PRICING STRATEGIES

• HONDA: ENTERING THE MARKET VIA THE PEOPLE’S CAR PROGRAM

Up until the end of the Martial Law era, there were only three car brands in the country: Toyota,
Mitsubishi, and Nissan. But by the early 1990s, the People’s Car Program, a government initiative
to introduce low-cost automobiles to the market, led to the entry of a host of new automobiles.
The program, however, had a fairly challenging entry requirement. In order for a new automaker
to enter the Philippine market, it must introduce a “People’s Car” which at that time was
classified as a vehicle that would be on sale for less than 200,000 pesos only. Kia, in particular,
became an early entrant into the market with its highly successful model, the Kia Pride.
To Honda Motors, however, which was intent on entering the local market, this was going to be
a serious challenge. Honda was a producer of cars that were at a slight premium compared to
other mid-priced vehicles and there was no way tat they could produce a vehicle that could be
sold for less than 200,000 pesos.
The company eventually got around the entry requirement through the skin of its teeth. For its
People’s Car entry, Honda choose to bring in the two-door Honda Civic – a car which normally
would be sold at a loss if priced below 200,000 pesos. The company then proceeded to strip the
car of all its luxuries – air conditioning, upholstery, sound system, power options – and declare the
stripped vehicle to be its People’s Car. If any byer wanted to trick out their Civic with these
amenities, then they will have to pay for all the extras.
The two-door Civic went on to become a bestseller. Although even at its stripped down state,
Honda did not make any real money from this model. But that did not matter because the car
allowed the company to enter the Philippine market. It was with its more premium vehicles such
as the Accord and later, the CR-V that it finally able to have profitable operations.
“PRICE IS NOT JUST ABOUT COST PLUS MARKUP. IT SHOULD ALSO BE A TOOL FOR
COMMUNICATION AND FOR STRATEGY.”
Suggested Retail Price? Is not that just a suggestion?
Chances are, you would have already heard of the term “SRP”, it denotes the price that a
consumer product is expected to be sold at over the counter and in stores.

But once upon a time, there was no such thing as a suggested retail price. Prices are always the
subject of negotiation.
In fact, you would still see this pricing mindset whenever you go to tiangge or palengke.
Because the seller knows that the buyer is going to ask for a discount (tawad), a generous level
of price padding is factored into the initial offer price. The buyer, meanwhile, is expected to
understand that the seller does actually put in a generous margin on the merchandise and,
therefore is entitled to ask for tawad.
Merchandisers now look for non-haggling shoppers so they can get away with more than what is
reasonable.
The insights? Consumers do not really know what the real price of a product should be and
sellers can have a pretty wide leeway on how to price their products.

How can we tell that something is cheap or expensive? BY COMPARING.

But if you have no frame of reference or if you have nothing to compare an item with, then you
may have no way of telling whether it is cheap or expensive.

This then led to the development of fixed price policies, where each store item would have a
price that has been set beforehand. Because price has already been preset (either through
price tags or price lists), shoppers are free to simply accept or reject each item without having to
undergo the haggling process with the seller.
But what if the manufacturers or suppliers themselves want to control the end-user price of their
products? That is why we have the SRP.
At any rate, SRPs are intended to be pricing tools for suppliers so that they can somehow control
the list of price of their products at the store level. Without this, they may arbitrarily set prices for
these products or worst price them out of the market’s reach.
Pricing a New Product
If it is a new product that is being sold, then the business can either skim the market or penetrate
the market. Market skimming involves setting the price high in order to milk the segments with
higher disposable incomes, with the price gradually being reduced over time to milk the next
income tiers, and so on. This works particularly well for products that have built up a lot of
anticipation from the market which do not have any clear substitutes at the moment.
Market penetration involves setting the price even lower than planned, if only to attract as much
of the market into trying it and hopefully becoming loyal to it. Eventually the price will be
increased, but it is hoped that by that time, the consumers would have already made the
product part of their lifestyles so there is less resistance to increases in price.
PSYCHOLOGICAL PRICING

Much of pricing’s communication, particularly with regard to referencing other products’ prices,
is inherently psychological in nature.

• Odd-number pricing. Prices that ends in non-rounded odd numbers, such as 9.95 or 99.50,
are said to give the consumers the perception that the prices are not as expensive as they
actually are. This is because we read numbers from left to right and a 9 is seen to be not as
intimidating a 10 would be, nor would a 99 be as imposing as a 100.
The presence of the centavos also somehow communicates to the consumer that the price is
already set to its lowest possible amount. Also, the odd-end numbers are seen to be “friendlier”
or more palatable than even numbers.

• Free pricing. Assume that you are selling two complementary products as a tube of
toothpaste for 80 pesos and a cheap toothbrush for 20 pesos. You are going to gain far
greater leverage by bundling these two products together, selling the bundle for 100 pesos
and proclaiming the toothbrush as a free. Studies show that “free” items have such
compelling power that you will likely be able to sell more using this bundling than if you
simply were selling the toothpaste at 80 pesos.
DISCRIMINATORY PRICING
Discrimination is defined as the treating of different groups of people in different manners. In
marketing, however, market segmentation is a way of life. Market segmentation often translates
to opportunities for discriminatory pricing – offering different prices to different market segments.

• Customer-segment pricing. If your product is being offered in both an upscale distribution

point as well as a retailer for a broader consumer market, then you may have a different
price to each. You get to benefit from then higher margins with the former while
maximizing volume with the latter. Another example is the practice of student pricing.
Students get discounts while others are “discriminated”.

• Product-form pricing. What is the difference between business and economy class on a
plane? The food and the legroom. But in terms of actual costs incurred, the costs involved
for providing business class amenities are not commensurate with the far greater margins
 that the airline charges for it. Hence, much of the price premium that is being charged for
business class is simply a discrimination between the passengers for these different classes.

• Image pricing. Upscale products practically demand higher prices, otherwise their
credibility may be ruined. A high-end luxury vehicle may have a sticker price that is
tremendously high compared to its actual costs of production. This extra-high margin is
there in order to preserve the upscale image of the product more than anything else.

• Location pricing. Metro Manila-based manufacturers have a Metro Manila price and a
provincial price. This is a form of discrimination that is based on the physical location of the
buyers. The rationale is that it may cost more to ship the products to provincial markets
versus shipping within Metro Manila.

• Time pricing. A bakeshop makes it a point to sell all of its remaining stock at 50 percent off
once the clock hits 8p.m. This is a form of discrimination – what is the difference between
selling the stocks at 7:59 p.m. and a minute later?
PRODUCT MIX PRICING
The following are price considerations in managing a portfolio of products.

• Product line pricing. If you have a line of products, chances are that many of these try to
target distinct markets by being placed at different price points. The flagship product in
line will likely have a popular price point as it seeks to target a wide audience. The
premium product gets a premium price while a populist offering will have a low price
point. P&G has Tide as its high-value flagship brand, while Ariel has (ideally) a slightly more
premium price because of its more effective cleaning power, and Bonux is the low priced
good-value offering that goes againts cheaper detergent.

• Optional feature pricing. It is difficult to sell complete packages to consumers. It may be

easier to sell them a basic stripped-down model first, then everything else becoming
optional add-ons. This is how a number of automobiles are sold – the base model is
stripped of most luxuries, but can therefore be offered at an attractive price point.
However, once buyer chooses to add on the options – leather seat covers, audio system ,
navigation – the total amount rises.

• Captive product pricing. You buy a printer for a very low outlay but when it is time to get
new ink cartridges, the inks turn out to be expensive. Companies that are in the business of
selling supplies tend to work on this way, to the point of selling their product at a loss
because they end up having the customer as a captive market for the consumables on
which they really make money.

• By-product pricing. Imagine you are producing beer and have had no use for the spent
grains that are a by-product of the brewing process. But then one day you learn to process
the spent grains and turn them into animal feeds, so now you can create another business
unit that will focus on feeds. The unit will have to buy the spent grains from the brewing
 business. The brewing business then gets additional revenues effectively lowering its COS
which will allow lower prices.

• Product bundle pricing. If you have a portfolio of product to sell, chances are that not all
of them are fast-moving goods. Some may be laggards or simply be items that the market
is not that aware of. In cases like these, bundling the slower products together with star
performers can be a strategic option. The bundle will be offered at a discount, making the
package attractive to consumers. The star performer ends up subsidizing the laggard in
order to keep it alive or the laggard is sold at a loss to get rid of inventory,
There are still one more factor to consider when setting the final price. Before rolling out your SRP,
you will still need to map out all the possible discounts, incentives, and even taxes that you
would want to and have them plug into your price schema.
Trade discounts are the incentives that you offer to resellers or participants in your selling process.
This can include commissions for sales personnel.

VAT or Value-added Tax is a form of input tax where the tax is earmarked onto the added value
that your firm produces. The current rate of VAT is 12%, this means that and additional 12% of
your SRP should be earmarked for the payment of VAT