Pricing Policy in Marketing

Presented by:

Rohit Ranganathan
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Copyright 2001 by McGraw-Hill Ryerson Limited

Agenda
Price competition and value pricing

Pricing strategies for market entry

Price discounts and allowances Geographic pricing strategies Special strategies

Pricing
Pricing is one of the most important elements of the marketing mix, as it is the only mix, which generates a turnover for the organisation. 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 organisation. (e.g. Honda Civic Hybrid)

Pricing Factors
Pricing should take into account the following factors:
Fixed and variable costs. Competition Company objectives Proposed positioning strategies. Target group and willingness to pay.

Pricing Strategy
How does a company decide what price to charge for its products and services? Some firms have to decide what to charge different customers and in different situations (e.g. car dealer) They must decide whether discounts are to be offered, to whom, when, and for what reason (e.g. frequent flyer)

Price vs. Non-price Competition

In price competition, a seller regularly offers products priced as low as possible and accompanied by a minimum of services.(e.g. TATA Nano)

With value pricing, firms strive for more benefits at lower costs to
consumer. (Metro Cash-n-Carry) In non-price competition, a seller has stable prices and stresses other

aspects of marketing (e.g. Mercedes Benz)

With relationship pricing, customers have incentives to be loyal - get price incentive if you do more business with one firm. (Future Group

Loyalty Card)
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Non-price Competition
Some firms feel price is the main competitive tool; customers always want low prices (e.g. Big Bazaar) Other firms are looking for ways to add value, thereby being able to avoid low prices (Apple) Sometimes prices have to be changed in response to competitive actions (e.g. Low Cost Airlines)

Many firms would prefer to engage in non-price competition by building brand equity and relationships with customers (e.g. Kingfisher)

Relationship Pricing
Uses price as a method to build long-term relationships with the best customers (IT Companies)

Focuses on giving better deals to better customers (Jet Privilege Program)

Goal is to price relative to the value of the customer to the firm, while building loyalty and stimulating repeat buying

The Price Determination Process

In pricing, an organization first must decide on its pricing goal. The next step is to set the base price for a product. The final step involves designing pricing strategies that are compatible with the rest of the marketing mix. Many strategic questions must be answered: Will our company compete on the basis of price or other factors? What kind of discount schedule (if any) should be adopted?

The Process: An Illustration

SELECT PRICING OBJECTIVE

SELECT METHOD OF DETERMINING THE BASE PRICE: Cost-plus pricing Price based on both demand and costs Price set in relation to market alone

DESIGN APPROPRIATE STRATEGIES: Price vs. non-price competition Skimming vs. penetration Discounts and allowances Freight payments One price vs. flexible price Psychological pricing Leader pricing Everyday low vs. high-low pricing Resale price maintenance
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Market Entry Pricing Strategies

Market-Skimming Pricing: Setting a high initial price for a new product. Works if product is new, distinctive and desired Early in Product Life Cycle, when demand inelastic Protected by entry barriers, e.g. patents (e.g. Mitsubishi Pajero)

Market-Penetration Pricing: Setting a low initial price for a new product. Works if large market, elastic demand Economies of scale are possible Fierce competition (e.g. TATA DOCOMO)
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Discounts and Allowances

Quantity discount: The more you buy, the cheaper it becomes. (Megamart) Trade discounts: Reductions from list for functions performed - storage, promotion. Cash discount: A deduction granted to buyers for paying their bills within a specified period of time, (after first deducting trade and quantity discounts from the base price) (MSEDL)

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Other Discounts and Allowances

Seasonal Discounts (e.g. Shoppers Stop Season Sale) Promotional Discounts (e.g. launch of a new product / service) (Aircel launch in Mumbai)

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The Competition Act

Predatory pricing: Selling at unreasonably low prices to lessen competition.(Local Broadband provider)

Price discrimination: The use of different prices for different customers. It is illegal if a price advantage is granted to one, but not another, where both compete and the articles are similar. (Car Dealers)

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Geographic Pricing Strategies

Point-of-Production pricing: Price quoted at factory buyer pays transportation. (factory outlets) Uniform delivered pricing: Same delivered price quoted to all; works if transportation costs small. (Maggi) Zone-delivered pricing: Set same price within several zones, e.g. Bread Freight-absorption pricing: Seller absorbs transport cost to penetrate market. (Sangam Direct)
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Psychology of Pricing
The psychology of pricing suggests that price will convey a message about the product or service being sold
leader pricing bait pricing prestige pricing

Price lining involves setting prices at a small number of fixed levels within a retail store

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Questionable Pricing Practices

Resale price maintenance involves a supplier requiring that intermediaries sell a product at a certain price. Some firms reduce prices, possibly even below cost, to attract customers; this form of lossleader pricing is not illegal unless it persists for a long time with the goal of eliminating competition (predatory pricing)

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