance"
pricing for services, in which you charge on a variable scale
according to the results you achieve.
Saves the typical customer $1,000 a year in, say, energy costs.
In that case, $60 seems like a bargain - maybe even too cheap.
H
Calculating Price- Popular price points aka
psychological pricing
There are certain "price points" (specific prices) at which people become
much more willing to buy a certain type of product.
For example, "under Rs100" is a popular price point.
Rs.49, Rs.99 (notice how many fast-food places have a "value menu").
BATA famous for Rs.499/ Rs.999

Calculating Price - Fair pricing
- Sometimes it simply doesn't matter what the value of the
product is, even if you don't have any direct competition.
There is simply a limit to what consumers perceive as "fair". If
it's obvious that your product only cost $20 to manufacture,
even if it delivered $10,000 in value, you'd have a hard time
charging two or three thousand dollars for it -- people would
just feel like they were being gouged.
Pricing Strategy Matrix

Marketing Mix- The Price
Pricing Strategies
Penetration
Skimming
Competition
Product line
Bundle
Psychological
Pricing is the only mix which generates a turnover for the organization.
The remaining 3ps are the variable cost for the organization.
It costs to produce and design a product, it costs to distribute a product and costs to promote it.
Price must support these elements of the mix. Pricing is difficult and must reflect supply and demand relationship.


Premium/Penetration/Economy
PRICING
Premium Pricing.
Use a high price where there is a uniqueness about the product or service. This
approach is used where a a substantial competitive advantage exists. Such high
prices are charge for luxuries such as Gucci, Raybans Savoy Hotel rooms, and
Concorde flights.
Penetration Pricing.
The price charged for products and services is set artificially low in order to gain
market share. Once this is achieved, the price is increased. This approach was used
by Mobile Companies (Tata Indicom or Reliance) or Introductory prices and offers
like personal care products- Lux Body wash/Maggi sauces
Economy Pricing.
This is a no frills low price. The cost of marketing and manufacture are kept at a
minimum. Supermarkets often have economy brands for soups, spaghetti, etc.
Skimming
Price Skimming.
Early stages of a product life cycle
Charge a high price because you have a substantial competitive advantage.
However, the advantage is not sustainable. The high price tends to attract
new competitors into the market, and the price inevitably falls due to
increased supply. Manufacturers of digital watches used a skimming
approach in the 1970s. Once other manufacturers were tempted into the
market and the watches were produced at a lower unit cost, other
marketing strategies and pricing approaches are implemented.
Premium pricing, penetration pricing, economy pricing, and price
skimming are the four main pricing policies/strategies.
Psychological/ Product Line
Psychological Pricing.
This approach is used when the marketer wants the consumer
to respond on an emotional, rather than rational basis. For
example 'price point perspective' 99 cents not one dollar.
Product Line Pricing.
Where there is a range of product or services the pricing
reflect the benefits of parts of the range. For example car
washes. Basic wash could be $2, wash and wax $4, and the
whole package $6.

Optional/Captive/Product Bundle
Pricing
Optional Product Pricing.
Companies will attempt to increase the amount customer spend once they start to
buy. Optional 'extras' increase the overall price of the product or service. For
example airlines will charge for optional extras such as guaranteeing a window
seat or reserving a row of seats next to each other.
Captive Product Pricing
Where products have complements, companies will charge a premium price where
the consumer is captured. For example a razor manufacturer will charge a low
price and recoup its margin (and more) from the sale of the only design of blades
which fit the razor.
Product Bundle Pricing.
Here sellers combine several products in the same package. This also serves to
move old stock. Videos and CDs are often sold using the bundle approach
Promotional/Geographical/Value Pricing
Promotional Pricing.
Pricing to promote a product is a very common application. There are
many examples of promotional pricing including approaches such as
BOGOF (Buy One Get One Free).
Geographical Pricing.
Geographical pricing is evident where there are variations in price in
different parts of the world. For example rarity value, or where shipping
costs increase price.
Value Pricing.
This approach is used where external factors such as recession or
increased competition force companies to provide 'value' products and
services to retain sales e.g. value meals at McDonalds.