TOPIC: PRICING DECISIONS Price is the only Marketing Mix variable that generates revenue. All the other variables viz. Product, Place, and Promotion incur costs. For any kind of transaction, an offering has a price for its value. Price goes by many names – rent, rate, fee, tuition, toll, fare, royalty, honorarium, etc. Price is the most flexible or easily changeable element of the marketing mix elements. A marketer can change the price without much investment in time as compared to making changes to the Product features, Promotion strategies, or distribution channels. Price can be defined as quantifying (into Dollars, Pounds, Rupees, etc.) the perceived value of an offering to the buyer at a particular time. Pricing includes setting of objectives, determining price flexibility, outlining strategies, finalizing price, and controlling it depending on the challenges. Organizations have to rely on the managerial skills in the implementation and control of pricing strategies. Its success relies heavily on how the managerial staff monitors the response of customers and competitors. In developing countries, price is the major factor that drives sales. Pricing and price-wars among competitors is the biggest problem that an organization faces. There are different ways in which organizations approach the final pricing decision. These decisions depend on competitors, costs, demand, perceived value, long term return on investment or short term return on investment, etc. Role/ importance of pricing in marketing strategy 1) Price in combination with promotion becomes a strong tool for influencing buyers to buy products. It interests the buyers and highlights the image of the brand to increase sales. Sometimes organization’s focus on other marketing mix elements by keeping the price constant based on recovering costs at certainpercentage. 2) Finalizing price in combination with other marketing mix variables, sets guidelines and boundaries for management to set marketing strategies. 3) Pricing also determines standard of living. The lower the prices in the economy, the higher is the purchasing power in the hands of consumers. Price reflects purchasing power of the market. 4) Price is a strong weapon against competitors. 5) Price determines the profits on sales. It is a basis of generating profits. As it is the most flexible of the marketing mix variables, organizations exercise this freedom very often for defensive or offensive pricing strategies. 6) Price influences two types of management decisions. First is setting price for a new product and second, adjusting the price of existing products basis the market situation, costs, etc. 7) Depending on the marketing program, organizations use Price in different ways – Demand oriented strategy, cost oriented strategy, competition oriented strategy, and also because of ethical constraints. 8) Price should be carefully set basis its combination with the other marketing mix variables. The price on a product affects the market of another product in the product line from the same manufacturer. For example, a soap priced similar to another soap from the same manufacturer which has different features will have impact on the sales of each other, and the customer will have difficult time in making a choice. Price setting should be according to the product features and should accompany strong promotional activities like discounts, education of product features, etc. 9) Price should be set in relation to the delivered value and perceived value of the product -Price also communicates the quality of the product. If a product is priced very low and its features communicated are better than the competitor, the customers may think that the product has low quality. In such cases organizations have to invest heavily in promotional activities and communicate clearly highlighting the services associated like warranties, brand value, etc. 10) Prices should be set in coordination with distributors. Most organizationsstrive to give higher profit margins to distributors as the distributors like wholesalers and retailers too aggressively promote the products to consumers. 11) High promotional activities result in costs. Organizations have to set price basis the costs associated to advertising, public relations, etc. The organizations have to carefully analyze the promotional expenditure and decide if it will result in production and marketing economies of scale. This will reduce the unit cost and give freedom to make price changes. objectives of Pricing AND variables/ elements of Price Mix. Pricing objectives refer to the targets to be achieved via pricing strategies in the marketing plan. These should be clearly outlined in quantitative terms so as to be understood by all the members involved in pricing decisions. The pricing objectives can be divided as Short term objectives and Long term objectives- 1) Short term pricing objectives- The short term objectives for pricing policies are as below- • Attracting new customers, middlemen, etc. • Generate interest in the product • Discourage competition • Sales or profit growth • Rapidly establish market position • Meeting competition • Maintain market share • Promote new products • Recover costs of a product in decline stage • Secure key accounts 2) Long term pricing objectives- The long term objectives for pricing policies are as below- • Stabilize industry prices • Market share growth • Maximize long-run profits • Strategic pricing in different markets • Retain or capture market share • Maintain price leadership • Maximize return on investment • Product and quality leadership Advertisements Whether the objectives are long term or short term, they should be clearly defined and easily understandable. The organization adopts a pricing strategy depending on the pricing objective. In the short run, most of the time the main objective is to survive in the market which has intense competition or changes in consumer preferences. Adding value to the brand generally comes under long term objective. Price should be used as a strategic tool rather than it being determined by costs and markets. There are many variables that affect the pricing strategy. Basis the factors, an organizationutilizes different pricing variables to cover the costs of manufacturing and generate profits. The Price Variables depend on “Pricing policies and strategies”, “terms of credit” and “resale price maintenance.” Pricing Policies and Strategies are outlined basis the market needs. These help the organization’s in outlining different Discount options – discounts offered for large quantity sale, cash discounts, trade discounts, seasonal discounts, etc. Advertisements Terms of credit help to increase of market size. Increase the sale of the product results in increase in production. More the production, more is the economies of scale. Buying on credit is the most followed option in modern day marketing as it is a means of sales promotion and contributes to hassle free selling. In today’s economy, no firm can do business without offering credit facility. Resale Price Maintenance is also followed by many organization’s. Through this the manufacturer or the distributor recommends the profit margin at which the next channel member/ members can sell the product. Here the minimum sale price is fixed below which the channel member cannot sell the product. This Price variable helps the organization in generating cooperation and support from the distributors. When a certain profit margin in fixed, the intermediaries cannot sell the product below or above the specified percentage. This helps consumers as well as it protects them from being overcharged for the product by the middlemen. Pricing Strategies. When making price decisions, an organization has to follow price strategies. Price strategies offer a set of guidelines and gives direction to the organization for pricing decisions for the target markets. It determines the extent of pricing basis the region, price variability, price levels, price stability, use of price lining, and pricing according to stages of the product in the product life cycle. 1) Region based pricing (Geographical pricing) – This involves studying the region or country of the target market and setting the prices accordingly. Different regions have different set of prevalent systems for making payments. Also, the organization may consider adding additional percentage to price basis the taxes, transportation and storage costs. Many companies are asked to invest back a percentage of their earnings in the target market country. The system in which the buyers want to payback in other forms other than money is known as countertrade. These can take place in different forms like barter, compensation deals, buyback agreements, and offset. (Source – Marketing Management; Prof. Kotler, Developing price strategies and programs, 2004, p.g. 489). Barter system involves exchange of goods instead of money and no third-partyinvolvement. Compensation deals involve seller receiving some percentage of payment in the form of products and the rest in money. In buyback agreement the seller sells the machinery, technology, etc. to buyers and agrees to buy the products developed by the buyer using that machinery, technology, etc. In Offset the seller receives the complete payment in money but needs to spend a large amount of that in the country of operation within a specified time. For example, many companies were not allowed to trade in India unless a substantial amount of earning was spent in India. There were bills passed in the parliament after a heated debate. 2) Pricing through Price variability/differentiation – When an offering is sold to buyers at two or more prices equal to each buyer’s perception of product value though they do not reflect proportional difference in marginal costs. These can be done in the following forms – Advertisements • Customer basis- one customer may pay one price and another a different price at one time and place. For example, different movie shows at different timings and different age groups, warehouse sales, etc. • Product-form basis – different versions of the product are priced differently for buyers with different perceptions. For example, Motorola sells its Moto X series with a different back cover texture at different prices. • Place basis – geographically separated target markets will have a different price of the same product though the cost of offering in each location is same. • Time basis – the product price changes with time. For example, off-peak prices for theatre, movies, seasonal products, etc. 3) Pricing through Price levels – A border pricing is set with in which the price is set. For considering the general price, management considers competitive advantage, product line objectives, attractiveness of target market, current and desired image of the firm. A company like Maruti Suzuki has always targeted middle class and upper middle-class customers. It maintained this image for a long time but has moved at changing it image in the last decade by moving into the premium segment of cars. Maruti Suzuki has cars for different income and lifestyle segments. They manufacture cars like Alto, Alto 800, A-star for lower middle-class customers. They have moved into making SUV vehicles as well. But the image that the company has maintained is of reliability, affordability and fuel-efficient vehicles for price sensitive Indian customers. 4) Pricing through Price lining – Price lining refers to setting price for products within a product line to meet the needs of customers. For example, Maruti Suzuki has cars for different income and lifestyle segments. Wagon, DeZire are targeted to middle class segments whereas Alto and A-star is to target lower middle-class market. If it launches a new car in a certain product line, it will need to consider the price level close to the products in that product line. Advertisements 5) Pricing according to stages of the product in the product life cycle – Some organization’s plan in advance the pricing strategies of the product as it moves through the different stages of life cycle. As the competition becomes intense with the success of the product, the organization has to change the price of the product or else customers will switch to new products from rival firms or substitute products. For example, after 5-6 months of its launch, a premium mobile phone has its price reduced with the launch of new models from rival companies. The firm tries to earn as much revenues possible before the product becomes obsolete in few years. New product pricing There is great flexibility with the organization’s in setting a price for a new product as compared to the product in other stages of life cycle. New product launch and its price are given lot of importance as these cover the overall marketing strategy of the organization. The products in growth, maturity and decline stage face competition and give little choice in increasing the prices. New products on the other hand have little or no competition hence, can be utilized to generate high profits through Market skimming pricing strategy and Market penetration pricing strategy. Skimming pricing strategy involves setting high profit margin relative to costs to “skim” as much profit as possible from the high demand in the market. Once the competitors enter the market with a similar or a substitute product, the organization reduces the price of the product to make it available for price sensitive customers. Most of this strategy is directed towards the Innovators and Early adopters in the target market to “skim the cream” highlighting the unique product features, brand image, and quality. (Innovators – they are willing to try new ideas and are first to buy the new product. They help get the product exposure. Early adopters – these people adopt new ideas early but carefully. They serve as the opinion leaders. Early majority – these form around 34% of the market and adopt a new product earlier than an average consumer.)For example, Samsung mobile’s launch of a new note series handset is usually high priced. After few months the price is generally lowered amidst competition. Penetration pricing strategy involves setting a low price of the new product relative to costs to increase the market share in a short period. This strategy keeps the competitors away as the profit margins are low. The organization’s objective is to gain market share and maintain it for a longer period through economies of scale. This strategy is mostly successful if the market is not big. Competitors enter the market if the market is big and the demand is high. For example, Motorola entered the Indian market through the launch of it Moto G models. The price of this model was kept fairly low as compared to competitive products offering similar features. The launch was such a great success that all the handsets of this model were sold within 20 minutes of its launch through Flipkart, an ecommerce giant, which was given exclusive selling rights. Advertisements 6) Psychological pricing – the law of demand is not always successful for making sales and profits. Customers are influenced via psychological pricing methods like odd-even pricing ($19.99), pricing the product highlighting the quality, etc. Customers usually estimate the price of a product based on their past experience or noticing the prices at some places or media channels. The sellers try to tab on these perceptions and manipulate these reference prices. They may display the product among prestige and expensive products, etc. STEPS INVOLVED IN SETTING PRICING POLICY. 1) Specify Pricing Objective- Pricing objectives refer to the targets to be achieved via pricing strategies in the marketing plan. These should be clearly outlined in quantitative terms so as to be understood by all the members involved in pricing decisions. Depending on the challenges a firm faces in the market, the objective can be either of these – survival, maximize current profit, maximize market share, product-quality leadership. These objectives can be short-term or long-term. a) Short term pricing objectives- • Attracting new customers, middlemen, etc. • Generate interest in the product • Discourage competition • Sales or profit growth • Rapidly establish market position • Meeting competition • Maintain market share • Promote new products • Recover costs of a product in decline stage • Secure key accounts b) Long term pricing objectives- • Stabilize industry prices • Market share growth • Maximize long-run profits • Strategic pricing in different markets • Retaining or capture market share • Maintain price leadership • Maximize return on investment • Product and quality leadership Whether the objectives are long term or short term, they should be clearly defined and easily understandable. Advertisements 2) Determine Costs – There is a close relationship between price and cost. The organization strives to make profits to ensure the various costs it incurred in production and marketing of the products are covered. Careful analysis of costs need to be done to make profits. Many firms fail to set price basis the costs believing that the costs will be covered over a long term through economies of scale. Costs incurred at various stages of product development including the services from departments other than production like legal Consultants, market research, finance, etc., promotion activities, and inflation should be carefully accounted for pricing strategy. A company incurs two forms of costs – Fixed costs and variable costs. Fixed costs are that which the organizations incur irrespective of the production or sales revenue. These include staff salaries, property tax, interest, rent, etc. not dependent on production or sales. Variable costs vary with production. Less the production of units will result in decrease in costs. It has been observed that with increase in production and experience, production costs decline due to the learning curve effect. Many timesorganization’s set the price below the initial total cost. As the sales and production increases, the costs decrease with experience. If this is not taken into account and the price is set higher, there is increase in profits which attracts competition. The profits earned this way are generally short run. It is therefore important that the organization’s understand the cost theory. The management should consider the probable production stages, manufacturing improvements that result from experience, variable and fixed costs for proper estimation of costs. 3) Evaluate Demand – The lower limits of price are set by costs and the upper limits are set by demand and competition. The law of demand states that Price is inversely proportional to demand. Increase in price will lower demand, and decrease in price will increase demand provided all other relevant factors remain constant. This does not holds true in all the cases. Sometimes price reflects product quality like in prestige goods. Customer responses to different price levels are difficult to estimate. Marketers use market opportunity analysis and demand estimation methods to evaluate demand. Change in demand is studied with increase in price. A small percentage increase may not affect the demand largely but a significant increase in price may decline demand substantially. The response of demand to price change is measured by price elasticity of demand. It is the relationship between changes in sales with the percentage change in price. The changes at alternative price levels are studied closely. According to the product type, the demand elasticity also changes. Elasticity is the result of consumer behavior. Increase in price of Petrol or Diesel fuel didn’t affect the sales of large vehicles. The affect was very insignificant. Advertisements According to Prof. Kotler there are many reasons for less elastic demand – • Less or no substitutes, competitors • Buyers fail to notice the price change • Buyers are slow to change their buying habits • Buyers think the price raise is fair The buyers may continue buying the product at an increased price but not for a longer period. They will eventually switch to substitute or competitor products. The response of customers to prices must be evaluated for the total market. Reducing the price may increase sales but it should justify and should be beneficial for the organization in the target market. 4) Evaluate Competition – Most of the time, organization’s set their price basis the price of the competitors. They set the price above the competition, below the competition or at par with the competition. For this the organization must study the industry structure it operates in. The organization may change the price irrespective of costs incurred just because the competitor has done so. The organization should compare the product features with substitute and competitor products. Then basis the value and benefits offered by the product, the management should set price of the product. If the product offers more features, the management can set a little higher price and vice versa. If the products in the market are similar, competition becomes intense and leads to price wars. As customers can easily check prices of products from different manufacturers, study of competitor’s prices becomes essential. 5) Select Pricing Method – Once the organization has analyzed Demand, Costs and Competition, it initiates the process of setting the price. Organizations choose from any of the below pricing methods – 1. Cost Oriented Pricing method – Costs form the base of price range and there are two commonly used methods of setting the price – Cost-Plus/ Markup pricing and Target Return pricing. 1.1 Cost-Plus/ Markup Pricing – It involves adding an additional percentage of profit to the sellers per unit cost of the product. The profit or markup is percentage of the selling price instead of the cost. The following formula can be used to determine the price- Selling price = Average unit cost/ (1 – Desired markup percentage) If the average unit cost is $10 and the markup is 20%, then the selling price will be $12.5. [10/1-0.2). This method is successful only if the marked-up price generates expected sales. The major drawback of this method is that it ignores the demand, competition and perceived value of the product. This method is popular in retail and wholesale trade. It depends on the type of goods. The markups are set higher on seasonal goods, specialty goods, goods with high storage and distribution costs, goods with inelastic demand like medicines. Premium goods will have a higher markup as compared to ordinary consumer goods. There are benefits of using this method. It avoids price wars as competition is not taken into account. The costs are identified and taken into consideration which is easier to analyses as compared to demand and competition. As demand is not considered for setting a price, the consumers are charged fairly. Else the price will be set higher if the demand is severe in the market. 1.2 Target Return Pricing – In this method the price is set such that the profit would give a target rate of return on the investment (ROI). It determines the level of sales needed to cover all the costs. The firm tries to determine the price at which it will break even or make the target profit it is seeking. The fixed and variable costs are determined before setting the price. Target Return Price = unit cost + [desired return*invested capital/unit sales] Target return pricing is based on break even analysis. Break-even volume = fixed cost /(price – unit variable costs) Different prices are considered and their impact on sales and profits are estimated. This method ignores the market demand and is solely derived from costs. But it helps ensure that the price set exceeds the costs which helps in earning profits. 2. Demand Oriented Pricing method – Demand cannot be ignored while considering pricing decisions. What customer thinks about the product (perceived value) and the market demand is given importance in this method. There are two ways of setting prices under this method – Perceived value pricing and Value pricing. 1.1 Perceived value pricing – in this method the price is set either matching or lower than customer perceived value of the product. The organization invests in promotion activities like advertising and sales force to communicate and educate customers on the perceived value of the product. For consumer products, it is based on psychological pricing strategy. Many times customers are willing to pay higher price depending on their perception of quality for which they are paying. It becomes essential for organization’s to conduct market research. The data collected through research should give a realistic estimate of the market’s perception of the value of the product. Perceived value can be based on brand image, product value based on its performance, quality, distribution network, after sales service, etc. For example, an electronic manufacturer created a temperature sensing device. Unsure of setting the price, the organization conducted a survey on their expectations as compared to similar or same products in the market. It was learned that the existing products were not as accurate. The customers showed great interest on the reliability and accuracy of the product. This helped the organization price the product little higher that the competing product in the marked based on customer perception. The organization’s product was more accurate than those available in the market. The organization should strive to deliver more value that the competitor’s product and communicate the same in the target market. 1.2 Value pricing – the price is set lower that the value being offered to the customer. The price is generally lower as compared to the high quality of the product. Reliance Jio is adopting this strategy for providing high speed internet at fairly lower price than its competitors. Other examples include pricing strategy adopted by Wal-Mart, Big Bazaar. Everyday low pricing (EDLP) is another value pricing tool used at retail level. There are no special sales or promotions done. In high-low pricing, the prices are set higher for a longer period but promotions are done to sell products even lower than EDLP for a certain period. Big Bazar sells products at lower prices on Wednesdays. The ecommerce giants like Flipkart and Amazon have low prices for products on festival days (Flipkart’s Big Billion sale on Diwali festival in India generates revenues in billions on a single day). 1.3 Demand-Modified Break-Even pricing – in this method the demand estimates in conjunction with break-even analysis and setting the alternative prices to achieve the highest profit. The estimates of market demand are required at feasible price. Then break-even points and expected total sales revenue is calculated. Here the primary challenge facing the organization is obtaining the right estimate of the price and quantity relationship. For example, a unit sold at $5, $7 or $10 can generate break-even at different profit earnings depending on the demand forecasts. The organizations can do analysis on historical data, conduct direct customer interviews to check their response for different prices, or conduct in store experiments where consumers make purchase decisions. 3. Competition Oriented Pricing method – although an organization cannot overlook the demand and cost factors when setting price, many organizations set the price of a product in relation to the competitors prices. 1.1 Going-Rate pricing – the price of the product is set equal, above or lower than that of the competitor. This method is more popular in cases where costs are difficult to measure and demand has no relation with the price. The organization believes that the market leaders are better able to set the price. This method is also more suitable when costs and demand are stable and have minimal effect on sales and profits. 1.2 Sealed-bid pricing – the firms bid the lowest to increase the odds of being selected. The firm sets a price anticipating how the competitor will respond instead of relying on the costs and demands associated with production. The organization can win the contract which requires pricing less than other firms. However, the cost factor cannot be ignored as the firm is in the business of making profits. 4. Auction based pricing and Group pricing are also becoming popular with the increased use of internet. The above methods narrow down the approach in setting the final price. However, other pricing methods also should be considered. Psychological pricing –the law of demand is now always successful for making sales and profits. Customers are influenced via psychological pricing methods like odd-even pricing ($19.99), pricing the product highlighting the quality, etc. Customers usually estimate the price of a product based on their past experience or noticing the prices at some places or media channels. The sellers try to tab on these perceptions and manipulate these reference prices. They may display the product among prestige and expensive products, etc. Influence of other marketing mix elements –Price can also be set basis the brand image, quality, advertising, etc. in relation to competition. If an organization has invested heavily on advertising for an average quality product, consumers are willing to buy a product that is well known. Similarly, customers are willing to buy a product only if there is a service center for the manufacturer in their town. For example, customers are happy buying a Samsung mobile instead of an Apple’s iPhone in a developing country because of easy access to Samsung service center. (The above discussion is loosely based on David Cravens, Gerald Hills and Robert Woodruff. Marketing Management, AITBS books, Delhi 2002; and Prof. Kotler’s, Marketing Management, 11th edition) Advertisements 6) Implementation and Control – Apart from studying the response from the consumer, the impact of pricing on distributors and sales people should also be considered. The successful implementation of price and making changes to it depends largely in coordination with the distributors and sales team. These are the people who directly talk to consumers and their inputs become very valuable in price changes. For successful control of prices, an organization should closely collect data from- • Consumers, • Distributors, • Staff members who come in direct contact with consumers, • Reaction from competitors. The data collected should be carefully monitored and acted upon by the managers who work on pricing objectives and strategies. THE PRICING METHODS Organizations mostly choose the pricing methods based on demand, costs or competition in the target market. Some of the pricing methods are given below- 1) Cost Oriented Pricing method – Costs form the base of price range and there are two commonly used methods of setting the price – Cost-Plus/ Markup pricing and Target Return pricing. a) Cost-Plus/ Markup Pricing – It involves adding an additional percentage of profit to the sellers per unit cost of the product. The profit or markup is percentage of the selling price instead of the cost. The following formula can be used to determine the price- Selling price = Average unit cost/ (1 – Desired markup percentage) If the average unit cost is $10 and the markup is 20%, then the selling price will be $12.5. [10/1-0.2). This method is successful only if the marked-up price generates expected sales. The major drawback of this method is that it ignores the demand, competition and perceived value of the product. This method is popular in retail and wholesale trade. It depends on the type of goods. The markups are set higher on seasonal goods, specialty goods, goods with high storage and distribution costs, goods with inelastic demand like medicines. Premium goods will have a higher markup as compared to ordinary consumer goods. There are benefits of using this method. It avoids price wars are competition is not taken into account. The costs are identified and taken into consideration which is easier to analyze as compared to demand and competition. As demand is not considered for setting a price, the consumers are charged fairly. Else the price will be set higher if the demand is severe in the market. Advertisements b) Target Return Pricing – In this method the price is set such that the profit would give a target rate of return on the investment (ROI). It determines the level of sales needed to cover all the costs. The firm tries to determine the price at which it will break even or make the target profit it is seeking. The fixed and variable costs are determined before setting the price. Target Return Price = unit cost + [desired return*invested capital/unit sales] Target return pricing is based on break even analysis. Break-even volume = fixed cost /(price – unit variable costs) Different prices are considered and their impact on sales and profits are estimated. This method ignores the market demand and is solely derived from costs. But it helps ensure that the price set exceeds the costs which helps in earning profits. 2) Demand Oriented Pricing method – Demand cannot be ignored while considering pricing decisions. What customer thinks about the product (perceived value), and the total market demand is given importance in this method. There are two ways of setting prices under this method – Perceived value pricing and Value pricing. a) Perceived value pricing – in this method the price is set either matching or lower than customer perceived value of the product. The organization invests in promotion activities like advertising and sales force to communicate and educate customers on the perceived value of the product. For consumer products, it is based on psychological pricing strategy. Many times, customers are willing to pay higher price depending on their perception of quality for which they are paying. It becomes essential for organizations to conduct market research. The data collected through research should give a realistic estimate of the market’s perception of the value of the product. Perceived value can be based on brand image, product value based on its performance, quality, distribution network, after sales service, etc. For example, an electronic manufacturer created a temperature sensing device. Unsure of setting the price, the organization conducted a survey on their expectations as compared to similar or same products in the market. It was learned that the existing products were no as accurate as the product created and customers showed great interest on the reliability and accuracy of the product. This helped the organization price the product little higher that the competing product in the marked based on customer perception. The organization should strive to deliver more value that the competitor’s product and communicate the same in the target market. b) Value pricing – the price is set lower that the value being offered to the customer. The price is generally lower as compared to the high quality of the product. Reliance Jio is adopting this strategy for providing high speed internet at fairly lower price than its competitors. Other examples include pricing strategy adopted by Wal-Mart, Big Bazaar. Everyday low pricing (EDLP) is another value pricing tool used at retail level. There are no special sales or promotions done. In high-low pricing, the prices are set higher for a longer period but promotions are done to sell products even lower than EDLP for a certain period. Big Bazar sells products at lower prices on Wednesdays. The ecommerce giants like Flipkart and Amazon have low prices for products on festival days (Flipkart’s Big Billion sale on Diwali festival in India generates revenues in billions on a single day). Advertisements FACTORS THAT AFFECT PRICING The management sets the price in relation to costs and the attractiveness of the target market like, customer’s ability to spend, demand, competition. The management also does the analysis for giving appropriate margins to the distributors. The possible range of prices also gets affected because of legal and ethical constraints. All these factors determine the upper and lower limit of price. These factors that affect pricing are discussed below- 1) Marketing Mix – Management can easily do variations to the price component of the marketing mix element. The other elements, product, promotion, and place (distribution channels) are not easy to change as it takes a considerable time, effort, and coordination to make changes to them. All these 4 elements are related to each other; hence pricing decision cannot be taken without considering the other elements. Change in promotion or distribution network will add to costs. Making changes to the product also results in costs because of need of different raw materials, technological investments, etc. Increase in costs will increase the lower limit of setting price. Making price changes or setting prices without considering Product, Promotion and Place elements will generally have negative impact on the entire marketing strategy and may also result in losses. 2) Organizational decision making and implementation – The skills of the management and right decision making by them goes a long way in successful pricing. The top management should work in coordination with the lower management for making an effective pricing strategy. The correct systems need to be used for the flow of information from the customers and distributors to all the concerned employees of the organization. Arriving at a pricing decision requires effective analysis of costs, demand and competitor strategy. The organization has to make sure that they have the right employees handling the right tasks at the right time 3) Product differentiation – How different the product is from the other offerings in the market? The difference can be in terms of its features, positioning, design, shape, etc. This difference is according to the customer’s perception about the product. Depending on the uniqueness of the product value to the customer, the organization sets a price. For example, HUL (Hindustan Unilever) has bathing soaps targeting different customers which are priced differently basis their uniqueness. Advertisements 4) Product life cycle – An organization can opt for penetration pricing or skimming pricing strategy for its new product. Skimming pricing involves “skimming of the cream” by targeting innovators, early adopters and early majority type of customers. Penetration pricing is done to gain immediate market share by keeping lowest possible price of the product. But once the product moves to the next stages of life cycle like growth, maturity and decline, price changes need to be done to counter competition and ensure market survival. In the decline stage the prices are kept so as to cover the costs and utilization of the inventory already bought from the suppliers. The strategy is to make as much earnings as possible to cover the fixed costs for which the organization has already paid – raw material, etc. 5) Distribution Network – As the distributors make their earnings by selling products from manufacturers or other distributors, the organization has to ensure that they receive their fair share of margin from sales. The organizations cannot survive without proper coordination from the distributors. Depending on the distribution network, the organizations strategy will have a direct impact on the costs and pricing. For example, an organisation can sell its products through ecommerce, or wholesalers and retailers, etc. Each channel has its merits depending on the marketing strategy of the firm. 6) Suppliers – The price at which the raw materials are bought from the suppliers, and changes in the same by the suppliers also affect the pricing decisions. The contract signed with suppliers make have changes after its renewal. Sometimes, suppliers have monopoly in the market in the absence of any other supplier for the same raw materials. The organizations always try to maintain cordial relation with the suppliers as the entire production depends on the products supplied by the suppliers. So the pricing decisions of suppliers have direct impact on the pricing decisions of the firm. 7) Buyers – The buyer behavior of the target market also has a great influence on the pricing decisions. The organizations constantly gather information from retailers, sales people, etc. on the response of customers. The buyers can influence price decrease by majority of them not buying and giving negative feedback about the price to the distributors and sales people. Thus the organization has to make changes to the price basis the majority of buyers in the target market. Advertisements 8) Demand – Demand cannot be ignored while considering pricing decisions. The customers understanding of the product (perceived value), and the total market demand in the market affect the price strategy largely. The demand can be elastic, wherein a fall in price would result in increase in demand. For example, 10% decrease in price would result in 20% increase in demand in the target market. If demand is inelastic, a fall in price doesn’t has a significant increase in demand. For example, a 10% price reduction may increase demand by 0.2%. The firm has to study the market demand and formulate its pricing strategy. The marketing managers are concerned with the level of demand at different price levels. The cost factor also is considered when evaluating demand for pricing. If the costs have also gone up, lowering the price of a product in elastic demand, will not generate profits. 9) Competition – The pricing strategies of competitors affect the product pricing decisions. An organization serving the same target market eats into the market share of the organization. To gain market share as much as possible, the organization has to constantly strive to gain more customers. The organization invests and makes changes in the product via differentiation (to prove product uniqueness), promotion and distribution (place) to counter competition. Depending on the price changes by competitors, the firm adjusts the price of its product to stay, survive or maintain leadership in the market. A firms pricing is affected by the marketing strategies of its competitors. 10) Target market attractiveness and economy – The spending power and types of customers (early adopters, laggards, etc.) in the target market also affects the pricing strategy. If the economic condition of the target market is good, there is great opportunity for the organization to generate sales via different pricing methods and strategies – Market penetration, market skimming, perceived value pricing, demand differential pricing, etc. If economic condition is weak, the prices are usually set low. Many times, there are no competitors in such situations, but the pricing is set so as to serve the demand in the market. If prices are set high, a competitor will usually enter the market with a low priced product. 11) Government regulations – The government regulates the prices of products through its various policies. These policies ensure that a customer is not exploited by increase in unreasonable prices. For example, the government of New Delhi (union territory and capital of India) had to intervene when customers were unfairly charged during peak season by the cab service companies. Advertisements 12) Ethical constraints – With long term moral effects of pricing decisions, the management should consider its commitment to serve the society. Ethical constraints suggest that a firm should make a reasonable profit, provide quality products and make them available at the right place at the right time. Most of the organizations try to maintain an image of themselves considering the effect of non-ethical values in the long run. Is it justified to charge customer based on product value (perception) itself even if the costs are low and profit margins too high? How high the price can be set? Management considers such questions relative to its social responsibility.