Description
This presentation is about different industries and analyze how companies adopt creative pricing strategies and what factors drive their decision making. For this we apply our suggested model to various industries and attempt to measure the applicability of the model.
Creative Pricing
Aditi Bathia ? 04 Nupur Gandhi ? 17 Vaishali Lapasia ?32 Nayan Joshi ?119 Marketing Strategy MMS ? Marketing
INTRODUCTION
One of the most difficult decisions for companies today is to decide what price to set for products and services. A good pricing strategy has always been a key driver to sales and therefore customer retention for a company. An adequate, sustainable and creative pricing strategy is based on the equilibrium of financial returns desired by companies and well being of consumers in the tough competitive global arena. The target group of customers decides pricing strategy for the company. For example, if a company wants to target upper class income level consumers, it should have a premium pricing strategy. There are a lot of factors that need to be taken into account by companies while pricing theirproducts and services. In this paper we will look at these factors in detail. We will also analyse the extent to which these factors influence the pricing decision making process. A company has varied options available while choosing its pricing strategies. In this paper we look at what are these strategies and under which circumstances to use which of these strategies. We have developed a model which can be used by companies to decide which pricing strategy to be adopted to increase the market share in the industry. In the process of developing the model we have made some assumptions which are also discussed in further detail. As of now, it is not a tested model and is in its initial stage of development. It is very difficult to integrate all the factors in the model and give suggestions for strategies accordingly. But we have tried our best to integrate some of the most important factors for pricing strategies in the model. Further in this paper, we look at different industries and analyse how companies adopt creative pricing strategies and what factors drive their decision making. For this we apply our suggested model to various industries and attempt to measure the applicability of the model. We also look at some of the breakthroughs in pricing strategies by companies which have surpassed the conventional rules to lead the market.
We also suggest through this paper, different tactics that can be adopted by companies while creatively pricing their products and services. These tactics can help companies to make their pricing strategies successful.
FACTORS INFLUENCING PRICING STRATEGIES
1. Product Type Broadly speaking, there are three types of products: a. Highly differentiated b. Differentiated c. Undifferentiated Highly differentiated are those which have certain PODs which are unique to that brand. They usually cater to a niche segment or offer something uniquely different in terms of functionality or psychological benefits as compared to their counterparts. Differentiated are those which have some differentiation in terms of functionality of the product. The PODs that they offer might not be that difficult to replicate. But they do have something unique to offer. Undifferentiated are those which do not offer any PODs whatsoever. The products are highly standardized in the industry and if not brands, the products are more or less generic in nature. It is very difficult to distinguish the features in terms of functionality or psychological benefits if it was not for the brand. Pricing strategies that a company adopts highly depends on which product type it offers. Strategies adopted for differentiated product will not work for undifferentiated product. 2. Target Group Pricing strategy for a company also depends on what is the profile of the segment it is targeting. An effective STP will be useful for identifying the target group of customers. The age, gender, income levels, standard of living, dining habits, way of living, etc. of the target group will help us understand what price to command from them for our products and services.
3. Competition Every industry has certain degree of competition from various other players be it global, national, regional or small players. Competition also comes from unorganized sector to a large extent in some industries. In some industries there is high degree of competition and in some industries there is low degree of competition. Pricing strategy of a company depends also on the degree of intensity of competition driving the market forces. 4. External environment The external social, political, economic and technological environment has a great influence on pricing decision making process for a company. For example during recession times, no matter how premium the target segment is, no point keeping the prices high if they are not in a position to afford such high prices. 5. Product life cycle Pricing decisions also vary to a large extent depending upon which stage of the PLC curve is the company in. A company enters a market with a pricing strategy and consequently the strategies change as the product moves ahead in the PLC curve. The strategy for a product at growth stage will be very different than at a maturity or a decline stage. 6. Economies of scale The degree of economies of scale that a company is able to command also drives its pricing decisions. Less economy of scale results in high costs of manufacturing which in turn influences the price of the product. If a company is able to leverage on more economy of scale, it may command low price because it then becomes affordable for the company to transfer the benefits of economies to the customer. 7. Brand image The brand image of a company goes a long way in deciding the pricing policy for its products. A company with an established brand image can always command higher prices because it wins customer’s trust and loyalty.
8. Legal framework of government In some industries like insurance, the pricing policies are highly regulated and controlled by the government. 9. Industry Type The type of industry the product is in greatly determines the price range the product will work in. For example, if the product is in insurance industry, IRDA rules will greatly influence the pricing strategies of the company.
LITERATURE STUDY
TYPES OF PRICING STRATEGIES
1. Skimming Skimming strategy involves initially selling a product at a high price, sacrificing high sales to gain high profit, therefore ‘skimming’ the market. This strategy is usually employed to reimburse the cost of investment of original research into the product. It is commonly used in electronics market when a new range, e.g. DVD players, is firstly dispatched into the market at a high price. These early adopters are relatively less price?sensitive because either their need for the product is more than others or they understand the value of the product better than others. This strategy is employed only for a limited duration to recover most of investment made to build the product. To gain further market share, a seller must use other pricing tactics such as competition led or penetration. 2. Penetration Pricing Penetration pricing is a technique of setting a relatively low initial entry price, often lower than the eventual market prices, to attract more and more customers. The strategy works on an expectation the consumers will switch to a new brand because lower price is offered. Penetration pricing is associated with the marketing objective of increasing the market share or sales volume rather than making profits in the short run. The advantages of penetration pricing to a firm are:
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It can result in fast diffusion and adoption. This can achieve high market penetration rates quickly. This can take the competition by surprise, not giving them time to react.
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It can create goodwill among the early adopters segment. This can create more trade through word of mouth.
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It creates cost control and cost reduction pressures from the start, leading to greater efficiency.
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It discourages the entry of competitors. Low prices act as a barrier to entry. It can create high stock turnover throughout the distribution channel. This can create critically important enthusiasm and support in the channel.
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It can be based on marginal cost pricing, which is economically efficient. 3. Competition Led Pricing
This type of pricing means adopting to the same strategy as competitors have adopted, keeping similar prices for products as compared to competitor’s products and not differentiated much on pricing aspects. Sometimes this type of pricing also helps when the company wants to enjoy a decent market share without trying to play with competitor’s market share. 4. Premium Pricing Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation or represent exceptional quality and distinction. 5. Psychological Pricing Pricing designed to have a positive psychological impact. These types of pricing strategies play with consumer psyche in order to encourage more shopping behaviour in them. E.g. Price a product at Rs. 95 or Rs. 99 instead of Rs. 100.
6. Dynamic Pricing A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers ? ranging from where they live to what they buy to how much they have spent on past purchases ? dynamic pricing allows companies to adjust the prices of identical goods to correspond to a customer’s willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight. 7. Target Pricing Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers. Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product. 8. High?Low Pricing Method of pricing for an organization where the goods or services offered by the organization are regularly priced higher than competitors, but through promotions, advertisements, and or coupons, lower prices are offered on key items. The lower promotional prices are targeted to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products.
9. Discounting Discounting means offering various discount schemes to attract higher sales volume. This type of strategy is highly short term in nature. Discount schemes like upto 50% off come under this type. Also schemes like 25% extra come under this type as the strategy drives more volume at same cost which at the end means discounting the original price of the product. 10. Tiered Pricing Tiered pricing is also commonly used by various companies to attract more sales volumes.Through tiered pricing companies charge basic price for a basic product and higher prices for a product with a clearly defined additional benefit. 11. Discrimination Pricing This strategy involves setting a different price for the same product in different segments of the market. For example, this can be for different ages or for different opening times, such as cinema tickets. 12. Predatory Pricing In business and economics, predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business. The predatory merchant then has fewer competitors or is even a de facto monopoly, and hypothetically could then raise prices above what the market would otherwise bear.
MODEL: CREATIVE PRICING MATRIX
Creative pricing matrix is a pricing decision making model developed by us and is based on an observation that the decision of pricing strategies of a company depends upon 3 factors, namely:
1. Product Type 2. Product Life Cycle 3. Competition Product type is classified as highly differentiated, differentiated and undifferentiated. The product life cycle goes through 4 phases: Introduction, Growth, Maturity, and Decline. In this competitive business scenario, we can classify competition as high competition market or low competition market. The matrix is developed to formulate the best and the most creative pricing strategies to be adopted by a company depending upon their product type, the stage of their PLC curve and the intensity of competition in the industry. The options of pricing strategies that a company has are as follows: 1. Skimming 2. Penetration pricing 3. Competition led pricing 4. Premium pricing 5. Psychological pricing 6. Dynamic pricing 7. Target pricing 8. High?low pricing 9. Discounting 10. Tiered pricing 11. Discrimination pricing 12. Predatory pricing
ASSUMPTIONS OF THE MODEL
1. Product type implies degree of differentiation and not positioning of the same. That is, a product type may be differentiated, undifferentiated or highly differentiated. However, the positioning may be premium, exclusive or ordinary. Thus, even a moderately differentiated product may be positioning it as a premium
brand if it is able to create that perception in the minds of the consumers. Example, tide washing powder did not provide any significant benefits over other detergents. Hence was moderately differentiated. However, upon introduction, it positioned 2. itself as a premium brand. Hence, this assumption is of utmost importance and in order to understand the model presented, must not be confused with positioning. 3. External Environment: External environment includes all factors affecting the company’s strategy, profitability, operations, sales or strategy but not within control of the company itself. Thus, it includes government rules, market scenario, demand conditions. However, competition is not included in this section as it is considered as a significant separate factor altogether. 4. Competition includes competitor strategy, competitor intensity and competitor strength to tackle your strategy. 5. Stage of Product Life Cycle (henceforth stated as PLC): The stages of PLC considered in the model presented are introduction, growth, maturity and decline. 6. Factors Considered: Various other factors may also be considered while forming a pricing strategy. This model, however, considers the 3 most important and interrelated factors affecting the product pricing at every stage.
MODEL:
EXPLANATION OF THE MATRIX
1. PRODUCT TYPE: Highly Differentiated PLC: Introduction COMPETITION: Low/High A company whose product is highly differentiated caters to a particular segment of consumers whose buying behaviour, standard of living, consumption patterns and need from the product are extremely different from the rest. The product has extremely strong points of difference which the company can leverage upon while interacting with the target customers. This type of product is for consumers who need something extra than what
others need in the same category. Companies which are successful in satisfying these needs create a niche for themselves in that particular category. When a highly differentiated product is introduced in the market, it most of the times is a result of a want for something extra that has been observed in some consumers who were first satisfied with the existing products. While strategising the price policies company can take advantage of being first in the race to satisfy that particular need. For a product which is satisfying a specific need of the consumers, intensity of competition takes a back seat as competitors PODs are always different than their PODs. Therefore this segment enjoys highest level of loyalty among the consumers. PRICING STRATEGY: Premium Pricing A highly differentiated product when enters the market should command a premium price for itself. This is because consumers will be willing to pay more for the differentiation that the product offers. And more importantly this will help the company to build an aspiration level for the product among the consumers. People who won’t be able to buy the product due to its premium pricing will aspire to own it one day. Additionally people who buy the product will enjoy a proud feeling to own the brand. The motive of the company at introduction stage should be to recover the cost of investment that has gone in research of the highly differentiated product and create a distinctive brand image rather than increase market share or profits. 2. PRODUCT TYPE: Highly differentiated PLC: Growth COMPETITION:Low/high At growth stage of a highly differentiated product the brand has already built an aspirational level amongst the consumers. This stage enjoys huge brand loyalty as people who own this brand have a sense of belongingness towards it. Now is the time to increase the market share and target a leadership position in the category notwithstanding the highly differentiating position in the market. For this the company should now target the next level of potential customers who have always aspired to buy the brand but price was always a
constraint. Motive of the company at this stage should be to increase the market share and strengthen the brand rather than to make profits. PRICING STRATEGY: Dynamic Pricing At growth stage of a highly differentiated product a dynamic pricing strategy should be adopted by the company irrespective of the intensity of competition. Pricing a product at different levels considering the profile of the current and potential customers will ensure wider consumer base as people who were first aspiring to buy the brand will now be able to buy it. This will ensure greater market share. The brand will be able to build a distinctive identity for itself and command huge loyalty and respect in the minds of the consumers. 3. PRODUCT TYPE: Highly differentiated PLC: Maturity COMPETITION:Low/high When the highly differentiated product reaches the maturity stage of product life cycle, this means that the brand has already established a distinctive image and has now become aged. The target and potential customers have already been tapped by the brand and it has reached a stage where there are no more potential customers to buy the product. This stage of in the cycle enjoys huge brand loyalty from the customers. The customers are able to resonate to the brand and consider it a part of their personality and way of living. The brand still has an aspirational built for the next level of consumers who have never dreamed of buying the highly priced product. Now is the time to attract these consumers to try the brand but without lowering the prices as that can lead to brand dilution and the already loyal customers might feel disconnected to the lower priced brand image. PRICING STRATEGY: High?Low Pricing At this stage company should introduce 2 things: a. Promotional schemes b. Loyalty benefits
The promotional schemes will be targeted to attract the potential buyers with a view to make them try the product so that they are ready to shell out some more money once they like it. This can be achieved through heavy advertising for awareness of the sales promotion campaigns. The already existing loyal customers should be given some additional benefits by way of loyalty points or membership to an elite group, etc. This will ensure that these loyal customers stay with the brand even when potential buyers are targeted with the help of promotional offers. Even the customers who are not very frequent buyers will now buy more frequently. 4. PRODUCT TYPE: highly differentiated PLC: Decline COMPETITION:Low/high When a highly differentiated product enters the decline stage of PLC, it means that the brand is no more able to attract new customers and even the existing customers who were once loyal to the brand have now started looking at different options in the category. They no more resonate with the brand and many of them have started switching to competitors’ brands. There are various reasons for this stage to occur. One strong and most frequent reason is lack of innovation or saturation of the target segment. At this stage a company has the following options available with it: a. Opt out of business b. Continue satisfying the same customers with new developments in the product c. Target new segments with the same product (modifying the product to suit needs of the new segment) If the company chooses to target new segments with the same product as well as continue satisfying the existing customers, it is the pricing strategy which will play a major role in deciding the future of the product.
PRICING STRATEGY: Tiered Pricing Introducing tiered pricing strategy at this level means introducing variants in product features. The company should charge basic price for the most basic variant and higher price for variant offering clear additional benefit. In this way the company will be able to attract new segments to try the product for the first time as it has now become affordable to their pockets and also company will be able to retain the customers who are now switching to new brands by offering additional benefits which are clearly visible. 5. PRODUCT TYPE: Differentiated PLC:Introduction COMPETITION:Low Differentiated products are those catering to the masses but have certain points of difference than the competitors. There are a wide range of brands available in the category and it is for consumers to decide which type of differentiation suits them the best. This type of product portfolio enjoys comparatively less loyalty than those in the highly differentiated product type. Consumers can easily switch to other brands if they get better features in them. The consumers using this type of products normally tend to show off that they own the latest product of the market and that their product has something better than the competitors. They are not that price sensitive. But they cannot be considered as loyal customers. The company cannot assume that their customers will be loyal and hence not switch to other brands throughout their life cycle. Hence in order to retain the existing customers and attract more customers this type of product demands continuous innovation, be it in terms of product development or pricing strategy at various stages of the product life cycle. At introduction stage the motive of the company should be to attract consumers by leveraging the points of difference. Creating a differentiating brand image should be the plan of action for the company. As the competition is low, there is no pressure on price
points and consumers buy a certain product just because they get some features which others do not provide. PRICING STRATEGY: Skimming The product should be creatively priced at introduction stage for a differentiated product type where the market is less competitive. Here, skimming strategy can be highly successful. If the product is highly priced than the competitors’ brands, this will create an image in the minds of the consumers that the product has something better to offer than its counterparts. This way the company will be able to catch the attention of new customers and they will be willing to try the new product even if it means shelling out some more money from their pockets. 6. PRODUCT TYPE: Differentiated PLC: Growth COMPETITION: Low When the product reaches the growth stage, the main motive of the company should be to increase the market share and target the leadership position. This can be done by retaining customer loyalty in the product as well as attracting new customers to use the product. So, now is the time to recheck the pricing strategy. PRICING STRATEGY: Competition Led At introduction stage the product was priced highly by using skimming strategy. Now price of the product should be brought down at par with the competitors’ brands. This will ensure customer loyalty as customers will not find any reason to switch. Also potential customers who were not buying the product at first due to price constraints will now buy it because they already had the perception that the product does have something different to offer to them and they can now afford it willingly. 7. PRODUCT TYPE: Differentiated PLC: Maturity COMPETITION: Low
At maturity stage, the brand has already established a good differentiating image for itself. Now is the time for company to target profits. Company would have invested heavily into advertising and product development in order to build the brand. Now is the time to reimburse that investment. But premium pricing strategy cannot work here as this product type enjoys comparatively less brand loyalty and therefore there are great chances of customers switching to other brands if the product is too highly priced. PRICING STRATEGY: Target Pricing At maturity stage target pricing can be the best pricing strategy to be adopted by the company. This is because the company at this stage is playing in huge volumes and it makes sense to target a fixed rate of return on sales. 8. PRODUCT TYPE: Differentiated PLC: Decline COMPETITION: Low The decline stage for a product occurs for either of the two reasons: a. Competitors have been successful to attract the customers with the help of some points of difference. b. The need that the product had first created, now, no more exists. In either case, pricing strategy of the product will play a major role in deciding the future of the brand. The company should now also start targeting new segments for the product. PRICING STRATEGY: Discounting At decline stage the company should aggressively use discounting as a pricing strategy to retain the existing customers as well as attract new customers. Sales and discount offers by companies help in creating a buzz in the market for the brand thus attracting new customers to try the product. Also, word of mouth is a tool which helps discounting strategy to retain the existing customers who had or were thinking of switching to other brands. 9. PRODUCT TYPE: Differentiated
PLC: Introduction COMPETITION:High When a differentiated product type enters a highly competitive market place, the main objective of the company is to increase awareness about the brand and attract more and more consumers to try the product. Since the consumers in this segment are not that price sensitive, the company should target awareness about the differentiating features of the product. PRICING STRATEGY: Skimming If the product is highly priced than the competitors’ brands, this will create an image in the minds of the consumers that the product has something better to offer than its counterparts. This way the company will be able to catch the attention of competitors’ customers and they will be willing to try the new product even if it means shelling out some more money from their pockets. 10. PRODUCT TYPE
ifferentiated PLC:Growth COMPETITION:High At growth stage the scenario is that the company is enjoying good brand image but not a very good market share because of high intensity of competition. If the company continues keeping the price of the product high, there are huge chances that customers will shift to other brands who offer some other differentiating features. On other side, if the company cuts the prices at one go, customers will develop a perception of inferior quality and will feel cheated because they had initially shelled out more money for the same product. However it becomes all the more important for the company to target different segments with the same product in order to increase the market share. PRICING STRATEGY: Discrimination Pricing Keeping different prices for the same product for different segments can be a good strategy to solve the problem. The segments should be created as per their geographic or
demographic profiles which will lead to expansion of the brand to other markets. This will ensure that the existing customers will not feel cheated and will continue to be associated with the brand. 11. PRODUCT TYPEifferentiated PLC:Maturity COMPETITION:High At maturity stage the brand has become a well established identity with a good image and decent market share. But due to high competition in the market place there are chances that existing customers will be stolen away by competitors. Also, at this stage, it is very difficult for company to target new consumers as the market is almost saturated with lots of competitors having strong presence in the market place. Therefore it is very important to attract competitors’ customers to try the product if the company wants to increase the market share and target leadership position. PRICING STRATEGY: Psychological Pricing A pricing strategy which is determined to create a positive psychological in the minds of the consumers will work as a good strategy at this stage. This will ensure brand resonance in existing customers as well as will prove to be useful in attracting competitors’ customers. Company should price the product in such a way that consumers get highly attracted to the brand. This strategy should be backed with heavy advertising campaigns which will be easy for a company in maturity stage. 12. PRODUCT TYPEifferentiated PLCecline COMPETITION:High The decline stage for a product occurs for either of the two reasons: c. Competitors have been successful to attract the customers with the help of some points of difference. d. The need that the product had first created, now, no more exists.
In either case, pricing strategy of the product will play a major role in deciding the future of the brand. The company should now also start targeting new segments for the product. PRICING STRATEGY: Discounting At decline stage the company should aggressively use discounting as a pricing strategy to retain the existing customers as well as attract new customers. Sales and discount offers by companies help in creating a buzz in the market for the brand thus attracting new customers to try the product. Also, word of mouth is a tool which helps discounting strategy to retain the existing customers who had or were thinking of switching to other brands. 13. PRODUCT TYPE: Undifferentiated PLC: Introduction COMPETITION: Low Undifferentiated products are those which are generic in nature and their features are more like commodities. There is not at all differentiation between company’s product and competitors’ products. Here, the only driver of consumers’ decision while buying a product will be the price of the product or the value added services that the company offers or equity that the umbrella brand enjoys. Also presence of strong unorganized sector makes it all the more difficult for companies to drive sales. For introducing an undifferentiated product in a low competition market, the pricing strategy will be completely different than that for other product types. PRICING STRATEGY: Penetration Pricing Entering the market with low pricing and then subsequently increasing the prices as the product life cycle stage proceeds further is a good strategy to be adopted for an undifferentiated product.Here the objective of the company should be to aggressively attract new customers and hence increase the market share to a substantial amount in the short run. Low competition means consumers are not having much choice while buying the product. If the company launches the product at low prices than competitors, huge number of consumers will get attracted to try the product. Since the type is undifferentiated these
consumers will also not shift to other brands if they are satisfied with the pricing of the product. This strategy should be backed by heavy advertising in order to grab maximum attention in minds of the consumers. 14. PRODUCT TYPE: Undifferentiated PLC: Growth COMPETITION: Low When the product enters growth stage, awareness is for the brand is already there and the main task for the company, now, is to recover costs continue attracting more consumers in order to grab a decent market share. Here also, as the competition is low, emphasis on price is comparatively less as consumers do tend to buy a brand just because they have been buying it since long time. PRICING STRATEGY: Competition Led Company can now higher the prices to levels of competitors by ensuring that he existing consumers will not switch to other brands as they too are offering the same prices and these consumers are now comfortable using the brand since quite some time. 15. PRODUCT TYPE: Undifferentiated PLC: Maturity COMPETITION: Low A matured brand enjoys decent brand image. But since it is in undifferentiated product type, it is very difficult for companies to retain customer loyalty. Consumers tend to switch at this level for reasons like want for some change, etc. Since pricing of all the brands is similar till the growth stage, it is now important to again strategically price it to retain the existing customers. PRICING STRATEGYiscounting At maturity stage the company should aggressively use discounting as a pricing strategy to retain the existing customers as well as attract new customers. Sales and discount offers by
companies help in creating a buzz in the market for the brand thus attracting new customers to try the product. Also, word of mouth is a tool which helps discounting strategy to retain the existing customers who had or were thinking of switching to other brands. 16. PRODUCT TYPE: Undifferentiated PLC: Decline COMPETITION: Low When an undifferentiated product reaches a decline stage inspite of discount pricing in the less competitive market place, this can mean that the need for the category is being satisfied by some other category. In the long term the product type has to be shifted from undifferentiated to differentiated one. But if this is not possible in the category, the only point that needs to be considered in order to stay in the market is the pricing strategy. PRICING STRATEGY: Psychological Pricing A pricing strategy which is determined to create a positive psychological in the minds of the consumers will work as a good strategy at this stage. This will ensure brand resonance in existing customers as well as will prove to be useful in attracting competitors’ customers. Company should price the product in such a way that consumers get highly attracted to the brand. 17. PRODUCT TYPE: Undifferentiated PLC: Introduction COMPETITION: High The most challenging job for a marketer is to decide the pricing strategy for an undifferentiated product entering into a highly competitive market. The company cannot launch the product at low price as heavy competition will not let it survive in the market. Also, for this product type people using a particular brand will continue using the same one since there is not much difference in the prices or features of different products in this category.
PRICING STRATEGY: Competition Led Introducing the brand at prices which are at par with the existing competition can be the best strategy to go for. This is because consumers using existing brands might change to a new brand only due to a want for change. Also, launching a new product in a highly competitive market at low prices will not be a sustainable strategy as this will lead to price wars and a new entrant finds it very difficult to survive in front of existing big players. 18. PRODUCT TYPE: Undifferentiated PLC: Growth COMPETITION: High Nurturing an undifferentiated product at growth stage in a highly competitive market is by itself a huge task. The brand is growing, but so are competitors’ brands. Sustaining the brand presence in such a situation can be achieved through effective pricing strategy. Consumers are exposed to a large number of brands which offer similar products at similar prices. It becomes very difficult for consumers to choose a different brand at various situations. Therefore consumers tend to buy the same brand all the time. PRICING STRATEGY: Psychological Pricing A pricing strategy which is determined to create a positive psychological in the minds of the consumers will work as a good strategy at this stage. This will ensure brand resonance in existing customers as well as will prove to be useful in attracting competitors’ customers. Company should price the product in such a way that consumers get highly attracted to the brand. 19. PRODUCT TYPE: Undifferentiated PLC: Maturity COMPETITION: High At maturity level, the company has already gained a particular level of market share and enjoys brand loyalty to some extent. Customers who are buying the brand will be reluctant to switch because of similar reasons as stated above. Now is the time to attract new
segments and customers of competitors’ brands and achieve a leadership position in the market. PRICING STRATEGY: Predatory Pricing Since the company now has the resources to predatory price the product to such an extent that huge consumer base gets attracted to the brand in the short run, even some percentage of loss will be affordable to the company. The main objective for the company should be to not allow new entrants into the market and also make way for existing small competitors to exit the market which will ensure leadership position or the company in the long run. 20. PRODUCT TYPE: Undifferentiated PLC: Decline COMPETITION: High When an undifferentiated product reaches a decline stage inspite of psychological pricing in the highly competitive market place, this can mean that the need for the category is being satisfied by some other category. In the long term the product type has to be shifted from undifferentiated to differentiated one. But if this is not possible in the category, the only point that needs to be considered in order to stay in the market is the pricing strategy. PRICING STRATEGY: High?Low Pricing At this stage company should introduce 2 things: a. Promotional schemes b. Loyalty benefits The promotional schemes will be targeted to attract new segments for the category. This can be achieved through heavy advertising for awareness of the sales promotion campaigns.
The already existing loyal customers should be given some additional benefits by way of loyalty points or membership to a club, etc. This will ensure that these loyal customers stay with the brand even when potential buyers are targeted with the help of promotional offers.
INDUSTRY EXAMPLES WITH RESPECT TO CREATIVE PRICING MODEL
1. PRODUCT TYPE: Highly Differentiated COMPETITION: Low E.g.: 1. Personal Care? Olay Total Effects In a market which is highly saturated with all almost competitors positioning on fairness attributes, Olay total effects positioned itself as an anti aging cream which fights the seven signs of aging. This highly differentiated product type was premium priced at range of Rs. 799 to Rs. 1499 which clearly was targeted to higher income group of the society. Now the brand has reached growth stage, where the company has used the dynamic pricing strategy by gradually introducing smaller packs at less price points. In order to encourage trial in the potential customer group Olay introduced its trial pack at Rs. 99 without changing its premium positioning. 2. Fashion Garments? This could be any designer item like watches of Rolex, Omega or Rado These products break the clutter and are highly differentiated. They command a price over the premium because of the high level of differentiation of the product that they offer. They can be priced at a premium price. In the growth stage they can opt for dynamic pricing wherein based on the fluctuations in demand they can upscale the price of the product. In the maturity stage,they can price their products at slightly low range in fliers and advertisements. This might draw crowd in the exclusive brand outlets. Inside the store the customer can be provided a range of products in similar category to encourage Cross?selling and up?selling. In the decline
stage probably the tiered strategy might be the saviour. The pricing strategy on the PLC can be described as below:
• Introduction
Dynamic
• Growth
• Maturity
Tiered
• Decline
Premium
High?low
2. PRODUCT TYPE: Highly differentiated COMPETITION: High E.g.: Automobile: Limousine The best example is the Highly Differentiated Limousine in the automobile Market. These products break the clutter and are highly differentiated. They command a price over the premium because of the high level of differentiation of the product that they offer. They can be priced at a premium price. In the growth stage they can opt for dynamic pricing wherein based on the fluctuations in demand they can upscale the price of the product. In the maturity stage, they can price their products at slightly low range in fliers and advertisements. This might draw crowd in the exclusive brand outlets. Inside the store the customer can be provided a range of products in similar category to encourage Cross?selling and up?selling. In the decline stage probably the tiered strategy might be the saviour. The pricing strategy on the PLC can be described as below:
• Introduction
Dynamic
• Growth
• Maturity
Tiered
• Decline
Premium
High?low
3. PRODUCT TYPE: Differentiated COMPETITION: Low E.g.: Air Conditioners? Eon, slider etc In case of a differentiated product having low competition like the EON, Slider, the product is used by very few and produced by meagre few. The company can safely opt for Skimming strategy and differentiate itself. Later it can price itself as competition?led strategy. In maturity stage the company would try to break even by setting a target price. This is mentioned keeping in mind that the differentiated product like slider might not break?even very soon in the growth or maturation stage. In case such a product fails to work in the market it can opt for discounting its highly?priced products. The pricing strategy on the PLC can be described as below:
• Introduction
Competition? Led
• Maturity
Discounting
• Growth
• Decline
Skimming
Target
4. PRODUCT TYPE: Differentiated COMPETITION: High E.g.: Retail Outlet: Shoppers’ Stop A differentiated brand like Shopper’s stop introduced products through skimming strategy. Once they realised the satisfaction of customers towards their products and the resulting higher revenues,they decided to devise different products for different segments. So in same product category we have Shopper stop’s different products priced differently for different segments E.g. In ladies casual section Rs 199?299 ????????Middle income group Rs 299?499 Higher ???????????Middle class group Rs 500 and above ?????????? Lavish spenders The pricing strategy on the PLC can be described as below:
• Introduction
Discrimination
• Maturity
Discounting
• Growth
Skimming Psychological
• Decline
5. PRDUCT TYPE: Undifferentiated COMPETITION: Low E.g.:Salt: Tata salt An undifferentiated product like salt like Tata salt which has very few competitors fits best in this category. Since the product is undifferentiated it has to be priced at a
low price through penetration strategy. To attract competitors it can move its pricing strategy to discounting.Towards maturity it can maintain prices at par with competitors and during Decline stage it can wisely use psychological pricing Rs 10/kg now Rs 9/kg. The pricing strategy on the PLC can be described as below:
• Introduction
Discounting
• Maturity
Psychological
• Growth
Penetration Competition? led
• Decline
6. PRODUCT TYPE: Undifferentiated COMPETITION: High E.g.: 1. Packaged Drinking Water? Bisleri Bisleri is the pioneer in packaged drinking water category. It was priced at Rs. 15 for 1 ltr bottle at the time of its launch. A lot of other competitors like Aquafina, Oxyrich and many others joined the race at similar price points (Competition led). Bisleri then reworked its financial model and due to its volume benefits was able to bring down the price drastically by 20%. At this stage it set the psychological perception in the minds of the consumers that Rs. 15 for a mineral water pack is too high and people readily accepted because of Bisleri’s huge brand equity. Ultimately all the other brands had to bring down their prices to same level as Bisleri in order to survive in the market. Now, Bisleri has already reached maturity level. The next strategy it should adopt is predatory pricing itself at Rs. 10. Even if Bisleri suffers short term losses due to such a strategy, it will still survive the top most position in the market
because for other competitors it will not be possible to cut down the prices to such a low level as they don’t enjoy the huge economies of scale that Bisleri enjoys. Through this Bisleri will be able to restrict competition to some extent and also protect its leadership position. 2. Telecom industry: Docomo Docomo as a new entrant in a highly competitive telecom marketshould have ideally gone for a Competition?led strategy. Instead it went for Price Discrimination strategy. It introduced the one paisa calling assuming it would acquire many customers. Sure Docomo acquired customers but there was no retention of customers as all other players slashed their calling rates and brought them in pa with Docomo. This strategy of Docomo backfired upon them as within 4 months of their launch their revenues started plummeting. This is a great example of failure of creative pricing strategy. It also stresses the importance of pricing as an important factor in the success of a brand or aproduct or a company. Had it followed the following path it could have been successful. The pricing strategy on the PLC can be described as below:
• Introduction
Psychological
• Maturity
High?low
• Growth
Competition? led Predatory
• Decline
HOWEVER SOME BRANDS BREAK THE CONVENTIONAL RULES OF PRICING YET EMERGE AS GLOBAL SUCCESS BY PRICING CREATVIELY IN TRUE SENSE
Let us now have a look at some of these brands who have surpassed all the rules of creative pricing yet survived successfully in the market place. McDonalds This is one brand which has surpassed all the rules of pricing in a differentiated market place. McDonalds entered India at the time when there was almost no competition for it. McDonalds was a pioneer in bringing the burger and French fries concept and hence the fast food culture to India. It could have priced itself as a premium product and still win the hearts of Indians with its highly innovative product. But, breaking all the rule of pricing strategies, McDonalds entered India with the positioning of “value for money”. Its Happy Price Menu @ Rs. 20 is one of the most innovative pricing breakthroughs in the world. Tide Detergent Tide detergent entered the market when Nirma dominated the bottom of the pyramid and Surf dominated the higher income group. Tide is in a differentiated product type with high intensity of competition around. It entered with a skimming strategy pricing 1 kg at Rs. 120 which was a big number for this category. The motive was to clearly target the upper segment of the society and create an aspirational built for the brand in the minds of the net set of potential customers. But once this motive was achieved, instead of giving in the market dynamics which would have wanted tide to go for competition led pricing by coming in lines with the closest competitor surf at Rs. 79, Tide chose to go for penetration strategy by lowering the price to Rs. 65. Through this price point, tide catered the untapped middle class segment which was earlier ignored by other detergents. Thus, Tide’s pricing strategy helped the brand to cater to the ignored segment of the market thus ensuring success for itself.
Tata Nano Nobody had ever dreamt of driving a car which is priced at as low as Rs. 1 lakh. Through this we can say that Tata Nano entered as a highly differentiated product type. It entered the market with a clear positioning: Car for the Aam Aadmi. Such pricing breakthrough is a clear outcome of strong and powerful engineering. Bata Shoes Bata shoes introduced the concept of psychological pricing to Indian markets. In a market where all the close competitors were pricing their shoes at similar price range of 500 to 1500, Bata shoes invented a new technique to grab customer attention and make them perceive that Bata shoes are value for money. The priced their shoes at Rs. 499 to 1499. The use of 99 instead of 100 has been a breakthrough strategy which understood consumer behaviour in the apt way. This strategy is now being followed by almost all the other retail outlets and works wonders in attracting customers to the brand.
TIPS TO USE CREATIVE PRICING
When setting the price of the product companies can adopt simple tactics that work in almost all industries. But every industry has its own nuances and not every tactic will work for every company. Therefore it is for the company management to decide which of the following tactics will be apt for their product. 1. Let your price speak for itself A higher price says that your product is better. People have this perception in their minds that higher price commands better quality and a good brand image. They feel proud to be associated with highly priced products. Even when there is less difference between brand A and brand B, a higher price sometimes works wonders as consumers develop a perception that brand A, which is highly priced, is of better quality than brand B. But sometimes it is difficult to charge premium for the brand. In such situations, the price should be made silent. Consumers focus on price when they are not able to site difference
between two products. While negotiating with customers it is important to protect the gross?margins and focus on less costly variables such as delivery time. 2. Make ‘more quantity’ the selling point Selling higher quantity often has a dramatic effect on gross margin. Most manufacturers can almost double their price for twice the volume with only a minor increase in production cost.For example in banking industry, the cost of a Rs. 50,000 loan is same as the cost of a Rs. 5, 00,000loans. For this tactic to work, quantity must be important to the customer. For example, selling a 500ml teapot for Rs. 500 and a 100ml teapot for Rs. 300 may not increase the total sales as most people do not repair their china teapot often and they might not need a larger bottle. 3. Package the price right Salespeople while approaching a middle class people often introduce a premium product and then show the mid market option. The customer will refer everything against the premium product and chances are that they will spend more than planned and end up buying the premium option. There are many ways to package the price right. Telephone companies bundle the local phone service with high speed internet and long distance calls. Bundling in such a manner works as it takes the customer’s eyes off the individual prices. Customers feel happy with a slight discount and convenience of a one stop shop. Tiered pricing is also used extensively as a part of packaging the price. 4. Use of wasted capacity Scheduling work during traditional downtime is a very good tactic to cut down on costs. The key is to price the work in a proper manner. Imagine a manufacturing facility that shuts down Fridays in July because orders are traditionally slow. Use this time to schedule lower priced work. Assuming your overhead is accounted forthrough regular sales, this additional revenueonly needs to be priced higher than variablecosts. This tactic works best when
selling to different region or different customer base as the existing customers will not be offended that they are charged higher price. 5. Selectively discounting Everyone loves a deal. For many industries, discounting tools such as coupons or sales can move inventory, generate short?term profits and introduce the product to newer segments. But if the product is a premium one, the company should protect the integrity of the brand by offering a different benefit instead of discounting the price. For example free furniture with every kitchen table purchased can be an effective tactic to ensure better sales in short run. Price discounting for a premium product can sometimes work wonders for strengthening long term relationships with customers. For example, a high end men’s clothing store that holds a special sale exclusively for existing customers actually gives the message that they value loyal customers’ more than new customers. 6. Know when to charge for extras Many businesses allow hidden value to creep into their customers’ experiences. By not charging for every little thing, they offer something small which means a lot to the customers. The trick is to realise which free extras are beneficial to consumers. If these extras are not important to them, the company should recapture the lost gross margin by adding these costs to price.
CONCLUSION:
Pricing for a product is the decision considering a large number of factors which directly or indirectly results in success or failure of a brand. A good pricing strategy is a source to increasing market share, sales and therefore profits for the company. In turn, it is the result of effective positioning and continuous innovation in terms of product development and marketing.
The model presented in the paper might not serve the needs of all types of products and services. It is ultimately for the company to decide its pricing strategy depending upon various factors affecting the business environment.
doc_120443987.pdf
This presentation is about different industries and analyze how companies adopt creative pricing strategies and what factors drive their decision making. For this we apply our suggested model to various industries and attempt to measure the applicability of the model.
Creative Pricing
Aditi Bathia ? 04 Nupur Gandhi ? 17 Vaishali Lapasia ?32 Nayan Joshi ?119 Marketing Strategy MMS ? Marketing
INTRODUCTION
One of the most difficult decisions for companies today is to decide what price to set for products and services. A good pricing strategy has always been a key driver to sales and therefore customer retention for a company. An adequate, sustainable and creative pricing strategy is based on the equilibrium of financial returns desired by companies and well being of consumers in the tough competitive global arena. The target group of customers decides pricing strategy for the company. For example, if a company wants to target upper class income level consumers, it should have a premium pricing strategy. There are a lot of factors that need to be taken into account by companies while pricing theirproducts and services. In this paper we will look at these factors in detail. We will also analyse the extent to which these factors influence the pricing decision making process. A company has varied options available while choosing its pricing strategies. In this paper we look at what are these strategies and under which circumstances to use which of these strategies. We have developed a model which can be used by companies to decide which pricing strategy to be adopted to increase the market share in the industry. In the process of developing the model we have made some assumptions which are also discussed in further detail. As of now, it is not a tested model and is in its initial stage of development. It is very difficult to integrate all the factors in the model and give suggestions for strategies accordingly. But we have tried our best to integrate some of the most important factors for pricing strategies in the model. Further in this paper, we look at different industries and analyse how companies adopt creative pricing strategies and what factors drive their decision making. For this we apply our suggested model to various industries and attempt to measure the applicability of the model. We also look at some of the breakthroughs in pricing strategies by companies which have surpassed the conventional rules to lead the market.
We also suggest through this paper, different tactics that can be adopted by companies while creatively pricing their products and services. These tactics can help companies to make their pricing strategies successful.
FACTORS INFLUENCING PRICING STRATEGIES
1. Product Type Broadly speaking, there are three types of products: a. Highly differentiated b. Differentiated c. Undifferentiated Highly differentiated are those which have certain PODs which are unique to that brand. They usually cater to a niche segment or offer something uniquely different in terms of functionality or psychological benefits as compared to their counterparts. Differentiated are those which have some differentiation in terms of functionality of the product. The PODs that they offer might not be that difficult to replicate. But they do have something unique to offer. Undifferentiated are those which do not offer any PODs whatsoever. The products are highly standardized in the industry and if not brands, the products are more or less generic in nature. It is very difficult to distinguish the features in terms of functionality or psychological benefits if it was not for the brand. Pricing strategies that a company adopts highly depends on which product type it offers. Strategies adopted for differentiated product will not work for undifferentiated product. 2. Target Group Pricing strategy for a company also depends on what is the profile of the segment it is targeting. An effective STP will be useful for identifying the target group of customers. The age, gender, income levels, standard of living, dining habits, way of living, etc. of the target group will help us understand what price to command from them for our products and services.
3. Competition Every industry has certain degree of competition from various other players be it global, national, regional or small players. Competition also comes from unorganized sector to a large extent in some industries. In some industries there is high degree of competition and in some industries there is low degree of competition. Pricing strategy of a company depends also on the degree of intensity of competition driving the market forces. 4. External environment The external social, political, economic and technological environment has a great influence on pricing decision making process for a company. For example during recession times, no matter how premium the target segment is, no point keeping the prices high if they are not in a position to afford such high prices. 5. Product life cycle Pricing decisions also vary to a large extent depending upon which stage of the PLC curve is the company in. A company enters a market with a pricing strategy and consequently the strategies change as the product moves ahead in the PLC curve. The strategy for a product at growth stage will be very different than at a maturity or a decline stage. 6. Economies of scale The degree of economies of scale that a company is able to command also drives its pricing decisions. Less economy of scale results in high costs of manufacturing which in turn influences the price of the product. If a company is able to leverage on more economy of scale, it may command low price because it then becomes affordable for the company to transfer the benefits of economies to the customer. 7. Brand image The brand image of a company goes a long way in deciding the pricing policy for its products. A company with an established brand image can always command higher prices because it wins customer’s trust and loyalty.
8. Legal framework of government In some industries like insurance, the pricing policies are highly regulated and controlled by the government. 9. Industry Type The type of industry the product is in greatly determines the price range the product will work in. For example, if the product is in insurance industry, IRDA rules will greatly influence the pricing strategies of the company.
LITERATURE STUDY
TYPES OF PRICING STRATEGIES
1. Skimming Skimming strategy involves initially selling a product at a high price, sacrificing high sales to gain high profit, therefore ‘skimming’ the market. This strategy is usually employed to reimburse the cost of investment of original research into the product. It is commonly used in electronics market when a new range, e.g. DVD players, is firstly dispatched into the market at a high price. These early adopters are relatively less price?sensitive because either their need for the product is more than others or they understand the value of the product better than others. This strategy is employed only for a limited duration to recover most of investment made to build the product. To gain further market share, a seller must use other pricing tactics such as competition led or penetration. 2. Penetration Pricing Penetration pricing is a technique of setting a relatively low initial entry price, often lower than the eventual market prices, to attract more and more customers. The strategy works on an expectation the consumers will switch to a new brand because lower price is offered. Penetration pricing is associated with the marketing objective of increasing the market share or sales volume rather than making profits in the short run. The advantages of penetration pricing to a firm are:
?
It can result in fast diffusion and adoption. This can achieve high market penetration rates quickly. This can take the competition by surprise, not giving them time to react.
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It can create goodwill among the early adopters segment. This can create more trade through word of mouth.
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It creates cost control and cost reduction pressures from the start, leading to greater efficiency.
? ?
It discourages the entry of competitors. Low prices act as a barrier to entry. It can create high stock turnover throughout the distribution channel. This can create critically important enthusiasm and support in the channel.
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It can be based on marginal cost pricing, which is economically efficient. 3. Competition Led Pricing
This type of pricing means adopting to the same strategy as competitors have adopted, keeping similar prices for products as compared to competitor’s products and not differentiated much on pricing aspects. Sometimes this type of pricing also helps when the company wants to enjoy a decent market share without trying to play with competitor’s market share. 4. Premium Pricing Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation or represent exceptional quality and distinction. 5. Psychological Pricing Pricing designed to have a positive psychological impact. These types of pricing strategies play with consumer psyche in order to encourage more shopping behaviour in them. E.g. Price a product at Rs. 95 or Rs. 99 instead of Rs. 100.
6. Dynamic Pricing A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers ? ranging from where they live to what they buy to how much they have spent on past purchases ? dynamic pricing allows companies to adjust the prices of identical goods to correspond to a customer’s willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight. 7. Target Pricing Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers. Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product. 8. High?Low Pricing Method of pricing for an organization where the goods or services offered by the organization are regularly priced higher than competitors, but through promotions, advertisements, and or coupons, lower prices are offered on key items. The lower promotional prices are targeted to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products.
9. Discounting Discounting means offering various discount schemes to attract higher sales volume. This type of strategy is highly short term in nature. Discount schemes like upto 50% off come under this type. Also schemes like 25% extra come under this type as the strategy drives more volume at same cost which at the end means discounting the original price of the product. 10. Tiered Pricing Tiered pricing is also commonly used by various companies to attract more sales volumes.Through tiered pricing companies charge basic price for a basic product and higher prices for a product with a clearly defined additional benefit. 11. Discrimination Pricing This strategy involves setting a different price for the same product in different segments of the market. For example, this can be for different ages or for different opening times, such as cinema tickets. 12. Predatory Pricing In business and economics, predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business. The predatory merchant then has fewer competitors or is even a de facto monopoly, and hypothetically could then raise prices above what the market would otherwise bear.
MODEL: CREATIVE PRICING MATRIX
Creative pricing matrix is a pricing decision making model developed by us and is based on an observation that the decision of pricing strategies of a company depends upon 3 factors, namely:
1. Product Type 2. Product Life Cycle 3. Competition Product type is classified as highly differentiated, differentiated and undifferentiated. The product life cycle goes through 4 phases: Introduction, Growth, Maturity, and Decline. In this competitive business scenario, we can classify competition as high competition market or low competition market. The matrix is developed to formulate the best and the most creative pricing strategies to be adopted by a company depending upon their product type, the stage of their PLC curve and the intensity of competition in the industry. The options of pricing strategies that a company has are as follows: 1. Skimming 2. Penetration pricing 3. Competition led pricing 4. Premium pricing 5. Psychological pricing 6. Dynamic pricing 7. Target pricing 8. High?low pricing 9. Discounting 10. Tiered pricing 11. Discrimination pricing 12. Predatory pricing
ASSUMPTIONS OF THE MODEL
1. Product type implies degree of differentiation and not positioning of the same. That is, a product type may be differentiated, undifferentiated or highly differentiated. However, the positioning may be premium, exclusive or ordinary. Thus, even a moderately differentiated product may be positioning it as a premium
brand if it is able to create that perception in the minds of the consumers. Example, tide washing powder did not provide any significant benefits over other detergents. Hence was moderately differentiated. However, upon introduction, it positioned 2. itself as a premium brand. Hence, this assumption is of utmost importance and in order to understand the model presented, must not be confused with positioning. 3. External Environment: External environment includes all factors affecting the company’s strategy, profitability, operations, sales or strategy but not within control of the company itself. Thus, it includes government rules, market scenario, demand conditions. However, competition is not included in this section as it is considered as a significant separate factor altogether. 4. Competition includes competitor strategy, competitor intensity and competitor strength to tackle your strategy. 5. Stage of Product Life Cycle (henceforth stated as PLC): The stages of PLC considered in the model presented are introduction, growth, maturity and decline. 6. Factors Considered: Various other factors may also be considered while forming a pricing strategy. This model, however, considers the 3 most important and interrelated factors affecting the product pricing at every stage.
MODEL:
EXPLANATION OF THE MATRIX
1. PRODUCT TYPE: Highly Differentiated PLC: Introduction COMPETITION: Low/High A company whose product is highly differentiated caters to a particular segment of consumers whose buying behaviour, standard of living, consumption patterns and need from the product are extremely different from the rest. The product has extremely strong points of difference which the company can leverage upon while interacting with the target customers. This type of product is for consumers who need something extra than what
others need in the same category. Companies which are successful in satisfying these needs create a niche for themselves in that particular category. When a highly differentiated product is introduced in the market, it most of the times is a result of a want for something extra that has been observed in some consumers who were first satisfied with the existing products. While strategising the price policies company can take advantage of being first in the race to satisfy that particular need. For a product which is satisfying a specific need of the consumers, intensity of competition takes a back seat as competitors PODs are always different than their PODs. Therefore this segment enjoys highest level of loyalty among the consumers. PRICING STRATEGY: Premium Pricing A highly differentiated product when enters the market should command a premium price for itself. This is because consumers will be willing to pay more for the differentiation that the product offers. And more importantly this will help the company to build an aspiration level for the product among the consumers. People who won’t be able to buy the product due to its premium pricing will aspire to own it one day. Additionally people who buy the product will enjoy a proud feeling to own the brand. The motive of the company at introduction stage should be to recover the cost of investment that has gone in research of the highly differentiated product and create a distinctive brand image rather than increase market share or profits. 2. PRODUCT TYPE: Highly differentiated PLC: Growth COMPETITION:Low/high At growth stage of a highly differentiated product the brand has already built an aspirational level amongst the consumers. This stage enjoys huge brand loyalty as people who own this brand have a sense of belongingness towards it. Now is the time to increase the market share and target a leadership position in the category notwithstanding the highly differentiating position in the market. For this the company should now target the next level of potential customers who have always aspired to buy the brand but price was always a
constraint. Motive of the company at this stage should be to increase the market share and strengthen the brand rather than to make profits. PRICING STRATEGY: Dynamic Pricing At growth stage of a highly differentiated product a dynamic pricing strategy should be adopted by the company irrespective of the intensity of competition. Pricing a product at different levels considering the profile of the current and potential customers will ensure wider consumer base as people who were first aspiring to buy the brand will now be able to buy it. This will ensure greater market share. The brand will be able to build a distinctive identity for itself and command huge loyalty and respect in the minds of the consumers. 3. PRODUCT TYPE: Highly differentiated PLC: Maturity COMPETITION:Low/high When the highly differentiated product reaches the maturity stage of product life cycle, this means that the brand has already established a distinctive image and has now become aged. The target and potential customers have already been tapped by the brand and it has reached a stage where there are no more potential customers to buy the product. This stage of in the cycle enjoys huge brand loyalty from the customers. The customers are able to resonate to the brand and consider it a part of their personality and way of living. The brand still has an aspirational built for the next level of consumers who have never dreamed of buying the highly priced product. Now is the time to attract these consumers to try the brand but without lowering the prices as that can lead to brand dilution and the already loyal customers might feel disconnected to the lower priced brand image. PRICING STRATEGY: High?Low Pricing At this stage company should introduce 2 things: a. Promotional schemes b. Loyalty benefits
The promotional schemes will be targeted to attract the potential buyers with a view to make them try the product so that they are ready to shell out some more money once they like it. This can be achieved through heavy advertising for awareness of the sales promotion campaigns. The already existing loyal customers should be given some additional benefits by way of loyalty points or membership to an elite group, etc. This will ensure that these loyal customers stay with the brand even when potential buyers are targeted with the help of promotional offers. Even the customers who are not very frequent buyers will now buy more frequently. 4. PRODUCT TYPE: highly differentiated PLC: Decline COMPETITION:Low/high When a highly differentiated product enters the decline stage of PLC, it means that the brand is no more able to attract new customers and even the existing customers who were once loyal to the brand have now started looking at different options in the category. They no more resonate with the brand and many of them have started switching to competitors’ brands. There are various reasons for this stage to occur. One strong and most frequent reason is lack of innovation or saturation of the target segment. At this stage a company has the following options available with it: a. Opt out of business b. Continue satisfying the same customers with new developments in the product c. Target new segments with the same product (modifying the product to suit needs of the new segment) If the company chooses to target new segments with the same product as well as continue satisfying the existing customers, it is the pricing strategy which will play a major role in deciding the future of the product.
PRICING STRATEGY: Tiered Pricing Introducing tiered pricing strategy at this level means introducing variants in product features. The company should charge basic price for the most basic variant and higher price for variant offering clear additional benefit. In this way the company will be able to attract new segments to try the product for the first time as it has now become affordable to their pockets and also company will be able to retain the customers who are now switching to new brands by offering additional benefits which are clearly visible. 5. PRODUCT TYPE: Differentiated PLC:Introduction COMPETITION:Low Differentiated products are those catering to the masses but have certain points of difference than the competitors. There are a wide range of brands available in the category and it is for consumers to decide which type of differentiation suits them the best. This type of product portfolio enjoys comparatively less loyalty than those in the highly differentiated product type. Consumers can easily switch to other brands if they get better features in them. The consumers using this type of products normally tend to show off that they own the latest product of the market and that their product has something better than the competitors. They are not that price sensitive. But they cannot be considered as loyal customers. The company cannot assume that their customers will be loyal and hence not switch to other brands throughout their life cycle. Hence in order to retain the existing customers and attract more customers this type of product demands continuous innovation, be it in terms of product development or pricing strategy at various stages of the product life cycle. At introduction stage the motive of the company should be to attract consumers by leveraging the points of difference. Creating a differentiating brand image should be the plan of action for the company. As the competition is low, there is no pressure on price
points and consumers buy a certain product just because they get some features which others do not provide. PRICING STRATEGY: Skimming The product should be creatively priced at introduction stage for a differentiated product type where the market is less competitive. Here, skimming strategy can be highly successful. If the product is highly priced than the competitors’ brands, this will create an image in the minds of the consumers that the product has something better to offer than its counterparts. This way the company will be able to catch the attention of new customers and they will be willing to try the new product even if it means shelling out some more money from their pockets. 6. PRODUCT TYPE: Differentiated PLC: Growth COMPETITION: Low When the product reaches the growth stage, the main motive of the company should be to increase the market share and target the leadership position. This can be done by retaining customer loyalty in the product as well as attracting new customers to use the product. So, now is the time to recheck the pricing strategy. PRICING STRATEGY: Competition Led At introduction stage the product was priced highly by using skimming strategy. Now price of the product should be brought down at par with the competitors’ brands. This will ensure customer loyalty as customers will not find any reason to switch. Also potential customers who were not buying the product at first due to price constraints will now buy it because they already had the perception that the product does have something different to offer to them and they can now afford it willingly. 7. PRODUCT TYPE: Differentiated PLC: Maturity COMPETITION: Low
At maturity stage, the brand has already established a good differentiating image for itself. Now is the time for company to target profits. Company would have invested heavily into advertising and product development in order to build the brand. Now is the time to reimburse that investment. But premium pricing strategy cannot work here as this product type enjoys comparatively less brand loyalty and therefore there are great chances of customers switching to other brands if the product is too highly priced. PRICING STRATEGY: Target Pricing At maturity stage target pricing can be the best pricing strategy to be adopted by the company. This is because the company at this stage is playing in huge volumes and it makes sense to target a fixed rate of return on sales. 8. PRODUCT TYPE: Differentiated PLC: Decline COMPETITION: Low The decline stage for a product occurs for either of the two reasons: a. Competitors have been successful to attract the customers with the help of some points of difference. b. The need that the product had first created, now, no more exists. In either case, pricing strategy of the product will play a major role in deciding the future of the brand. The company should now also start targeting new segments for the product. PRICING STRATEGY: Discounting At decline stage the company should aggressively use discounting as a pricing strategy to retain the existing customers as well as attract new customers. Sales and discount offers by companies help in creating a buzz in the market for the brand thus attracting new customers to try the product. Also, word of mouth is a tool which helps discounting strategy to retain the existing customers who had or were thinking of switching to other brands. 9. PRODUCT TYPE: Differentiated
PLC: Introduction COMPETITION:High When a differentiated product type enters a highly competitive market place, the main objective of the company is to increase awareness about the brand and attract more and more consumers to try the product. Since the consumers in this segment are not that price sensitive, the company should target awareness about the differentiating features of the product. PRICING STRATEGY: Skimming If the product is highly priced than the competitors’ brands, this will create an image in the minds of the consumers that the product has something better to offer than its counterparts. This way the company will be able to catch the attention of competitors’ customers and they will be willing to try the new product even if it means shelling out some more money from their pockets. 10. PRODUCT TYPE
ifferentiated PLC:Growth COMPETITION:High At growth stage the scenario is that the company is enjoying good brand image but not a very good market share because of high intensity of competition. If the company continues keeping the price of the product high, there are huge chances that customers will shift to other brands who offer some other differentiating features. On other side, if the company cuts the prices at one go, customers will develop a perception of inferior quality and will feel cheated because they had initially shelled out more money for the same product. However it becomes all the more important for the company to target different segments with the same product in order to increase the market share. PRICING STRATEGY: Discrimination Pricing Keeping different prices for the same product for different segments can be a good strategy to solve the problem. The segments should be created as per their geographic or demographic profiles which will lead to expansion of the brand to other markets. This will ensure that the existing customers will not feel cheated and will continue to be associated with the brand. 11. PRODUCT TYPE
ifferentiated PLC:Maturity COMPETITION:High At maturity stage the brand has become a well established identity with a good image and decent market share. But due to high competition in the market place there are chances that existing customers will be stolen away by competitors. Also, at this stage, it is very difficult for company to target new consumers as the market is almost saturated with lots of competitors having strong presence in the market place. Therefore it is very important to attract competitors’ customers to try the product if the company wants to increase the market share and target leadership position. PRICING STRATEGY: Psychological Pricing A pricing strategy which is determined to create a positive psychological in the minds of the consumers will work as a good strategy at this stage. This will ensure brand resonance in existing customers as well as will prove to be useful in attracting competitors’ customers. Company should price the product in such a way that consumers get highly attracted to the brand. This strategy should be backed with heavy advertising campaigns which will be easy for a company in maturity stage. 12. PRODUCT TYPEifferentiated PLCecline COMPETITION:High The decline stage for a product occurs for either of the two reasons: c. Competitors have been successful to attract the customers with the help of some points of difference. d. The need that the product had first created, now, no more exists. In either case, pricing strategy of the product will play a major role in deciding the future of the brand. The company should now also start targeting new segments for the product. PRICING STRATEGY: Discounting At decline stage the company should aggressively use discounting as a pricing strategy to retain the existing customers as well as attract new customers. Sales and discount offers by companies help in creating a buzz in the market for the brand thus attracting new customers to try the product. Also, word of mouth is a tool which helps discounting strategy to retain the existing customers who had or were thinking of switching to other brands. 13. PRODUCT TYPE: Undifferentiated PLC: Introduction COMPETITION: Low Undifferentiated products are those which are generic in nature and their features are more like commodities. There is not at all differentiation between company’s product and competitors’ products. Here, the only driver of consumers’ decision while buying a product will be the price of the product or the value added services that the company offers or equity that the umbrella brand enjoys. Also presence of strong unorganized sector makes it all the more difficult for companies to drive sales. For introducing an undifferentiated product in a low competition market, the pricing strategy will be completely different than that for other product types. PRICING STRATEGY: Penetration Pricing Entering the market with low pricing and then subsequently increasing the prices as the product life cycle stage proceeds further is a good strategy to be adopted for an undifferentiated product.Here the objective of the company should be to aggressively attract new customers and hence increase the market share to a substantial amount in the short run. Low competition means consumers are not having much choice while buying the product. If the company launches the product at low prices than competitors, huge number of consumers will get attracted to try the product. Since the type is undifferentiated these
consumers will also not shift to other brands if they are satisfied with the pricing of the product. This strategy should be backed by heavy advertising in order to grab maximum attention in minds of the consumers. 14. PRODUCT TYPE: Undifferentiated PLC: Growth COMPETITION: Low When the product enters growth stage, awareness is for the brand is already there and the main task for the company, now, is to recover costs continue attracting more consumers in order to grab a decent market share. Here also, as the competition is low, emphasis on price is comparatively less as consumers do tend to buy a brand just because they have been buying it since long time. PRICING STRATEGY: Competition Led Company can now higher the prices to levels of competitors by ensuring that he existing consumers will not switch to other brands as they too are offering the same prices and these consumers are now comfortable using the brand since quite some time. 15. PRODUCT TYPE: Undifferentiated PLC: Maturity COMPETITION: Low A matured brand enjoys decent brand image. But since it is in undifferentiated product type, it is very difficult for companies to retain customer loyalty. Consumers tend to switch at this level for reasons like want for some change, etc. Since pricing of all the brands is similar till the growth stage, it is now important to again strategically price it to retain the existing customers. PRICING STRATEGY
iscounting At maturity stage the company should aggressively use discounting as a pricing strategy to retain the existing customers as well as attract new customers. Sales and discount offers by companies help in creating a buzz in the market for the brand thus attracting new customers to try the product. Also, word of mouth is a tool which helps discounting strategy to retain the existing customers who had or were thinking of switching to other brands. 16. PRODUCT TYPE: Undifferentiated PLC: Decline COMPETITION: Low When an undifferentiated product reaches a decline stage inspite of discount pricing in the less competitive market place, this can mean that the need for the category is being satisfied by some other category. In the long term the product type has to be shifted from undifferentiated to differentiated one. But if this is not possible in the category, the only point that needs to be considered in order to stay in the market is the pricing strategy. PRICING STRATEGY: Psychological Pricing A pricing strategy which is determined to create a positive psychological in the minds of the consumers will work as a good strategy at this stage. This will ensure brand resonance in existing customers as well as will prove to be useful in attracting competitors’ customers. Company should price the product in such a way that consumers get highly attracted to the brand. 17. PRODUCT TYPE: Undifferentiated PLC: Introduction COMPETITION: High The most challenging job for a marketer is to decide the pricing strategy for an undifferentiated product entering into a highly competitive market. The company cannot launch the product at low price as heavy competition will not let it survive in the market. Also, for this product type people using a particular brand will continue using the same one since there is not much difference in the prices or features of different products in this category.
PRICING STRATEGY: Competition Led Introducing the brand at prices which are at par with the existing competition can be the best strategy to go for. This is because consumers using existing brands might change to a new brand only due to a want for change. Also, launching a new product in a highly competitive market at low prices will not be a sustainable strategy as this will lead to price wars and a new entrant finds it very difficult to survive in front of existing big players. 18. PRODUCT TYPE: Undifferentiated PLC: Growth COMPETITION: High Nurturing an undifferentiated product at growth stage in a highly competitive market is by itself a huge task. The brand is growing, but so are competitors’ brands. Sustaining the brand presence in such a situation can be achieved through effective pricing strategy. Consumers are exposed to a large number of brands which offer similar products at similar prices. It becomes very difficult for consumers to choose a different brand at various situations. Therefore consumers tend to buy the same brand all the time. PRICING STRATEGY: Psychological Pricing A pricing strategy which is determined to create a positive psychological in the minds of the consumers will work as a good strategy at this stage. This will ensure brand resonance in existing customers as well as will prove to be useful in attracting competitors’ customers. Company should price the product in such a way that consumers get highly attracted to the brand. 19. PRODUCT TYPE: Undifferentiated PLC: Maturity COMPETITION: High At maturity level, the company has already gained a particular level of market share and enjoys brand loyalty to some extent. Customers who are buying the brand will be reluctant to switch because of similar reasons as stated above. Now is the time to attract new
segments and customers of competitors’ brands and achieve a leadership position in the market. PRICING STRATEGY: Predatory Pricing Since the company now has the resources to predatory price the product to such an extent that huge consumer base gets attracted to the brand in the short run, even some percentage of loss will be affordable to the company. The main objective for the company should be to not allow new entrants into the market and also make way for existing small competitors to exit the market which will ensure leadership position or the company in the long run. 20. PRODUCT TYPE: Undifferentiated PLC: Decline COMPETITION: High When an undifferentiated product reaches a decline stage inspite of psychological pricing in the highly competitive market place, this can mean that the need for the category is being satisfied by some other category. In the long term the product type has to be shifted from undifferentiated to differentiated one. But if this is not possible in the category, the only point that needs to be considered in order to stay in the market is the pricing strategy. PRICING STRATEGY: High?Low Pricing At this stage company should introduce 2 things: a. Promotional schemes b. Loyalty benefits The promotional schemes will be targeted to attract new segments for the category. This can be achieved through heavy advertising for awareness of the sales promotion campaigns.
The already existing loyal customers should be given some additional benefits by way of loyalty points or membership to a club, etc. This will ensure that these loyal customers stay with the brand even when potential buyers are targeted with the help of promotional offers.
INDUSTRY EXAMPLES WITH RESPECT TO CREATIVE PRICING MODEL
1. PRODUCT TYPE: Highly Differentiated COMPETITION: Low E.g.: 1. Personal Care? Olay Total Effects In a market which is highly saturated with all almost competitors positioning on fairness attributes, Olay total effects positioned itself as an anti aging cream which fights the seven signs of aging. This highly differentiated product type was premium priced at range of Rs. 799 to Rs. 1499 which clearly was targeted to higher income group of the society. Now the brand has reached growth stage, where the company has used the dynamic pricing strategy by gradually introducing smaller packs at less price points. In order to encourage trial in the potential customer group Olay introduced its trial pack at Rs. 99 without changing its premium positioning. 2. Fashion Garments? This could be any designer item like watches of Rolex, Omega or Rado These products break the clutter and are highly differentiated. They command a price over the premium because of the high level of differentiation of the product that they offer. They can be priced at a premium price. In the growth stage they can opt for dynamic pricing wherein based on the fluctuations in demand they can upscale the price of the product. In the maturity stage,they can price their products at slightly low range in fliers and advertisements. This might draw crowd in the exclusive brand outlets. Inside the store the customer can be provided a range of products in similar category to encourage Cross?selling and up?selling. In the decline
stage probably the tiered strategy might be the saviour. The pricing strategy on the PLC can be described as below:
• Introduction
Dynamic
• Growth
• Maturity
Tiered
• Decline
Premium
High?low
2. PRODUCT TYPE: Highly differentiated COMPETITION: High E.g.: Automobile: Limousine The best example is the Highly Differentiated Limousine in the automobile Market. These products break the clutter and are highly differentiated. They command a price over the premium because of the high level of differentiation of the product that they offer. They can be priced at a premium price. In the growth stage they can opt for dynamic pricing wherein based on the fluctuations in demand they can upscale the price of the product. In the maturity stage, they can price their products at slightly low range in fliers and advertisements. This might draw crowd in the exclusive brand outlets. Inside the store the customer can be provided a range of products in similar category to encourage Cross?selling and up?selling. In the decline stage probably the tiered strategy might be the saviour. The pricing strategy on the PLC can be described as below:
• Introduction
Dynamic
• Growth
• Maturity
Tiered
• Decline
Premium
High?low
3. PRODUCT TYPE: Differentiated COMPETITION: Low E.g.: Air Conditioners? Eon, slider etc In case of a differentiated product having low competition like the EON, Slider, the product is used by very few and produced by meagre few. The company can safely opt for Skimming strategy and differentiate itself. Later it can price itself as competition?led strategy. In maturity stage the company would try to break even by setting a target price. This is mentioned keeping in mind that the differentiated product like slider might not break?even very soon in the growth or maturation stage. In case such a product fails to work in the market it can opt for discounting its highly?priced products. The pricing strategy on the PLC can be described as below:
• Introduction
Competition? Led
• Maturity
Discounting
• Growth
• Decline
Skimming
Target
4. PRODUCT TYPE: Differentiated COMPETITION: High E.g.: Retail Outlet: Shoppers’ Stop A differentiated brand like Shopper’s stop introduced products through skimming strategy. Once they realised the satisfaction of customers towards their products and the resulting higher revenues,they decided to devise different products for different segments. So in same product category we have Shopper stop’s different products priced differently for different segments E.g. In ladies casual section Rs 199?299 ????????Middle income group Rs 299?499 Higher ???????????Middle class group Rs 500 and above ?????????? Lavish spenders The pricing strategy on the PLC can be described as below:
• Introduction
Discrimination
• Maturity
Discounting
• Growth
Skimming Psychological
• Decline
5. PRDUCT TYPE: Undifferentiated COMPETITION: Low E.g.:Salt: Tata salt An undifferentiated product like salt like Tata salt which has very few competitors fits best in this category. Since the product is undifferentiated it has to be priced at a
low price through penetration strategy. To attract competitors it can move its pricing strategy to discounting.Towards maturity it can maintain prices at par with competitors and during Decline stage it can wisely use psychological pricing Rs 10/kg now Rs 9/kg. The pricing strategy on the PLC can be described as below:
• Introduction
Discounting
• Maturity
Psychological
• Growth
Penetration Competition? led
• Decline
6. PRODUCT TYPE: Undifferentiated COMPETITION: High E.g.: 1. Packaged Drinking Water? Bisleri Bisleri is the pioneer in packaged drinking water category. It was priced at Rs. 15 for 1 ltr bottle at the time of its launch. A lot of other competitors like Aquafina, Oxyrich and many others joined the race at similar price points (Competition led). Bisleri then reworked its financial model and due to its volume benefits was able to bring down the price drastically by 20%. At this stage it set the psychological perception in the minds of the consumers that Rs. 15 for a mineral water pack is too high and people readily accepted because of Bisleri’s huge brand equity. Ultimately all the other brands had to bring down their prices to same level as Bisleri in order to survive in the market. Now, Bisleri has already reached maturity level. The next strategy it should adopt is predatory pricing itself at Rs. 10. Even if Bisleri suffers short term losses due to such a strategy, it will still survive the top most position in the market
because for other competitors it will not be possible to cut down the prices to such a low level as they don’t enjoy the huge economies of scale that Bisleri enjoys. Through this Bisleri will be able to restrict competition to some extent and also protect its leadership position. 2. Telecom industry: Docomo Docomo as a new entrant in a highly competitive telecom marketshould have ideally gone for a Competition?led strategy. Instead it went for Price Discrimination strategy. It introduced the one paisa calling assuming it would acquire many customers. Sure Docomo acquired customers but there was no retention of customers as all other players slashed their calling rates and brought them in pa with Docomo. This strategy of Docomo backfired upon them as within 4 months of their launch their revenues started plummeting. This is a great example of failure of creative pricing strategy. It also stresses the importance of pricing as an important factor in the success of a brand or aproduct or a company. Had it followed the following path it could have been successful. The pricing strategy on the PLC can be described as below:
• Introduction
Psychological
• Maturity
High?low
• Growth
Competition? led Predatory
• Decline
HOWEVER SOME BRANDS BREAK THE CONVENTIONAL RULES OF PRICING YET EMERGE AS GLOBAL SUCCESS BY PRICING CREATVIELY IN TRUE SENSE
Let us now have a look at some of these brands who have surpassed all the rules of creative pricing yet survived successfully in the market place. McDonalds This is one brand which has surpassed all the rules of pricing in a differentiated market place. McDonalds entered India at the time when there was almost no competition for it. McDonalds was a pioneer in bringing the burger and French fries concept and hence the fast food culture to India. It could have priced itself as a premium product and still win the hearts of Indians with its highly innovative product. But, breaking all the rule of pricing strategies, McDonalds entered India with the positioning of “value for money”. Its Happy Price Menu @ Rs. 20 is one of the most innovative pricing breakthroughs in the world. Tide Detergent Tide detergent entered the market when Nirma dominated the bottom of the pyramid and Surf dominated the higher income group. Tide is in a differentiated product type with high intensity of competition around. It entered with a skimming strategy pricing 1 kg at Rs. 120 which was a big number for this category. The motive was to clearly target the upper segment of the society and create an aspirational built for the brand in the minds of the net set of potential customers. But once this motive was achieved, instead of giving in the market dynamics which would have wanted tide to go for competition led pricing by coming in lines with the closest competitor surf at Rs. 79, Tide chose to go for penetration strategy by lowering the price to Rs. 65. Through this price point, tide catered the untapped middle class segment which was earlier ignored by other detergents. Thus, Tide’s pricing strategy helped the brand to cater to the ignored segment of the market thus ensuring success for itself.
Tata Nano Nobody had ever dreamt of driving a car which is priced at as low as Rs. 1 lakh. Through this we can say that Tata Nano entered as a highly differentiated product type. It entered the market with a clear positioning: Car for the Aam Aadmi. Such pricing breakthrough is a clear outcome of strong and powerful engineering. Bata Shoes Bata shoes introduced the concept of psychological pricing to Indian markets. In a market where all the close competitors were pricing their shoes at similar price range of 500 to 1500, Bata shoes invented a new technique to grab customer attention and make them perceive that Bata shoes are value for money. The priced their shoes at Rs. 499 to 1499. The use of 99 instead of 100 has been a breakthrough strategy which understood consumer behaviour in the apt way. This strategy is now being followed by almost all the other retail outlets and works wonders in attracting customers to the brand.
TIPS TO USE CREATIVE PRICING
When setting the price of the product companies can adopt simple tactics that work in almost all industries. But every industry has its own nuances and not every tactic will work for every company. Therefore it is for the company management to decide which of the following tactics will be apt for their product. 1. Let your price speak for itself A higher price says that your product is better. People have this perception in their minds that higher price commands better quality and a good brand image. They feel proud to be associated with highly priced products. Even when there is less difference between brand A and brand B, a higher price sometimes works wonders as consumers develop a perception that brand A, which is highly priced, is of better quality than brand B. But sometimes it is difficult to charge premium for the brand. In such situations, the price should be made silent. Consumers focus on price when they are not able to site difference
between two products. While negotiating with customers it is important to protect the gross?margins and focus on less costly variables such as delivery time. 2. Make ‘more quantity’ the selling point Selling higher quantity often has a dramatic effect on gross margin. Most manufacturers can almost double their price for twice the volume with only a minor increase in production cost.For example in banking industry, the cost of a Rs. 50,000 loan is same as the cost of a Rs. 5, 00,000loans. For this tactic to work, quantity must be important to the customer. For example, selling a 500ml teapot for Rs. 500 and a 100ml teapot for Rs. 300 may not increase the total sales as most people do not repair their china teapot often and they might not need a larger bottle. 3. Package the price right Salespeople while approaching a middle class people often introduce a premium product and then show the mid market option. The customer will refer everything against the premium product and chances are that they will spend more than planned and end up buying the premium option. There are many ways to package the price right. Telephone companies bundle the local phone service with high speed internet and long distance calls. Bundling in such a manner works as it takes the customer’s eyes off the individual prices. Customers feel happy with a slight discount and convenience of a one stop shop. Tiered pricing is also used extensively as a part of packaging the price. 4. Use of wasted capacity Scheduling work during traditional downtime is a very good tactic to cut down on costs. The key is to price the work in a proper manner. Imagine a manufacturing facility that shuts down Fridays in July because orders are traditionally slow. Use this time to schedule lower priced work. Assuming your overhead is accounted forthrough regular sales, this additional revenueonly needs to be priced higher than variablecosts. This tactic works best when
selling to different region or different customer base as the existing customers will not be offended that they are charged higher price. 5. Selectively discounting Everyone loves a deal. For many industries, discounting tools such as coupons or sales can move inventory, generate short?term profits and introduce the product to newer segments. But if the product is a premium one, the company should protect the integrity of the brand by offering a different benefit instead of discounting the price. For example free furniture with every kitchen table purchased can be an effective tactic to ensure better sales in short run. Price discounting for a premium product can sometimes work wonders for strengthening long term relationships with customers. For example, a high end men’s clothing store that holds a special sale exclusively for existing customers actually gives the message that they value loyal customers’ more than new customers. 6. Know when to charge for extras Many businesses allow hidden value to creep into their customers’ experiences. By not charging for every little thing, they offer something small which means a lot to the customers. The trick is to realise which free extras are beneficial to consumers. If these extras are not important to them, the company should recapture the lost gross margin by adding these costs to price.
CONCLUSION:
Pricing for a product is the decision considering a large number of factors which directly or indirectly results in success or failure of a brand. A good pricing strategy is a source to increasing market share, sales and therefore profits for the company. In turn, it is the result of effective positioning and continuous innovation in terms of product development and marketing.
The model presented in the paper might not serve the needs of all types of products and services. It is ultimately for the company to decide its pricing strategy depending upon various factors affecting the business environment.
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