HOW CAN PRICING BE USED AS AN EFFECTIVE MARKETING STRATEGY

As Warren Buffett famously said " Price is what you pay and value is what you get "

" A successful company is one which is able to ensure that the customer who purchases it's products gets and/or senses more utility /value from it than the price at which it is bought if the utlity could be measured in terms of money."

The challenges is then two fold for such companies

1. How to increase the utility value of ity's product by understanding the needs which could be further fulfiled by adding / changing design of the product and

2. The delta cost of the change being less than the delat revenue that the comoany can get by making such chnages

Two biggest examples of such changes are introdcution of IPhone which Cannibalized IPOD by Apple ( but if Apple would not have done it competitors would have taken that market )

& second Netflis dividing it's operations into DVD and Streaming knoing fully well that it's streamimng will eat the DVD business just like its DFVD killed the BLOCKBUSTER.

But they did not hesitated to make such decisions and have been able top grow and withstand competition.


Pricing needs to be futuristic and decision must be taken with an approach to increase revenue and profitability over a longer period rather than just for the period which can be a very short term decision and hamper the growth and sustenance of the business.

The pricing strategy is not a function of cost and mark-up but that of volumes , markets to be served , credit risk , risk of inventory loss due to obsolency and cost of sales and marketing in addition to all other costs.

Let us take an example of a company which produces Trousers in India and sells to domestic and also exports .

If the company produces and sells 1 Million units and has a fixed overhead of say USD 2 Million the Overhead recovery rate is USD 2 per piece , and the sales price is USD 10 and all cost other than overhead is USD 7.

Now if the company puts up a marketing campaign of say USD 1 Million and is able to generate 30 % additional sales of domestic sales and it may jump to 60 % if the price is reduced by 10 % in export market which is 40 % of total sales.

Under these circumstance there can be 2 approaches

1. To find the incremental profits under each of three scenarios

As the original approach yieds maximum profit one approach is to stay with that

But a more pragmatic approach can be the to go by the 3 rd approach where although the overall profit for the current year comes down by USD 380K but it after investing USD 1 Million in Marketing and USD 640 K in discounts to increase the no of units by 42 % .

If the company can maintain to sell the same quantity next year with same pricing it would be making a profit of USD 1.62 Million ( as marketing spend would not be there ) and therefore would be able to recover the marbinal loss of profis plus additional profit of USD 240 K and in future years USD 520K every year assuming that the additional marketing to keep the momentum would be 100K .

So this is the multiplier effect of pricing along with marketing spend/



There are three approaches to pricing

1. Cost Based

2. Competition Based

3. Customer Based

Simplistically put , In a cost based approach a company looks at the cost of a particular product or service ( both variable and fixed ) and puts a loading of a certain expected profit margin on the same and quotes the price.

In a Competion Based pricing the price is determined basis the strategy of the company the which it wants to position it's product vis-a-vis the competitors and the market share and the segement of market it wants to attract.

The third and most interesting pricing is customer based pricing . Just one question before I write any further . What do you think is customer based pricing ? Is it the pricing at which the customer will happily buy and so we sell at the price at which he wants to buy .

No it is not cutomer based pricing . That model is customer chase pricing which is rampant these days followed by all the large format retailers whether online or brick and mortar.

But in between all of this companies have a CUSTOMER BASED PRICING STRATEGY which helps them maintain their overall margins and volumes as per their plan.

There are different models to it

1. Pricing at a Premium

a) EXCLUSIVITY MODEL : This is the model followed all over the world by the fashion designers . They do not make more than one or very few depending upon the price of it's fashion clothes and is designed as per the requirement or as per the creativity of the designer .

Here the pricing is done much even above the top branded products to create their own EX factor and the PRICING is done keeping in mine the status of the buyer so that only people with that status can wear that fashion line when introduced .

Subsequently once the exclusivity charm is exploited the pricing are sometimes reduced and more pieces are introduced for volumes .

b )PROHIBHITIVE PRICING

This is another way of pricing for a set of customers who believe in buying the best of the brands for unrelaible quality and the snob value which makes them feel a class apart.

The company has to ensure that the products are made fom the world's best quality and are sold at the highest end markets and the pricing is also much above everyone's reach.

Examples are Brands like Aurora Diamente , MontBlanc , Visconti in Pens , Hermes in Leather etc.




2. THE VALUE BASED CUTOMER PRICING : There are customers generally from the corporate world or into their own business ventures who do not easily trust many brands and at the same time want to have value for the price that they buy for . These types of customers are very loyal customers wuth whom if once the trust is build would come and be loyal buyers . For these customers companies Pricing Strategy is to have good products with prices a notch above the normal non branded or lower category brand products , buit with a high level of personalized services like no question return , free alterations , offers etc. Example M&S , Arrow , Cross etc.

3. PRICING FOR MIDDLE INCOME POPULATION

The pricing for targeting this segement is generally by creating an high aspiration value and then giving regular promotional offers and discounts through which the goods are sold .


4. PRICING FOR MASS : This pricing is again of different types . For an individual product it is kept at minimum margins and sometimes even at losses to begin with to capture market sdhare and then bring the procurement price down.

Another strategy is to give the product at cheap rates and then the consumables is where the margins are made though the consumables are of daily use and low priced