Chapter 7

PRICING STRATEGY
Pricing strategy is an important aspect of marketing strategy. While it seems a simple matter to just fix a
price, the price signals both money value and psychological dimensions which can impact the future of the
company – not just the company’s profitability but also, sometimes, its very existence!

Questions always arise about how to price a product or a service, and what will be the consequences if the
price is not right. E.g. When Red Bull, a very popular energy drink, was first launched, the entrepreneur-
promoter decided to price the product at an ultra-premium price of $2 a can, while a Cola of similar,
comparable size might sell at $0.50 or $1.00 per can. And in spite of this big price difference, the product
Red Bull became a huge success worldwide, and has been having double digit growth every year for the
past 20 years. The pricing strategy, in this case, was part of the company’s strategy to clearly and strongly
differentiate Red Bull from other drinks of any kind.

Doubts, questions and uncertainties always arise in respect of pricing: “Is our price too high? Is that why
our sales are not higher?” Conversely, one might ask: “Is our price too low? Our sales are up, but are we
losing profit opportunity by charging too low a price? I.e., is our growth in sales being achieved at the cost
of possible profits?”

As mentioned earlier, pricing is easy to change, and can be implemented immediately (unlike the other
‘P’s). The consequences, (loss of business, growth, or no change) are also immediately perceivable.

BOEING, attempting to put AIRBUS out of business, reduced the prices of their planes to near cost level,
reasoning that AIRBUS’ costs would be higher (because it was a new company, having new equipment,
and it’s operations may not be as efficient as BOEING’s, an older and more experienced company) and
would therefore not be able to match BOEING’s prices. The price reduction led to a price war that led to
the first ever loss at BOEING, a loss of such magnitude that the CEO lost his job. On subsequent
investigation by BOEING, it was discovered that AIRBUS, because of the employment of lean
management and many other productivity improvement techniques in their manufacturing operations, had
a cost structure much lower than BOEING’s and still was able to make a profit even when BOEING was
losing money! Thus, making pricing decisions on hunches, anger, or poorly reasoned logic, could prove
very expensive for a company and may even lead it to bankruptcy.

In 2002, Coca Cola launched a 200 ml pack at a price of ₹ 5/- with the idea of penetrating the Indian cold
drinks mass market. The strategy was to make the drink affordable by the rural consumers as well, thereby
enlarging the market significantly. The strategy was a disaster. Sales did not pick up as expected, and the
company incurred its largest loss. Price alone was not what drove sales. A cold drink is expected to be
available cold when drinking it. The extended power cuts and lack of refrigerators with retailers were
factors that were more important factors inhibiting growth in sales. The reduced price could not compensate
for a warm ‘cold drink’! They could not get the volumes required to offset the low price.

World-wide, Coca-Cola was positioned as AMERICAN, attracting consumers to ‘be American’, experience
America by drinking Coca-Cola, through related imagery in their advertising and promotions. This did not
work in India. Finally, what worked was something more relevant to the Indian consumer: ‘Tanda matlab
Cola’ did the trick. They had to Indianise their positioning – and then it worked, and their sales began to
pick up. But, meanwhile, Coca Cola (and Pepsi – who followed the pricing of Coca Cola) increased their
price of the 200 ml pack to ₹7 - 8. They also made a significant effort to ensure that their products are
chilled and served cold at all points of sale.

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The Seller’s Perspective on Pricing
Sellers have a tendency to inflate prices because they want to receive as much as possible from the exchange
with a buyer. Price is most often about what the seller will accept in exchange for a product, rather than
any market place reality. Sound pricing strategy ignores sentimental feelings of worth and instead focuses
on the market factors that affect the exchange process. From the seller’s perspective, four key issues
become important to pricing strategy:

1. Cost,
2. Demand,
3. Customer value, and
4. Competitors’ pricing.

Cost: A firm must recover its direct costs (cost of raw materials, supplies, sales commissions,
transportation, etc.) and its indirect costs (e.g. admin expenses, utilities, rent, etc.) to make a profit – to
remain viable. Many smart pricing strategies build in a target profit margin as if it were a cost.

In situations where availability of a product is limited, a firm might consider opportunity cost in their
pricing. Thus, if normally, the Bangalore-Delhi sector airfare is priced at ₹ 4,000/seat, the company might
decide to raise the price during holiday seasons or the day before a weekend (Friday), when number of
passengers increase substantially and enough seats are not available to match the demand. On such
occasions, there might be travellers prepared to pay a higher charge of ₹ 5,000/seat as the person would not
want to travel at another time. This kind of flexible pricing is most common in services (hotels, airlines,
taxis, etc.) Similarly, when traffic reduces (on weekends when people would be with their families at home)
airlines might consider reducing prices to attract passengers so that seats going empty can be filled. Resort
hotels get almost empty during some months of the year. E.g. in Goa, during the rainy season, vacationers
stay away and holiday elsewhere. These resorts in Goa offer special promotional packages during such
times, making it very attractive for enough people to stay there. This way, the hotel is able to minimise
room-nights going empty.

Manufacturers of tangible goods do not normally adopt such flexible pricing as such goods have a long
shelf life. Prices do not change for such products day to day. However, special promotional prices might
be adopted during holiday seasons to increase the velocity of the inventory, to clear old stocks, or introduce
new products.

Demand: market demand is another key issue in pricing strategy. A consumer may not pay the price that a
seller has fixed on the basis of his costs. Inefficient firms quickly experience difficulty in selling their
products in the market, as customers go with more efficient competitors. (As happened in the Boeing Vs
Airbus situation.) Firms must know what consumers will pay for a product before offering it for sale. What
value do consumers perceive in the product? How strongly do they desire the particular product? The
situation in which the product is sold also has a bearing on the pricing: e.g. a coffee shop may charge 50%
more for coffee and other food items inside the airport as there is no alternative for the bored or hungry
traveller who wants to eat something while waiting for his flight.

Customer value: In some cases, pricing strategy encompasses more than the product and its price. The
value delivered to the customer, in such cases, determines the price, particularly in business and industria l
markets. E.g. if an insurance broker can offer a solution that reduces a client’s risk by ₹ 100 lakh, what is
the solution worth to the client? Obviously less that ₹ 100 lakh. But he might be prepared to pay ₹ 10 lakh
– a tenth of the risk amount.

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Companies in the information technology (IT) area, consultancy, marketing research, and other
professional services increasingly track the bottom-line impact that their service provides to customers.
The same is true for a new production machine that increases capacity by 25%, while utilising 50% less
labour and improves quality (reduces rejections) by 20%. These impacts may have little to do with the cost
of manufacturing this machine. It is the innovation and the intellectual capital that drives the price of the
product – particularly in situations where competitive firms are unable to deliver such benefits to a
purchaser.

Competitors’ pricing: Finally, a selling organisation should be aware of what its competitors charge for
the same or comparable products. Although all firms should be aware of competitive prices, they should
resist the temptation to blindly meet or beat competitors. Unless the company promotes itself as always
having the lowest price, it should think in terms of existing within a price range when it comes to
competitors. Mercedes Benz, for example, does not have to match BMW’s pricing. Terms of payment
should also be factored into the pricing. A store might offer a 2-year interest free financing of its big-ticket
furniture. This price might be higher than a competitor’s price that includes just 90 days credit, and a
consumer might prefer this higher price because of the convenience of the 2-year financing scheme.

The Buyer’s Perspective on Pricing

In many ways, the buyer’s perspective on pricing is the opposite of the seller’s perspective. For the buyer,
price is about what the buyer will give up in exchange for a product. The key for the selling firm is to find
out just how much a buyer would be prepared to give up for the perceived benefits from the product.

From the buyer’s perspective, 2 key issues determine pricing strategy for most firms:

1. Perceived value
2. Price sensitivity

The subject of ‘perceived value’ has been discussed in sufficient depth earlier and in Consumer Behaviour.

On the buyer’s side, price elasticity translates into the unique and varying buying situations that cause
buyers to be more or less sensitive to price changes. Sensitivity to price changes in different situations.

The Relationship Between Price, Revenue and Profit

The traditional understanding of this relationship was: Profit = Sales – Cost. This understanding
underpinned most strategic decisions in the world. In the past few decades, companies have been forced to
review this relationship, and in so doing, had to review the business model, organisation structure and
almost every aspect of their operations.

As more and more nations became industrialised, global competition intensified. Many emerging countries
having some factor advantages could offer products considerably cheaper than established manufacturers.
China became the ‘manufacturer for the world’, India became an outsourcing hub for IT support services,
Bangladesh, Vietnam and many other countries became sources of low cost garment manufacturing, and
so on.

In addition to this, the global business environment can now be termed as ‘VUCA’ – volatile, uncertain,
complex and ambiguous.

Companies had to find new ways to survive and grow their revenues and profits. Their understanding of
the relationship now changed to:

“Sales – Profit = Cost”

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That is, managements realised that cost management is strategic priority and that companies had to create
cost competitive advantage to succeed in the competitive business arena. Managements had to review all
the components of their business to find ways to bring total cost of the product or service down to such a
level that the company could compete in the market on price (offer the lowest price) and yet achieve the
desired target profit figures!

This requires a company to

 Redesign its business model

 Improve efficiency in its value chain, and
 Introduce state-of-the-art technology appropriate to drive down the cost of operations.

Companies have had to bring every cost element into sharp focus and make cost-ownership a hot priority
down the value chain.

This is one of the reasons why there is such an intensified interest in robotics, artificial intelligence, and
any new technology that will contribute to reducing costs and improving efficiencies.

Some common myths in pricing

Myth #1: When business is good, a price cut will capture greater market share and will improve the
profitability of the company.

The concept of the benefits of growing (or increasing) the market share was originally advocated on the
basis that as volumes of products manufactured and sold increase, the company gains experience in all
aspects of its operations (as also its suppliers) and this increased experience in turn results in improved
efficiencies, improved productivity, and reduced costs – which could off-set the reduced prices. The
reduced costs ought to be equal to or exceed the quantum of price reduction to enable the company to
improve its profit earnings from the increase in market share. Unfortunately, many make the mistake that
market share increase automatically reduces costs – which need not necessarily follow. Cost reduction has
to be scientifically pursued, to gain the benefit of increased market share.

Myth #2: When business is bad, a price cut will stimulate sales.

This one is a risky proposition very often resorted to, without checking their arithmetic. Reality, most often,
is that any price cut must be offset by an increase in sales volume just to maintain the same level of revenue.
Here is an example:

Assume that a consumer electronics firm sells high-end stereo receivers for ₹ 10,000/- per system. The
firm’s total cost is ₹ 6,000/- per system. The gross margin, then, is ₹ 4,000/-. When sales of this high-end
system declines, the firm decides to cut the price to increase sales. Their strategy is to offer a rebate of ₹
1,000/- to anyone who buys the system over the next three months. (It is a time-bound offer.) This amounts
to a price cut of 10%. But when you consider the impact on the gross margin, the cut translates to a 25%
cut in the margin (from ₹ 4,000 to ₹ 3,000). As a result, to maintain the same level of overall (total) gross
margin, the firm must increase the sales volume by 33%. Will the ₹ 1,000/- rebate increase sales volume
by 33%? This question is critical to the success of the pricing strategy. Quite often, the needed increase in
sales volume is too. Consequently, the firm’s revenue and profits are worse after the price cut. Hence, a
marketer must be able to judge accurately the resulting sales volumes and achieve or exceed the target sales
volume, to benefit from the price cut.
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Rather than blindly using price cuts to stimulate sales and revenues, it is often better for a firm to find ways
to build value into the product and justify the current price, or even a higher price, rather than cutting the
price. In the above case of the stereo manufacturer, giving customers ₹ 1,000 worth of CDs, DVDs and
other accessories (of freebies) for each purchase would be a much better option than a ₹ 1,000 rebate. Video
game manufacturers, such as Microsoft (Xbox) and Sony (PlayStation), bundle games and accessories with
the system boxes to increase value. The customer is made clear the value of these additions. The cost (to
the manufacturer) of giving customers these free add-ons is low, because the market buys these in bulk
quantities. The added expense is almost always less than the price cut. And the increase in value may allow
the marketer to charge higher prices for the product bundle. This is why bundling is a popular concept
among marketers.

Major Determinants of Pricing Strategy

Pricing decisions are among the most complex decisions in developing a marketing plan. There are a
number of important factors that determine pricing strategy. While the factors are identified below, it must
be kept in mind that they are all inter-related and must be treated holistically.

Pricing Objectives
The pricing objectives have to reflect the market reality. What kind of sales volumes can you achieve
realistically, and at the same time, what profit margins would be realistically possible, to achieve the overall
profit objective?

The description of some common pricing objectives are:

1. Profit-oriented: Designed to maximise price relative to competitors’ prices, the product’s

perceived value, the firm’s cost structure, and production efficiency. Profit objectives are typically
based on a target return, rather than simple profit maximisation.
2. Value-Oriented: Sets prices in order to maximise rupee or unit sales volume. This objective
sacrifices profit margin in favour of high product turnover. Many Chinese firms follow this pricing
strategy.
3. Market Demand: Sets prices in accordance with customer expectations and specific buying
situations. This objective is often known as “charging what the market will bear.”
4. Market share: Designed to increase or maintain share of market regardless of fluctuations in
industry sales. Market share objectives are often used in the maturity stage of the product life cycle.
5. Cash Flow: designed to maximise the recovery of cash as quickly as possible. The objective is
useful when the firm has a cash emergency or when the product life cycle is expected to be quite
short.
6. Competitive matching: designed to match or beat competitor’s prices. The goal is to maintain the
perception of good value relative to the competition.
7. Prestige: set high prices that are consistent with a prestige or high status product. Prices are set
with little regard for the firm’s cost structure or the competition.
8. Status Quo: maintains current prices in an effort to sustain a position relative to the competition

Supply and Demand

When customer demand increases for a particular product, do prices fall? Prices tend to increase. Hotel
rooms charges, petroleum products in the international market, generally all commodities in the
international market, movie tickets (reduced prices in the mornings and afternoons and higher prices in the
evenings), Second-hand sales are always at severe discounts – buyers expect to pay reduced prices for
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second-hand products. At the same time, if the particular product is a rare collector’s item (painting,
antique, etc.) the demand pulls the price up, to beyond what it might have cost new.

The Firm’s Cost Structure

The firm’s cost in producing and marketing a product are an important factor in setting prices. However,
the firm’s cost structure should not be the driving force behind pricing strategy. The reason is simple but
often ignored: Different firms have different cost structures. By setting prices solely on the basis of costs,
firms run the risk of setting their price too high or too low. Cost is best understood as an absolute floor
below which prices cannot be set for an extended period of time.

Hindustan Lever just could not compete with NIRMA on the basis of their prevailing cost structure. They
had to develop an entirely new and different business model, manufacturing detergent powder in outsourced
facilities, creating a separate management and marketing structure, and creating an altogether new brand –
“WHEEL” to compete with NIRMA.

Competition and Industry Structure

Firms that use competitive matching pricing objectives face a constant struggle to monitor and respond to
competitors’ price changes. This struggle is a way of life in the travel and tourism industry. Also in the soft
drinks market. Even when firms do not necessarily need t match competitors’ prices, it is strategically
essential to keep monitoring competitors’ prices for same or similar products. While brand prices are
higher, product and generic competitors in the market must not be overlooked.

The competitive market structure of the industry in which a firm operates affects its flexibility in setting
prices. Industry structure also affects how competitors will respond to changes in price. There are four basic
competitive market structures:

1. Pure competition: A market containing an unlimited number of sellers and buyers. Market entry
is easy and no single participant can influence price or supply significantly. For the most part, pure
competition does not exist, although some commodity and agricultural products come reasonably
close.
2. Monopolistic competition: This market contains many sellers and buyers. Marketing strategy
involves product differentiation and/or niche marketing to overcome the threats imposed by the
wide availability of substitute products. This might give some firms some degree of control over
their prices. Most markets fall into this category.
3. Oligopoly: A market containing relatively few sellers who control the supply of a dominant portion
of the industry’s product. However, no one seller controls the market. One firm’s prices affect the
sales of competing firms: therefore, all firms quicly match the price changes of competitors. The
airline, automobile, tobacco, oil, and steel are some examples of this.
4. Monopoly: A market dominated by a single seller who sells a product with no close substitutes.
The single seller is the sole source of supply. Regulated utilities (electricity power distributors) are
the only monopolies operating today.

Stage of the Product Life Cycle

As discussed in the earlier section on strategies over the PLC, pricing strategy changes over the life cycle
of the product. At the launch and introduction of the product, depending upon how well the product concept
is expected to be received by the potential customers, the company might decide to charge a high premium
price. The company anticipates that there will be a high demand for the new to-be launched product, and

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that this high price and high sales volume will quickly recover all the research and development expenses
incurred in developing and launching the product.

Apple’s launches of their phones illustrates this. However in spite of being a strong marketing company,
they have made a few missteps as explained below.

In June 2007, people who had rushed to buy the Apple iPhone over the last two months suddenly and
embarrassingly found that they had overpaid by $200 for the year’s most coveted gadget. Apple angered
many of its most loyal customers by dropping the price of its iPhone to $400 from $600 only two months
after it first went on sale.

Ken Dulaney, a vice president at Gartner Research, said that in

general starting high and dropping the price slowly was a smart
strategy. By starting the price high, manufacturers can gauge early
demand and reap greater profit from early adopters who are willing
to pay any amount to be the first with a particular device. “It’s
probably a formula taught in business school,” Mr. Dulaney said.

That must have been what Apple was counting on. But the size and
speed of the price cut alienated some of Apple’s most loyal
supporters. “My love affair with Apple is officially over,” wrote one
iPhone owner on the Unofficial Apple Weblog site.

Mr. Jobs said the cuts were precipitated by a desire to build demand
aggressively for the product in the coming holiday shopping season.
Analysts, however, wondered if it was indicative of sagging demand
An early adopter left an Apple store in for the expensive phone.
Manhattan in late June with one of the
first iPhones. He might wish he had “I don’t think it’s a stretch to deduce from this that maybe the rate of
waited. sales weren’t meeting expectations, so they decided to drop the
price,” said Charles Golvin, an analyst at Forrester Research. “Bear
in mind that Steve Jobs said at the last earnings call that they expected to sell a million devices in the
following quarter. Maybe they recognized the trajectory wasn’t going to get them there at that price.”

For many customers, though, all was forgiven after learning of the $100 store credit. Rob Enderle, president
of the Enderle Group, a market research firm in San Jose, Calif., was skeptical of the store credit. “A $100
credit could be perceived as adding insult to injury,” said Mr. Enderle, noting that store credits are seldom
well received. “It’s a way to make you go buy something else, and gives the company a chance to make
more money.”

But the company’s fans have in the past overlooked overheating computers, iPods that are easily scratched
and batteries that cannot be replaced easily or inexpensively. Loyalty is still strong for Apple.

(As per Apple’s official website, the iPhone 8 is priced at $799 as on October 22, 2017)

************

From this example of Apple Inc., it is obvious that pricing at the launch of a product is a strategic decision.
The company has to forecast how many units it wants to sell, say, in the first 3 months or 6 months (in its
early growth phase) and the price at which they expect to achieve this sales volume.

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Other Elements of the Marketing Mix
All the other Ps have an effect on pricing. For example, improvement in product quality and/or features
can increase the price if consumers perceive increased value and preparedness to pay the higher price.
Technology products generally fall in this category.

In the same category, a company might decide to have a product version for each price point. E.g. Maruti
Suzuki has a car model for every price point. As soon as a price point is discovered, they try to introduce a
model to offer at that price. The positioning and promotions are targeting segments that would be
particularly attracted to these price points.

Price Elasticity of Demand

As we have seen above, pricing has intricate connections to issues such as demand, competition, and
customer expectations. These issues come together in the concept of price elasticity of demand and underlie
setting effective prices in a marketing strategy.

Price elasticity refers to customers’ responsiveness or sensitivity to changes in price. This is represented
by the following equation:

Percentage change in Quantity Demanded

Price Elasticity of Demand =
Percentage change in Price

Given below are many of the behaviour patterns and purchase situations that can affect customers’
sensitivity to pricing changes.

Situations that increase price sensitivity

1. Availability of product substitutes: When consumers face a high number of substitutes, they will be
much more sensitive to price.
2. Higher total expenditure: This is best explained through this example: A couple might have planned a
vacation in Europe after they saw an advertisement of a package costing ₹ 1,00,000/-. However, that
summer, when they went to the particular travel agency that had advertised the package, they found that
the price had been raised by 20%, i.e. the total expenditure would now be ₹ 1,20,000/-. The couple
decided they don’t really need to go to Europe for their vacation. They, instead, decide to spend their
vacation in Thailand, at a much cheaper price. Yet, the same couple did not give a thought to a 20%
price increase in a cheese spread they normally use for breakfast. Here the price had increased from ₹
10/- to ₹ 12/-. They did not give it a thought.
3. Noticeable difference: Consumers tend to change their behaviour at specific price thresholds. A person
may buy a pair of chappals at prices ranging from ₹ 100 to 149. At ₹ 150, the consumer might suddenly
decide the price is too high. The one rupee made the difference for him to take notice and decide he
does not want to spend so much money. Such price points need to be understood for every category.
4. Easy price comparison: Customers become more price sensitive if they can easily compare prices
among competing products. In industries such as retailing, travel, toys, and books, price has become a
dominant purchase consideration because customers can easily compare prices. The Internet has
particularly intensified the price-sensitivity of consumers.

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Situations that decrease price sensitivity
1. Real or perceived necessities: Food, water, medical care, prescription drugs etc. Fall in this
category. If the customer perceives the product as a necessity, he becomes much less sensitive to
price increases for the product.
2. Lack of product substitutes:
3. Complementary products: If a product’s price is reduced, a complementary product becomes more
price inelastic. E.g. if air fares to Darjeeling are reduced to attract traffic, hotels in Darjeeling would
benefit. They are complementary products. Hotels could charge higher prices, and the customers
would not be so sensitive to these prices. Similarly, as computer prices drop, customers become
less sensitive to software price increases.
4. Product differentiation: Differentiation reduces the number of perceived substitutes for a product.
Product differentiation does not have to be based on real differences in order to make customers
less price sensitive. Many times the differences are just perceptual. The look of the product, the
advertising, the imagery, and prior experiences all come together to differentiate the product.
5. Perceived product benefits: For some customers certain products are just worth the price –
“expensive, but worth it!”. Consumers might choose to indulge themselves. Premium chocolates,
special coffee, premium coffee house (Cafe), Spa, etc fall in this area. Pens, watches, certain
models of cars also fall in this area.
6. Situational influences: circumstances that surround a purchase situation can vastly alter the
elasticity of demand for a product. Time pressure, purchase risk, ambience of the place, the
environment – smells, visuals, behaviour of people, social class of other customers, location – all
impact behaviour of consumers and their perception of the price. Another situational influence is
the risk situation. In situations like a punctured tire late at night, or a medical emergency in the
night, need of a plumber at night (when the tap has broken and water is gushing out in force,
flooding the house) – such emergencies significantly reduce a consumer’s sensitive to price. Yet
another situation is gift-purchasing situations, when customers tend to be less price sensitive.

BASIC PRICING STRATEGIES

A firm’s base price strategy establishes the initial price and sets the range of possible movements
throughout the product’s life cycle. The intitial price is critical; not only for initial success, but also for
maintaining the potential for profit over the long-term. Red Bull pricing strategy is a good example of this.
Right from the beginning they decided to price the product at a super-premium price of $2.00/can.

The basic pricing strategies are:

1. Price Skimming: A firm intentionally sets a high price relative to the competition with the idea
of skimming the profits off the top of the market. This is done typically in the early stages of the
PLC to recover the R&D & market development expenses incurred. Pharmaceutical and
technology companies typical resort to this. Price skimming is also resorted to when demand for
the product is too high and the firm wants to control it. For this strategy to work, consumers must
perceive the product as having unique advantages over competing products – for which he does
not mind paying the high price. Thus price skimming strategy has to be adopted with care, because
the consumer may reject the product if they are not convinced of its value. As the company scales
up manufacturing and introduction of newer models, the firm reduces the price to expand the
market and grow rapidly.

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 2. Penetration Pricing: The goal of penetration pricing is to maximise sales, gain widespread market
acceptance, and capture a large market share quickly by setting a relatively low initial price. This
approach works best when consumers are price sensitive for the product or product category, and
research and marketing expenses are relatively low, or when competitors are likely to enter the
market quickly.

Penetration pricing can be used to launch a new product introduction or to introduce new product
lines to an established product mix. This strategy’s objective is rapid market acceptance and
maximum sales and discouraging competitors from entering the market (as the low price could be
unviable for them).

3. Prestige Pricing: Firms set their prices at the top end of all competing products in a category. This
promotes an image of exclusivity and superior quality. This is used by luxury hotels, luxury cars,
luxury bag makers, luxury clothing makers, certain shoe brands, watch brands and so on.
4. Value-Based Pricing (EDLP – Every Day Low Price): Firms that use this strategy set reasonably
low prices, but still offer high quality products and adequate customer services. Retailing has
embraced this approach, advertising EDLP and promising best value. Many other businesses have
also adopted this strategy: low cost airlines, low cost hotels (Ginger brand of hotels), furniture
chain IKEA, and others.
5. Competitive Matching: in many industries, particularly oligopolies, pricing strategy focuses on
matching competitors’ prices and price changes. Two competitive factors drive this strategy: the
firms offer commodity-type of products with little to differentiate between competitors (airline,
oil, steel, cement, etc.). Second, some industries are so intensely competitive that competitive price
matching becomes a means of survival.
6. Non-Price Strategies: Firms down play price in the marketing programme by emphasising other
distinguishing aspects/features – something unique. Non-price strategies are most effective when:
a. The product can be successfully differentiated,
b. Customers see the differentiating characteristics as being important,
c. Competitors cannot emulate the differentiating characteristics, and
d. The market is generally not sensitive to price. Customers are willing to pay for these
experiences because they cannot be found anywhere else.

Adjusting Prices in Consumer Markets

In addition to the above base pricing strategy, firms also use other techniques to adjust or fine-tune prices.
These techniques can involve permanent adjustments to a product’s price or temporary adjustments used
to stimulate sales during a particular time or situation. While the list of creative techniques used is long,
we look at four of the most common techniques:

1. Promotional Discounting is also called a “Sale”. Customers generally love a sale. This strategy
involves charging higher prices on an everyday basis, then using frequent promotions and sales to
increase store traffic. However, this advantage is also its main drawback: customers become so
accustomed to sales and promotions that they will postpone or time their purchases until retailers
discount prices.
2. Reference Pricing is when firms use internal or external references to set prices. Internal
references are those a customer uses to judge prices. Often used by housewives when purchase
grain, vegetables, milk – they know what the price of such items should be and expect prices to be
near that. They will shop around elsewhere till they get the nearest price to their reference price.
Restaurant prices (for a meal), garments, etc. fall in this category too, as many other things. Sellers,
in these category of products, have to price their products with reference to these internal
references, or they may not be able to sell their products. External references pertain to products

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 where customers may have little experience or knowledge. In such cases, the manufacturer or
retailer provides the reference. The price tag, sign, advertising or promotion will say “Regular
price ₹500/-. Now ₹399/-.“ To be effective, the reference price must be credible and regular. It
must not be inflated. Reference price can also be a competitor’s price, which the seller uses to
attract customers, with a lower price. Yet another form of reference pricing used by some
manufacturers is when they reduce features from a product and offer it at a lower price. E.g. a ‘fully
loaded’ (with all features) car model may be priced at ₹ 10,00,000/-. The manufacturer may offer
the same model, but different versions, at lower prices such as ₹9,80,000/-, ₹9,65,000/-
₹9,45,000/- -- each price point set according to the number of features reduced from the top-of-
the-line model, which is the reference.
3. Odd-Even Pricing. Prices are rarely set at whole, round numbers. Prices are ₹35.99/-, ₹299/-, and
such like. The factors that drive the existence of odd prices over even prices are:
a. Demand curves are not a straight line. Elasticity of demand changes over various price
points. A consumer may not give it a thought to buy a product at prices up to ₹ 49.95. But
seeing a label of ₹ 50/- stops him from purchasing the same product he would have bought
at ₹ 49.95!
b. Another reason for odd pricing is that customers feel that the pricing has been thought out
carefully and is not arbitrary. Thus, if a plumber charges ₹96/- for a job, a consumer may
not hesitate to pay, while a charge of ₹ 100/- might trigger the customer’s thinking that the
price is arbitrary and high. The customer feels that the plumber is honest and doing
everything to fine-tune his price in favour of the customer at ₹96/-.
4. Price Bundling: This also sometimes called ‘solutions-based pricing’, or all-inclusive pricing. I
such cases, a manufacturer might bundle together a number of complementary products. E.g. a
manufacturer of a home-theatre system may bundle wireless headphone set, a set of recent DVD
movies, DVD songs, etc. An apartment complex builder may bundle micro-wave ovens, gas
pipeline (no cylinder headaches), silent split air conditioning, closed-circuit TV and security
system, fans, lights, choice of wardrobes etc all bundled into the price of the apartment.

ADJUSTING PRICES IN BUSINESS (INDUSTRIAL) MARKETS

While the above techniques are also used in business markets, there are a number of pricing techniques
unique to business markets, as follows:

1. Trade Discounts: Manufacturers reduce prices for certain intermediaries in the supply chain based
on the functions they perform. Wholesalers get larger trade discounts than retailers, as wholesalers
perform extra functions such as selling, storage, transportation, and risk taking.
2. Discounts and Allowances: Business buyers avail of discounts related to quantity purchased, or
on basis of payment terms (higher discount for cash on delivery), or on participating in a joint
promotional campaign.
3. Geographic pricing: transportation costs and related risks are factored into pricing. However, the
most common pricing is uniform delivered pricing – same price for all buyers regardless of
transportation expenses). Zone pricing is also used by some companies. These are different prices
based on transportation expenses to predefined geographic zones.
4. Transfer Pricing: this occurs when one unit in an organisation sells products to another unit.
5. Barter and Countertrade: E.g. Russia insisted that if Pepsi wants to sell their products in their
country, they should organise sales of Russian products in USA. Pepsi would have to buy such
products and sell them in the US.

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LEGAL AND ETHICAL ISSUES IN PRICING
Pricing is the most heavily watched and regulated of all marketing activities, as a difference in price can
cause such a significant competitive advantage. Companies may be tempted to artificially manipulate prices
to gain competitive advantage, disturb the balance in the market place, such that in the long-term, consumer
interests are violated.

Four of the most common legal and ethical issues in pricing are:

Price Discrimination: Firms charging different prices to different customers, typically to two different
intermediaries in the supply chain. Generally, such price discrimination could be illegal unless the price
differential has a basis in actual cost differences.

Price Fixing: Any agreement or collaboration between competitors on pricing can be construed as price
fixing. In many countries, sizable fines and prison terms are the norm for those convicted for price fixing.
Any agreement between competitors regarding supply, manipulation of terms, etc that might result in
pricing that goes against the interests of customers can be also interpreted as price fixing.

Predatory Pricing: this occurs when a firm charges very low prices for a product with the intent of driving
the competition out of business or out of a specific market. Once the competitor has been eliminated, prices
return to normal (or may even go higher, because of absence of competitor). Microsoft and Boeing were
both seen adopting predatory pricing. Boeing miscalculated and suffered huge losses, while Microsoft
image was tarnished and its chairman had to face gruelling hearings in the US Senate and Congress.

Deceptive Pricing: Intentionally misleading customers with price promotions is another area that has
received particular attention of courts. Such pricing is illegal in most countries around the world. Many
companies come close to being illegal by using a “Bait & Switch” technique. E.g. A car dealer might
advertise a special sale for a car that usually sells for ₹ 12 Lakh, with a special offer of ₹ 9.5 Lakh, if the
offer is availed today. As the deal looks very attractive, customers rush to the dealer. When the customer
asks for the product on sale, the dealer’s salesman shows a car in the showroom and says that unfortunately
the car has just been sold, and that was the last piece. This trick has been used to pull unsuspecting
customers into the showroom. It is now the job of the crafty salesman to convince the customer to buy the
car at a regular price, which he might discount a little to complete the sale. Such customers might not have
otherwise considered buying the car or even visiting the showroom. Similar techniques are used by many
retailers: they show an attractive product in the showcase at an affordable price. When customers come in,
they are shown more expensive products that fetch higher margins to the retailer. When the customer insists
he/she wants the particular product shown in the show-window, the salesman claims it is out of stock, and
continues to try to convince the customer to buy the higher margin product. This technique succeeds in
many cases. But the intent and practice is unethical.

Another deceptive practice is to use reference pricing psychology. A retailer selling suits and accessories
might prominently display suits at very high prices (for example, ₹55,000/-). The potential customer
looking for a suit for himself is taken to this rack first. He is allowed to touch and feel the suit, appreciate
its cut, styling and material. And when he or she asks for the price, he/she is shown the price tag of ₹55,000/-
. The salesman suggests that this is a premium product, and that he has an equally good suit at a much
lower price. What the retailer has done is established a reference price in the mind of the potential customer.
The potential customer will not resist the price of the next item he is shown, as his reference is now set at
₹55,000/-! Thus, when the shopper is shown suits in the price range of ₹35,000, he is informed that there
is a special deal on presently (a limited time deal). The price includes a premium cotton shirt, cuff links, a
branded perfume, and an elegant leather belt that matches the suit. The shopper feels he/she has got a great
deal and completes the purchase. The customer walks away feeling comfortable that he/she has struck a

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great deal. However, the retailer has not reduced any price at all. The full price of all the items was coming
to ₹35,000/- anyway. He did not have to negotiate this price down, because the resistance to this price was
reduced by artificially creating a reference price in the mind of the shopper! At the same time the salesman
has sold a number of products together. This is a deceptive practice.

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Chapter 8
PROMOTIONAL STRATEGIES
When planning communication strategies a company’s concern is that its communication must reach and
impact (influence) the target audience most cost effectively. The money they spend on advertising must
give them an effective return and achieve whatever goal the company has set to achieve through their
communications.

Problem is that while TV advertising is the most effective medium, it has its problems.

a) People watching the communication maybe the wrong audience. E..g. clothing ads for premium
segment of society may be watched by children, old ladies, lower income strata and others who are
not the target audience.
b) The target audience may have gone to the toilet during the commercial break or to the kitchen for
a snack and missed the advertisement.
c) People switch channels as soon as ads start, to see what’s interesting in other channels.
d) Increasingly, technology allows people to record their favourite programmes while they are out or
when they cannot see the programme and during replay, they skip the ads.

In the eighties one could safely advertise in a magazine such as India Today or Business India and expect
to get a good share of the target audience. Magazines also had the benefit of longer shelf-life over
newspapers. And in special editions, the shelf-life may last even six months or more.

Now there are specialised magazines for almost every kind of consumer interest: for auto enthusiasts, auto
racers, PC lovers, software geeks, the fashion crazy, house & office interiors, electronics, finance
investments, finance traders, agriculture, women only, and many others. This proliferation of focussed
magazines is good for marketers who have clearly segmented their markets. They can expect much more
serious readership of their specifically targeted ads.

Internet technologies and social networking websites are providing many innovative and cost-effective
solutions. In most cases consumers themselves take the initiative by voluntarily showing up (visiting a
website) and interacting with what they find online and sharing what they like with their friends and online
community members. In such “hits” you have their full attention.

There are specialised industry-specific search engines that are free for users provided they register. The
registration collects all the details of the individual and his company, his contact details, areas of interest,
and other data that could be useful for the companies in the search engine membership.

Now mobile advertising and other forms of digital advertising have become very attractive. Advertising
can be very localised. Thus, a restaurant can find ways to advertise digitally and target customers within
specific geographic areas.

Video games is also a medium of advertising for a number of products. Online video games (as well as off-
the-shelf) are a huge and fast growing segment. Game producers can introduce into the script of the game
and plot (for example) a truck carrying a DHL sign. People may be drinking a particular brand of juice,
driving a particular brand of car or motorcycle, and the protagonists may include brand names in their
conversations/dialogues.

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