Pricing strategy and scenario of “RFL PLASTICS (JUG)


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Pricing strategy and scenario of “RFL PLASTICS (JUG)

  2. 2. 1A REPORT ON“Pricing strategy and scenario of “RFL PLASTICS (JUG)”Course no: 412Submitted to:Moutushi TanhaAssistant ProfessorDepartment of MarketingUniversity of DhakaSubmitted by:Group: CANNONBOLTB.B.A. (16thBatch)Section: BDepartment of MarketingUniversity of DhakaDate of submission: May 10th, 2013Name of Members Roll no.Md .Afshanul Hossain 44IrfanulHaq 80Shaikh Md. Rasel 82Md. Asaduzzaman 162Md. MurshedulAlam 172Md. Saddam Hossain 258
  3. 3. 2Acknowledgments:"We would like to thank our course teacher, Moutushi Tanha, for the valuable advice andsupport she has given us in the writing of this report. We would also like to thank our librarianfor his attempt to help us. Thanks also to our all group mates for collaboration. Our deepestthanks go to our internet service providers for good services as well as the Maj. Gen. Amjad KhanChowdhuryof the RFLwho referred with precious information which was inevitable to accomplishthis practical research.”
  4. 4. 3Letter of TransmittalDate: May 10, 2013ToMoutushi TanhaAssistant ProfessorDepartment of MarketingUniversity of DhakaDear Madam,It is honor and great pleasure for us to present our Project Report on“Pricing strategy ofRFL plastic (jug).”This report was assigned to us as a partial requirement of the “Pricing policies and procedures”(course-412) in the 4thyear 1thsemester.The project program was an experience of rediscovering our potentials and full excitements.This report has given us an opportunity to apply our theoretical expertise, sharper our views,ideas, and communication skills, and bridge them with the real world of practical experience,which will be a good head start for our future professional career.During the preparation of the report we faced some problems that have been erased out withyour profound lecture and assistance. Without your cooperation and guideline this reportwould have been an incomplete one.Finally, thank you for your supportive thought and kind consideration for formulating an idea.Lastly we would be thankful once again if you please give your judicious advice on our effort.Sincerely yours,The members ofGroup- CannonboltDepartment of MarketingUniversity of Dhaka
  5. 5. 4Executive SummaryIn our entire report we have tried to focus on the pricing strategies practices of RFL plastic (jug) inBangladesh. We have divided the topics of the report into different segments. First we have discussedabout the origin of the report, objective and scope of the study, the method of preparing the report,limitations of the study. Then we have given the theoretical idea about the topics we are going todiscuss so that the reader can understand the topics clearly. Thereafter we have discussed about plasticindustry in Bangladesh in brief. Then we have entered into the core part of the report that encompassesvarious perspectives how RFLarrives at their prices and strategies. Finally, we drew a conclusion on thebasis of whole report.
  6. 6. 5Table of contents:Serial no Topics Page1 Introduction 062 Company background 073 Introduction of product 074 The nature of pricing process 085 Critical factor in pricing 09-106 Factors affecting pricing decision 10-127 Price structure 12-138 Price-quality relationship 15-179 Allocation of cost 17-1910 Cost volume relationship 19-2211 Break-even analysis 23-2612 Pricing decisions 26-2913 Retail pricing 29-3114 Pricing and legal issues 31-3315 Pricing in international market 33-3616 Appendices 37
  7. 7. 6IntroductionOrigin of the Report:As a partial requirement of BBA Program we are required to study the “pricing policies andprocedures”. In the classroom we get the opportunity to know the theoretical part of thesubject. But without practical orientation it is somewhat difficult to grasp the core concept, weare required to prepare a report on practical situation, So, in order to enhance theunderstanding of the core concept, we are required to prepare a report on practical situation tounderstand how to implement and practice the theoretical part in real life situation and for thesocial welfare.Objectives of the study:General Objective:The general objective of this report is to find out the pricing strategies, policies and proceduresof RFLSpecific Objectives: To measure the usage of core management. To identify the importance of cost in pricing decisions To identify the level of practices and strategies of the RFL To Identify how it affect their work To measure the performanceScope of the Study:The topic of our report is “Pricing strategies and scenario of RFL”. So the report will only beapplicable for pricing other than the report will not work at all for others. Because we just workonly based on the RFL and internet information.We didn’t use imaginary or irrelevant ideas. Allof our ideas and information based on facts.Methodology:The report in this study is basically on inductive one. The report is based on both primary andsecondary information.
  8. 8. 7Primary Information:The primary data have been added from our class lecture and from the books.Secondary Information:The secondary information has been extracted from various brochures and prospects of RFLand company visit information . Other notable information that was used for this report wasthe information gathered from internet.Company BackgroundRFL Plastics is a sister concern of PRAN-RFL group. The group has a turnover in the vicinity ofUSD $0.5 billion. Primarily Rangpur Foundry Ltd (RFL) was founded by Maj. Gen. Amjad KhanChowdhury(Retd) in 1981 with a vision to leveraging the farmer in irrigation through cast ironproducts like centrifugal pump as well as ensuring drinking water through Tube well. After thatit commenced its operation in plastics business in 2003. The factory sites are in companyowned industrial parks of 300,000 sq meters, which is fully equipped with state of the artinjection molding machines with a conversation capacity of over 10,000 tons per month.RFL Plastics currently utilizes 1200 molds through 250 machines having own tooling facilities.RFL is a very strong organization of 10,000 employees dedicated to supplying customized andquality plastic products globally.Product introduction:In this report we will only focus on a particular product of RFL plastic –“jug”. RFL has varioustypes of jug namely-1. Conical jug2. Trans blue juice jug3. Two color jug4. Beauty jug5. Blue designed jug
  9. 9. 86. Trans blue decorator7. Blue design8. Prism jug9. Dolphin design jug10. Trans blue orcid11. Cristal jug12. Designed jugThe nature of the pricing process of RFL:Of all the decisions made by the management of RFL, pricing is undoubtedly the most visiblebecause it’s direct impact on its performance in the market place and overall level ofprofitability. Price of Jug is quite visible in nature as consumers know well what they are payingfor the required product. RFL considers many factors in determining a pricing strategy. Oneuseful approach categorizes these as intrinsic and extrinsic factors.Intrinsic factors are thebaseline needs, such as costs, product characteristics, and soon, and the regulatory systemwhich places limitations on how those needs can be met.Extrinsic factors are related to theeconomic and operating environment of procurement, including product differentiation,demand, and the number of firms involved. Besides, there are some factors that contributed tomaking the marketplace much more difficult place for RFL to do business: Globalization Accelerated changes socially and demographically in customers. Shifts in public policy Technological changesBy considering the customer satisfaction and cost consideration RFL can come about throughthe premise that increases in quality resulting in increased customer satisfaction can lead toreduced costs through improving market place performance .As a result successful pricingbridges the gap between internal costs and external market demand to achieve a positionaladvantage. The strategic options for RFL are defined by: Cost structure of the firm: RFL sells provide reasonable product with reasonable price. Competitive status of the firm: RFL is the market leader in the plastic industries. Marketing strategies based on competition: RFL usually formulates marketing strategiesbased on the competitors in the relevant field such TALUKDAR plastic, TANIN plasticsetc.
  10. 10. 9 Organizational capabilities: Being the market leader, RFL possess enough resources thatis their competitive advantage.Critical factors in the pricing decision of RFL: Effective cost information: Management of RFL needs to look carefully at the costsinvolved in the allocation of resources to create and define the product. This means notonly manufacturing and distribution cost but special marketing and technological costs. Customer valuation: Rather than compete on price alone, marketers of RFL think interms of total value as perceived by the customer combination of features andexperiences that create a total customer perception of value. What a customer will payfor a product or products does not relate solely to physical features or performance aswell as symbolic features. Customers of RFL not only pay for the exactproduct(Jug) pricebut also for symbolic features like: durability, stylish design, status and prestige .price pricefeaturesfeaturesFigure: Conceptualization of providing total value to customers(4) Market targets: The total market for RFLplastics(Jug) can be segmented because of thedifferences between groups and needs of customers. RFL offers various types of plasticJugs including difference in color, shape, design and sizes. These difference may allowfor product and pricing differentials whereby no segment is buying the same product orpaying the same price as another. Competitive dynamics: It is important for RFL to know who are their competitors.Themajor competitors of RFL areTanin plastics, Talukdar plastics, Bangalplastics,Thai plastic.It is important for RFL to observe the reaction pattern of the price cut and price increaseCustomersegmentMarketerscompetitorsvaluevalueCost anddifferentiation
  11. 11. 10among their competitors. Besides they also observe the previous record of the industrypattern, capacity and price structure. Pricing strategies: Scale:RFL observe the size of their the plastics (Jug)purchases pricing separatelyfor individual customers. Consumer knowledge:RFL observes whether their actual and potentialcustomers are aware of their products. Demand:RFL observe how the law of demand is working in case of theircustomers. Besides they observe whether price can influence the purchasingdecision of the consumers. Information: In this case the marketers are to know about the micro and macroenvironment factors of pricing their plastics(Jug). Competitive substitute: The major competitors of RFL are Tanin plastics,Talukdar plastics, Bangalplastics,Thai plastic. RFL constantly compare its pricewith these companies. Patronage:RFL observe whether customers will favor their competitors for non-price reasons. In that case RFL consider their product, promotion and place tofight with.Factors Affecting Pricing DecisionPricing the product is one of the important elements in marketing mix. Bresnahan (1989)argued that until recently it has been one of the most neglected areas. Even today, pricing insome firms is simply based on the concepts of cost, market position, competition and necessaryprofits.
  12. 12. 11Figure 1: Critical factors that affect the pricing decisionObjectives of the Business: There may be various objectives of the firm such as getting areasonable rate of return, to capture the market, maintenance of control over sales and profitsetc. A pricing policy thus, should be established only after proper consideration of theobjectives of the firm.Cost of the Product:Kullback (1959) analyzed cost and price of a product are closely related.Normally, the price cannot or shall not fix below its cost (including the product, administrativeand selling costs). Price also determines the cost.Market Position: The prices of the products of different producers are different either becauseof difference in quality because of the goodwill of the firm. A reputed concern may fix may fixhigher prices for its products on the other hand, a new producer may fix lower prices for itsproducts. Competition may also affect the pricing decisions.Competitors Prices: Competitive conditions affect the pricing decisions. The company considersthe prices fixed and quality maintained by the competitors for their products.Distribution Channels Policy: Miller (1994) discussed that the nature of distribution channelsused and trade discounts which have to be allowed to distributors and the distributionexpenses also affect the pricing decisions.Price Elasticity and Demand Elasticity: Price elasticity affects the decisions of price fixation.Price elasticity means the consequential change of demand for the change for the change in theFactorsAffectingPricing Decision•Objectives of the Business•Cost of the Product•Market Position•Competitors Prices•Distribution Channels Policy•Price Elasticity and Demand Elasticity•Product’s Stage in the Life Cycle of the Product•Product Differentiation•Buying Patterns of the Consumers•Economic Environment•Government Policy
  13. 13. 12prices of the commodity. If demand is elastic, the firm should not fix high prices rather it shouldfix lower prices than that of the competitors.Product’s Stage in the Life Cycle of the Product:Mittelhammer and Cardell (1997) claimed thatPricing decision is affected by the stage of product in its life-cycle. In the introductory stage ofthe product, it is the price strategy which determines the price of the product.Product Differentiation: The price of the product also depends upon the characteristics of theproduct. In order to attract the customers different characteristics are added to the productsuch as quantity, size, color, alternative uses, etc.Buying Patterns of the Consumers: If the purchase frequency of the product is higher, lowerprices should be fixed to have a low profit margin. It will facilitate increasing the sale volumeand the total profits of the firm (Bresnahan and Peter, 1991).Economic Environment: In recession period, the prices are reduced to a sizable extent tomaintain the level of turnover. On the other hand, the price and increased in boom period tocover the increasing cost of production and distribution.Government Policy: Price discretion is also affected by the price control by the governmentthrough enactment of legislation when it is thought proper to arrest the inflationary trend inprices of certain commodities.Price structure:Price structure is defined as a series of the price levels that represent how a product will bepriced.Generally price of a product/product varies with market-segmentation. The more sub-segments the more marketers can serve their customers properly.In this case RFL can serve itscustomers properly as they have some sub-segments of their customers on the basis ofproducts features. Here they get some benefits: Greater flexibility in pricing Rapid adjustment to competitive trends in the market place Enhancement of market segmentation strategies
  14. 14. 13Constraints on pricing practice:Although market valuation and costs of products are major pricing determinants for RFL.Stillthere some other constraints: Industry membership: As a market leader RFL has to always applydefensive pricing strategy. Structure of the marketplace: The more competitive the industry, theeasier is the pricing decision. This has resulted in the increase use ofdifferent forms of non-price competitions for RFL such as customersatisfaction, product design and status symbol. General economic conditions: It is difficult for RFL to increase price duringthe time of recession as the purchasing power of consumer at that time isnot good enough to pay increased prices for the its product(Jug). Legal constraints: RFL has to abide by some legal constraints set by thegovernment such as: increase in raw materials price.Market interpretation of price:Price as a part of marketing mix:Price as an element of the marketing mix generates revenues to the firm. Effectiveness inpricing is viewed in terms of product positioning and total profitability. Firm with high relativequality with relative price has significant return on investment that RFL follows. Marketingmanagement weigh the behavioral aspects of price and then juggle all the elements ofmarketing mix, including price as an effort to attain the goals set forth. The elements of themarketing mix are synergistic that is the actions of elements taken together increase eachother’s effectiveness. So, price is not an isolated fact rather it’s an accumulated decision.Effective combinations high of price and quality can produce a favorable strategic position inturn higher profits . Firms classified as having high relative quality with low relative price reportthe highest return on investment; they are followed closely by firms designated as having highrelative quality and high relative price. Interestingly enough, the return on investment for highquality, high price firms tops that of low quality, low price firms by ,more than a two-to-onemargin or 34% to 15 % .The poorest performance are medium-quality, medium-price firms,with only 2% return.
  15. 15. 14Table: Return on investment as a function of quality and priceRelative price Relative qualityLow(%) Medium(%) High(%) Average(%)Low 15 11 36 21Medium 9 2 16 9High 17 18 34 23Average 14 10 29 17Price as purchasing information:Price is set for both functional aspects and non-functional aspects by RFL. So, RFL works on thevalue seeking customers. They transfers the intangible facts of pricing into tangible facts.Customers are always concerned about the psychographic features. They also use price to sortproducts into group of categories by doing so they lost convey impressions about theirproducts. Whether or not price provides information to the customer depends upon theinferred relationship between price and the product and also the reliability of that relationship.That means the product price of the RFL convey the message that as the price of the productsare high enough for the customer, it conveys that the product provided by the RFL can bedepended upon. RFL associates higher price with better quality and so their pricing is justifiedenough.Usually the greater the variation between brands, the greater the tendency to pay a higherprice as a payment for some identifiable product characteristics. Thus the customers of RFL areready to pay a higher price as a payment for some identifiable characteristics compared toother contemporary brands with RFL. As the social importance of product choice increases, therelationships and their dependability of price as information increases proportionately. A higherprice by excluding a large portion of the market defines status and differences in that RFLis ableto possess their product.
  16. 16. 15Figure: Reliability of price/quality relationship(9)LowHighHigh substitutabilityHighConsumer interpretation of the price of RFL:Time implications: Customers always consider delays in getting product a time cost. As a resultproducts that are readily available command a premium price as a trade-off with time costs.RFL always strictly maintain their quality with price for their customer’s convenience andsatisfaction.Psychological implications: It means customers do value some non-economic functions of theproduct they get. As a non-economic function, RFL provide the feeling of prestige to theircustomers that they reallycare for. So here RFL make their full justification to high quality withhigh price.The Price-Quality Relationship:Research shows that the consumers perception of product quality is related closely to theitems price. The higher the price of the product, the better its perceived quality.RFL is takingthe advantage of high price here. They provide high quality product with high price andNecessities ConvenienceStaplesShopping goodsor productsPositional goods orproducts
  17. 17. 16customers are willing to pay for this high price for high quality product. It is possible to measurequality, then quality difference can be compared to price differences. Comparative value can bedetermined by following formula:=–Where is the comparative value or the relative differences in value between a high-pricedproduct (H) and the lower price product (L) is the quality dimension of (H), QLis the qualitydimension of L, is the price of L.Here is a comparison of RFL with other competitive brands based on quality rating and list priceof plastic Jug:Brand Quality rating List price(jug)BDTRFL 97 150Talukdar 89 140Tannin 76 140Bengal 71 130Rahamat 63 125Thai 50 100Figure: Quality rating and list price of brands(8)Factors considering for fixing price by RFL:One of the determining factors for plastic product prices is the production cost.Other reasonsare as follows:a) Cost of raw materialsb) Machineries costc) Advertising and promotional costd) Competitors reactione) Distribution costPrice adjustment by RFL:(a) Changes in operating costs and revenue since the last price adjustment;
  18. 18. 17(b) Forecasts of future costs, revenue and return;(c) The need to provide the producer with a reasonable rate of return;(d) Public acceptability and affordability; and(e) Quantity and quality of service provided.Role of costs in pricing:RFLalways tries to reduce the price, extend the operation and improve the product. Theyreduce the price to a point where they believe more will result. The new price forces cost down.Using cost to determine price may be scientific in the narrowest sense, but not in the broadersense.Impact of cost on pricing:RFLtreats cost management as synonymous with pricing in elaborating the four P’s (product,price, place, promotion) of marketing in strategy formulation. A watchful eye on cost and howthey affect pricing and in turn margins is necessitated by two competitionconstant streams of new ways to contain cost and become more cost effective marketRFLtook their all salespeople off the road and made them online based. The result was a 10%reduction in selling expense with a doubling of sales volume.Cost structure pricing:While some cost can be easily detected, calculated and allocated to the price calculations of theRFL plastic(jug), others may either escape the attention of the management or be of such anature that the prediction of their probable impact on price is almost impossible to make withany degree of accuracy. Examples include1. service liability cost2. recall cost3. Costs of services rendered unsalable by noncompetitive circumstances.Allocation of cost:As market becomes more complex, product lines proliferate and competition becomesincreasingly diverse, firms cannot afford allocation scheme that paint vague and inaccurateportrayals of their respective cost structures.
  19. 19. 18There are two approaches of cost allocation followed by RFL allocation of cost on the basis of activities allocation of cost key determinants of the competitive advantageForecasting cost;Past cost are less important than current costs and current costs are less important than whatcosts will be in the future.Steps followed by RFL —Cost concept:Looking at cost from the standpoint of their use in pricing, normally two types of questions areasked by management body of RFL. They are- What type of costs is involved?Variable costFixed cost What costs have the greatest impact on customer?Features or benefitsIndividually or collectivelyReflection in pricingDetermination of the relative positions of the cost categories currentlyForecast the change in the relative cost positionForecast the extent of changes within each of the respective categories
  20. 20. 19Fixed and variable cost:Fixed costs are the cost of being in business for a period of time and only vary time to time.Fixed costs are, as the name suggests, those costs that you will incur regardless of how muchbusiness you do. A typical example would be office space or salary costs of permanentmembers of staff. While all costs are actually variable over time, the essence is to include thosecosts which it is very difficult to remove and that don’t vary widely according to how muchbusiness a company do.Cost-volume relationship:CostVolumeFixed costVariable costFigure :cost –volume relationship(10)From the above graph,we can conclude that if RFL produces more number of jugs, the variablecost will be distributed among the produced volume which will ultimately result in costreduction in every product(jug).Structural factors influencing cost:The more predominant structural factors affecting product cost can be grouped under severalheadings.These include:I. Economies associated with volumeII. Economies of scope
  21. 21. 20III. Core linkagesIV. Outsourcing and balancingEconomies associated with volume:There are several reasons why utilization of capacity impact product cost.The variable cost accompanying increasing volume are relatively small orinconsequential in comparison with fixed costThe saving from purchasing needed materials, supplies and services in quantityThe savings from utilization of unproductive timeMore efficient utilization of manpower in all areas of the firmLimitations of economies of scale:Growing heterogeneity of most marketsGrowing diversityLack of growth in marketsSaturated marketsEconomies of scope:Different between volume and varietyEmphasis on software rather than hardwareProduction of multiple products by using same machineryEmphasis on specialized machinery and equipmentHigh volume of productionExperience curveUnitcostAccumulated volumeFigure: a typical experience curve(11)
  22. 22. 21Core linkages:Core linkages are relationships between activities where the way one is performed materiallyimpacts cost of performing the other.In RFL the purchase of a higher quality raw materials and the use of latest technologies inproduction reduces both manufacturing cost and time . Savings from core linkages results fromtwo factors-CoordinationOptimizationBasic approaches to pricing:Actually there are three basic approaches to pricing. They are—Cost orientedDemand orientedCompetition orientedRFL basically follows the cost-oriented approach to pricing.Cost-oriented pricing:Cost-oriented pricing is the most elementary pricing method. It involves the calculation of allthe cost that can be attributed to a product whether variable or fixed and then adding to thisfigure a desirable markup as determined by management.Features of cost-oriented approach:SimplicityCost-justification defense of price discriminationWidely accepted methodDelivering the desired result in a relatively short period of timeWhy RFL uses cost-oriented approach?1. Cost-oriented approaches are defensible on ethical grounds2. Cost-oriented approaches use readily available data3. Absence of knowledge more sophisticated technique4. Industry wide accepted practice
  23. 23. 22In following cost-oriented approaches RFL faces some sort of weaknesses.They are--Ignoring marketing environmentIncorrect or distorted cost informationThe circular reasoning phenomenonThe volume fulfillment assumptionFailure to recognize competitive forcesOverlooking price as a strategic optionsPossibility of having to rise price when sales volume falls below expectationVolume assumptions for purpose of cost calculations:An important point to bear in mind that changes in volume will affect per unit cost. There arefour different approaches to the question of volume.An assumption of low volume: this approach is a conservative one. Management iscautious about the future sales performance of the product and assumes a low volume.This approach results in higher overhead of per unit output leading to higher prices.Assuming the continuation of current volume: this approach can be reasonably soundparticularly for industries which experience little or no cyclical fluctuations in theirbusiness. This is applicable only to industries with existing operation and not to newproducts and firms.Using the best estimate of future volume: it is highly optimistic and risky approach. Theweakness of this approach is its dependency on circular reasoning in arriving at theprice. In order to able to forecast future sales, it is necessary to have a price. Per unitcosts are a functions of volume which at this point is unknown.Using a standard volume approach: standard volume is a projection of unit volumetaking into consideration the varying condition over time in the firm as well as thecyclical fluctuation in the business condition demand and capacity utilization.RFL:Actually RFL maintains a standard volume in the case of projection of unit volume. Theythink this approach is designed to be representation of volume that is expected to prevailunder normal or average condition adjusted periodically to reflect to favorable orunfavorable market condition.
  24. 24. 23Break – even analysis:A management tool commonly associated pricing is cost-volume analysis or it is commonlyknown as break-even analysis. The break- even point is the point where there is no profit orloss. It is a portrayal or how many units of the product are to be sold if the firm wants torecover both fixed and variable cost from the sales revenue.RFL Jug retail priceVariable cost per jugUnit contribution marginTotal fixed costBDT 120BDT 60BDT 60BDT 7500000Break- even point:Break – even point= 125000 unitsIf the firm’s sales volume fall short one lakh twenty five units, in that case losses will beincurred. That can be best understood from the following calculations:Sales (200000 jugs commercial at BDT 120)Less variable costs (200000 jug at BDT 60)ContributionLess fixed costsBDT 24000000BDT 12000000BDT 12000000BDT 7500000Profit BDT 4500000Break- even chart:Pricing decision can be made using the break- even poinnteither arithmetical or graphic form.The break – even chart is a graphic representation of the relationships discussed abouti. Costii. Volume
  25. 25. 24iii. PriceTaka is shown on the vertical scale on chart and unit produced and sold are shown on thehorizontal scale. Break- even point is the point at which the total revenue line intersects withthe total cost line. Profit and losses can be measured directly on the chart for any volume level.Profits are measured to the right of the break – even point at any volume are equal to the takadifferences between the total revenue line and the total cost line. Losses on the other hand aremeasured to the left of the break- even point at any point are equal the difference in takabetween the total cost line and total revenue line.The break-even chart for RFLProfit130Break Even point variable cost120110 fixed costLoss120 125 130 150Volume (in lakh)Profit volume graph:PriceinBDT
  26. 26. 25In addition to the break-even point chart management may find that a profit volume graph is auseful graph showing how profits are affected by the changes in the volume produced and sold.140Profit130120 120 125 130 140 1Loss Volume(in lakh)110Figure : profit volumeOutcome with different pricing alternatives:By using sensitivity analysis it is possible to have different outcomes by shifting the demandcurve totally or in part to obtain pessimistic, optimistic or the most likely demand estimates.Pricealternatives(BDT)Estimated salesvolumeTotal revenue(millions)Expected totalcost (millions)Difference(millions)2001501301201001000001100001200001250001500002016.515.6241520.1151323.5520(.1) estimation:To be able to determine the optimum price when a number of price possibilities exist, one mustobtain an estimate of the responsiveness of the quantity demanded of the product to pricechanges. There are a number of methods of estimating demands. The specific condition in theProfit (in lakh)
  27. 27. 26particular case may require using a different technique or may favor one over another. Each ofthese methods have advantages and limitations.1) Aggregate sales representative estimates2) Expert estimates3) Analysis of historical data4) Surveys of buyer5) Worth of product’s functional performance6) Test markets7) Laboratory experimentsAmong these estimations methods RFL actually focuses on the analysis of historical data. Here atime series is developed. A time series is a set of observations on a variable such as salesvolume in which those observations are arranged in relation to time. RFL actually focuses onthe assumption that relationship between quantity sold and price in past periods can be usedto predict sales at a given prices at a future period.Pricing decisions:Pricing environment:Even though the pricing environment varies from industry to industry there are some basicobjectives and strategies that may apply equally to various industries. RFL attempts to carve outa niche or small viable market segment that can be addressed with a unique marketingstrategy. RFL follows a segmentation strategy. In segmenting the market, RFL considers thefollowing characteristics—o Lifestyleo Income levelo Geographic locationo Brand personalityo Prestigeo Occupationo Statuso Life standardProduct portfolio:Each product and segment is looked upon as having different needs and objectives by RFL.Differences can be expressed in terms of the following criteria—i. Life-cycleii. Market shareiii. Growth potential and much more.
  28. 28. 27By using the growth share matrix (Boston consulting Group) each product is assigned a strategicrole on the basis of its market growth rate and relative market share. There are four types ofstrategic business units.Stars: stars are those business units having high growth and high share. In RFL the star productin jug category is Prismjug .Cash cows: cash cows are those services that have a dominant share of a slowly growingmarket. In RFL the cash cow product in jug category is Conical jug.Question marks: question marks are also known as problem children. These services areservices with low share of fast growing market. In RFL the question mark product in jugcategory is Trans Blue Orcid.Dogs: Dogs are those service units with a low share of a slowly growing market. In RFL Bluecolorjug is termed as dog.Pricing objectives:Even though the most logical starting point for pricing would be the company’s objectives, itappears that RFL has no formal objectives. But in order to cope with the industry trend RFLmaintains some sorts of formal objectives. Objectives of RFL are given below:i. Achieve a specific target return on investment or on net salesii. Maintain or enhance a market shareiii. Meet or prevent competitioniv. Maximize profitv. Stabilize pricesPricing strategies:The price strategies selected by RFL naturally dependent on the objectives the firm has chosento pursue. Actually there are verities of strategies present—1. Skimming:A product pricing strategy by which a firm charges the highest initial pricecustomers will pay. As the demand of the first customers is satisfied, the firm lowers theprice to attract another, more price-sensitive segment.Therefore, the skimming strategy gets its name fromskimming successive layers of "cream," or customersegments, as prices are lowered over time. Twotypes are-- Rapid skimming strategy Slow skimming strategy2. Prestige pricing:Marketing strategy where prices areset higher than normal because lower prices will hurtinstead of helping sales, such as for high-end
  29. 29. 28perfumes, jewelry, clothing, cars, etc Also. called image pricing.3. Penetration pricing: A marketing strategy used by firms to attract customers to a newproduct or service. Penetration pricing is the practice of offering a low price for a newproduct or service during its initial offering in order to attract customers away fromcompetitors. The reasoning behind this marketing strategy is that customers will buyand become aware of the new product due to its lower price in the marketplace relativeto rivals. Two parts- Rapid penetration strategy Slow penetration strategy4. Expansionistic pricing: Expansionistic pricing is a more exaggerated form of penetrationpricing and involves setting very low prices aimed at establishing mass markets, possiblyat the expense of other suppliers. Under this strategy, the product enjoys a high priceelasticity of demand so that the adoption of a low price leads to significant increases insales volumes. Expansionistic pricing strategies may be used by companies attemptingto enter new or international markets for their products. Lower-cost version of aproduct may be offered at a very low price to gain recognition and acceptance byconsumers. Once acceptance has been achieved more expensive versions or models ofthe offering can be made available at higher prices. The extreme case of expansionisticpricing, where offerings are made available to the (overseas) market at a price that isactually less than the cost of production is known as dumping. This practice is closelyscrutinized by governments since it can force domestic producers out of business andmany countries have enacted anti-dumping legislation. Markets that might benefit fromexpansionistic pricing strategies include those of magazine and newspaper publishers.Where low prices (annual subscription rates) attract a large number of subscribers,publishers can benefit from the higher rates that they are able to charge advertisers fortheir advertising ‘space’. Book and CD ‘clubs’ also use expansionistic to attract newmembers.5. Preemptive pricing: Pre-emptive pricing is a strategy which involves setting low prices inorder to discourage or deter potential new entrants to the suppliers market, and isespecially suited to markets in which the supplier does not hold a patent, or othermarket privilege and entry to the market is relatively straightforward.6. Extension pricing: Extension pricing is a strategy where companies set a basic priceacross the board for a product or service. Wherever consumers go, the price will be thesame. It covers virtually all costs associated with production, including shipping, taxes,and other expenses that may arise. This pricing strategy is one among several optionscompanies can use when they decide on pricing strategies. It has some advantages aswell as drawbacks to consider. The practice has a long and established history.Consumers may be familiar with some products which are always priced identically, nomatter where they buy them. These companies have an extension pricing policy, andtypically require all their business partners to abide by the strategy. If one business
  30. 30. 29attempts to undercut or mark up, it may lose the right to sell the product. This createsan obvious incentive to abide by the policy.Companies use several metrics when establishing extension pricing. They think aboutthe costs of production, along with expenses associated with packaging, inspecting, andshipping. In considering these factors, they need to think about remote distributionlocations, because these can add to the costs of shipping. The goal is to generate aroughly equalized price that will balance these expenses out in the final retail price ofthe item to allow retailers to make good on their costs and generate a profit. With anunderstanding of the expenses, the company sets an extension price, the cost it wantscustomers to pay at the final end of the distribution chain. This allows them todetermine wholesale prices, which subtract a standardized retail markup with someleeway for shipping costs. Companies with specific pricing agreements may periodicallyinspect price lists and audit stores to confirm that they are complying with theagreement. The consequences for violations can depend on the contract language. Forconsumers, this has a clear advantage, because they can buy a product anywhere andbe assured of the same price. Businesses do not always fare as well under extensionpricing. They may not be able to use these products in promotions and sales, forexample, and may be stuck with stock they cannot sell. Demand for the product usuallyrequires retailers to carry it, and they may use various sales products to increaserevenues, using it as an anchor to draw customers in. If a store carries mattresses withextension pricing, for example, it could sell sheets and accessories to boost income.Retail PricingThere are many outside influences that affect profitability and a retailers bottom line. Settingthe right price is a crucial step toward achieving that profit. Retailers are in business to make aprofit, but figuring out what and how to price products may not come easily.Before we can determine which retail pricing strategy to use in setting the right price, we mustknow the costs associated with the products. Two key elements in factoring product cost is thecost of goods and the amount of operating expense.The cost of goods includes the amount paid for the product, plus any shipping or handlingexpenses. The cost of operating the business, or operating expense, includes overhead, payroll,marketing and office supplies.Regardless of the pricing strategy used, the retail price of the products should more than coverthe cost of obtaining the goods plus the expenses related to operating the business. A retailersimply cannot succeed in business if they continue to sell their products below cost.One Price versus Variable Price:
  31. 31. 30The term one price is a phrase used to mean the price of a good or a service is not subject tobargaining. The term commonly indicates that an external agent, such as a merchant or thegovernment, has set a price level, which may not be changed for individual sales. In the case ofgovernments, this may be due to price controls.Bargaining is very common in many parts of the world, outside of retail stores in Europe orNorth America or Japan, this makes this an exception from the general norm of pricing in theseareas.One the Other hand, Variable pricing is a form of pricing of products or services as distinct froma fixed price. Traditional examples include auctions, bargaining, discounts, price skimming,penetration pricing and price shading (where the seller may vary the price by a certain amountor percentage as required). Stock markets and foreign exchange markets are based in variablepricing, with pricing models generally becoming more sophisticated driven in part by reducedtransaction costs using modern information technology; notably examples include yieldmanagement and congestion pricing.Price Lining:Price lining, also referred to as product line pricing, is a marketing process wherein products orservices within a specific group are set at different price points. The higher the price of aproduct, the higher the perceived quality to the consumer.However, while price lining can beprofitable, it relies on a number of factors to make it work and is not always the best pricingoption for every product or service.Price PointsUsing the price line model, each product or service within a group is set at distinct price points.Price pointing allows marketers to sell the same product but charge for additional features andoptions. For example, a car may come in three different styles: a value model, a standard modeland a limited model. While each model has a different price point, the costlier model is seen ashigher-end when compared to the base model, while both retain the same brand name.Effect on ConsumersPrice lining offers consumers the flexibility of choice. Those seeking additional features orhigher quality are willing to purchase the product at a higher price point, while budgetconscious shoppers or those that just want the basics may go for the lower-priced option.However, while consumers generally like to have choices, there is a danger that if the higherprice point is not justified, they may disregard the product or service altogether. Therefore, itsimportant to set prices according to what consumers are willing to pay.
  32. 32. 31AdvantagesApart from offering purchasing value to consumers, price lining has several other advantages.Pricing products or services using this method offers companies higher profit without a highinvestment. Rather than focusing on offering several different products, marketers can focus ona single brand, which lowers advertising costs, labor and overhead. Price lining products alsoresults in reduced inventory, which in turn reduces the cost of storage and upkeep.DisadvantagesOne of the disadvantages of price lining is its narrow focus on cost alone. As a business model,price lining does not take inflation or consumer purchasing trends into account. A weakeconomy, a change in purchasing patterns, or additional fluctuations in the market, may causeconsumers to lean toward the lower-priced products, thus leaving companies stuck with higher-priced inventory. Also, if the differentiation of benefits between the higher and lower end pricepoints is unclear or indistinguishable to end consumers, they may avoid the brand altogether.Pricing and the Legal IssuesPrice Discrimination:Price discrimination or price differentiation exists when sales of identical goods or services aretransacted at different prices from the same provider in a theoretical market with perfectinformation, perfect substitutes, and no transaction costs or prohibition on secondary exchange(or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopolisticand oligopolistic markets,[3] where market power can be exercised. Otherwise, the momentthe seller tries to sell the same good at different prices, the buyer at the lower price canarbitrage by selling to the consumer buying at the higher price but with a tiny discount.However, product heterogeneity, market frictions or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing todifferent consumers, even in fully competitive retail or industrial markets. The effects of pricediscrimination on social efficiency are unclear. Output can be expanded when pricediscrimination is very efficient.First degree price discrimination
  33. 33. 32This type of price discrimination requires the monopoly seller of a good or service to know theabsolute maximum price (or reservation price) that every consumer is willing to pay. Byknowing the reservation price, the seller is able to absorb the entire consumers surplus fromthe consumer and transform it into revenues. The seller produces more of his product than hewould to achieve monopoly profits with no price discrimination, which means that there is nodeadweight loss. Examples of where this might be observed are in markets where consumersbid for tenders, though, in this case, the practice of collusive tendering could reduce the marketefficiency.Second degree price discriminationIn second degree price discrimination, price varies according to quantity demanded. Largerquantities are available at a lower unit price. This is particularly widespread in sales to industrialcustomers, where bulk buyers enjoy higher discounts.Additionally to second degree price discrimination, sellers are not able to differentiate betweendifferent types of consumers. Thus, the suppliers will provide incentives for the consumers todifferentiate themselves according to preference. As above, quantity "discounts", or non-linearpricing, is a means by which suppliers use consumer preference to distinguish classes ofconsumers. This allows the supplier to set different prices to the different groups and capture alarger portion of the total market surplus.In reality, different pricing may apply to differences in product quality as well as quantity. Forexample, airlines often offer multiple classes of seats on flights, such as first class and economyclass. This is a way to differentiate consumers based on preference, and therefore allows theairline to capture more consumers’ surplus.Third degree price discriminationIn third degree price discrimination, price varies by attributes such as location or by customersegment, or in the most extreme case, by the individual customers identity; where theattribute in question is used as a proxy for ability/willingness to pay.Additionally to third degree price discrimination, the supplier(s) of a market where this type ofdiscrimination is exhibited are capable of differentiating between consumer classes. Examplesof this differentiation are student or senior discounts. For example, a student or a seniorconsumer will have a different willingness to pay than an average consumer, where thereservation price is presumably lower because of budget constraints. Thus, the supplier sets alower price for that consumer because the student or senior has a more elastic Price elasticityof demand (see the discussion of Price elasticity of demand as it applies to revenues from the
  34. 34. 33first degree price discrimination, above). The supplier is once again capable of capturing moremarket surplus than would be possible without price discrimination.Pricing in International MarketPrice: A part of the marketing mix:The price is what the customer pays for buying a solution. It includes direct and indirect costs aswell as opportunity costs.Direct costs are cash outlays a customer makes in order to obtain something. An examplewould be admission to an amusement park. Direct costs are, in many cases, a relatively smallpart of the total cost.Indirect costs are costs associated with obtaining something. An example would be the cost ofriding various rides in a amusement park, food and entertainment along the way etc. The totalof the indirect costs is often more sometimes much more, than the direct cost. The total cost isobtained by adding the direct and indirect costs.Opportunity costs are what we give up when we do something. They can have various types ofvalue sometimes monetary, sometimes not. Opportunity costs include other things you couldbe doing instead of going to an amusement park. Examples might include mowing the lawn orgoing to a baseball game (which would be non-monetary) and not working overtime onSaturday in order to go to an amusement park (which would be monetary).The price the park visitor pays to go to an amusement park is the total of all costs, includingdirect, indirect and opportunity costs. The perceived benefits of going to a national park have tobe at least as great as the total of the costs if a potential park visitor is going to make a decisionto go to a park.Determining the price:How do you set monetary prices? There are basically two ways. These are cost-based pricingand value-based pricing. Cost-based pricing is based on the total of all costs associated withdelivering a product or service to a customer. An example of cost-based pricing would be whenan organization identifies all of the costs associated with producing a product or service, addsthem up, adds a margin for profit (in the business sector) and arrives at the "price" thecustomer is to be charged. This type of pricing is the "floor" for pricing decisions in that it is aslow as the price can be and still cover all of the costs associated with delivering the product orservice. Im unaware of applications of this type of pricing in the park service world, unless itmight be applied by concessionaires.
  35. 35. 34Importance of price in marketing mix: Price is the amount of money charged for a product or a service, or the sum ofthe values that consumers exchange for the benefits of having or using theproduct or service Price is the only element in the marketing mix that produces revenue. Price is also the most flexible element of the marketing mix. The most common mistakes in setting prices are; pricing that is too cost oriented prices that are not revised enough to reflect the market changes pricing that does not take rest of the marketing mix into account prices that are not varied enough for different products, market segments &purchase occasionsFactors influencing international pricing:Factors internal to an international firm—strategic objectives cost leader, differentiation, focus gain market share, protect market share, to maintain status quo revenue, profit or market share maximizationmarketing mix policies product, place & promotion costs short term vs. long term cost focus full cost, variable cost, marginal cost pricing organizational considerations transfer pricing cost vs. profit centerFactors external to an international firm nature of market (buyer or seller) level of market development/sophistication market demand and consumers’ ability to buy competitive situation & consumer surplus product life-cycle-stage type of packaging, environmental issues
  36. 36. 35 distribution & marketing costs transportation costs government policies, tariffs, taxes & other restrictions country of origin image after-sales service, warranties & guaranties exchange rate fluctuation environmental factorsFactors contributing the selection of final price: Psychological effects of price Influence of other marketing mix elements Company pricing policies Costs Impact of price on other parties distributors or dealers company sales force competitorsManaging price escalation in foreign markets:Rearrange the distribution channel length of channel / exorbitant marginsEliminate costly features (or make them optional) no-frills versions - sell core productsDownsize the product offer smaller version or a lesser countAssemble or manufacture the product in foreign markets closer proximity to customers - lower costsAdapt the product to escape tariffs and taxes by shifting it to different tax classificationPricing in inflationary environments: Modify components, ingredients, parts and/or packaging materials
  37. 37. 36 Source materials from low-cost suppliers Shorten credit terms Include escalator clauses in long-term contracts - to hedge against inflation Quote prices in a stable currency Pursue rapid inventory turnovers Draw lessons from other countriesImpact of pricing strategy of RFL on the following sectors: Legal aspects Ecological aspects Political aspects Economic aspects Socio cultural aspects Technological aspects Competitive aspectsLegal aspects: actually RFL needs to consider some legal constraints while calculating their product ( Jug)price. They needs to conduct their manufacturing process in a eco – friendly way.Ecological aspects:like all other companies RFL is very much conscious about the ecological balance ofthe society. That’s why they are trying their best to keep the environment free from pollution. Recentlythe have started “go green” campaign to aware people about the ecological balance.Political aspects: one of the major determinant or obstacle of RFL in order to perform their activitiesefficiently is the political condition of the country.Economic aspects: Economic impact, the direct and secondary costs and benefits of production and theplastic industry are defined. General methods of approaching plastic industry impact estimation arepresented, along with criteria for evaluating alternative approaches.Social aspect : Social and cultural factors are important to consider while creating andimplementing a marketing strategy of a company. These often-linked but somewhat differentfactors have diverse effects on the decisions of consumers and buyers. Basically, socioculturalfactors are customs, lifestyles and values that characterize a society. More specifically, culturalaspects include aesthetics, education, language, law and politics, religion, social organizations,technology and material culture, values and attitudes. Social factors include reference groups,family, role and status in the society. Small-business owners should be aware of and understandthese factors connection with buying habits.Technological aspect:Internet has brought opportunities as well as challenges for the plastic industry as a whole.One of the most serious threats from the internet is an opportunity for foreign companies to
  38. 38. 37target consumers directly to sell their products. To counteract the threat of reduced businessdue to the Internet, RFL need to use internet marketing to its full potential to target customersand business opportunities.AppendicesReferences:1. RFL (1981), (online), Available at [Accessed on 7th May, 2013]2. RFL Plastic Ltd.Company address12, r. k. mission road, 1203, DhakaPhone019 12257049Fax02 95594153. Hanna N., Dodge R. (1997), Pricing policies and procedures, 2/e, Macmillan Press Ltd,Hampshire.4. Bresnahan, T. F. (1989): "Studies of Industries with Market Power," in Richard Schmalensee andRobert Willig, eds., Handbook of Industrial Organization, New York: North Holland5. Bresnahan, T. F., and Peter C. Reiss (1991): "Empirical Models of Discrete Games," Journal ofEconometrics, 48, 57-81.6. Kullback, J. (1959): Information Theory and Statistics, New York: John Wiley & Sons.7. Mittelhammer, R. C., and Cardell, N. S. (1997) "On the Consistency and Asymptotic Normal-ity ofthe Data-Constrained GME Estimator in the GLM," Working Paper, Washington State University8. Pricing policies and procedures by Nessim Hanna , H.Robert Dodge,chapter-1,figure 1.110.Pricing policies and procedures by Nessim Hanna , H.Robert Dodge,chapter-2,figure2.211.Pricing policies and procedures by Nessim Hanna , H.Robert Dodge,chapter-4,figure 4.1
  39. 39. 3812.Pricing policies and procedures by Nessim Hanna , H.Robert Dodge,chapter-4,figure 4.2