UNDERSTANDING PRICING
Traditionally, price has been the major determinant of a buyer’s choice . This is still the case with the large segments of the buyers across the globe. Although the non pricing factors have become quite important in the last few decades, price still remains an important factor in determining sales and profitability.
How companies price
Companies do their pricing in variety of ways. In small companies prices are often set by the boss. In large companies pricing is handled by the division and product line managers. Even here, the top management sets general pricing objectives and policies and often approved the price proposed by lower levels of management. In industries where the pricing is the key factor companies will often establish a pricing department to set or assist others in determining the appropriate prices. Others who exert an influence on the pricing include sales manager, production managers finance managers, and accountants.
Consumer psychology and pricing
Many economis assume that the consumers are “price takers” and accept prices at “face value” or as given. Marketers recognize that consumer often actively process the price information, interpreting price in terms of their knowledge from prior purchasing experience, formal communication( advertising, sales calls and brochures ), informal communication( friends, colleagues or family members), and point of purchase or online resources.
Here we consider the three key topics – reference prices, price-quality inferences and price endings.
REFERENCE PRICE:- When examining the products, however , consumer often employ reference prices. In considering an observed prices, consumers often compare it to an internal reference price(pricing information from memory) or an external frame of reference(such as posted “regular retail price”).Reference price thinking is also encouraged by stating a high manufacturer’s suggested price, or by indicating that the product was priced much higher originally, or by pointing to a competitor’s high price.
PRICE QUALITY INFERENCES:- Many consumers use price as an indicators of quality. Image pricing is especially effective with ego-sensitive products such as perfumes and expensive cars. When alternative information about true quality is available, price becomes a less significant indicator of quality. When this information is not available, price act as a signal of quality. Some brands adopt scarcity as a means to signify quality and justify premium pricing.
PRICE CUES:- Consumer perceptions of prices are also affected by the alternative pricing strategies. Many sellers believe that price should end in the odd number. Many costumer see some products priced at Rs.2999 instead of Rs.3000 as a price in the Rs 2000 rather than Rs.3000 range. Explanation for ‘9’ endings is that the convey the notion of discount or the bargain, suggesting that if a company wants a high-price image, it should avoid the odd-ending tactic.Price that end with “0” and “5” are also common in marketplace as they are thought to be easier for the consumer to process and retrieve from memory.
SETTING THE PRICE
A firm must se a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channels or geographical area, and when it enters bid omn the new contract work.
The firm has to consider many factors in setting its price policy. Here are describe the six step procedures.
STEP 1:- SELECTING THE PRICING OBJECTIVE
A company can pursue any of the five major objectives through pricing: survival, maximum current profit, maximum market share, maximum market skimming, or the product quality leadership.
SURVIVAL:- Survival is a short term objective; in the long run, the firm must learn how to add value or the face extinction.
MAXIMUM CURRENT PROFIT:- Estimating the demand and the costs associated with with alternative prices and choose the price that produces maximum current profit, cash flow, or the rate of return on investment. This strategy assumes that the firm has knowledge of its demand and cost functions.
MAXIMUM MARKET SHARE:- Some companies want to maximize their market share, believe that the higher sales volume will lead to the lower unit costs and higher long run profit. They set the lowest price assuming that the market is price sensitive.
MAXIMUM MARKET SKIMMING:- Market skimming makes the sense under following conditions: (1) A sufficient numbers of buyers have a high current demand; (2) The unit cost of producing a small volume is not so high that they cancel the advantage of charging what the traffic will bear; (3) The high initial price does not attract more competitors to the market; (4) The high price communicates the image of the superior product.
STEP 2:- DETERMINING DEMAND
Each price will lead to a different level of demand and therefore have a different impact on the company’s marketing objectives.If the prices is too high, the level of demand may fall.
PRICE SENSITIVITY:- Generally the customers are more price sensitive to the products that cost lot or are bought frequently. They are less price sensitive to the low cost items, the items that they buy infrequently, or when the price is only the small part of the total cost of the price than competitors.
ESTIMATING THE DEMAND CURVES:- Most companies make some attempt to measure their demand curves using several different methods as:
1) Statistical analysis of past prices, quantities sold, and other factors can reveal their relationship. The data can be longitudinal or cross- sectional.
2) Price experiments can be conducted.
3) Surveys can explore how many units can a consumers would buy at different proposed prices, although there is always the chance that they might understate their purchases intentions at higher price to discourage the company from setting the higher prices.
PRICE ELASTICITY OF DEMANAD:- Marketers need to know how responsive, or elastic, demand would be to a change in price. Demand is likely to be elastic under following conditions: (1) There are few or no substitutes or competitors; (2) Buyers do not readily notice the higher price; (3) Buyers are slow to change their buying habits; (4) Buyers think the higher prices are justified.
STEP 3:- ESTIMATING COSTS
The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk.
• Fixed costs are the cost that do not vary with the production or sales revenue.
• Variable costs vary directly with the level of production
• Total costs consist of the sum of the fixed and variable cost for any given level of production.
• Average cost is the cost per unit at that level of production; it is equal to total costs divided by production.
STEP 4:- ANALYZING COMPETITORS
Within the range of the possible prices determined by market demand and company costs, the firm must take competitors costs, prices and possible price reaction into account. The firm should first consider the nearest competitor’s price.
STEP 5:- SELECTING A PRICING MODEL
Companies select a pricing method that includes one or more of these three considerations. (1) Costs set a floor to the price. (2) Competitors prices and the price of the substitutes provides an orienting point. (3) Costumers assessment of unique features establishes the price ceiling. Six price setting methods are as follows:-
1) Markup pricing:- The most elementary pricing method is to add a standard markup to the product’s cost.
2) Target return pricing:- The firm determines the price that would yield its target rate of return on investment.
3) Perceived value pricing:- An increading number of companies now base their price on the customer’s perceived value. They must deliver the value promised by their value proposition, and the customer must perceive this value.
4) Value pricing:- An important type of value pricing is everyday low pricing , which take place at the retail level. A retailer who holds to an EDLP pricing policy charges a constant low price with little or low price promotions and special sales.These can be contrasted to high-low pricing, here the retailer charges higher prices on the everyday basis but then runs frequent promotions in which prices are temporarily lowered below the EDLP level.
5) Going rate pricing:- In going rate pricing, the firms bases its price largely on competitors prices. The firm might charge the same, more, or less than major competitors.
6) Auction :- type pricing:- This type of pricing have become more popular, especially with the growth of internet. Companies need to be aware of three major types of auction and their separate pricing procedures.
• English auctions:- One seller and many buyer. This auctions are being used today for selling antiques, cattle, real estate, and used equipment and vehicles.
• Dutch auctions :- One seller and many buyer or one buyer and many sellers. Each seller sees what the last bid is and decides whether to go lower.
• Sealed-bid auctions:- A variant of sealed-bid auctions involves a two stage bidding process. The first stage is the submission of technical bids. Only those who pre-qualify on technical bids are asked to submit the commercial bids. This typically followed for high-ticket items and projects.
7) Group pricing :- Consumers and business buyers can join groups to
avail a volume discount and other concession Housing and other cooperatives forming a consortium for joint negotiations in the purchase of critical raw¸ utilities or the purchase of the plant and equipment by small scale industries; neighbors pooling together to avail bulk discount in the purchase of agricultural produce from wholesale market fall in this category.
STEPS 6: SELECTING THE FINAL PRICE
In selecting the final price, the company must consider the additional factors as mentioned below.
1) IMPACT OF OTHER MARKETING ACTIVITIES
2) COMPANY PRICING POLICIES
3) GAIN AND RISK SHARING PRICING
4) IMPACT OF PRICE ON THE OTHER PARTIES
ADAPTING THE PRICE
Several price adaptation strategies are as follows.
1) Geographical pricing ( Cash, Countertrade, Barter )
Barter:- The direct exchange of goods, with no money and no third party involved.
Compensational deal:- The seller receives some percentage of the payment in cash and the rest in products.
Buy back arrangement:- The seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment.
Offset:- The seller receives full payment in cash but agrees to spend the substantial amount of the money in that country within a stated time period.
2) Price discounts and allowance
Discount pricing has become the modus operandi of a surprising number of companies offering both products and services. Most companies will adjust their list price and give discounts and allowance for early payment, volume purchase, and off season buying. Companies must do this carefully or find that their profits are much less than planned.
3) Promotional Pricing
Companies can use several pricing technique to stimulate the early purchase.
• Loss leader pricing:- Supermarkets and department stores often drop the price on well known brands to stimulate the additional store traffic.
• Special event pricing:- Sellers will establish the special price in certain season to draw in more customers. Every august there are back to school sales.
• Cash rebates:- Auto companies and other consumer goods companies offer cash rebates to encourage the purchase manufacturers products within the specified period.
• Low interest financing:- Instead of cutting its price, the company can offer its costumers low-interest financing.
• Longer payment terms:- Sellers, especially mortgage banks and companies, stretch loans over long period and thus lower the monthly payments.
• Warranties and service contracts:- Companies can promate sales by by adding a free or low cost warranty or service contract.
• Psycological discounting:- This strategy involves setting an artificially high price and then offering the product at substantial savings.
4) Differentiated Pricing
Price discrimination occurs when a company sells a product or services at two or more prices that do not reflect a proportional difference in costs.
In first degree price discrimination the seller charges a separate price to each customer depending on the intensity of his or her demand.
In second degree price discrimination the seller charges less to buyers who buy a large volume.
In third degree price discrimination the seller charges different amounts to different classes to buyers.
INITIATING AND RESPONDING TO PRICE CHANGES
1) Initiating Price Cuts
A price cutting strategies involves the following possible traps.
• Low quality trap:- Consumer will assume that the quality is low.
• Fragile market share trap:- A low price buys market share but not market loyalty.
• Shallow pockets trap:- The higher priced competitors may cut their prices and may have longer staying power because of deeper cash reserves.
2) Initiating price increases
The price can be increased in following ways.Each has a different impact on buyers.
• Delayed quotation pricing:- the company does not sell a final price until the product is finished or delivered.
• Escalator clauses:- The company require the customer to pay today’s price and all or part of any inflation increases that take place before delivery.
• Unbundling:- The company maintains its price but removes or prices separately one or more element that were part of the former offer, such as free delivery or installation.
• Reduction of discounts:- The company instructs its sales force not to offer its normal cash and quantity discounts.
3) Reaction to price changes
Any price change can provoke a response from customers, competitors, distributors, supplier, and even government.
• Customers Reaction:- Price cut can be interpreted in many ways: the firm is in financial trouble; the item is to replace by the new model; the price will come down even further the quality has been reduced.
• Competitors Reactions:- Competitors are most likely to react when the numbers of firms are few, the product is homogeneous, the buyers are highly informed.
4) Responding to competitor’s price changes
Brand leaders respond in several ways.
• Maintain prices:- The leader might maintain its price and profit margin, believing that 1) it would lose too much profit if it reduced its price, 2) it would not loose much market share,3)it could regain market share when necessary.
• Maintain price and add value:- The firm may find it cheaper to maintain price and spend money to improve perceived quality than to cut price and operate ay lower margin.
• Reduce price:- The leader might drop its price to match the competitor’s price.It might do so because 1) its cost fall with volume, 2) it would lose market share because market is price sensitive, 3) it would hard to rebuild market share once it is lost. This action will cut profits in short run.
• Increase price and improve quality:- The leader might raise its price and introduce new brands to bracket the attacking brand.
• Launch a low price fighter line:- It might add lower priced items to the line or create a separate, lower priced brand.
Traditionally, price has been the major determinant of a buyer’s choice . This is still the case with the large segments of the buyers across the globe. Although the non pricing factors have become quite important in the last few decades, price still remains an important factor in determining sales and profitability.
How companies price
Companies do their pricing in variety of ways. In small companies prices are often set by the boss. In large companies pricing is handled by the division and product line managers. Even here, the top management sets general pricing objectives and policies and often approved the price proposed by lower levels of management. In industries where the pricing is the key factor companies will often establish a pricing department to set or assist others in determining the appropriate prices. Others who exert an influence on the pricing include sales manager, production managers finance managers, and accountants.
Consumer psychology and pricing
Many economis assume that the consumers are “price takers” and accept prices at “face value” or as given. Marketers recognize that consumer often actively process the price information, interpreting price in terms of their knowledge from prior purchasing experience, formal communication( advertising, sales calls and brochures ), informal communication( friends, colleagues or family members), and point of purchase or online resources.
Here we consider the three key topics – reference prices, price-quality inferences and price endings.
REFERENCE PRICE:- When examining the products, however , consumer often employ reference prices. In considering an observed prices, consumers often compare it to an internal reference price(pricing information from memory) or an external frame of reference(such as posted “regular retail price”).Reference price thinking is also encouraged by stating a high manufacturer’s suggested price, or by indicating that the product was priced much higher originally, or by pointing to a competitor’s high price.
PRICE QUALITY INFERENCES:- Many consumers use price as an indicators of quality. Image pricing is especially effective with ego-sensitive products such as perfumes and expensive cars. When alternative information about true quality is available, price becomes a less significant indicator of quality. When this information is not available, price act as a signal of quality. Some brands adopt scarcity as a means to signify quality and justify premium pricing.
PRICE CUES:- Consumer perceptions of prices are also affected by the alternative pricing strategies. Many sellers believe that price should end in the odd number. Many costumer see some products priced at Rs.2999 instead of Rs.3000 as a price in the Rs 2000 rather than Rs.3000 range. Explanation for ‘9’ endings is that the convey the notion of discount or the bargain, suggesting that if a company wants a high-price image, it should avoid the odd-ending tactic.Price that end with “0” and “5” are also common in marketplace as they are thought to be easier for the consumer to process and retrieve from memory.
SETTING THE PRICE
A firm must se a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channels or geographical area, and when it enters bid omn the new contract work.
The firm has to consider many factors in setting its price policy. Here are describe the six step procedures.
STEP 1:- SELECTING THE PRICING OBJECTIVE
A company can pursue any of the five major objectives through pricing: survival, maximum current profit, maximum market share, maximum market skimming, or the product quality leadership.
SURVIVAL:- Survival is a short term objective; in the long run, the firm must learn how to add value or the face extinction.
MAXIMUM CURRENT PROFIT:- Estimating the demand and the costs associated with with alternative prices and choose the price that produces maximum current profit, cash flow, or the rate of return on investment. This strategy assumes that the firm has knowledge of its demand and cost functions.
MAXIMUM MARKET SHARE:- Some companies want to maximize their market share, believe that the higher sales volume will lead to the lower unit costs and higher long run profit. They set the lowest price assuming that the market is price sensitive.
MAXIMUM MARKET SKIMMING:- Market skimming makes the sense under following conditions: (1) A sufficient numbers of buyers have a high current demand; (2) The unit cost of producing a small volume is not so high that they cancel the advantage of charging what the traffic will bear; (3) The high initial price does not attract more competitors to the market; (4) The high price communicates the image of the superior product.
STEP 2:- DETERMINING DEMAND
Each price will lead to a different level of demand and therefore have a different impact on the company’s marketing objectives.If the prices is too high, the level of demand may fall.
PRICE SENSITIVITY:- Generally the customers are more price sensitive to the products that cost lot or are bought frequently. They are less price sensitive to the low cost items, the items that they buy infrequently, or when the price is only the small part of the total cost of the price than competitors.
ESTIMATING THE DEMAND CURVES:- Most companies make some attempt to measure their demand curves using several different methods as:
1) Statistical analysis of past prices, quantities sold, and other factors can reveal their relationship. The data can be longitudinal or cross- sectional.
2) Price experiments can be conducted.
3) Surveys can explore how many units can a consumers would buy at different proposed prices, although there is always the chance that they might understate their purchases intentions at higher price to discourage the company from setting the higher prices.
PRICE ELASTICITY OF DEMANAD:- Marketers need to know how responsive, or elastic, demand would be to a change in price. Demand is likely to be elastic under following conditions: (1) There are few or no substitutes or competitors; (2) Buyers do not readily notice the higher price; (3) Buyers are slow to change their buying habits; (4) Buyers think the higher prices are justified.
STEP 3:- ESTIMATING COSTS
The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk.
• Fixed costs are the cost that do not vary with the production or sales revenue.
• Variable costs vary directly with the level of production
• Total costs consist of the sum of the fixed and variable cost for any given level of production.
• Average cost is the cost per unit at that level of production; it is equal to total costs divided by production.
STEP 4:- ANALYZING COMPETITORS
Within the range of the possible prices determined by market demand and company costs, the firm must take competitors costs, prices and possible price reaction into account. The firm should first consider the nearest competitor’s price.
STEP 5:- SELECTING A PRICING MODEL
Companies select a pricing method that includes one or more of these three considerations. (1) Costs set a floor to the price. (2) Competitors prices and the price of the substitutes provides an orienting point. (3) Costumers assessment of unique features establishes the price ceiling. Six price setting methods are as follows:-
1) Markup pricing:- The most elementary pricing method is to add a standard markup to the product’s cost.
2) Target return pricing:- The firm determines the price that would yield its target rate of return on investment.
3) Perceived value pricing:- An increading number of companies now base their price on the customer’s perceived value. They must deliver the value promised by their value proposition, and the customer must perceive this value.
4) Value pricing:- An important type of value pricing is everyday low pricing , which take place at the retail level. A retailer who holds to an EDLP pricing policy charges a constant low price with little or low price promotions and special sales.These can be contrasted to high-low pricing, here the retailer charges higher prices on the everyday basis but then runs frequent promotions in which prices are temporarily lowered below the EDLP level.
5) Going rate pricing:- In going rate pricing, the firms bases its price largely on competitors prices. The firm might charge the same, more, or less than major competitors.
6) Auction :- type pricing:- This type of pricing have become more popular, especially with the growth of internet. Companies need to be aware of three major types of auction and their separate pricing procedures.
• English auctions:- One seller and many buyer. This auctions are being used today for selling antiques, cattle, real estate, and used equipment and vehicles.
• Dutch auctions :- One seller and many buyer or one buyer and many sellers. Each seller sees what the last bid is and decides whether to go lower.
• Sealed-bid auctions:- A variant of sealed-bid auctions involves a two stage bidding process. The first stage is the submission of technical bids. Only those who pre-qualify on technical bids are asked to submit the commercial bids. This typically followed for high-ticket items and projects.
7) Group pricing :- Consumers and business buyers can join groups to
avail a volume discount and other concession Housing and other cooperatives forming a consortium for joint negotiations in the purchase of critical raw¸ utilities or the purchase of the plant and equipment by small scale industries; neighbors pooling together to avail bulk discount in the purchase of agricultural produce from wholesale market fall in this category.
STEPS 6: SELECTING THE FINAL PRICE
In selecting the final price, the company must consider the additional factors as mentioned below.
1) IMPACT OF OTHER MARKETING ACTIVITIES
2) COMPANY PRICING POLICIES
3) GAIN AND RISK SHARING PRICING
4) IMPACT OF PRICE ON THE OTHER PARTIES
ADAPTING THE PRICE
Several price adaptation strategies are as follows.
1) Geographical pricing ( Cash, Countertrade, Barter )
Barter:- The direct exchange of goods, with no money and no third party involved.
Compensational deal:- The seller receives some percentage of the payment in cash and the rest in products.
Buy back arrangement:- The seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment.
Offset:- The seller receives full payment in cash but agrees to spend the substantial amount of the money in that country within a stated time period.
2) Price discounts and allowance
Discount pricing has become the modus operandi of a surprising number of companies offering both products and services. Most companies will adjust their list price and give discounts and allowance for early payment, volume purchase, and off season buying. Companies must do this carefully or find that their profits are much less than planned.
3) Promotional Pricing
Companies can use several pricing technique to stimulate the early purchase.
• Loss leader pricing:- Supermarkets and department stores often drop the price on well known brands to stimulate the additional store traffic.
• Special event pricing:- Sellers will establish the special price in certain season to draw in more customers. Every august there are back to school sales.
• Cash rebates:- Auto companies and other consumer goods companies offer cash rebates to encourage the purchase manufacturers products within the specified period.
• Low interest financing:- Instead of cutting its price, the company can offer its costumers low-interest financing.
• Longer payment terms:- Sellers, especially mortgage banks and companies, stretch loans over long period and thus lower the monthly payments.
• Warranties and service contracts:- Companies can promate sales by by adding a free or low cost warranty or service contract.
• Psycological discounting:- This strategy involves setting an artificially high price and then offering the product at substantial savings.
4) Differentiated Pricing
Price discrimination occurs when a company sells a product or services at two or more prices that do not reflect a proportional difference in costs.
In first degree price discrimination the seller charges a separate price to each customer depending on the intensity of his or her demand.
In second degree price discrimination the seller charges less to buyers who buy a large volume.
In third degree price discrimination the seller charges different amounts to different classes to buyers.
INITIATING AND RESPONDING TO PRICE CHANGES
1) Initiating Price Cuts
A price cutting strategies involves the following possible traps.
• Low quality trap:- Consumer will assume that the quality is low.
• Fragile market share trap:- A low price buys market share but not market loyalty.
• Shallow pockets trap:- The higher priced competitors may cut their prices and may have longer staying power because of deeper cash reserves.
2) Initiating price increases
The price can be increased in following ways.Each has a different impact on buyers.
• Delayed quotation pricing:- the company does not sell a final price until the product is finished or delivered.
• Escalator clauses:- The company require the customer to pay today’s price and all or part of any inflation increases that take place before delivery.
• Unbundling:- The company maintains its price but removes or prices separately one or more element that were part of the former offer, such as free delivery or installation.
• Reduction of discounts:- The company instructs its sales force not to offer its normal cash and quantity discounts.
3) Reaction to price changes
Any price change can provoke a response from customers, competitors, distributors, supplier, and even government.
• Customers Reaction:- Price cut can be interpreted in many ways: the firm is in financial trouble; the item is to replace by the new model; the price will come down even further the quality has been reduced.
• Competitors Reactions:- Competitors are most likely to react when the numbers of firms are few, the product is homogeneous, the buyers are highly informed.
4) Responding to competitor’s price changes
Brand leaders respond in several ways.
• Maintain prices:- The leader might maintain its price and profit margin, believing that 1) it would lose too much profit if it reduced its price, 2) it would not loose much market share,3)it could regain market share when necessary.
• Maintain price and add value:- The firm may find it cheaper to maintain price and spend money to improve perceived quality than to cut price and operate ay lower margin.
• Reduce price:- The leader might drop its price to match the competitor’s price.It might do so because 1) its cost fall with volume, 2) it would lose market share because market is price sensitive, 3) it would hard to rebuild market share once it is lost. This action will cut profits in short run.
• Increase price and improve quality:- The leader might raise its price and introduce new brands to bracket the attacking brand.
• Launch a low price fighter line:- It might add lower priced items to the line or create a separate, lower priced brand.