Read the caselet carefully and answer the following questions:
1.What are the issues that marketers face in pricing products and services? Discuss.
2.In pricing a product, there are many considerations to reach a number for a specific product, such as different types of costs, expected returns on investments etc. Explain the various methods on which companies can base their pricing.
The domestic airline industry witnessed an unusual phenomenon in late 2004. While the major airlines rather reluctantly announced a 10 percent increase in fares, triggered by higher international fuel prices, at the start of a bright tourist season, the newcomer and price -warrior Deccan Airways on the same day slashed the already rock-bottom prices on some sectors by 20 percent. Contrary to the expectations of the conservative business traveler, its flights reportedly went full. The safety-minded traveling public has apparently shed its skepticism and started supporting the newer entrants, first Sahara and then Deccan. While Jet Airways, the main challenger to the State-owned monopoly, is an example of a superior strategy based on efficient customer service, comfort, punctuality and attention to detail, and could exact even a premium, the purely price-based competitors wrote themselves a different script.
In an earlier era, price-based warfare had been relatively rare across most of Indian business. True, there were a few low-priced manufacturers in many categories but they were written off as beyond the pale by the so-called large, organized sector, the assumption being that anyone who could charge a price much lower than the established players must have sacrificed some essential element of quality and performance. At best, a lower price was an occasional and defensive tactic during times of difficulties, meant mainly to stimulate falling demand in a recession. One made annual plans forecasting both revenues and net profits, assuming predictable conditions for at least a 12-month period, taking it for granted that if input costs increased beyond expectations, price increases could be automatic, and could be forced upon the market place to protect one's profit margins.
Almost all industries have, however, been brought face to face in recent times with the severe and demanding nature of the market forces, and the crucial, indeed survival value of pricing decisions. Dropping prices is not just a passing gimmick any more; genuinely steep and permanent price reductions have become part of the game.
How to fix the price of a given product (whether a multi-million dollar contract or a bottle of a new shampoo brand) is such a messy and hazy affair when you get right down to it that it is still a fertile field for sophisticated research. At best, one can only give some guidelines, which meant a lot of “it depends” statements. One could think of many ways to reach a number for a specific product, mostly from internal considerations such as different types of costs, variable or otherwise, expected returns on investments, probability of reaching a certain minimum volume needed, the level of corporate ambitions for profit and so on; yet the puzzle remains, what the right price is remains a moot point, although one could ideally describe it as the level where the customer and the producer are both left satisfied that they have had a bargain.
The pricing of a product has an impact on the demand, sales revenue, profit margins and the break-even level. It sends signals about the direction in which the management is heading to all external associates – from distributors, dealers, and customers to bankers and industry analysts.
Sometimes, perhaps more often than senior management care to admit, the decision is not so much whether to lower the
price to match competition but when to do so, and by how much. When mulling over such decisions, it is always a temptation for the CFO to procrastinate by asking for more and more analysis, making fine distinctions and forecasts of likely impact of different combinations of price reductions and promotional discounts, on sales and profits. Faced with the prospect of a squeeze on margins one does tend to clutch at straws and postpone the evil day. Most frequently, a price reduction is also seen as an indignity, an admission of defeat on the part of the managers. It is as though the sales force and dealers were incompetent to extract a full and ‘just’ price from the market. Yet, in very competitive times – as the present and foreseeable future – managements have few options beyond trying to restrict the damage to the bottom-line by continuous efforts to trim costs without anyway offending the perceived value of the customer. All said and done, the final word today is with the customer, not the cost accountant or even the competition.
Nowhere is the distinction between an ‘attractive’ and customer value so critical as in the case of the capital asset. Directors of companies that appreciated this difference, acted on the principle that they owed it to the shareholders to provide them sustained value returns of a high order – and not to those ‘share-flippers’ primarily driven by the price from one day to the next. There is a worthwhile parallel in this for the marketing managers who think strategically. If they wish to build long-term customer preference for their brands, they must systematically deliver long-term value, and thus reward the loyalists more than the switchers.
In the case of consumer durables, this value in an enduring sense is captured by the lifetime cost of owning and use, including repair and upkeep. Thus flawless performance, durability, reliability and superlative service and warranty handling (if and when it becomes necessary) are all values deliver ed and to be factored into the real price. The initial purchase price alone does not reveal the whole story. With services, notably those such as airlines, hotels for the business traveler and banking, the real pay-off to both parties comes from an ascending scale of value (or net gain). Hence, the cost of loyalty reward programs and owner clubs have a real part in the value delivered. Therefore, it must be reckoned in any comparison with costs of selling the same service to a moving stream of new customers.
A more infrequently encountered issue is how high a price to charge. Typically, this happens when a marketer innovates in some distinctive aspect and therefore offers visible and significantly greater performance, access, safety, convenience or other benefits in the product compared to older and established brands.
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