The success or failure of the business of a marketing company largely depends upon the selection of suitable pricing policies and strategies. Pricing policies and strategies of a marketing company are affected by its marketing objectives, financial resources, research and development activities, and consumer characteristics, etc. Therefore, pricing policies and strategies vary from company to company.
Strategies & Policies of Pricing in Marketing
A marketing company may select an appropriate price policy and strategy from the following:
1. Skim the Cream Pricing Strategy
The cream-skimming strategy involves setting a price which is higher than the expected price. This policy can be used monopoly situation of the market. In the situation of the seller’s market, it may be used to earn maximum profits.
Skim the cream pricing is particularly suitable when a company is marketing an innovative product. In the early stages of the product life cycle, the company can charge a high price and Consumers will accept it because of the lack of price comparison.
A company can effectively segment the market on an income basis. In the first phase that segment of the market is covered which responds to distinctiveness and exclusiveness in a product and is relatively less sensitive to prices.
In the second phase, the company can reduce the price to appeal to those segments of the market which are sensitive to the price of the product. By a judicious implementation of this policy, a company can remain the market leader for a long time.
For this purpose, the company may divert funds from the profits earned in the introduction stage to further research and development to make substantial modification in the product.
With the entry of competitors in the field, the company can then be in a position to introduce the superior product in the market and by price reduction of product it may remain the market leader.
This policy acts as a strong hedge against a possible mistake in price determination. If the original price is too high and the market does not respond well, the company can easily reduce it.
But it is difficult to raise the price which proves to be too low to cover the cost. High initial prices may be used to keep demand within the limits of production capacity of the market company.
In this light, if the marketing company patented its product, it can adopt skim the cream pricing strategy. It is estimated the marketing companies engaged in pharmaceutical, high technology, software, and design industries are going to get enormous benefits under the new patent regime.
2. Market Penetration Pricing Strategy
Under this strategy, a low initial price is for the product in order to reach a mass market immediately. The purpose of Penetration pricing is to capture maximum market share.
When the product is well established in the market, the company can gradually increase the price of its products. This strategy has been successfully implemented by the tea industry in India.
Market Penetration pricing is suitable when the customers of the target market are sensitive to price. The policy is useful if the product faces strong competition soon after it is introduced in the market.
This is appropriate when a substantial reduction in unit price can be achieved through large scale operations.
By using market Penetration pricing a marketing company can obtain two objectives – it may discourage competitors from the entry in the company field and in the initial stage, it may capture sufficient market share due to the low price of the product.
Penetration pricing may also be followed when the product has greater elasticity of demand and mass production provides a substantial reduction in the cost of production.
This pricing strategy is also useful when the high-income segment of the population is not adequate.
The marketing company should consider the psychology of pricing in addition to their economics.
Generally, consumers use prices as an indicator of quality. Under the Penetration pricing, the low price may be perceived as a poor quality product.
3. Discount and Allowances Strategy
This is widely used in pricing strategy in the situations of stiff competition. The area and scope of discounts and allowances strategies are broad due to its various objectives.
It may serve to motivate consumers to purchase more, to induce middleman to sell more, to keep production lines in Operation, to improve funds position, etc.
Discount and allowances result in a deduction from the list price. This deduction may be in the form of cash or some other concession.
There are several forms of discount and allowances used by marketing companies.
These can be discussed under the following headings:
1. Quantity Discount
Quantity discounts are deductions offered from list prices by the seller in order to encourage middleman or dealers to buy larger quantities of product.
Quantity discounts may be divided into two categories:
2. Cumulative Quantity Discount
In the method, every purchase over a period of time will be added for the calculation of discount.
In this method, a chain of transactions can be generated.
3. Non Cumulative Quantity Discount
Under this method, the buyer is entitled to obtain a discount at list price if he Purchases products in a specified number.
Big orders can be obtained from wholesalers and retailers and a marketing company can reduce its operational cost and production cost.
4. Trade Discount
Trade Discount is price out offered on the list price of the product. The manufacturer may offer to middleman may offer to customers.
Quantity discount is related to the volume of products purchased, whereas trade discount has no linkage with the quantity purchased.
5. Cash Discount
A cash discount is a cash deduction granted to buyers for paying their bills within a specified period of time.
Wholesalers usually adopt this method to motivate retailers to pay their bills to secure cash discount.
The retailer can use its surplus funds to obtain deduction and wholesaler can improve his liquidity position.
Retailers may use this method for consumers too. A marketing company having heavy-duty may offer a cash discount for early recovery.
6. Seasonal Discount
If a marketing company produces a product which is purchased seasonally, it may adopt the strategy of granting a seasonal discount to buyers.
By seasonal discount, a company can maximize its sales.
7. Off-Season Discount
To keep the production line in operation in reasonable order during the slack season, a marketing company may offer off-season discount to the buyers of its product.
8. Promotional Allowances
Promotional allowances are price reductions granted by a marketing company in payment for promotional services performed by channel members. The area of promotional allowances is very comprehensive.
A marketing company may provide free goods to the middle man for the purpose of display. The company can share advertising and other promotional expenditures incurred by the middleman.
4. Geographical Pricing Strategies
In price determination, a marketing company may consider the transportation cost involved in the delivery of a product to the buyer.
This pricing policy useful when transportation cost becomes an important part of total variable costs.
The decision in this regard may have an important bearing on the location of the plant, the source of its raw material, geographical area of the company’s market and its competitive strength in various market areas.
The following methods are generally used in geographical pricing strategy:
1. Ex-Factory Pricing
It is a widely used Geographic pricing system.
In this method, a marketing company quotes the selling price at the factory site or other points of production and the buyer pays the entire cost of transportation.
It is appropriate when the firm is dealing in bulky and heavyweight products which incur high transportation cost.
2. Zonal Pricing
Under the zonal pricing policy, a marketing company divides its total market into broad Geographic zones and a uniform price is set within each zone.
In India, the number of FMCG companies are following this pricing policy.
3. Uniform Pricing
Uniform pricing system may be used by a marketing company where transportation costs are a minor part of its total cost structure.
In uniform pricing, a marketing company quotes a single price for all buyers regardless of their locations.
Under this pricing policy, buyers located near the plant of marketing company pay some of the cost of transportation for the buyers residing in a more distant location. Bata shoe company, follow this pricing policy. It provides credibility to the firm. Customer does not hesitate to buy the product anywhere from the country.
5. One Price vs Variable Price Strategy
Under one price policy or strategy, a marketing company charges the same prices from all customers who buy similar quantities of the product under the same terms of sale.
Therefore, it is clear in this policy that the company does not discriminate between buyers so far as the price of the product is concerned.
In the variable price strategy, the company will sell the product to buyers at different prices.
The prices for products under this policy would be decided by bargaining between the marketing company and buyers.
6. Psychological Pricing or Odd Pricing
At the retail level, psychological pricing strategy is commonly used. Such a pricing strategy was originally adopted by the footwear industry.
For example, under this pricing strategy prices of products are set at odd amounts such as $499, $99, etc.
Retailers believe that odd pricing will result in larger sales and would give an impression to buyers that price calculations are accurate. This pricing policy is generally avoided in higher priced products.
Now, this pricing strategy is being used in the number of consumer products such as clothing and watches and other technological products also.
7. Resale Price Maintenance Strategy
This strategy is used when a marketing company wants to control the prices at which retailers will resale its products to the ultimate consumer or industrial user.
In this strategy, under the contract between the marketing company and retailer, the latter is Bound to sell the company’s products at the specified prices.
The resale price is so rigidly enforced that retailers franchise may be canceled if he does not adhere to the company’s price list. This is possible when the marketing company has selective or exclusive distribution rights.
Resale price maintenance has been a controversial pricing strategy. because it prevents fair competition in the market.
Thus, it is termed as an anti-consumer pricing strategy.
8. Price Lining Strategy
Price lining strategy is generally used by retailers to sell products. Under this strategy, a limited number of prices are determined at which the retailer will sell its entire Merchandise.
From the retailer’s point of view, the policy is advantageous because it provides great assistance to them in the planning of purchases. For consumers, the policy provides many benefits.
It saves time and wastage of efforts of consumers because they go to select shops according to their affordable capacity.
9. Leader Price Strategy
Leader pricing strategy may be defined as the one in which a marketing company in the industry initiates price changes and other companies in the field follow approximating price set by the initiating company.
The company initiating price changes is called price leader and those followed it, price followers.
A company can hope to become a price leader and initiate price changes when it commands a substantial market share or enjoys brand reputation sound pricing.
10. Price Competition Policy or Strategy
Under this policy, in marketing company competes on the pricing front. This policy suitable when the target market of a company is very sensitive to prices.
In this strategy, the marketing firm tries to provide “value for money” to consumers. In this strategy, the company may decide to engage itself in price competition by regularly offering prices which are as low as possible.
The marketing company adopting this policy often offers minimum services to consumers.
This pricing policy has special significance in Indian markets keeping in view price sensitiveness of our most population due to poor purchasing power.
The success story of ‘Nirma Chemicals‘ is the best example in this regard ‘Ajanta watches‘ has also followed this pricing strategy and garnered good market share.
11. Non-Price Competition Strategy
In this strategy, the marketing company does not bother for the prices of the product.
The prices of products are set above the market level. Two major methods of non-price competition are product differentiation and promotion.
Under this strategy, a marketing company creates differential value in its product to position them superior to rival’s products. With the support of an aggressive promotional campaign, the company tries to create brand loyalty for its products in order to reduce price comparisons.
In non-price competition, a marketing company attempts to shift its demand curve to the right by means of product differentiation, promotional activities or with the help of some other device.
By using this pricing strategy, a marketing company may earn high profits, because consumers’ buying decisions would be based on brands not on the price of the product.
The pricing strategy of “Hindustan Lever Limited” and “Titan watches” is a good example in this regard. It is important that in this strategy the marketing firm charges ‘money for value’.
The firm tries to provide the maximum value of the product and the customer is ready to pay high prices to enjoy the value of the product.
12. Transfer Price Strategy
Transfer pricing strategy refers to prices charged when goods or purchased products sold within the corporate family.
Determination of mode of transfer pricing becomes necessary when a firm begins to establish joint ventures, the establishment of foreign subsidiaries, setting collaborations with other partners or going to appoint franchise holders in foreign countries, in order to give a boost to its global marketing operations.
In these situations, the firm has to search an appropriate method of charging prices as good moving from one unit to the situated in another country or from the international division to foreign subsidiaries.
Basic objectives of transfer pricing strategy are:
- To facilitate the control of the Parent company of its subsidiaries.
- To keep the operations of all units across the world of profitable.
- To reduce the problem related to text structures.
- To maintain harmony among the different units or with subsidiaries.
- To keep the prices of the firm’s products competitive to its rival foreign companies.
Thus, now you know the Strategies & Policies of Pricing in Marketing.