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What is Price and Pricing? Explain role/ importance of Pricing in marketing strategy.

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, finalising price, and controlling it depending on the challenges. Organisations 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 organisation faces. There are different ways in which organisations 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.

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What are the objectives of Pricing? Also discuss the 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

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Explain Pricing Strategies.

When making price decisions, an organisation has to follow price strategies. Price strategies offer a set of guidelines and gives direction to the organisation 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 organisation 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 party involvement.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.

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Discuss the 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, maximise current profit, maximise 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-
• Stabilise industry prices
• Market share growth
• Maximise long-run profits
• Strategic pricing in different markets
• Retaining or capture market share
• Maintain price leadership
• Maximise return on investment
• Product and quality leadership

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Explain in detail the Pricing Methods

Organisations 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).

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Explain New Product Pricing strategies or, Explain Skimming Pricing and Penetration Pricing strategies.

New product pricing – There is great flexibility with the organisations 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 are extremely important activities of the overall marketing strategy of the organisation. 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 utilised 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 organisation 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. Late majority – these people buy the product only after majority of the market has bought the product. They want to avoid the risk of buying a product with defects. Laggards – these are the people who mostly resist change and adopt a product only once it is not considered an innovation. They are tradition bound and buy the product as a tradition.)

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What are the 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) Organisational 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 organisation. Arriving at a pricing decision requires effective analysis of costs, demand and competitor strategy. The organisation has to make sure that they have the right employees handling the right tasks at the right time

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Discuss Price Changes by an organisation and how organisations respond to competitor’s price changes.

To counter the competitor’s strategy by making changes to the marketing mix elements like product, place and promotion is a difficult task for an organisation. Hence, organisations usually respond to their competitors by making changes to the price. As price element can be easily countered by the competitors, it is in the best interest of the marketing managers to formulate strong marketing strategies based on 3P’s – product features and quality, place (strong and effective distribution network), and promotion activities.

There are many reasons that force an organisation to make price changes. These could be market penetration, market skimming, fall or increase in costs, entry of competitors or a substitute product, economic condition of the target market, laws and regulations, product life cycle, etc.

Before initiating a price change, an organisation should consider the following –
1) Reaction of customers – The buyers may think that a deceased price is because of low quality or the product is about to become obsolete. For example, the Nexus 6 model of the mobile phone from Google Nexus was lowered to half of its price in May 2016 on ecommerce sites in India. Some customers thought that it is not a successful handset as compared to earlier Nexus series phones, and the company is just trying to sell the stock lying in warehouses. The product’s success sometimes depends on the customer’s perception in the target market. In the following months the product was eliminated. It can work to the advantage as well as disadvantage to the organisation. A careful analysis of the situation is needed about the reaction of buyers, and the organisation should be ready with a plan B to meet any challenges arising due to price change.

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