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Is It All About Price?
IntroductionThe marketplace today is complex network of interacting layers, dynamically reshaping themselves to suit the purpose of business. The changes have been compounded by the new paradigms established in customer management and loyalty and heightened levels of competition and revenues require micro management. Yet this entire complex ecosystem still follows the primary principles of business, “money for goods and services consumed”. It is hardly surprising therefore that pricing has become a complex activity.
In the overall marketing mix, price is probably the most important item that can affect a company’s sales and profitability. How to set prices and measure their impact on a company’s business model, however, is less clear.
The Pricing StrategyLow price/low added value · Likely to be segment specific Low price · Risk of price war and low margins/need to be a 'cost leader'. Hybrid · Low cost base and reinvestment in low price and differentiation Differentiation (a) Without a price premium · Perceived added value by user, yielding market share benefits (b) With a price premium · Perceived added value sufficient to bear price premium Focused differentiation · Perceived added value to a 'particular segment' warranting a premium. Increased price/standard · Higher margins if competitors do not value risk of losing market share. Increased price/low values · Only feasible in a monopoly situation Low value/standard price · Loss of market share
Pricing MethodsThere are many ways to price a product. Let's have a look at some of them and try to understand the best policy/strategy in various situations. ± Premium Pricing Use a high price where there is uniqueness about the product or service. ± Penetration Pricing The price charged for products and services is set artificially low initially in order to gain market share. ± Economy Pricing This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. ± Price Skimming Charge a high price because you have a substantial competitive advantage. The high price attracts new competitors, and the price inevitably falls. ± Psychological Pricing The marketer wants the consumer to respond on an emotional basis. ± Product Line Pricing Where there is a range of product or services the pricing reflect the benefits of parts of the range. ± Optional Product Pricing Companies attempt to increase the amount a customer spends once he starts to buy. ± Captive Product Pricing Where products have complements, companies will charge a premium price where the consumer is captured. ± Product Bundle Pricing Here sellers combine several products in the same package. ± Promotional Pricing There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free) to hike sales. ± Geographical Pricing Geographical pricing is evident where there are variations in price in different parts of the world. ± Value Pricing This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.
Price Based PromotionsDiscounts: Used as a strategy by outlet stores who offer merchandise at the lowest market prices. Every day low pricing (ELDP): Continuity of pricing that is below regular retails. High/low pricing (H/LP):
Exemplified by retailers who first price merchandise at a premium, then sale price.
Methods for setting retail prices
? The cost-oriented method
This method adds a fixed percentage to the price. This is determined by what mark-up a retailer "works" on.
¨ Demand-oriented method
Prices are based on what the customer expects to pay. This method corresponds to the perceived value of the product.
w Mixture modeling
This procedure is used to determine a price threshold over which the characteristics of the demand function changes (e.g. stockpiling or normal purchase).
Adjustments to the Retail Price
Markdowns lead to a permanent reduction in price. These may be taken as a result of slow selling or as part of a systematic strategy.
A temporary reduction in price used to generate additional sales during peak selling periods.
X Other Pricing Strategies
Q Manufacturer coupons - great promotional tool to attract new customers, encourage repeat sales and larger purchases, and increase market share.
Q Leader pricing - selling one or a few items a deep discount to increase traffic and sales on complementary items.
Q Price bundling - offering value pricing for a package of different items.
Price warsThe causes of a Price war When the marketers feel that the offerings in the market are overvalued. Ų There is a decline in the market share of the company. Ų There is excess plant capacity. Ų Marketers are ready to buy market share at the cost of their current margin. Ų Companies want to dominate the market through lower costs. Some of the commonly adopted marketing strategies are: Change customer choice ± Launch low price fighter brand ± Increase price and improve quality Converting the latent buying potential into a real purchase is hard work indeed. More importantly, the myth of a 200 million strong "middle class" and its latent spending potential has been blown to pieces. "Pricing" has emerged as a frontrunner for pushing through a sale. A much hyped price war is rocking the Rs 80,000-crore FMCG industry. While giants HLL & P&G are taking lead, others like Reckitt Benckiser, Dabur India and Henkel Spic are following suit. The idea is to push volumes in semi-urban and rural markets to negate the squeeze on profit margins. However, FMCG is not the only sector to have been affected by these fierce price wars. Industries like automobiles, consumer electronics and cellular services are not far behind. Companies attribute the lower price to scale economies and cost management. And consequently, prices seem to move in only one direction- downwards!
However, FMCG is not the only sector to have been affected by these fierce price wars. Industries like automobiles, consumer electronics and cellular services are not far behind. Companies attribute the lower price to scale economies and cost management. And consequently, prices seem to move in only one direction- downwards!
Brand Positioning: Globalization Vs CustomizationMarketing gurus terms this day and age as “The positioning era”. To succeed in today’s over communicated society, a company must create a position in the prospect’s mind, a position takes into consideration not only the companies own strengths and weakness, but those of competitors as well.
The whole concept now boils down to creating a perception for our brand in the prospect's mind. The objective is that our brand stands apart from the competing brands and provides the consumer with what he wants.Thus speaking comprehensively, positioning is a function of ō Perception of your product. ō Functional and non-functional benefits associated with the product. ō Perception of the competing brands held by the target consumer. ō Decide what you want consumers to think about your product. ō Figure out how to position/reposition. Positioning may be along many dimensions ® Product Attributes ® Product effects ® Price
® User® Usage
® Relation to other products® Arbitrary “The Globalization of Markets” concept argued that firms should sell standardized consumer products worldwide. Many experts advocated a move towards a “global corporation”. The empirical claim behind this argument is that “The world’s needs and perceptions have become irrevocably homogenized”. However, many multinationals are confronted with the tapering of sales. Does this indicate a paradigm shift? Should a firm customize its product and/or message? The simplistic answer is YES- to achieve a better fit to the market demands in each country. A study across global markets suggests a significant variation in demand curves, buying behavior and consumer perceptions in different countries. In most countries there is substantial variation in consumers’ views of the “ideal” attribute or perception for a product. Coca Cola recently reconsidered its age old stance of offering essentially one product and (probably more importantly) one message to all markets. Till 1995, Coke was 9th in the Japanese beverage market. But then, the company adopted a repositioning strategy “aimed at the Japanese masses”. Today, brand Coke is 3rd in the market. It is interesting to see that even one of the most famous “World” brands ever is not betting on cultural differences in demands to disappear.
For different countries, the gains from adaptation will be larger if the demand differences are (a) widespread and (b) permanent. Differences attributable to geography and climate will not change much within the firm’s planning horizon and shall affect all consumers in a nation. Hence, it will usually pay to try to adapt to such changes. The mantra for today: Customized brand positioning!
Authored By: Siddharth Mohan Patnaik, Ravulpathi Janaki, IIM Lucknow
Siddharth Mohan Patnaik, IIM Lucknow
Ravulpathi Janaki, IIM Lucknow
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