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9.3. Pricing And Market Orientation
As in any other question of marketing, pricing is dependent on how the customer will react to the prices set. Customers do not usually buy the cheapest products; they buy those that represent good value for money. If this were not so, the most popular cars in Britain would be Ladas and Yugos, rather than Vauxhalls and Fords. Typically, customers will assess the promises the supplier has made about what the product is and will do, and will measure this against the price being asked.
This leaves the marketer with a problem. Marketers need to decide what price will be regarded by customers as good value for money, while still allowing the company to make a profit.
The main methods of pricing used by firms are following -
Value and Skimming Pricing - Embryonic stage refers to such products that are newly introduced in the market and their recognition with the consumers is yet to be established. The value pricing may be an appropriate strategy to practice with the new products. It is also known as skimming the market. In this process, a high price is set for the product to ‘cream off’’ all available demand. The price is maintained for some time, to allow the customers who regard the product as important to ‘upgrade’ them into the high price bracket. In a broad sense, it is the product segmentation. However, the value pricing approach would prove advantageous only when enough product awareness is created among the consumers through advertisements, demonstrations and effective consumer services. In the long run such an approach would create a specific group of customers or consumer segment for the product.
Advantage of a high profit under the value pricing approach is anticipated in the long run when there is consumer segmentation for the product with a high recognition. However in this approach, the selling cost may shoot up reducing the profit margin low in the initial stages.
Skimming pricing is the strategy of establishing a high initial price for a product with a view to “skimming the cream off the market” at the upper end of the demand curve. It is accompanied by heavy expenditure on promotion. A skimming strategy may be recommended under the following business conditions:
- When a company has expended large sums of money on research and development for a new product
- When the competition is expected to develop and market a similar product in the near future, or
- When the product is very innovative and market is expected to mature very slowly.
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Under these circumstances, a skimming strategy has several advantages. At the top of the demand curve, price elasticity is low. Besides, in the absence of any close substitute, cross-elasticity is also low. These factors, along with heavy emphasis on promotion, tend to help the product make significant inroads into the market. The high price also helps the segment market.
One may also turn to a penetration strategy with a view to achieving economies of scale. Savings in production costs alone may not be an important factor in setting low prices because, in the absence of price elasticity, it is difficult to generate sufficient sales. Finally, before adopting penetration pricing, one must make sure that the product fits into the lifestyles of the mass market. How low the penetration price should be differs from case to case. There are different types of prices used in penetration strategies: restrained elimination prices, promotional prices, and keep-out prices.
Penetration pricing reflects a long-term perspective in which short-term profits are sacrificed in order to establish sustainable competitive advantage. Penetration policy usually leads to above average long-run returns that fall in to a relatively narrow range. Price skimming, on the other hand, yields a wider range of lower average returns.
Penetration Pricing - This policy may be adopted to penetrate the market as quickly as possible to secure cost advantages through pushing products in high volume. In case, new products of qualities similar to those already existing in the market have to be introduced for crash sales in the market, the price may be derived in relation to its competitive products. The important issue to be kept in view is the anticipated selling cost and the volume of sales to determine the prices. The penetration price always needs to be little lower than the price of the existing products similar to it. The penetration price is conceptually an artificial pricing approach to push the product in the market. The real price may be fixed later in the process to assess the demand elasticity of the product in the primary and subsequent markets.
Penetration pricing is the strategy of entering the market with a low initial price so that a greater share of the market can be captured. The penetration strategy is used when an elite market does not exist and demand seems to be elastic over the entire demand curve, even during early stages of product introduction. High price elasticity of demand is probably the most important reason for adopting a penetration strategy. The penetration strategy is also used to discourage competitors from entering the market. When competitors seem to be encroaching on a market, an attempt is made to lure them away by means of penetration pricing, which yields lower margins.
Geographical Pricing - It is the strategy to exercise a discriminatory pricing policy across the various territorial market segments. The marketer who serves a number of distinct regions can adopt this policy without creating psychological barriers either to the customers or distributors in purchasing and selling the products.
Conspicuous Pricing - Skimming approach implies in this pricing policy where the price of the product is kept higher than its substitutes in order to make it conspicuous, so the product may be recognised as a symbol of social status. An example of jewellery watches may be cited in this context that serve as a status product for the customers.
Psychological Pricing- This approach makes the customer feel that he is paying a relatively lower price for the product. To stimulate such a view the price is fixed in integral values very close to the round numeric values, e.g., prices of Bata shoes Rs.499/-. Such a price structure gives the customer a materialistic satisfaction in buying the product.
Value-Added Pricing - In this price determining process, the company takes care of the value of its by-products in the principal product and prices them accordingly. Such approaches are generally applicable for evolving price strategies of semi-processed products like meat, oilseeds, milk, chemicals etc.
Complementary Product Pricing - Prices of the principal products are dependent on the pricing pattern of associated products, and vice-versa. It is logical that the prices of the complementary products should be lower e.g., film of camera, battery of camera etc. or else the customers may withdraw the principal product from use.
Price Discounts - This is one of the most popular strategies adopted by the private companies in order to attract the consumer towards their stocks and increase sales by offering a discount on the price of the products either on selected or all items in accordance with the business state of the organization. The discounts are offered in terms of cash, kind or discount vouchers, facilitating the customers to buy the products of the company for the amount discounted. The discounts offered by the government supported organizations include:
- Cash discounts
- Quantity discounts
- Discount in kind
- Trade discounts
- Seasonal discounts
- Institutional discounts
- Grant-in-aid discounts
- Stock clearing discounts.
A company may offer a discount either by making the customer pays less than the prescribed price of the product or set a strategy to provide additional quantity of products on the pre-set price.
Discriminate Pricing- A company modifies its pricing strategy for the products according to the customer-segments, product forms, product image, location and time. These approaches are to be decided on the basis of the competition prevailing in the market. However, a marketing manager has to keep his corporate objectives in view before discriminating the price in several forms stated above.
Promotional Pricing- Under specific circumstances, companies will temporarily price their products below the list price to promote sales. In this process, sometimes, risk is taken by the companies to fix the price even below the cost. There are many forms of promotional pricing strategy. They are:
- Loss leader pricing
- Special event pricing and
- Low financing
In this strategy, there always remains a threat of copying down by competitors. Thus, such a policy should not be recommended for a long period of time.
Pricing is a logical proposition keeping in view the competitive products in the market. A company has to determine the price on the basis of internal economics pertaining to business objectives, targets, marketing policies and profit targets and external forces like the demand and strategies of competitive products.
Mark-Up Pricing - It is an elementary pricing method that is exercised by adding mark-up standard to the cost of the product. There are considerable variations in mark-ups among the different products. Thus, this methodology is not considered to be scientific. However, mark-up pricing remains popular for several reasons (i) it is a cost plus exercise and appears to be fairer for both customers and sellers (ii) sellers opine that this approach is simple and (iii) price competition is minimised.
Customary Pricing - Customary pricing is customer-orientated in that it provides the customer with the product for the same price at which it has always been offered. An example is the price of a call from a coin-operated telephone box. Telephone companies need only reduce the time allowed for the call as costs rise. For some countries (e.g. Australia) this is problematical since local calls are allowed unlimited time, but for most European countries this is not the case.
The reason for using customary pricing is to avoid having to reset the callboxes too often. Similar methods exist for taxis, some children’s sweets, and gas or electricity pre-payment meters. If this method were to be used for most products there would be a steady reduction in the firm's profits as the costs caught up with the selling price, so the method is not practical for every firm.
Demand Pricing - Demand pricing is the most market-orientated method of pricing. Here, the marketer begins by assessing what the demand will be for the product at different price levels. This is usually done by asking the customers what they might expect to pay for the product, and seeing how many choose each price level.
As the price rises, fewer customers are prepared to buy the product, as fewer will still see the product as good value for money.
For demand pricing, the next stage is to calculate the costs of producing the product in the above quantities. Usually the cost of producing each item falls as more are made. Given the costs of production it is possible to select the price that will lead to a maximisation of profits. This is because there is a trade-off between quantity produced and quantity sold: as the firm lowers the selling price, the amount sold increases but the income generated decreases.
The price at which the product is sold will depend on the firm's overall objectives; these may not necessarily be to maximise profit on this one product, since the firm may have other products in the range or other long-term objectives that preclude maximizing profits at present.
Strategy For Price Leadership - Price-leadership strategy prevails in competitive market environment. The leading firm then makes pricing moves that are duly acknowledged by other members of the industry. Thus, this strategy places the burden of making critical pricing decisions on the leading firm; others simply follow the leader. The leader is expected to be careful in making pricing decisions. A faulty decision could cost the firm its leadership because other members of the industry would then stop following its footsteps.
For example, if in increasing prices, the leader is motivated only by self-interest; its price leadership will not be emulated. Ultimately the leader will be forced to withdraw the increase in price. The price-leadership strategy is a static concept. The major factors that influence the price leadership include:
- Substantial share of the industry's production capacity
- Large market share of the products and brands in the market
- Domination in the product class or consumer segment
- Cost effective production and distribution strategy
- Strong distribution system, perhaps including captive wholesale outlets
- Good customer relations
- An effective market information system that provides analysis of the realities of supply and demand
- Sensitivity to the price and profit needs of the rest of the industry
- A sense of timing to know when price changes should be made, and
- Effective product line financial controls, which are needed to make sound price leadership decisions
In an environment where growth opportunities are adequate, companies would rather maintain stability than fight each other by means of price wars. Thus, the leadership concept works out well in this case. In the auto industry, General Motors is the leader, based on market share. Usually, the leader is the company with the largest market share. The leadership strategy is designed to stave off price wars and “predatory” competition that tend to force down prices and hurt all parties. The leaders chastise companies that deviate from this form through discounting or shaving. Price deviation is quickly disciplined.
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