PRICING STRATEGY

There are many ways to price a product

 One of the four major element of the marketing mix is price. Pricing is an important strategic issue that because it is related to product positioning. It also affects other marketing mix elements product feature , channel decisions,& promotions. There is no single method e to determine the price, the following is the general sequence of steps that might be followed for developing the price of the new products .

 Developing marketing strategy - perform marketing analysis, segmentation, targeting & positioning. Make marketing mix decisions- define the product , distribution & promotional tactics. Estimate the demand curve- understand how quantity demanded varies with price. Calculate the cost- include fixed & variable cost associated with the product. Understand environmental factors - evaluate likely competitors actions , understand legal constraints, etc.

Definitions
Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, Quality of product. The effective price is the price the company receives after accounting for discounts, promotions, and other incentives. Promotional pricing refers to an instance where pricing is the key element of the marketing mix.

Pricing Process:
Set Pricing Objectives Analyze demand Draw conclusions from competitive intelligence Select pricing strategy appropriate to the political, social, legal and economical environment Determine specific prices

Pricing Objectives:
It is necessary that the marketing manager decide the objective of pricing before actually setting price. According to experts, pricing objectives are the overall goals that describe the role of price in an organization's long-range plans. The objectives help the marketing manager as guidelines to develop marketing strategies. The following are the important pricing objectives. Market Penetration Market Skimming Target rate of Return Price Stabilization Meet of Follow Competition Market Share Profits Maximization Cash Flow Product Line Promotion Survival

Market Penetration Objective:

In the initial stages of entering the market, the entrepreneurs may set a relatively low price. This is mainly to secure a large share of the market. In a highly price sensitive market, the businessman may continue to sell his products even without profit. He is interested in growth rather than in making a profit. In the market penetration objective, the unit cost of production and distribution will decrease when the volume of sales attain a particular target. In brief, market penetration objective is an attempt to secure a large share of the market by deliberately setting the low prices.

Market skimming objective:

Market skimming means utilizing the opportunities in the market to reap the benefits of high sales, increased profits and low unit costs. Some of the entrepreneurs study the buyer's needs and try to provide the suitable goods, but charge them high prices. This objective is realized in those markets where the magnitude of competition is very low. The entrepreneurs, in this situation, make profits over a short period. The market-skimming objective would not be meaningful, when the consumer refuses to purchase the goods at the prices fixed by the producers. This pricing objective would be suitable in the markets where the consumers feel that costly goods are of the superior quality.

Target rate of return objective:

Rate of return is normally measured in relation to investment and sales. The producers enjoying some protection may prefer to earn a target rate on investment. This would be possible where the entrepreneur enjoys a franchise or a monopolistic situation. But in the long run, every businessman attempts to secure an adequate return on investment through price setting. Mostly, middleman like wholesalers, retailers will price their merchandise to earn a particular rate of return on sales.

Price Stabilization objective:

Frequent changes in the prices of product will harm the long-term interests of the companies. Hence, they aim at stabilization of prices. They do not exploit a short supply position to earn the maximum. During the periods of good business, they try to keep prices from rising and during the periods of depression, they keep prices from falling too low. Thus, they take a long-term view in achieving price stability.

Meet or follow competition objective:

Pricing is often done to meet or even prevent competition. If a company is a price leader, it is better to follow it to ward off the possibility of competition.

Market share objective:

A company may either have the objective of maintaining the present market share or increase its share depending upon its stature. Particularly, big business houses adopt such pricing that it enables them to retain their market share.

 If they raise their market share, they may draw the attention of the government and if they shed their share, they may lose revenues. Contrary to this, small business houses are found interested in raising their share in the market so as to reap the benefit of large-scale production. In few cases, firms may sell the products even at a lower cost to capture the market. However, such practice may lead to financial crisis. As a matter of fact, this is an objective to be adopted by new firms cautiously.

Profit Maximization objective:

Profit maximization does not mean profiteering. There is nothing wrong in this policy if practiced over the long run. As a matter of fact, many of the enterprises strive to maximize their profits. Maximization of profits should be on the total output and not on a single item. In such case, consumers do not get dissatisfied since a particular group is not called for paying a high price. While adopting this pricing objective, the marketers should attempt to project their image in the market through sales promotion techniques. The marketers should watch the reactions of the consumers. Profit maximization through price hikes should be sparingly used.

Cash flow objective:

One of the important objectives of pricing is to recover invested funds within a stipulated period. Most of the time you will find different prices for the cash and credit transactions. Generally, you find lower prices for the cash sales and high prices for the credit sales. But this pricing objective could be implemented with good results only when the firm has monopoly in the market.

Product line promotion objective:

Product line means a group of products that are related either because they satisfy similar needs of different market segments or because they satisfy different but related needs of a given market segment. While framing the product line, the marketer may also include such goods, which are not popular. The intention of the marketer is to push through all the goods without any discrimination. Thus, the ultimate objective is to increase the overall demand of the goods. In this pricing objective, equal prices are adopted for the entire product line.

Survival objective:
Perpetual existence of the business over a period is the indication of the sound financial position of the enterprise. All organizations will have to meet expected and unexpected, initial and external economic losses. These enterprises have to pool up the resources to meet all the contingencies through appropriate pricing strategies. Price is use to increase sale volume to level up the ups and downs that come to the organization.

Demand-Based Pricing:
Definition: Price depends upon your customers' perception of your products' value and the level of demand for your item. Your product must provide a unique benefit to your target market. Example: Your product has prestige appeal so it can be priced in a range well above the cost of production. For example, luxury cars and gourmet food have prestige appeal. Caution: Success depends on your knowledge of your customers and your market. You must have an uncanny skill for accurately estimating customer demand to avoid disappointing sales results.

Demand-based pricing is any pricing method that uses consumer demand - based on perceived value - as the central element.
These include: Price skimming, Price discrimination & Yield management, Price points, Psychological pricing, Bundle pricing, Penetration pricing, Price lining, Value -based pricing, and Premium pricing

Pricing factors are

Manufacturing cost, Market place, Competition, Market condition, Quality of product.

Multidimensional Pricing:
Multidimensional pricing is the pricing of a product or service using multiple numbers. In this practice, price no longer consists of a single monetary amount (e.g., sticker price of a car), but rather consists of various dimensions (e.g., monthly payments, number of payments, and a down payment). Research has shown that this practice can significantly influence consumers' ability to understand and process price information

Premium Pricing
Use a high price where there is a uniqueness about the product or service. This approach is used where a substantial competitive advantage exists. A few examples of companies which partake in premium pricing in the marketplace include Rolex. People will buy a premium priced product because: They believe the high price is an indication of good quality; They believe it to be a sign of self worth - "They are worth it It authenticates their success and status It is a signal to others that they are a member of an exclusive group;

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.

Economy Pricing:
This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Retail outlets often have economy brands for soups, spaghetti, etc.

Price Skimming.
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. They form the bases for the exercise.

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 Rs200, wash and wax Rs400, and the whole package Rs600.

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 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.

Cost-Based Pricing:
Price is based on a product's total fixed and variable costs. Example: Typical pricing in commodity markets. For example, a commodity-type raw product such as steel is priced using a standard formula based on cost. Caution: If you use this exclusively, you must be able to stay in business with a very low profit margin. In non commodity businesses, this option should be only one aspect of the total product pricing strategy.

Competition-Based Pricing:
Definition: Price is set in relationship to your competition's prices. In some cases this may be below cost and is usually indicative of a product that has no competitive edge. Example: You are caught in an industry "price war" where all products must compete on the basis of price or risk losing their market share. Caution: Your Company's long-term goals may be sacrificed in the interest of competitive pricing. Also, you are at the mercy of the larger companies in your industry that can afford short-term losses in order to play this expensive game of war.

Value Pricing:
Gives your customer more quality for less than they expected to pay. Example: Used when you want to gain market share, position your product with customers, or obtain market acceptance of a new product. Caution: Product quality must be consistent and your company must operate efficiently for this to be an effective strategy. Using this strategy means that you understand your customers and competitors very well. In addition, you may find it difficult to raise prices to more profitable levels once your initial distribution goal is achieved.

 The price/quality relationship refers to the perception by most consumers that a relatively high price is a sign of good quality. The belief in this relationship is most important with complex products that are hard to test, and experiential products that cannot be tested until used (such as most services). The greater the uncertainty surrounding a product, the more consumers depend on the price/quality hypothesis and the more of a premium they are prepared to pay.