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Pricing Policy in Marketing

Copyright © 2001 by McGraw-Hill Ryerson Limited

Presented by:

Rohit Ranganathan

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Agenda

– Price competition and value pricing

– Pricing strategies for market entry

– Price discounts and allowances

– Geographic pricing strategies

– Special strategies

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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)

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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.

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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)

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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 competitionnon-price competition by building brand equity and relationships with customers (e.g. Kingfisher)

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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

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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?

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SELECT PRICING OBJECTIVE

SELECT METHOD OF DETERMINING THE BASE PRICE:

Cost-pluspricing

Price based onboth demandand costs

Price set inrelation tomarket alone

DESIGN APPROPRIATE STRATEGIES:

Price vs. non-pricecompetitionSkimming vs. penetrationDiscounts and allowances

Freight paymentsOne price vs. flexible price Psychological pricing

Leader pricing Everyday low vs.high-low pricingResale pricemaintenance

The Process: An Illustration

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Market Entry Pricing Strategies

• Market-Skimming Pricing 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:Quantity discount: The more you buy, the cheaper it becomes. (Megamart)

• Trade discountsTrade discounts:: Reductions from list for functions performed - storage, promotion.

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

• Price discriminationPrice 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:Point-of-Production pricing: Price quoted at factory - buyer pays transportation. (factory outlets)

• Uniform delivered pricing:Uniform delivered pricing: Same delivered price quoted to all; works if transportation costs small. (Maggi)

• Zone-delivered pricing:Zone-delivered pricing: Set same price within several zones, e.g. Bread

• Freight-absorption pricing: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 maintenanceResale 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 “loss-“loss-leader”leader” pricing is not illegal unless it persists for a long time with the goal of eliminating competition (predatory pricing)

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THANK YOU