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Rabbi Zidni Ilma’

1 Chapter 10 In a world where internet has been made available, consumers are now able to make quick comparisons between different prices being offered to them for the same products. This has led to firms trying to cut prices as much as possible, but it should not be done. Focus should be on how to persuade customers that the price they are paying is justified for the market offering being made available. 1.1 Major pricing strategies The amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product or service. The price that the firms charge will be somewhere between the price which generates no profit and the prices that generates no demand. The figure shows the major considerations behind the price.

1.1.1 Customer value-based pricing Setting price based on buyers’ perceptions of value rather than on the seller’s cost. This can be divided into four steps • • • •

Determine the perceived value of the customer Determine the price that can be charged as per customer value Figure out how much costs can be incurred to achieve the target profit Design the product to deliver at the target price

Good value does not necessarily mean low price. It can be considered as providing good quality, good variety, etc. to justify the high price. However, it is difficult to measure and put a monetary value to mere perceptions of a person. 1.1.2 Good value pricing Offering just the right combination of quality and good service at a fair price. In many cases, this has involved introducing less- expensive versions of established brand name products or new lower-price lines. For example, Mc Donald dollar menu. In other cases, good-

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value pricing involves redesigning existing brands to offer more quality for a given price or the same quality for less. An important type of good-value pricing at the retail level is called everyday low pricing (EDLP). EDLP involves charging a constant, everyday low price with few or no temporary price discounts such as CHASE UP. In contrast, high-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. I am sure you must have noticed the increase in frequency of sales ever since corona happened. 1.1.3 Value-added pricing Attaching value-added features and services to differentiate a company’s offers and charging higher prices to build Pricing power (the ability to escape price competition). A hassle-free return policy, free delivery, customization may allow a firm to charge higher prices. 1.1.4 Cost based pricing Setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk. Companies may keep they margins lows to allow lower prices, but this results in greater sales and profits. Cost as a function of production levels and learning curve The average cost of a product decreases as the level of production increases due to increase in economies of scale, and fixed costs being spread over a larger number of units. However, this is true for a certain production limit after which the plant becomes inefficient, and costs start to rise. Moreover, learning curve leads to a fall in costs too as when someone gets used to doing one thing, he can make it more quickly with less material used. 1.1.4.1 Cost plus pricing Adding a standard markup to the cost of the product. Markup price is calculated using the following formula. 𝑃𝑟𝑖𝑐𝑒 =

𝑐𝑜𝑠𝑡 1 − 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛%

However, such pricing method is purely profit motive based. This does not account for any competition, demand of the goods, and price laws, etc. 1.1.4.2 Break even pricing Setting price to break even on the costs of making and marketing a product or setting price to make a target return. 1.1.5 Competitor based Pricing Setting prices based on competitors’ strategies, prices, costs, and market offerings.

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In assessing competitors’ pricing strategies, a company should ask several questions. First, how does the company’s market offering compare with competitors’ offerings in terms of customer value? If consumers perceive that the company’s product or service provides greater value, the company can charge a higher price. If consumers perceive less value relative to competing products, the company must either charge a lower price or change customer perceptions to justify a higher price. A greater value can be provided in the shape of warranty, customer service, reliability, etc. Moreover, the strength of the competitor must be observed. Is the competitor in a position to lower the prices to drive out existing competition? 1.2 Internal and external factors affecting prices Internal factors affecting pricing include the company’s overall marketing strategy, objectives, and marketing mix as well as other organizational considerations. External factors include the nature of the market and demand and other environmental factors. 1.2.1 Overall marketing strategy, and objectives If a firm is going for market penetration, they will have to keep the prices low. If a firm is practicing in a niche market, they will keep the prices high. If a firm’s objective is survival, they will charge lower prices. If a firm has positioned itself as a value brand, low prices will be kept. If a firm’s motive is to provide high quality and service, they will charge a higher price. Companies however sometimes may decide the price first, then tailor the rest of the marketing mix to justify the price they are going to charge. This is called Target pricing. Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met. 1.2.2 Market and demand Under Pure competition there are undifferentiated products, so a price established by demand and supply will be charged. Under Monopolistic competition there is differentiation of the products, thus extensive marketing, promotions, etc. takes place to provide customers the best value at the best price. Under Oligopoly there are few dominant sellers in the economy who compete based on pricing. Under Monopoly there is only one seller, he can charge whatever he wants because you literally have no alternative. 1.2.2.1 Demand and price elasticity Elasticity refers to the %change in demand resulting from an initial %change in price. Inelastic means that the %change in demand is greater than the %change in price. A firm may increase prices only when it has an inelastic demand because if he does so when there is an elastic demand, its total revenue hence profit will fall.

Rabbi Zidni Ilma’

2

Chapter 11

2.1 New Product Pricing A firm when introduces a product has either of the two options: Price skimming and Market penetration pricing. 2.1.1 Price skimming Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales. Under this model, the market starts off by having a high price then slowly lowers it down as time moves forward and competitors start entering the market. Market skimming makes sense only under certain conditions. • • •

First, the product’s quality and image must support its higher price, and enough buyers must want the product at that price. Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price.

2.1.2 Market penetration pricing Setting a low price for a new product to attract many buyers and a large market share. Higher sales allow the firm to invest in capital machinery that allows the products to be generated at a low cost. Several conditions must be met for this low-price strategy to work. • • •

First, the market must be highly price sensitive so that a low price produces more market growth. Second, production and distribution costs must decrease as sales volume increases. Finally, the low price must help keep out the competition, and the penetration pricer must maintain its low-price position. Otherwise, the price advantage may be only temporary

2.2 Product mix pricing strategies 2.2.1 Product line pricing Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors’ prices. The price steps should consider cost differences between products in the line. More important, they should account for differences in customer perceptions of the value of different features. For example, Netflix charges for different types of account based on number of screens. 2.2.2 Optional pricing The pricing of optional or accessory products along with a main product.

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A base price must be decided for the standard product and then a price must be charged for the add on. For example, ice cream parlor gives you an option to add toppings at a certain price. 2.2.3 Captive product pricing Setting a price for products that must be used along with a main product, such as blades for a razor and games for a videogame console. Ever noticed, how you get a razor as low as 50 rupees, but you must pay 10-20 rupees for just a single blade that will be used once only. Similarly, PS4 can be acquired for as cheap as 20 thousand, but one game is worth 3-5 thousand. 2.3 By product pricing Setting a price for by-products to help offset the costs of disposing of them and help make the main product’s price more competitive. A production of a good often results in by products. For example, producing sugar results in bagasse and molasses. These have a demand for their own if these by products can be sold to generate a profit. A less price can be charged on the main product. 2.4 Bundle pricing Combining several products and offering the bundle at a reduced price. Grocery stores selling daily use items in a bundle together. Moreover, ordering a drink and burger together in a bundle is always cheaper than ordering them separately. 2.5 Price adjustment strategies. These helps us understand how to change a labeled price to account for changes in economic conditions, etc. 2.5.1 Discount A straight reduction in price on purchases during a stated period or of larger quantities. Discount can be offered in 4 types • • • •

Cash discount: a discount for early payment than the given deadline Trade discount: a discount on the selling price prior to issue of an invoice Season discount: buying goods out of the season. Winter clothes purchase during summers. Quantity discount: discount on buying in bulk

2.5.2 Segmented pricing Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Under customer-segment pricing, different customers pay different prices for the same product or service. For example, public transport often charges lower prices for students and senior citizens.

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Under product form pricing, different versions of the product are priced differently but not according to differences in their costs. For example, economy and business class seats on the same plane. Using location-based pricing, a company charges different prices for different locations, even though the cost of offering each location is the same. For example, a high price for the window seat. Finally, using time-based pricing, a firm varies its price by the season, the month, the day, and even the hour. For example, Careem charging high fares on weekends. 2.5.3 Psychological pricing Pricing that considers the psychology of prices and not simply the economics; the price is used to say something about the product. When people lack information or skill to determine value, they consider price to be an information seller. Where, a high price tells that the product is superior in quality. For example, which one is the better doctor? The one who charges 200 or the one of charges 2000? Reference pricing is Prices that buyers carry in their minds and refer to when they look at a given product. These are often influenced by the last price a consumer paid, or hearsay. Moreover, a high price for another variant of the same product will act as a reference. Imagine you are buying a hoodie which is costing you 2000, but another variant in a premium color is being sold at 5000. You will probably think that the standard one is a better value of money. 2.5.4 Promotional pricing Temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales. This can help a potential buyer smoothly go through the buying decision process. A firm may also experience new customers, which they can cater to build a long-term healthy relationship. However, people then may think that if the firms can charge low prices this means that the firms usually charge higher prices. 2.5.5 Geographic pricing To be learned 2.5.6 Dynamic an online pricing Adjusting prices continually to meet the characteristics and needs of individual customers and situations. Dynamic pricing offers many advantages for marketers. For example, online sellers such as Amazon, L.L. Bean, or Apple can mine their databases to gauge a specific shopper’s desires, measure his or her means, check out competitors’ prices, and instantaneously tailor offers to fit that shopper’s situation and behavior, pricing products accordingly. Similarly, when you go to a bazaar and bargain with the supplier as you practice showrooming which is checking up the prices on online stores while you are at a physical store.

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Done well, dynamic pricing can help sellers to optimize sales and serve customers better. However, done poorly, it can trigger margin-eroding price wars and damage customer relationships and trust. 2.5.7 International pricing To be learned 2.6 Price change A company change prices when they face situations like change in substitute’s price, inflation, rise in demand, etc. 2.6.1 Initiating price change 2.6.1.1 Initiating price cuts A firm may cut price when the economy is down, or when there is excess capacity in the firm. However, a price war may initiate as competitors may try to hold on to their market share in the economy. 2.6.1.2 Price increase A price increase may occur due to inflation, where the company tries to pass on extra costs on to the customer. Secondly, when there is shortage so that increase in price will decrease demand. 2.6.1.3 Buyer reaction to price change A buyer may interpret a price increase in two ways. • •

Prices have been increased due to an increase in quality, and functionality of the product. They have been increased because the firm is greedy and wants more profit.

2.6.2 Responding to price change The firm needs to consider several issues when a competitor changes its price • • • •

Why did the competitor change the price? Is the price change temporary or permanent? What will happen to the company’s market share and profits if it does not respond? Are other competitors going to respond?

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2.7 Public policy and Pricing 2.7.1 Price fixing Federal legislation on price-fixing states that sellers must set prices without talking to competitors. Otherwise, price collusion is suspected. Price-fixing is illegal per se—that is, the government does not accept any excuses for price-fixing. Recently, governments at the state and national levels have been aggressively enforcing price-fixing regulations in industries ranging from gasoline, insurance, and concrete to credit cards, computer chips, and e-books 2.7.2 Predatory pricing Sellers are also prohibited from using predatory pricing—selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business. This protects small sellers from larger ones that might sell items below cost temporarily or in a specific locale to drive them out of business 2.7.3 Deceptive pricing Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers. This might involve bogus reference or comparison prices, as when a retailer sets artificially high “regular” prices and then announces “sale” prices close to its previous everyday prices.

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3 Chapter 12 3.1 Supply chain and the value delivery network Value delivery network is a network composed of the company, suppliers, distributors, and, ultimately, customers who partner with each other to improve the performance of the entire system in delivering customer value. Producing a product or service and making it available to buyers requires building relationships not only with customers but also with key suppliers and resellers in the company’s supply chain. This include both upstream (the supply of raw materials) and downstream (the supply of company’s product to people). 3.2 The nature and importance of marketing channels Supply chain management is the process of managing upstream and downstream value-added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers Marketing channel (distribution channel) is a set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user Many few businesses these days to personal selling, and most use distribution channels to get their products to the final customer. Distribution channel decisions often involve long-term commitments to other firms. For example, Indus motors have a very large distribution channel. They can’t just one day decide not to go through these channels and sell online because they have contractual commitments with their distributors. Therefore, managements should design their supply chain carefully as it is very hard to alter. 3.2.1 How channel members add value Producers use intermediaries because they create greater efficiency in making goods available to target markets. Through their contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm more than it can achieve on its own.

The figure shows how the number of interactions can be reduced by using an intermediary.

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From an economic point of view, distributing channels buy in bulk from the producers and sell it in portions, because neither producer wants to sell in small quantities nor customer wants to buy in bulk quantities. Members of the marketing channel (both distributors and producers) perform many key functions. Some help to complete transactions: Information. Gathering and distributing information about consumers, producers, and other actors and forces in the marketing environment needed for planning and aiding exchange. • Promotion. Developing and spreading persuasive communications about an offer. • Contact. Finding and engaging customers and prospective buyers. • Matching. Shaping offers to meet the buyer’s needs, including activities such as manufacturing, grading, assembling, and packaging. • Negotiation. Reaching an agreement on price and other terms so that ownership or possession can be transferred. Others help to fulfill the completed transactions: • Physical distribution. Transporting and storing goods. • Financing. Acquiring and using funds to cover the costs of the channel work. • Risk taking. Assuming the risks of carrying out the channel work. 3.2.2 Number of Channel levels Channel level is a layer of intermediaries that performs some work in bringing the product and its ownership closer to the final buyer. The number of intermediary levels indicates the length of a channel. Direct marketing channel: A marketing channel that has no intermediary levels, and producers sell directly to the consumer. Indirect marketing channel: A marketing channel containing one or more intermediary le...