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Pricing Strategy Project Final PDF
Pricing Strategy Project Final PDF
Abstract :
From time to time we come across instances where businesses are not realizing their full
potential when setting prices. Sometimes this can mean missed revenue, in other cases it can
have a negative effect on the brand – sending a mixed message of what it stands for. In either
case profits can be lost. In this research paper , we take a look at the key factors to consider when
reviewing your pricing strategy. Price is the only revenue generating element amongst the
4ps,the rest being cost centers. Pricing is the manual or automatic process of applying prices to
purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or
sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date,
combination of multiple orders or lines, and many others. Automated systems require more setup
and maintenance but may prevent pricing errors. In setting pricing policy, a company estimates
the demand curve, the probable quantities it will sell at each possible price. It estimates how its
costs vary at different levels of output . In this paper , we also study situations when companies
often face situations where they may need to cut or raise prices. The firm facing a competitor's
price change must try to understand the competitor's intent and the likely duration of the change.
Introduction :
One of the four major elements of the marketing mix is price. Pricing is an important strategic
issue because it is related to product positioning. Furthermore, pricing affects other marketing
mix elements such as product features, channel decisions, and promotion. Price is the one
element of the marketing mix that produces revenue; the other elements produce costs. Prices are
perhaps the easiest element of the marketing program to adjust; product features, channels, and
even promotion take more time. Price also communicates to the market the company's intended
value positioning of its product or brand. A well-designed and marketed product can command a
price premium and reap big profits.
Motivation :
Developing strategy is one thing-managing the change process to embed that strategy in the
organization is quite another. The truth is that implementing effective pricing strategy involves
changing the expectations and behaviors of all of the actors involved in the sales process.
Customers must learn that they will be treated fairly and that abusive purchase tactics will not be
rewarded with ad hoc discounts. Sales must learn that they will be rewarded for closing deals
that increase firm profitability rather than using price as a tactical lever to increase sales volume.
Finance must learn to look beyond cost as a determinant of price to better understand the
tradeoffs between price, cost, and market response. ―Financial incentives are, without question,
one of the most powerful levers for behavioral change among salespeople.‖
A low price can be a viable substitute for product quality, effective promotions, or an energetic
selling effort by distributors
From the marketers point of view, an efficient price is a price that is very close to the maximum
that customers are prepared to pay. In economic terms, it is a price that shifts most of the
consumer surplus to the producer. A good pricing strategy would be the one which could balance
between the price floor(the price below which the organization ends up in losses) and the price
ceiling(the price beyond which the organization experiences a no demand situation).
Understanding Pricing
Price is not just a number on a tag or an item : Price is all around us. You pay rent for
your apartment, tuition for your education, and a fee to your physician or dentist. The airline,
railway, taxi, and bus companies charge you a fare; the local utilities call their price a rate; and
the local bank charges you interest for the money you borrow. The price for driving your car on
Florida's Sunshine Parkway is a toll, and the company that insures your car charges you a
premium. The guest lecturer charges an honorarium to tell you about a government official who
took a bribe to help a shady character steal dues collected by a trade association. Clubs or
societies to which you belong may make a special assessment to pay unusual expenses. Your
regular lawyer may ask for a retainer to cover her services. The "price" of an executive is a
salary, the price of a salesperson may be a commission, and the price of a worker is a wage.
Finally, although economists would disagree, many of us feel that income taxes are the price we
pay for the privilege of making money.
Throughout most of history, prices were set by negotiation between buyers and sellers.
"Bargaining" is still a sport in some areas. Setting one price for all buyers is a relatively modern
idea that arose with the development of large-scale retailing at the end of the nineteenth century.
F. W. Woolworth, Tiffany and Co., John Wanamaker, and others advertised a "strictly one-price
policy," because they carried so many items and supervised so many employees.
Today the Internet is partially reversing the fixed pricing trend. Computer technology is
making it easier for sellers to use software that monitors customers' movements over the Web
and allows them to customize offers and prices. New software applications are also allowing
buyers to compare prices instantaneously through online robotic shoppers. As one industry
observer noted, "We are moving toward a very sophisticated economy. It's kind of an arms race
between merchant technology and consumer technology.
Traditionally, price has operated as the major determinant of buyer choice. This is still
the case in poorer nations, among poorer groups, and with commodity-type products. Although
nonprice factors have become more important in recent decades, price still remains one of the
most important elements determining market share and profitability. Consumers and purchasing
agents have more access to price information and price discounters. Consumers put pressure on
retailers to lower their prices. Retailers put pressure on manufacturers to lower their prices. The
result is a marketplace characterized by heavy discounting and sales promotion.
independently of the rest of the marketing mix rather than as an intrinsic element of market-
positioning strategy; and price is not varied enough for different product items, market segments,
distribution channels, and purchase occasions.
Others have a different attitude: They use price as a key strategic tool. These "power
pricers" have discovered the highly leveraged effect of price on the bottom line. They customize
prices and offerings based on segment value and costs.
The importance of pricing for profitability was demonstrated in a 1992 study by
McKinsey & Company. Examining 2,400 companies, McKinsey concluded that a 1 percent
improvement in price created an improvement in operating profit of 11.1 percent. By contrast, 1
percent improvements in variable cost, volume, and fixed cost produced profit improvements,
respectively, of only 7.8 percent, 3.3 percent, and 2.3 percent.
Effectively designing and implementing pricing strategies requires a thorough
understanding of consumer pricing psychology and a systematic approach to setting, adapting,
and changing prices.
Price
Supply
Demand
Quantity
Fig : Graph showing how the supply and demand for the goods generally affects prices
Law of Demand: all other factors being the same, higher prices will lead to lower quantities
being demanded.
There are many ways to price a product which have been discussed in detail in the paper.
Premium Pricing.
Penetration Pricing.
Economy Pricing.
Price Skimming.
Psychological Pricing.
Product Line Pricing.
Optional Product Pricing.
Captive Products Pricing .
Product Bundle Pricing.
Promotional Pricing.
Geographical Pricing.
Value Pricing.
A successful pricing strategy must be built on a solid analytical foundation which goes well
beyond high-level customer values or competitive anecdotes. It requires quantified models of
customer decision-making, competitive economics, and segmented internal economics.
– matching prices
– add to bundle (as long as customers want it!)
• Create barriers to exit
– contracts / subscriptions
– automatic billing
– phone numbers (no longer in the U.S.)
– family plans
• Provide loyalty programs
– frequent flyer
– Starbuck cards
Competition Customer
Cost Custom
PRICING MODELS :
• Cost-based Pricing
• Value-based Pricing
• Flat-Rate Pricing
• Ala-Carte Pricing
• Two-Part Pricing
• Peak Load / Congestion Pricing
• Dynamic Pricing
Flat-Rate Pricing
• Single rate per time period:
– PROS:
• provides unlimited use
• increases use
• simple to explain & bill
• popular with customers / low risk
– CONS:
• difficult to predict average price
• unfair in that some people subsidize others
• fair in that charges are predictable
Ala-Carte Pricing
Variable rate depending on use:
– PROS:
• considered fair
– greater choice
– greater control
– CONS:
• more difficult to explain
• more difficult to bill
• more risk
Two-part Pricing I
Combines flat rate plus variable:
e.g., monthly fee plus cost per minute (declining?)
– PROS
• spreads costs more fairly
– CONS
• perceived as hassle
• unpredictable
Two-Part Pricing II
Combines down-payment & flat rate per month:
– PROS:
• covers fixed costs immediately
• spreads customer’s costs
• fits customer’s monthly budget
• generates financing revenues
• predictable / low risk
– CONS:
• increases total cost to customer
• requires long-term billing
Dynamic Pricing
Variable rate for each customer:
– PROS:
• maximizes profit per customer
– CONS:
• difficult to implement
• requires detailed demand schedule
• difficult to explain
• considered unfair
PRICE-QUALITY INFERENCES
Many consumers use price as an indicator of quality. Image pricing is especially effective
with ego-sensitive products such as perfumes and expensive cars. A $100 bottle of perfume
might contain $10 worth of scent, but gift givers pay $100 to communicate their high regard for
the receiver.
Price and quality perceptions of cars interact. Higher-priced cars are perceived to possess
high quality. Higher-quality cars are likewise perceived to be higher priced than they actually
are. When alternative information about true quality is available, price becomes a less significant
indicator of quality. When this information is not available, price acts as a signal of quality.
Some brands adopt scarcity as a means to signify quality and justify premium pricing.
Some automakers have bucked the massive discounting craze that shook the industry and are
producing smaller batches of new models, creating a buzz around them, and using the demand to
raise the sticker price. Waiting lists, once reserved for limited-edition cars like Ferraris, are
becoming more common for mass-market models, including Volkswagen and Acura SUVs and
Toyota and Honda minivans.
PRICE CUES Consumer perceptions of prices are also affected by alternative pricing
strategies. Many sellers believe that prices should end in an odd number. Many customers see a
stereo amplifier priced at $299 instead of $300 as a price in the $200 range rather than $300
range. Research has shown that consumers tend to process prices in a "left-to-right" manner
rather than by rounding. Price encoding in this fashion is important if there is a mental price
break at the higher, rounded price. Another explanation for "9" endings is that they convey the
notion of a discount or bargain, suggesting that if a company wants a high-price image, it should
avoid the odd-ending tactic. One study even showed that demand was actually increased one-
third by raising the price of a dress from $34 to $39, but demand was unchanged when the price
was increased from $34 to $44.
Prices that end with "0" and "5" are also common in the marketplace as they are thought to be
easier for consumers to process and retrieve from memory. "Sale" signs next to prices have been
shown to spur demand, but only if not overused: Total category sales are highest when some, but
not all, items in a category have sale signs; past a certain point, use of additional sale signs will
cause total category sales to fall.
Estimating costs;
Analyzing competitors' costs, prices, and offers;
Selecting a pricing method; and
Selecting the final price.
Price Segmentation
• Big opportunity:
– Computer allows finer discrimination
– Customers want choice but not confusion
Segments
Consumer type : Use of product
• Speed , • immediate,
• quality, • soon ,
• 7/24/365 , • overnight
• options / content
through pricing: survival, maximum current profit, maximum market share, maximum market
skimming, or product-quality leadership.
SURVIVAL Companies pursue survival as their major objective if they are plagued with
overcapacity, intense competition, or changing consumer wants. As long as prices cover variable
costs and some fixed costs, the company stays in business. Survival is a short-run objective; in
the long run, the firm must learn how to add value or face extinction.
MAXIMUM CURRENT PROFIT Many companies try to set a price that will maximize
current profits. They estimate the demand and costs associated with alternative prices and choose
the price that produces maximum current profit, cash flow, or rate of return on investment. This
strategy assumes that the firm has knowledge of its demand and cost functions; in reality, these
are difficult to estimate. In emphasizing current performance, the company may sacrifice long-
run performance by ignoring the effects of other marketing-mix variables, competitors' reactions,
and legal restraints on price.
MAXIMUM MARKET SHARE Some companies want to maximize their market share.
They believe that a higher sales volume will lead to lower unit costs and higher long-run profit.
They set the lowest price, assuming the market is price sensitive. Texas Instruments (TI) has
practiced this market-penetration pricing. TI would build a large plant, set its price as low as
possible, win a large market share, experience falling costs, and cut its price further as costs fall.
The following conditions favor setting a low price:
The market is highly price sensitive, and a low price stimulates market growth;
Production and distribution costs fall with accumulated production experience; and
A low price discourages actual and potential competition.
Penetration: Starts at lowest possible price
PROS: penetrates market quickly , keeps out competition
CONS: creates low reference price , misses full profit potential
MAXIMUM MARKET SKIMMING Companies unveiling a new technology favor
setting high prices to maximize market skimming. Sony is a frequent practitioner of market-
skimming pricing, where prices start high and are slowly lowered over time. When Sony
introduced the world's first high-definition television (HDTV) to the Japanese market in 1990, it
was priced at $43,000. So that Sony could "skim" the maximum amount of revenue from the
various segments of the market, the price dropped steadily through the years—a 28-inch HDTV
cost just over $6,000 in 1993 and a 42-inch HDTV cost about $1,200 in 2004.
Market skimming makes sense under the following conditions:
A sufficient number of buyers have a high current demand;
The unit costs of producing a small volume are not so high that they cancel the advantage
of charging what the traffic will bear;
The high initial price does not attract more competitors to the market;
The high price communicates the image of a superior product.
Skimming: Adjusts prices down over time:
PROS: skims off maximum profit for each segment & establishes high reference price
CONS: attracts competition, difficult to administer
enough not to be out of consumers' reach. Brands such as Starbucks coffee, Aveda shampoo,
Victoria's Secret lingerie, BMW cars, and Viking ranges have been able to position themselves
as quality leaders in their categories, combining quality, luxury, and premium prices with an
intensely loyal customer base.
OTHER OBJECTIVES Nonprofit and public organizations may have other pricing
objectives. A university aims for partial cost recovery, knowing that it must rely on private gifts
and public grants to cover the remaining costs. A nonprofit hospital may aim for full cost
recovery in its pricing. A nonprofit theater company may price its productions to fill the
maximum number of theater seats. A social service agency may set a service price geared to
client income. Whatever the specific objective, businesses that use price as a strategic tool will
profit more than those who simply let costs or the market determine their pricing.
Price elasticity depends on the magnitude and direction of the contemplated price change.
It may be negligible with a small price change and substantial with a large price change. It may
differ for a price cut versus a price increase, and there may be a price indifference band within
which price changes have little or no effect. A McKinsey pricing study estimated that the price
indifference band can range as large as 17 percent for mouthwash, 13 percent for batteries, 9
percent for small appliances, and 2 percent for certificates of deposit.
Finally, long-run price elasticity may differ from short-run elasticity. Buyers may
continue to buy from a current supplier after a price increase, but they may eventually switch
suppliers. Here demand is more elastic in the long run than in the short run, or the reverse may
happen: Buyers may drop a supplier after being notified of a price increase but return later. The
distinction between short-run and long-run elasticity means that sellers will not know the total
effect of a price change until time passes.
Now suppose three firms compete in this industry, TI, A, and B. TI is the lowest-cost
producer at $8, having produced 400,000 units in the past. If all three firms sell the calculator for
$10, TI makes $2 profit per unit, A makes $1 per unit, and B breaks even. The smart move for TI
would be to lower its price to $9. This will drive B out of the market, and even A may consider
leaving. TI will pick up the business that would have gone to B (and possibly A). Furthermore,
price-sensitive customers will enter the market at the lower price. As production increases
beyond 400,000 units, TI's costs will drop still further and faster and more than restore its profits,
even at a price of $9. TI has used this aggressive pricing strategy repeatedly to gain market share
and drive others out of the industry.
Experience-curve pricing, nevertheless, carries major risks. Aggressive pricing might
give the product a cheap image. The strategy also assumes that competitors are weak followers.
It leads the company into building more plants to meet demand, while a competitor innovates a
lower-cost technology. The market leader is now stuck with the old technology. Most
experience-curve pricing has focused on manufacturing costs, but all costs can be improved on,
including marketing costs. If three firms are each investing a large sum of money in
telemarketing, the firm that has used it the longest might achieve the lowest costs. This firm can
charge a little less for its product and still earn the same return, all other costs being equal.
ACTIVITY-BASED COST ACCOUNTING
Today's companies try to adapt their offers and terms to different buyers. A manufacturer,
for example, will negotiate different terms with different retail chains. One retailer may want
daily delivery (to keep inventory lower) while another may accept twice-a-week delivery in
order to get a lower price. The manufacturer's costs will differ with each chain, and so will its
profits. To estimate the real profitability of dealing with different retailers, the manufacturer
needs to use activity-based cost (ABC) accounting instead of standard cost accounting.
ABC accounting tries to identify the real costs associated with serving each customer. It
allocates indirect costs like clerical costs, office expenses, supplies, and so on, to the activities
that use them, rather than in some proportion to direct costs. Both variable and overhead costs
are tagged back to each customer. Companies that fail to measure their costs correctly are not
measuring their profit correctly and are likely to misallocate their marketing effort. The key to
effectively employing ABC is to define and judge "activities" properly. One proposed time-
based solution calculates the cost of one minute of overhead and then decides how much of this
cost each activity uses.
TARGET COSTING
Costs change with production scale and experience. They can also change as a result of a
concentrated effort by designers, engineers, and purchasing agents to reduce them through target
costing. Market research is used to establish a new product's desired functions and the price at
which the product will sell, given its appeal and competitors' prices. Deducting the desired profit
margin from this price leaves the target cost that must be achieved. Each cost element—design,
engineering, manufacturing, sales—must be examined, and different ways to bring down costs
must be considered. The objective is to bring the final cost projections into the target cost range.
If this is not possible, it may be necessary to stop developing the product because it could not sell
for the target price and make the target profit. To hit price and margin targets, marketers of
9Lives® brand of cat food employed target costing to bring their price down to "four cans for a
dollar" via a reshaped package and redesigned manufacturing processes. Even with lower prices,
profits for the brand doubled.
MARKUP PRICING The most elementary pricing method is to add a standard markup to
the product's cost. Construction companies submit job bids by estimating the total project cost
and adding a standard markup for profit. Lawyers and accountants typically price by adding a
standard markup on their time and costs.
TARGET-RETURN PRICING In target-return pricing, the firm determines the price that
would yield its target rate of return on investment (ROI). Target pricing is used by General
Motors, which prices its automobiles to achieve a 15 to 20 percent ROI. This method is also used
by public utilities, which need to make a fair return on investment.
VALUE PRICING In recent years, several companies have adopted value pricing: They win
loyal customers by charging a fairly low price for a high-quality offering. Among the best
practitioners of value pricing are IKEA and Southwest Airlines. In the early 1990s, Procter &
Gamble created quite a stir when it reduced prices on supermarket staples such as Pampers and
Luvs diapers, liquid Tide detergent, and Folger's coffee to value price them. In the past, a brand-
loyal family had to pay what amounted to a $725 premium for a year's worth of P&G products
versus private-label or low-priced brands. To offer value prices, P&G underwent a major
overhaul. It redesigned the way it developed, manufactured, distributed, priced, marketed, and
sold products to deliver better value at every point in the supply chain.
Value pricing is not a matter of simply setting lower prices; it is a matter of re-engineering the
company's operations to become a low-cost producer without sacrificing quality, and lowering
prices significantly to attract a large number of value-conscious customers. An important type of
value pricing is everyday low pricing (EDLP), which takes place at the retail level. A retailer
who holds to an EDLP pricing policy charges a constant low price with little or no price
promotions and special sales. These constant prices eliminate week-to-week price uncertainty
and can be contrasted to the "high-low" pricing of promotion-oriented competitors. In high-low
pricing, the retailer charges higher prices on an everyday basis but then runs frequent promotions
in which prices are temporarily lowered below the EDLP level. The two different pricing
strategies have been shown to affect consumer price judgments—deep discounts (EDLP) can
lead to lower perceived prices by consumers over time than frequent, shallow discounts (high-
low), even if the actual averages are the same.
In recent years, high-low pricing has given way to EDLP at such widely different venues as
General Motors' Saturn car dealerships and upscale department stores such as Nordstrom; but the
king of EDLP is surely Wal-Mart, which practically defined the term. Except for a few sale items
every month, Wal-Mart promises everyday low prices on major brands. "It's not a short-term
strategy," says one Wal-Mart executive. "You have to be willing to make a commitment to it,
and you have to be able to operate with lower ratios of expense than everybody else."
Some retailers have even based their entire marketing strategy around what could be called
extreme everyday low pricing. Partly fueled by an economic downturn, once unfashionable
"dollar stores" are gaining in popularity:
The most important reason retailers adopt EDLP is that constant sales and promotions are costly
and have eroded consumer confidence in the credibility of everyday shelf prices. Consumers also
have less time and patience for such time-honored traditions as watching for supermarket
specials and clipping coupons. Yet, there is no denying that promotions create excitement and
draw shoppers. For this reason, EDLP is not a guarantee of success. As supermarkets face
heightened competition from their counterparts and from alternative channels, many find that the
key to drawing shoppers is using a combination of high-low and everyday low pricing strategies,
with increased advertising and promotions.
GOING-RATE PRICING In going-rate pricing, the firm bases its price largely on
competitors' prices. The firm might charge the same, more, or less than major competitor(s). In
oligopolistic industries that sell a commodity such as steel, paper, or fertilizer, firms normally
charge the same price. The smaller firms "follow the leader," changing their prices when the
market leader's prices change rather than when their own demand or costs change. Some firms
may charge a slight premium or slight discount, but they preserve the amount of difference. Thus
minor gasoline retailers usually charge a few cents less per gallon than the major oil companies,
without letting the difference increase or decrease.
Going-rate pricing is quite popular. Where costs are difficult to measure or competitive response
is uncertain, firms feel that the going price is a good solution because it is thought to reflect the
industry's collective wisdom.
Brands with average relative quality but high relative advertising budgets were able to
charge premium prices. Consumers apparently were willing to pay higher prices for
known products than for unknown products.
Brands with high relative quality and high relative advertising obtained the highest
prices. Conversely, brands with low quality and low advertising charged the lowest
prices.
The positive relationship between high prices and high advertising held most strongly in
the later stages of the product life cycle for market leaders.
These findings suggest that price is not as important as quality and other benefits in the market
offering. One study asked consumers to rate the importance of price and other attributes in using
online retailing. Only 19 percent cared about price; far more cared about customer support (65
percent), on-time delivery (58 percent), and product shipping and handling (49 percent)
COMPANY PRICING POLICIES The price must be consistent with company pricing
policies. At the same time, companies are not averse to establishing pricing penalties under
certain circumstances.
Airlines charge $150 to those who change their reservations on discount tickets. Banks charge
fees for too many withdrawals in a month or for early withdrawal of a certificate of deposit. Car
rental companies charge $50 to $100 penalties for no-shows for specialty vehicles. Although
these policies are often justifiable, they must be used judiciously so as not to unnecessarily
alienate customers.
Many companies set up a pricing department to develop policies and establish or approve
decisions. The aim is to ensure that salespeople quote prices that are reasonable to customers and
profitable to the company. Dell Computer has developed innovative pricing techniques.
competitive offerings. Although various citizen groups have been formed to pressure companies
to roll back some of these fees, they don't always get a sympathetic ear from state and local
governments who have been guilty of their own array of fees, fines, and penalties to raise
necessary revenue.
Companies justify the extra fees as the only fair and viable way to cover expenses without losing
customers. Many argue that it makes sense to charge a premium for added services that cost
more to provide, rather than charge all customers the same amount regardless of whether or not
they use the extra service. Breaking out charges and fees according to the services involved is
seen as a way to keep the basic costs low. Companies also use fees as a means to weed out
unprofitable customers or change their behavior. Some airlines now charge passengers $50 for
paper tickets and $25 for every bag over 50 pounds.
Ultimately, the viability of extra fees will be decided in the marketplace and by the willingness
of consumers to vote with their wallets and pay the fees or vote with their feet and move on.
IMPACT OF PRICE ON OTHER PARTIES Management must also consider the reactions of
other parties to the contemplated price. How will distributors and dealers feel about it? If they do
not make enough profit, they may not choose to bring the product to market. Will the sales force
be willing to sell at that price? How will competitors react? Will suppliers raise their prices when
they see the company's price? Will the government intervene and prevent this price from being
charged?
While Wal-Mart's relentless drive to squeeze out costs and lower prices has benefited consumers,
the downward price pressure is taking a big toll on suppliers such as Vlasic.
retailers because they may end up losing long-run profits in an effort to meet short-run volume
goals. When automakers get rebate-happy, the market just sits back and waits for a deal. When
Ford was able to buck that trend, it achieved positive results.
FORD
In 2003, at a time when other American auto companies were emphasizing rebates and 0 percent
loans, Ford Motor Company actually raised average prices through "smart pricing." The
company analyzed sales data from dealerships to predict which prices and incentives would be
the most effective for different models in different markets. More marketing funds were allocated
to high-margin but slow-selling models, such as the F-150 truck, as well as to push lucrative
options and extras. Ford offered only a $1,000 rebate on the Escape, a small sport utility vehicle,
but $3,000 on the slower-selling Explorer model. Ford actually increased market share during
this time and estimated that smart pricing contributed one-third of its profit.
Kevin Clancy, chairman of Copernicus, a major marketing research and consulting firm, found
that only between 15 and 35 percent of buyers in most categories are price sensitive. People with
higher incomes and higher product involvement willingly pay more for features, customer
service, quality, added convenience, and the brand name. So it can be a mistake for a strong,
distinctive brand to plunge into price discounting to respond to low-price attacks. At the same
time, discounting can be a useful tool if the company can gain concessions in return, such as
when the customer agrees to sign a three-year contract, is willing to order electronically, thus
saving the company money, or agrees to buy in truck-load quantities.
Sales management needs to monitor the proportion of customers who are receiving discounts,
the average discount, and the particular salespeople who are over relying on discounting.
Higher levels of management should conduct a net price analysis to arrive at the "real price" of
their offering. The real price is affected not only by discounts, but by many other expenses that
reduce the realized price: Suppose the company's list price is $3,000. The average discount is
$300. The company's promotional spending averages $450 (15% of the list price). Co-op
advertising money of $150 is given to retailers to back the product. The company's net price is
$2,100, not $3,000.
Promotional Pricing
Companies can use several pricing techniques to stimulate early purchase:
Loss-leader pricing. Supermarkets and department stores often drop the price on well-
known brands to stimulate additional store traffic. This pays if the revenue on the
additional sales compensates for the lower margins on the loss-leader items.
Manufacturers of loss-leader brands typically object because this practice can dilute the
brand image and bring complaints from retailers who charge the list price. Manufacturers
have tried to restrain intermediaries from loss-leader pricing through lobbying for retail-
price-maintenance laws, but these laws have been revoked.
Special-event pricing. Sellers will establish special prices in certain seasons to draw in
more customers. Every August, there are back-to-school sales.
Cash rebates. Auto companies and other consumer-goods companies offer cash rebates
to encourage purchase of the manufacturers' products within a specified time period.
Rebates can help clear inventories without cutting the stated list price.
Low-interest financing. Instead of cutting its price, the company can offer customers
low-interest financing. Automakers have even announced no-interest financing to attract
customers.
Longer payment terms. Sellers, especially mortgage banks and auto companies, stretch
loans over longer periods and thus lower the monthly payments. Consumers often worry
less about the cost (i.e., the interest rate) of a loan and more about whether they can
afford the monthly payment.
Warranties and service contracts. Companies can promote sales by adding a free or low-
cost warranty or service contract.
Psychological discounting. This strategy involves setting an artificially high price and
then offering the product at substantial savings; for example, "Was $359, now $299."
Illegitimate discount tactics are fought by the Federal Trade Commission and Better
Business Bureaus. Discounts from normal prices are a legitimate form of promotional
pricing.
Promotional-pricing strategies are often a zero-sum game. If they work, competitors copy them
and they lose their effectiveness. If they do not work, they waste money that could have been put
into other marketing tools, such as building up product quality and service or strengthening
product image through advertising.
Differentiated Pricing
Companies often adjust their basic price to accommodate differences in customers, products,
locations, and so on. Lands' End creates men's shirts in many different styles, weights, and levels
of quality. A men's white button-down shirt may cost as little as $18.50 or as much as $48.00.
Price discrimination occurs when a company sells a product or service at two or more prices that
do not reflect a proportional difference in costs. In first-degree price discrimination, the seller
charges a separate price to each customer depending on the intensity of his or her demand. In
second-degree price discrimination, the seller charges less to buyers who buy a larger volume. In
third-degree price discrimination, the seller charges different amounts to different classes of
buyers, as in the following cases:
Customer-segment pricing. Different customer groups are charged different prices for
the same product or service. For example, museums often charge a lower admission fee
to students and senior citizens.
Product-form pricing. Different versions of the product are priced differently but not
proportionately to their respective costs. Evian prices a 48-ounce bottle of its mineral
water at $2.00. It takes the same water and packages 1.7 ounces in a moisturizer spray for
$6.00. Through product-form pricing, Evian manages to charge $3.00 an ounce in one
form and about $.04 an ounce in another.
Image pricing. Some companies price the same product at two different levels based on
image differences. A perfume manufacturer can put the perfume in one bottle, give it a
name and image, and price it at $10 an ounce. It can put the same perfume in another
bottle with a different name and image and price it at $30 an ounce.
Channel pricing. Coca-Cola carries a different price depending on whether it is
purchased in a fine restaurant, a fast-food restaurant, or a vending machine.
Location pricing. The same product is priced differently at different locations even
though the cost of offering at each location is the same. A theater varies its seat prices
according to audience preferences for different locations.
Time pricing. Prices are varied by season, day, or hour. Public utilities vary energy rates
to commercial users by time of day and weekend versus weekday. Restaurants charge
less to "early bird" customers. Hotels charge less on weekends.
The airline and hospitality industries use yield management systems and yield pricing, by which
they offer discounted but limited early purchases, higher-priced late purchases, and the lowest
rates on unsold inventory just before it expires. Airlines charge different fares to passengers on
the same flight, depending on the seating class; the time of day (morning or night coach); the day
of the week (workday or weekend); the season; the person's company, past business, or status
(youth, military, senior citizen); and so on.
That's why on a flight from New York City to Miami you might have paid S200 and be sitting
across from someone who has paid $1,290. Take Continental Airlines: It launches 2,000 flights a
day and each flight has between 10 and 20 prices. Continental starts booking flights 330 days in
advance, and every flying day is different from every other flying day. At any given moment the
market has more than 7 million prices. And in a system that tracks the difference in prices and
the price of competitors' offerings, airlines collectively change 75,000 prices a day! It's a system
designed to punish procrastinators by charging them the highest possible prices.
The phenomenon of offering different pricing schedules to different consumers and dynamically
adjusting prices is exploding. Most consumers are probably not even aware of the degree to
which they are the targets of discriminatory pricing. For instance, catalog retailers like Victoria's
Secret routinely send out catalogs that sell identical goods except at different prices. Consumers
who live in a more free-spending zip code may see only the higher prices. Office product
superstore Staples also sends out office supply catalogs with different prices.
Some forms of price discrimination (in which sellers offer different price terms to different
people within the same trade group) are illegal. However, price discrimination is legal if the
seller can prove that its costs are different when selling different volumes or different qualities of
the same product to different retailers. Predatory pricing—selling below cost with the intention
of destroying competition—is unlawful. Even if legal, some differentiated pricing may meet with
a hostile reaction. Coca-Cola considered raising its vending machine soda prices on hot days
using wireless technology, and lowering the price on cold days. Customers so disliked the idea
that Coke abandoned it.
For price discrimination to work, certain conditions must exist. First, the market must be
segmentable and the segments must show different intensities of demand. Second, members in
the lower-price segment must not be able to resell the product to the higher-price segment. Third,
competitors must not be able to undersell the firm in the higher-price segment. Fourth, the cost of
segmenting and policing the market must not exceed the extra revenue derived from price
discrimination. Fifth, the practice must not breed customer resentment and ill will. Sixth, the
particular form of price discrimination must not be illegal .
Delayed quotation pricing: The company does not set a final price until the product is finished
or delivered. This pricing is prevalent in industries with long production lead times, such as
industrial construction and heavy equipment.
Escalator clauses. The company requires the customer to pay today's price and all or part
of any inflation increase that takes place before delivery. An escalator clause bases price
increases on some specified price index. Escalator clauses are found in contracts for
major industrial projects, like aircraft construction and bridge building.
Unbundling. The company maintains its price but removes or prices separately one or
more elements that were part of the former offer, such as free delivery or installation. Car
companies sometimes add antilock brakes and passenger-side airbags as supplementary
extras to their vehicles.
Reduction of discounts. The company instructs its sales force not to offer its normal cash
and quantity discounts.
A company needs to decide whether to raise its price sharply on a one-time basis or to raise it by
small amounts several times. Generally, consumers prefer small price increases on a regular
basis to sudden, sharp increases. In passing price increases on to customers, the company must
avoid looking like a price gouger. Companies also need to think of who will bear the brunt of
increased prices. Customer memories are long, and they can turn against companies they
perceive as price gougers. A vivid illustration of such reactions was the experience of Marlboro,
Philip Morris's leading cigarette brand.
COMPETITOR REACTIONS Competitors are most likely to react when the number of firms
are few, the product is homogeneous, and buyers are highly informed. Competitor reactions can
be a special problem when they have a strong value proposition.
How can a firm anticipate a competitor's reactions? One way is to assume that the competitor
reacts in a set way to price changes. The other is to assume that the competitor treats each price
change as a fresh challenge and reacts according to self-interest at the time. Now the company
will need to research the competitor's current financial situation, recent sales, customer loyalty,
and corporate objectives. If the competitor has a market share objective, it is likely to match the
price change. If it has a profit-maximization objective, it may react by increasing the advertising
budget or improving product quality. The problem is complicated because the competitor can put
different interpretations on a price cut: that the company is trying to steal the market, that the company is
doing poorly and trying to boost its sales, or that the company wants the whole industry to reduce prices
to stimulate total demand.
The best response varies with the situation. The company has to consider the product's stage in
the life cycle, its importance in the company's portfolio, the competitor's intentions and
resources, the market's price and quality sensitivity, the behavior of costs with volume, and the
company's alternative opportunities.
An extended analysis of alternatives may not be feasible when the attack occurs. The company
may have to react decisively within hours or days. It would make better sense to anticipate
possible competitors' price changes and to prepare contingent responses. The figure shows a
price-reaction program to be used if a competitor cuts prices. Reaction programs for meeting
price changes find their greatest application in industries where price changes occur with some
frequency and where it is important to react quickly—for example, in the meatpacking, lumber,
and oil industries.
Pricing Option #1
• Clone industry
– Contracts, buckets, volume discounts
– Price competitively
– MTV applications
– Superior customer service
– Better off-peak hours
– Fewer hidden fees
• Easy to explain: better value at same cost
Pricing Option #2
• Similar pricing structure to industry
– Contracts, buckets, volume discounts
– Price per minute below industry for certain key buckets
• Better off-peak hours?
• Fewer hidden fees?
• Simple message: cheaper
Pricing Option # 3
• Shorten or eliminate contracts?
– Under 18, can’t enter contracts
• Pre-paid
CONCLUSION :
1. Despite the increased role of nonprice factors in modern marketing, price remains a critical
element of the marketing mix. Price is the only element that produces revenue; the others
produce costs.
2. In setting pricing policy, a company follows a six-step procedure. It selects its pricing
objective. It estimates the demand curve, the probable quantities it will sell at each possible
price. It estimates how its costs vary at different levels of output, at different levels of
accumulated production experience, and for differentiated marketing offers. It examines
competitors' costs, prices, and offers. It selects a pricing method. It selects the final price.
3. Companies do not usually set a single price, but rather a pricing structure that reflects
variations in geographical demand and costs, market-segment requirements, purchase timing,
order levels, and other factors. Several price-adaptation strategies are available: (1) geographical
pricing; (2) price discounts and allowances; (3) promotional pricing; and (4) discriminatory
pricing.
4. After developing pricing strategies, firms often face situations in which they need to change
prices. A price decrease might be brought about by excess plant capacity, declining market share,
a desire to dominate the market through lower costs, or economic recession. A price increase
might be brought about by cost inflation or overdemand. Companies must carefully manage
customer perceptions in raising prices.
5. Companies must anticipate competitor price changes and prepare contingent response. A
number of responses are possible in terms of maintaining or changing price or quality.
6. The firm facing a competitor's price change must try to understand the competitor's intent and
the likely duration of the change. Strategy often depends on whether a firm is producing
homogeneous or nonhomogeneous products. Market leaders attacked by lower-priced
competitors can choose to maintain price, raise the perceived quality of their product, reduce
price, increase price and improve quality, or launch a low-priced fighter line.
Thank You
REFERENCES :
• Marketing Management by Kotler and Keller
• Marketing Management – Planning , Implementation and Control
• www.Google.com
• www.wikipedia.org