Pricing Strategy

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Pricing Strategy
Managers feel that price is dictated by the market and they have no control over it. Pricing is also seen as a difficult area in which to set objectives and measure results. High unit sales and market shares sound promising but they in fact may mean that the price is too low. Getting the price right has a tremendous impact on the bottom line. A 1% increase in prices for a company with 8% profit margin will boost the same by 12.5%. Managers have to, however, concentrate on the process and not on the outcome. The first question is not, What should the price be? But rather, Have we addressed all the considerations that will determine the correct price? Based on experience across a variety of industries the two broad qualities of any pricing process are strategy and coordination. Not every point will apply to every business and managers may have to supplement the checklist with other actions that pertain to their specific situation. Marketing Strategy A company’s pricing policy has an impact on the company image. A “no hassle, no haggle” policy may seem daunting at first but goes a long way in developing a trust between the company and the customer. Let us not forget that even if we think we have won in the haggling we still retain the doubt that we could have got more if we had haggled more. It surely does not build relationships. Some may argue that haggling is a way of life in the Indian environment but just note the changes in the environment with the hawkers losing out to Mother Dairy and modern retail. The pricing policy for Swatch watches reflects the company philosophy of fun. The product is not just affordable but also approachable. The synergy of price and the rest of the marketing mix is a critical requirement of success. Coordination Pricing process has many participants. Accounting provides cost estimates, marketing the strategy, sales the customer inputs, production the supply constraints and finances the monetary requirements for the company health. Results can be disastrous with improper coordination. Problems arise when the philosophy of wide participation is carried over to the price setting mechanism. Each department may have the best intentions of doing price adjustments but the actions could result in losses. Coordination should answer the following questions:  What is our pricing objective?  Do all the participants in the process understand this objective?  Do they have an incentive to work towards that objective?

Steps to Better Pricing
1. Assess what value your customers place on a product or service. Most companies follow a mark-up pricing. This has to be reversed with pricing managers thinking about how customers value the product. If you are convinced that your planned product has substantial advantage over the leader and it can be communicated convincingly, price your product at a premium. If you, however, do not see the competitive advantage, price low and keep working on cost cutting in order to make money at that price. In either case you have followed the value perception by the customer as your guide. Value perception can be determined through market research or feedback from sales force and channels of distribution. 2. Look for variations in the way customers value the product. Customise your prices for different segments by recognising the benefits different segments seek. Clear examples are the mobile telephones and most electronic items and airlines and the hospitality industry. The software industry offers discounted prices for upgrading to the newer version. The questions which have to be answered by the pricing manager are: o Do customers vary in their intensity of use? o Do customers use the product differently? 3. Assess customers’ price sensitivity.

Price sensitivity is the percentage change in quantity sold given a 1% change in price. Elasticities vary widely across product categories and even brands within a category. It is important to examine the important factors influencing price sensitivity in three broad areas:  Customer economics o Is the cost borne by the end consumer or a third party? o Does the cost of the item represent a substantial percentage of a customer’s total expenditure? o Is he the end customer or a part of the channel? o Are buyers able to judge quality without using price as an indicator?  Customer search and usage o Is it costly for the buyer to shop around? The effect of technology in this search? o Is the time of purchase or the delivery significant to the buyer? o Is the buyer able to compare the price and performance of alternatives? o Is the buyer free to switch suppliers without incurring substantive costs?  Competitive situation o How is the offering different from competitors’ offerings? o Is the buyer looking for long term relationships or is it a one off deal? 4. Identify an optimal pricing structure. Two important issues to consider when creating a pricing structure are{  Quantity discounts – These are normally done in an industrial selling situation. Example – Consider a manufacturer, whose unit cost is Rs. 2,000 and he has to make a pricing policy for two buyers who value successive units of the product differently. UNITS 1 2 3 4 5 BUYER A Rs. 7,000 Rs. 2,000 Rs. 2,000 Rs. 2,000 Rs. 2,000 BUYER B Rs. 7,000 Rs. 5,000 Rs. 4,000 Rs. 3,500 Rs. 3,000

The typical price manager would go for a price of Rs. 7,000 and go for a unit sale of one each to both the buyers and make a contribution of Rs. 10,000. The astute pricing manager will ask “What is the optimum pricing schedule?” He will realise that he can offer the desired price to B and sell one piece to A and 5 to B at a total price of Rs. 22,500. He would then get a contribution of Rs. 17,500.  Bundle pricing – Manufacturers normally give up some of the profit potential on the initial product to make money on the consumables. This can also be done when two different customers value the components differently but the bundle at the same price. 5. Consider competitors’ reactions. Pricing is more like a chess game where you not only have to think of the competitors’ next move but your response and his counter-move. If you drop prices, does the competitor have the capacity to drop prices? If so, by how much will he drop the prices? What will be your counter-move then. Do not also forget that competition may not drop prices but increase his promotion to gain market share. You may also like to launch a flanker brand at lower prices rather than dropping prices of your main brand. 6. Monitor prices at the transaction level. The total set of pricing terms and conditions can be quite elaborate including cash discounts, quantity discounts and other negotiated discounts. The net revenue can also be influenced by returns, damages and warranty expenses. Most pricing managers concentrate only on setting the list prices and do not look at the interactions of all these factors on the realised price.

7. Assess customer’s emotional response. Price managers must consider the long term impact of the customer’s emotional reaction along with the short term economic outcome. Customer perceptions are very important and the company may have to undertake extensive awareness campaigns to correct these perceptions. 8. Analyse whether the revenues are worth the costs to serve Although customer value is crucial in pricing, managers have to consider the cost side. They have to avoid the dangerous strategic accounts who demand customised products, just in time delivery, small order quantities, high training and installation support. The negotiate prices very aggressively and squeeze out the maximum discounts from the company. If the buyer wants all this, you should charge the commensurate price for your product/service.

In summary, a company should conduct a price audit to the two qualities and the eight steps outlined above. You may add any elements which you think are relevant to your situation. Rate each item for its relevance and rank current performance on a 5 point scale. Managers are advised to have a long term perspective on pricing rather than treating it as a short term tool.

Inputs from How Do You Know When the Price is Right? By Robert J Dolan – Harvard Business Review.

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