Pricing Decisions

Editor's Notes

• #5 1. Pricing for a target return. This is a common objectives found with most of the established business firms. Here, the objective is to earn a certain rate of Return On Investment (ROI) and the actual price policy is worked out to earn that rate of return. The target is in terms of ‘return on investment’. There are companies which set the target at, for example, 20% return on investment after taxes. The target may be for a short-term or a long-term. A firm also may have different targets for its different products but such targets are related to a single overall rate of return target. 2. Pricing for market penetration. When companies set a relatively ‘low price’ on their new product in initial stages hoping to attract a large number of buyers and win a large market-share it is called penetration pricing policy. They are more concerned about growth in sales than in profits. Their main aim is capturing and to gain a strong foothold in the market. This object can work in a highly price sensitive market. It is also done with the presumption that unit cost will decrease when the level of sales reach a certain target. Besides, the lower price may make competitors to stay our. When market share increases considerably, the firm may gradually increase the price. 3. Pricing for market skimming. Many companies that launch a new product set ‘high prices’ initially to skim the market. They set the highest price they can charge given the comparative benefits of their product and the available substitutes. After the initial sales slow down, they lower the price to attract the next price-sensitive layer of customer. 4. Discriminatory pricing Some companies may follow a differential or a discriminatory pricing policy-charging different prices for different customers or allowing different discounts to different buyers. Discrimination may be practices on the basis or product or place or time. For example, doctors may charge different fees for different patients; railways charge different fares for usual passengers and regular passengers/ students. Manufacturers may offer quantity discounts or quote different list prices to bulk-buyers, institutional buyers and small buyers. 5. Stabilizing pricing. The objective of this pricing policy is to prevent frequent fluctuations in pricing and to fix uniform or stable price for a reasonable period. When price is revised, the new price will be allowed to remain for sufficiently a long period. This pricing policy is adopted, for example, by newspapers and magazines.
• #6 A. Internal Factors: 1. Cost: While fixing the prices of a product, the firm should consider the cost involved in producing the product. This cost includes both the variable and fixed costs. Thus, while fixing the prices, the firm must be able to recover both the variable and fixed costs. 2. The predetermined objectives: While fixing the prices of the product, the marketer should con­sider the objectives of the firm. For instance, if the objective of a firm is to increase return on investment, then it may charge a higher price, and if the objective is to capture a large market share, then it may charge a lower price. 3. Image of the firm: The price of the product may also be determined on the basis of the image of the firm in the market. For instance, HUL and Procter & Gamble can demand a higher price for their brands, as they enjoy goodwill in the market. 4. Product life cycle: The stage at which the product is in its product life cycle also affects its price. For instance, during the introductory stage the firm may charge lower price to attract the custom­ers, and during the growth stage, a firm may increase the price. 5. Credit period offered: The pricing of the product is also affected by the credit period offered by the company. Longer the credit period, higher may be the price, and shorter the credit period, lower may be the price of the product. 6. Promotional activity: The promotional activity undertaken by the firm also determines the price. If the firm incurs heavy advertising and sales promotion costs, then the pricing of the product shall be kept high in order to recover the cost. B. External Factors: 1. Competition: While fixing the price of the product, the firm needs to study the degree of competi­tion in the market. If there is high competition, the prices may be kept low to effectively face the competition, and if competition is low, the prices may be kept high. 2. Consumers: The marketer should consider various consumer factors while fixing the prices. The consumer factors that must be considered includes the price sensitivity of the buyer, purchasing power, and so on. 3. Government control: Government rules and regulation must be considered while fixing the prices. In certain products, government may announce administered prices, and therefore the mar­keter has to consider such regulation while fixing the prices. 4. Economic conditions: The marketer may also have to consider the economic condition prevail­ing in the market while fixing the prices. At the time of recession, the consumer may have less money to spend, so the marketer may reduce the prices in order to influence the buying decision of the consumers. 5. Channel intermediaries: The marketer must consider a number of channel intermediaries and their expectations. The longer the chain of intermediaries, the higher would be the prices of the goods.
• #7 This is the easiest and the most common method of price setting. In this method, a standard mark up is added to the cost of a product to arrive at its price. For example, the cost of manufacturing a fan is Rs. 1000/- adds 25 per cent mark up and sets the price to the retailer at Rs. 1250/-. The retailer in turn, may mark it up to sell at Rs. 1350/- which is 35 per cent market up on cost. The retailer’s gross margin in Rs. 1500/-. But this method is not logical as it ignores current demand and competition and is not likely to lead to the optimum price. Still mark up price is quite popular for three reasons: i) Seller have more certainty about costs than about demand and by tying the price to cost, they simplify their pricing task and need not frequently adjust price with change in demand. ii) Where all firms in the industry use this pricing method, their prices will similar and price competition will be minimized to the benefit of al of them; iii) It is usually felt by many people that cost plus pricing is fairer to buyers as well as to seller. 2. Break-Even Pricing and Target-Profit Pricing An important cost-oriented pricing method is what is called target-profit pricing under which the company tries to determine the price that would product the profit it wants to earn. This pricing method uses the popular ‘break-even analysis’. According to it, price is determined with the help of a break-even chart. The break-even charge depicts the total cost and total revenue expected at different sales volume. The break-even point on the chart if that when the total revenue equals total cost and the seller neither makes a profit nor incurs any loss. With the help of the break-even chart, a marketer can find out the sales volume that he has to achieve. In order to earn the targeted profit, as also the price that he has to charge for his product. Buyer-based Approach Perceive-Value Pricing Many companies base their price on the products perceived value. They take buyer’s perception of value of a product, and not the seller’ s cost, as the key to pricing. As a result, pricing begins with analyzing consumer needs and value perceptions, and price is set to match consumers’ perceived value. Such companies use the non-price variables in their marketing mix to build up perceived value in the buyer’s minds, e.g. heavy advertising and promotion to enhance the value of a product in the minds of the buyers. Then they set a high price to capture the perceived value. The success of this pricing method depends on and determination of the market’s perception of the product’s value. Competition-based Approach 1. Going Rate Pricing Under this method, the company bases its prices largely on competitor’s prices paying less attention to its own costs or demand. The company might charge the same prices as charged by its main competitors, or a slightly higher or lower price than that. The smaller firms in an industry follow the leading firm in the industry and change their prices when the market leader’s prices changes. The marketer thinks that the going price reflects the collective wisdom of the industry. 2. Sealed-Bid Pricing This is a competitive oriented pricing, very common in contract businesses where firms bid for jobs. Under it, a contractor bases his price on expectations of how competitors will price rather than on a strict relation to his cost or demand. As the contractor wants to win the contract, he has to price the contract lower than the other contractors. But a bidding firm cannot set its price below costs. If it sets the price much higher than the cost, its chance of getting the contract will be lesser.
• #11 Newspapers Newspapers are one of the traditional mediums used by businesses, both big and small alike, to advertise their businesses. Advantages Allows you to reach a huge number of people in a given geographic area  You have the flexibility in deciding the ad size and placement within the newspaper  Your ad can be as large as necessary to communicate as much of a story as you care to tell  Exposure to your ad is not limited; readers can go back to your message again and again if so desired.  Free help in creating and producing ad copy is usually available  Quick turn-around helps your ad reflect the changing market conditions. The ad you decide to run today can be in your customers' hands in one to two days.    Disadvantages  Ad space can be expensive  Your ad has to compete against the clutter of other advertisers, including the giants ads run by supermarkets and department stores as well as the ads of your competitors  Poor photo reproduction limits creativity  Newspapers are a price-oriented medium; most ads are for sales  Expect your ad to have a short shelf life, as newspapers are usually read once and then discarded.  You may be paying to send your message to a lot of people who will probably never be in the market to buy from you.  Newspapers are a highly visible medium, so your competitors can quickly react to your prices  With the increasing popularity of the Internet, newspapers face declining readership and market penetration. A growing number of readers now skip the print version of the newspaper (and hence the print ads) and instead read the online version of the publication.
• #12 Magazines Magazines are a more focused, albeit more expensive, alternative to newspaper advertising. This medium allows you to reach highly targeted audiences.  Advantages  Allows for better targeting of audience, as you can choose magazine publications that cater to your specific audience or whose editorial content specializes in topics of interest to your audience.  High reader involvement means that more attention will be paid to your advertisement  Better quality paper permits better color reproduction and full-color ads  The smaller page (generally 8 ½ by 11 inches) permits even small ads to stand out Disadvantages  Long lead times mean that you have to make plans weeks or months in advance  The slower lead time heightens the risk of your ad getting overtaken by events  There is limited flexibility in terms of ad placement and format.  Space and ad layout costs are higher
• #13 There are several forms of Yellow Pages that you can use to promote and advertise your business. Aside from the traditional Yellow Pages supplied by phone companies, you can also check out specialized directories targeted to specific markets (e.g. Hispanic Yellow Pages, Blacks, etc.); interactive or consumer search databases; Audiotex or talking yellow pages; Internet directories containing national, local and regional listings; and other services classified as Yellow Pages.   Advantages  Wide availability, as mostly everyone uses the Yellow Pages  Non-intrusive  Action-oriented, as the audience is actually looking for the ads  Ads are reasonably inexpensive  Responses are easily tracked and measured  Frequency Disadvantages  Pages can look cluttered, and your ad can easily get lost in the clutter  Your ad is placed together with all your competitors  Limited creativity in the ads, given the need to follow a pre-determined format  Ads slow to reflect market changes
• #14 Advantages Radio is a universal medium enjoyed by people at one time or another during the day, at home, at work, and even in the car.  The vast array of radio program formats offers to efficiently target your advertising dollars to narrowly defined segments of consumers most likely to respond to your offer.  Gives your business personality through the creation of campaigns using sounds and voices  Free creative help is often available  Rates can generally be negotiated  During the past ten years, radio rates have seen less inflation than those for other media Disadvantages Because radio listeners are spread over many stations, you may have to advertise simultaneously on several stations to reach your target audience  Listeners cannot go back to your ads to go over important points  Ads are an interruption in the entertainment. Because of this, a radio ad may require multiple exposure to break through the listener's "tune-out" factor and ensure message retention  Radio is a background medium. Most listeners are doing something else while listening, which means that your ad has to work hard to get their attention
• #15 Advantages Television permits you to reach large numbers of people on a national or regional level in a short period of time  Independent stations and cable offer new opportunities to pinpoint local audiences  Television being an image-building and visual medium, it offers the ability to convey your message with sight, sound and motion Disadvantages Message is temporary, and may require multiple exposure for the ad to rise above the clutter  Ads on network affiliates are concentrated in local news broadcasts and station breaks  Preferred ad times are often sold out far in advance  Limited length of exposure, as most ads are only thirty seconds long or less, which limits the amount of information you can communicate  Relatively expensive in terms of creative, production and airtime costs.
• #16 Direct mail, often called direct marketing or direct response marketing, is a marketing technique in which the seller sends marketing messages directly to the buyer. Direct mail include catalogs or other product literature with ordering opportunities; sales letters; and sales letters with brochures.   Advantages Your advertising message is targeted to those most likely to buy your product or service.  Marketing message can be personalized, thus helping increase positive response.  Your message can be as long as is necessary to fully tell your story.  Effectiveness of response to the campaign can be easily measured.  You have total control over the presentation of your advertising message.  Your ad campaign is hidden from your competitors until it's too late for them to react  Active involvement - the act of opening the mail and reading it -- can be elicited from the target market. Disadvantages Some people do not like receiving offers in their mail, and throw them immediately without even opening the mail.  Resources need to be allocated in the maintenance of lists, as the success of this kind of promotional campaign depends on the quality of your mailing list.  Long lead times are required for creative printing and mailing  Producing direct mail materials entail the expense of using various professionals - copywriter, artists, photographers, printers, etc.  Can be expensive, depending on your target market, quality of your list and size of the campaign.
• #17 Telephone sales, or telemarketing, is an effective system for introducing a company to a prospect and setting up appointments.       Advantages  Provides a venue where you can easily interact with the prospect, answering any questions or concerns they may have about your product or service.  It's easy to prospect and find the right person to talk to.  It's cost-effective compared to direct sales.  Results are highly measurable.  You can get a lot of information across if your script is properly structured.  If outsourcing, set-up cost is minimal  Increased efficiency since you can reach many more prospects by phone than you can with in-person sales calls.  Great tool to improve relationship and maintain contact with existing customers, as well as to introduce new products to them  Makes it easy to expand sales territory as the phone allows you to call local, national and even global prospects. Disadvantages  An increasing number of people have become averse to telemarketing.  More people are using technology to screen out unwanted callers, particularly telemarketers  Government is implementing tougher measures to curb unscrupulous telemarketers  Lots of businesses use telemarketing.  If hiring an outside firm to do telemarketing, there is lesser control in the process given that the people doing the calls are not your employees  May need to hire a professional to prepare a well-crafted and effective script  It can be extremely expensive, particularly if the telemarketing is outsourced to an outside firm  It is most appropriate for high-ticket retail items or professional services.