MARKETING MATERIAL
Service Prices Non-Profit Pricing Supply & Demand Equilibrium Price
Price Elasticity of Demand Real Demand Factors Influencing Price
Estimation of Demand Curve Product Life Cycle Services Life Cycles
Portfolios Product Line Pricing Segmentation Brand Monopoly
Regulation Customer Benefits Price & Distribution Market Factors
Environment Geographical Pricing New Products Pricing Skimming
Penetration Practical Pricing Price Premium Cost Plus Competitive Pricing
Target Pricing Historical Pricing Range Pricing Price Positioning
Market-Based Pricing Discounts Price Wars Volume Sales Selective Pricing
Minor Brands Price Challenges Avoiding Price Wars Prisoner's Dilemma
9447 MARKETING Chapter 7
- Pricing Decisions
Introduction
The traditional theory of pricing, that of supply versus demand,
is developed from economics. As such it offers a useful
intellectual framework for the consideration of pricing issues.
Unfortunately, most of the parameters needed to apply this theory
cannot normally be measured in practice; and customer needs and
market factors tend to dominate the more `practical' marketing
theory.
New product pricing, whether to `skim' profits or to `penetrate'
the market, is a particular form of pricing; which poses rather
different challenges.
However, much of this chapter is taken up with a description of
the various practical pricing policies adopted; from cost-plus
and market-based strategies to selective ones. Discounts are also
investigated; as, in some detail, is competitive pricing.
Probably the single most important decision in marketing is that
of price. This is partly because price may have an impact on
sales volumes. If the price is too high, and the market is
competitive, sales may be correspondingly reduced. Indeed, many
economists would see price as the main determinant of sales
volume. On the other hand, many of the more sophisticated
marketers have found ways to reduce the impact of price.
In practice, the main reason for the importance of price is that
it is one of the three main variables which determine the profit.
Thus, the profit per unit is equal to the price less the total
cost of producing that unit:
profit = price -cost
The third factor is the volume of sales; since the organization's
net profit is equal to the number of `units' sold multiplied by
the net profit obtained on each of those units. At this level the
mathematics are very simple --but also very important.
Thus, the higher the price can be raised, always assuming that
unit costs and sales volume do not change, the greater the profit
the organization makes; and many of the most powerful marketing
techniques have, therefore, been designed to maximize the price
which can be achieved. In practice, the calculation of profit is
much more complicated than this simple explanation allows for.
The long-term problems caused for the large Australian
corporations by that country's relatively loose definitions of
accounting have been evidenced by the massive insolvencies which
have resulted when reality has caught up with theory. Yet the
basic principle still holds --even if it is not necessarily easy
to implement!
AUDIT 9.1
How does your organization set its prices?
If your organization is in the non-profit sector, how does it
ration the resources amongst the competing demands which, in a
commercial market, is normally supposed to be a function of the
price mechanisms?
Most pricing theory talks in terms of products, but for services
the potential complication is added that some service providers
tend to have different terms for price (admission, tuition, cover
charge, interest, fee and so on). However, the result is exactly
the same. The consumer has to pay a price, and the mechanisms for
fixing that price are much the same, although there may be some
marginal differences, such as:
negotiation --in view of the variability of the service being
offered, there may be more scope for individual negotiation
discounts --owing to the `perishability' of the service, there
may be incentives to use it at unpopular times (off-peak train
fares, matin<130>e prices for theatres, and so on)
quality --higher pricing, to demonstrate quality (which is
usually much more intangible in a service) may be more prevalent
Price and Non-profit Organizations
Price is an element of the marketing mix which seems, at least on
first inspection, largely irrelevant to non-profit organizations.
Even so, there are a number of such organizations which (while
having charitable status and, accordingly, not allowed to make a
profit) still charge for their services. It is frequently the
case that the term `surplus' is interchangeable in these
organizations with profit; and they behave in exactly the same
way as profit-making organizations.
However, there remain a large number of organizations (typically
in the government sector) where no money changes hands. There
simply is no price. Allocation of the service to the consumer is
by other means; such as need (determined by a doctor, for
example) or queueing (such as in hospital waiting lists). Many
aspects of pricing are, therefore, not fully applicable. On the
other hand, some of the principles can still be applied if
`price' is replaced by the `perceived value' of the consumer
(discussed later in this chapter). Thus, the consumer still puts
a value (often a high value) on the service, and this can be
dealt with much as `price' itself. Certainly, if the service
providers are to best match their consumers' needs they should
have a good appreciation of the value the consumers put on the
service.
As Kotler and Andreasen - 1 - point out, however, there may be
other `costs' that some of these `consumers' might be asked to
pay, including:
`sacrifices of old ideas, values or views of the world'
`sacrifices of old patterns of behaviour'
`sacrifices of time and energy'
Much of the theory of pricing has derived from that of economics.
The basic idea, according to such theories, is that `demand' will
be different at each price which might possibly be chosen. In one
of the leading economics textbooks, Begg - 2 - defines it
thus:
'Demand' is the quantity of a good [which] buyers wish to
purchase at each conceivable price.
Demand is normally, but not always, assumed to fall as price
increases.
Thus, a 'demand curve', showing the demand at each price,
can be drawn:
For convenience, the demand curve (with demand increasing as
price falls) is here shown as a straight line, but it could
follow other paths; and, indeed, is most often shown as a smooth
curve which is concave towards the origin, reflecting a constant
price elasticity of demand (described below); since demand is
normally expected to be inversely proportional to price (that is,
the higher the price the less the demand).
Much of economics was, and still is, traditionally taught on the
basis of graphical representation, and the graphical approach
does make the theory easier to appreciate. In recent years,
particularly with the wider availability of personal computers
and the presumed increase in numeracy, this approach has been
complemented by the equivalent mathematical representation --in
this case as the 'demand function'. For an explanation, if
you are a mathematics aficionado, consult an economics textbook,
such as that written by Richard Lipsey. - 3 - Similar concepts
apply to 'supply'. Again, Begg's - 4 - definition, not
surprisingly, is:
Supply is the quantity of a good [which] sellers wish to sell at
each conceivable price.
Not unreasonably, supply is expected to increase as price
increases (the reverse of demand), giving the 'supply curve'
shown at the top of the next page. The supply line is
conventionally assumed to be straight.
The problem posed by this traditional `economic' approach is that
the `demand function' is usually almost impossible to determine.
As the eminent economist W. J. Baumol - 5 - said:
We have seen, then, how difficult it is to find actual demand
relationships in practice. These problems are, to a large extent,
a consequence of the very peculiarity of the demand function
concept itself --the fact that it represents the answers to a
set of purely hypothetical questions and that information is
taken to pertain simultaneously to the same moment of time.
However, if we assume that the function 'is' known, and if
the two curves (of demand and supply) are superimposed, we have:
This is the conventional graphical representation of the
'theory of supply and demand'.
At the 'equilibrium price', the quantity demanded by
consumers matches the quantity supplied by sellers; there will
be nothing left to sell, nor will there be any shortage --and it
is said that the market has `cleared'. This is the price which
will, therefore, be set by the market. Begg's - 6 - definition
is:
The equilibrium price clears the market ... It is the price at
which the quantity supplied equals the quantity demanded.
In economics, therefore, the basis of price is this balance
between supply and demand; and price itself is most often seen as
the prime determinant of both supply and demand.
The body of this theory was largely developed in the nineteenth
century, when the economic wealth of nations was still
developing. At that time most of the markets were still almost
pure commodity markets, supplying basic essentials, which were
undifferentiated; and the consumer's choice was accordingly based
on price alone. Their purchasing strategy was to use their very
limited funds to obtain the maximum amounts of these basic
essentials. This simple approach may still work in commodity
markets, where professional buyers purchase identical commodities
solely on the basis of price.
In addition, as Webster and Wind - 7 - point out:
This price-minimizing model from the theory of the firm, or
microeconomics, also assumes that the buyer has near perfect
information about the alternatives available to him in the
market. It further assumes that competing brands are reasonably
close substitutes.
They also take the model rather further, when they extend it in
terms of a 'lowest total cost model' which:
... is essentially an elaboration on the minimum price model
[above] in which additional costs (other than initial purchase
price) are recognized as significant. This model assumes a goal
of profit-maximization and a very well informed buyer. It adjusts
initial purchase price to reflect additional costs of the
product-in-use...
This is the `rational' model used to justify many capital goods
purchases.
In recent years, however, the majority of the inhabitants of the
developed nations have moved into a period of `affluence', and
the basis for their purchasing patterns, and the associated
economics, have changed. One view of this was particularly well
described by J. K. Galbraith. - 8 - In essence, this new view
of economics is that most purchasers are no longer restricted to
buying essentials, but can indulge in luxuries. The suppliers of
these differentiate them, to the extent that some suppliers can
achieve almost monopoly powers over their markets. The resulting
price theory is, therefore, much more complex. It is in this area
of business that most marketing activities take place; and here
there may be more truth in what Kenneth Galbraith says, despite
his criticisms of marketing, than in the teachings of some of the
neoclassical economists.
The degree to which demand is sensitive to price is called
'price elasticity of demand'. This is often shortened to
`elasticity of demand', although strictly this is incorrect,
since economists recognize that demand may also depend on other
factors, such as income. Again, Begg - 9 - gives the classical
definition:
The 'price elasticity of demand' is the percentage change in
the quantity of a good demanded divided by the corresponding
percentage change in its price.
or
price elasticity of demand = change of demand (per cent)
/ change of price (per cent)
This simply recognizes that some products or services are more
sensitive to price than others. In the commodities market, for
example, the demand for your product will be very dependent upon
the price you ask; and if you foolishly set the price above that
which prevails in the market, you will be very unlikely indeed to
sell anything, for the buyers well know that they can buy exactly
the same goods elsewhere at lower prices. The demand, or even
sometimes price itself, here is said to be 'elastic';
although purists would once more object, for the reasons
mentioned earlier.
At the other end of the spectrum there are those products demand
for which is very insensitive in terms of price. Thus, for
example, Apple has so differentiated its PCs that they have a
virtual monopoly of their segment and can set almost whatever
price the company wants, within limits. Again at the risk of
offending the purists, this is often called `inelastic demand'.
The reason why Apple is still somewhat constrained in its pricing
is that, in theory, depending upon the relative prices there can
often be switches of demand between various segments or even
between markets. Thus if the price of one good (say, the Apple
computer) rises too high, some of its buyers will switch to an
alternative good (say, an IBM computer), even though this is not
a perfect substitute. This is called the 'cross price
elasticity of demand':
The cross price elasticity of demand for good ('i') with
respect to changes in the price of good ('j') is the
percentage change in the quantity of good ('i') divided by
the corresponding change in the price of good
('j'). - 10 -
The point to note here is that a `good' in this context is any
similar product in one market or segment 'i'. The `good'
'j' is a product in another segment ('j'). Thankfully,
Begg shortens the term to `cross elasticity of demand'; yet again
despite the risk of offending the purists.
For most markets that now exist, however, a more practical demand curve might look rather different from this classical model;
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Rule #162 - REAL DEMAND -
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Thus, the typical demand 'curve' of most products or services is much steeper than traditionally assumed. In essence the demand is relatively inelastic (with respect to price). At the same time the supply 'curve' is very elastic above the entry price (the price at which the market becomes attractive to new entrants). below this point, however, it is inelastic. In other words, new entrants require a given price level before they will make the investment necessary to enter . Above it they will produce in ever larger quantities, but below it they will not even consider production.
In recognition of this 'entry' level price, the existing tenants will (or at least should, according to this theory) maintain the equilibrium price in the market somewhat below this level. The amount of this 'discount' can be described as the 'competitive insurance'; since it represents their uncertainty as to what is the exact level.
Contrary to much of economic theory, the evidence suggests that (except for those protected by patents) the monopoly price will be often be lower still; representing the 'monopoly insurance', which the monopoly-holder is willing to pay in order to avoid the monopoly being taken away (directly by competitive activity or indirectly by government regulation).
The problem is that these models describe price activity in only one context - that where only price counts, and 'commodity' prices obtain. On the other hand, when the operators within a market decide that its products or services should be treated as commodities, and be priced accordingly, then something like this holds. Fortunately, this applies to only a small minority of markets.
AUDIT 9.2
Do you, or your organization, have any idea of what the supply
and demand curves for your products or services are like? Can you
measure the price elasticity of demand?
If the answer to the second question is yes, you belong to a very
fortunate organization (or you are faking your answers). Most
organizations depend on products or services which are in markets
that are so complex, and changing so rapidly, that it is not
possible to measure these factors. There are, however, just a few
markets (such as those for basic commodities) where these can be
measured --and `scientific pricing' can be applied.
The above theory assumes `perfect markets', in which all
consumers and suppliers come equipped with perfect knowledge of
all the prices available, for products (commodities) which are
identical to each other. In addition, the market always clears;
that is, all the demand is exactly matched by supply, and vice
versa. This may be true of a few money markets, and the pure
commodity markets; although even in these cases other factors are
often also at work.
As suggested earlier, it clearly is 'not' true of most
markets in which marketers are plying their trade. Indeed, it is
almost impossible, by definition,
for a marketer to have any effect in a `perfect market'. In
economics this unwelcome intrusion of real life is the subject of
extensions to the basic theory, to cover `monopolies and
imperfect competition', for example: these extensions are
generally rather esoteric.
Even so, an understanding of the basic theories of supply and
demand does offer the marketer a useful insight into some of the
key factors which may affect the prices that he or she is able to
obtain. In particular, the concept of `elasticity of demand' is
one which is widely discussed, and does have a major role to play
in pricing decisions. In some markets, such as the car market,
where a long sales history is available and the behaviour of the
participants has been reasonably consistent and rational, it may
even be possible to use `regression analysis' (described in
chapter 5) to establish what the curves of supply and demand
actually are. As always, though, this is a historical process;
and the future behaviour may not be so consistent.
Estimation of the Demand Curve and `Price Elasticity'
Three main ways of measuring the demand curve (and the related
price elasticity of demand) are suggested by theorists:
'Statistical analysis of historical data'. This, at least in
theory, uses historical data to `plot' the curve. Unfortunately
there are very few situations in which this can be carried out
directly; since there are too many variables in the normal
complex market situation --and the `environmental' factors, in
particular, change over time. Even the use of `regression
analysis', as mentioned above, may not be able to remove the
effects of those other factors.
'Survey research'. It might seem that market research should
be able to find out what consumers would buy at various prices,
allowing the curve to be plotted. In practice, as it turns out,
the results from such research are generally so inaccurate that
the curves cannot be plotted with any certainty.
'Experiment'. The one successful device is to test prices,
in a test market. For many manufacturers this may be of
questionable value: the costs of the test are significant, and
the price effect measured may be relevant for just a short time.
Retailers themselves, with the luxury of many branches, are much
better placed to run such trials.
The practical reality is that these techniques are rarely used.
AUDIT 9.3
What are the most important factors which influence the prices
that your organization can obtain?
Let us, therefore, now look at the factors which can influence
`elasticity of demand', and thus affect price. The main factors
can be grouped into those which are almost totally under the
control of the organization and those which are out of its
control, or can only be partially controlled:
Organization factors
Life-cycle
Portfolio
Product line pricing
Segmentation and positioning
Branding
Customer factors
Demand
Benefits
Value
Distribution
Market factors
Competition
Environment
Organization-controlled Factors
Even in a very competitive market, at least some of the factors
affecting prices may be under the direct control of the
organizations involved.
We saw earlier that the stage of the life-cycle through which the
`product' is currently passing may in theory have an impact on
price. At the `introduction' it may be set high to capitalize on
its uniqueness (`skimming'), as the first video-recorders were.
This high price may be carried through to `maturity' or later;
taking `skimming' to its logical conclusion --as a `niche
player', such as Bang & Olufsen, might do. More probably, as we
shall see later in this chapter, the price might be reduced to
maximize `penetration'. It is only at the end of `maturity', when
the market moves into `saturation' that, according to this
theory, price competition should break out in earnest. Even then,
as products go into decline, prices should rise again as they are
`milked'.
The theory also requires that, to be under the control of the
organization, the `product' has a life-cycle which is separate
from that of the overall market; and that only happens if the
organization develops a segment, or `niche', of its own --which
is discussed below:
'Overall then, the PLC is usually not a particularly useful
guide to pricing policy'.
For `non-profit' services the life-cycle is also important, in
that the perceived value of the service will vary in much the
same way over the life-cycle (and service producers need to
recognize this). The concept of `product' portfolio may also be
used, based on value, to ensure that the `offering' to consumers
balances the 'range' of their needs. For example, a national
health service may need to maintain support for a wide range of
services, including some `old-fashioned' treatments (which
patients still demand), at the same time as bringing in new and
exciting services.
If, as is likely, the organization has a portfolio of products,
it can follow different pricing policies on each; balancing these
against each other, so that the overall impact is optimized. In
any case, such pricing may be forced upon it. A `problem child'
may fail to become a `star'; and if it is not to be immediately
discontinued, its price will probably need to be raised so that
it can be `milked' to retrieve some profit cover from the
situation.
Looking at the portfolio in more general terms, it may even be
possible to run two or more very similar brands with different
pricing policies. Thus one can be in the mainstream of the market
and at a reasonably high price, as is Unilever's Persil
detergent, while another is quite specifically targeted at a
lower price to cover those consumers who are particularly price
conscious; as Unilever's `Square Deal Surf' very obviously was
for a number of years.
The portfolio approach is a powerful one, not least because it
can `underwrite' any attempts to set a high-price policy by
differentiation; balancing the risk of such experiments against
the security offered by the brand remaining in the lower price
position. Such a higher-price policy often succeeds, not
infrequently against the expectations of most of those involved.
'The portfolio approach, however, is only available to those
who have the financial resources, and the position in the market,
to make it worthwhile'.
Another variation may be that the pricing of one product or
service has an impact upon others supplied by the organization:
'Interrelated demand'. The price of one product may affect
the demand for another. They may be complementary (for example,
the computer and the software that runs on it), so that an
increase in one part of the `package' results in demand for both
falling. They could, however, be alternatives; as already
mentioned, Procter & Gamble have a range of detergents, and
increasing the price of one may switch demand to another.
'Interrelated costs'. Sometimes the products use the same
facilities (the same car assembly line may produce a range of
models) or may be derivations of the same process (so that petrol
and heating oil are different `fractions' of crude oil, and one
cannot be produced without the other). In these circumstances,
changing sales volumes can obviously have knock-on effects on
other costs.
Pricing strategies under these circumstances can be complex; and
are usually a matter of judgement.
Segmentation and product positioning
The `classical' techniques for obtaining higher prices are those
of positioning and segmentation. By creating a distinct segment
which the brand can dominate, the producer hopes that the price
can be controlled. Indeed, unlike some of the more theoretical
approaches, experience shows that this can often be achieved in
practice (Apple, with its own special `niche', was able to stand
out against the cut-throat pricing which infected the rest of the
PC market).
Most of the techniques involved were covered, in some detail, in
chapter 6. All that need be said at this stage is that a prime
benefit of such segmentation and positioning is the reduction in
price pressures. 'If price competition is severe, therefore,
the first action should be to see if segmentation can offer a
degree of protection'.
As already explained, most of the economic thinking which lies
behind the theory of price elasticity of demand revolves around
`perfect competition' (which, in the economic context, usually
means exclusively price-based competition). On the other hand, it
can be argued that one of the main objectives of the marketer is to create a monopoly for the brands that he or she manages.
The ideal outcome would be that the brand was so differentiated
from its competitors that the customer would not choose these
other brands, even if the first choice brand was not available.
The marketer wants to see the consumer enter the supermarket
determined to buy Heinz Baked Beans, not just a suitable variety
of ordinary baked beans.
A variation of this process, in the industrial purchasing sector,
is described by Webster and Wind: - 11 -
The constrained choice model concentrates on the fact that most
supplier selection decisions involve choosing from a limited set
of potential vendors. Potential suppliers in this set are `in'
while all other potential suppliers are `out'. Constraints on the
set of possible suppliers can be imposed by any member of the
buying organization which has the necessary power ... The source
loyalty model assumes that inertia is the major determinant of
buying behaviour and stresses habitual behaviour.
Another element (which sometimes leads to the constrained choice
model) is that of `perceived risk'. As Cyert and March - 12 -
explain:
The perceived risk model emphasizes the buyer's uncertainty as he
evaluates alternative courses of action ... buyers are motivated
by a desire to reduce the amount of perceived risk in the buying
situation to some acceptable level, which is not necessarily
zero.
Something approaching this view surely led to the famous motto
`Nobody ever got fired for buying IBM'.
In some circumstances, such as those enjoyed by the power and
telephone utilities, the organization holds a near-absolute
monopoly, and can set its own prices. Paradoxically, there is
evidence that such monopolists often choose to set 'lower'
prices, to expand the market and preserve their monopoly position
(at least from the threat of regulation).
Indeed, regulation, including self-regulation, is a factor which
has a significant impact on the pricing policies employed by many
organizations; and perhaps also, down the line, in those other
organizations whose demand derives from them.
AUDIT 9.4
To what extent is your organization in control of its prices?
How, if at all, does it use the techniques of life-cycle pricing,
portfolio management, segmentation or positioning, and brand
monopolies?
If it does not already use any of these techniques, how could it
use them?
The major determinant of prices, of course, will be what the
consumer is prepared to pay, which is in turn related to a number
of other factors:
Customer factors
Demand
Benefits
Value
Distribution
Customer demand
Following from the earlier economic theory, and assuming a steady
supply --as is often the case --variations in customer demand
should result in changes in price. This is most obvious in the
commodity markets, such as that in oil: for example, consumers
reduced their demand for oil to such an extent following the
massive 1973 price rises that there was eventually a glut and
prices were forced down again. It is also evident in other
markets, such as that for housing, which have alternating periods
of boom or bust; often seasonally related. Holiday markets are
closely tied to the seasons, in particular to the school
holidays, and the prices reflect this. The railways operate a
similar approach, but on a daily basis, with high `rush-hour'
prices, but `off-peak' bargains.
In the non-profit sector, such surges in demand may be
controlled, at least to some extent, by allowing queues to
lengthen (as happens for cosmetic surgery).
The more important or desirable the benefits, the more the
consumer will be prepared to pay. Thus, as we have seen, there is
the basic `commodity price' which would be paid for any product
of an identical type; assuming that there was perfect
competition. Beyond this there is the `premium price' which
consumers will pay for the additional benefits they believe the
specific brand will give them. This emphasizes, yet again, the
importance of understanding which are the most important benefits
in the eyes of the consumer since these are the very ones which
will justify a premium price.
'These benefits are conceptualized as the `value' that the
customer sees in the product and, in theory, there should be a
balance between this and the price asked'.
This `perceived value' can then be matched against the price on
offer, to see whether the purchase is worth making. This theory
does at least recognize that different buyers, or groups of
buyers, may have different motivations. The Volvo buyer probably
places a higher value on personal safety than does the buyer of a
Porsche; and it is likely that the latter will consider that the
car's value as a status symbol is not to be ignored, in
comparison with, for example, that of a similarly specified
Japanese car.
In this `model' the 'rational' consumer is seen to weigh up
all the benefits and determine what they are worth. This idea
also lies behind the economists' theories of supply and demand.
It is assumed that each `consumption bundle', which may be made
up of a number of different goods, offers the consumer a specific
value of 'utility'. Different combinations of goods may
offer the consumer the same amount of utility, so that a line can
be drawn on a graph, linking these points of equal utility. This
is called an 'indifference curve', since the consumer is
believed to be indifferent between any of these choices --they
are all equally attractive. Few workable indifference curves have
been produced, and it is not normally a viable basis for
pricing.
Paradoxically, price itself is often seen as a measure of
quality: the higher the price the higher the quality is presumed
to be. As Erickson and Johansson's research - 13 - showed:
The price-quality relationship appears to be operating in a
reciprocal manner. Higher priced cars are perceived to possess
(unwarranted) high quality. High quality cars are likewise
perceived to be higher priced than they actually are.
The theoretical balance of `perceived value' and price can also
be used to apply this element of the 4 Ps to non-profit
organizations. In these cases the `perceived value' may be used
instead of `price'. Thus, the hospital consultants, who have a
large degree of control over the disposition of resources (and as
a result, over the queues) in a state health service could (and
perhaps should) take into account the patients' `perceived value'
of the various treatments, rather than just their own view of the
medical needs. In the light of this it might, for example, be
found that increasing the proportion of resources devoted to
minor surgery (rather than that dealing with life-threatening
ailments) would increase the overall `satisfaction' of the
patients as a whole. Without asking the patients (which is a
central concept of marketing) which choice they would make, at
least in terms of `perceived value', it is difficult to see how
their total `satisfaction' could be maximized.
If we return to the earlier factors, which we have already
discussed, we may see how this `perceived value' works for non-
profit organizations. In terms of the life-cycle, for example,
the perceived value may vary with its `age'; a newly launched
social service may be seen as more valuable (perhaps because it
will be tapping a backlog of clients with the most need) than it
will be late in its life-cycle, when alternatives will probably
have been developed. A portfolio of offerings may also be used,
but this time to present the community as a whole with the best
possible perceived value, balancing those little used services,
which (while they may have high value for each of the individuals
involved) may be seen as marginal by the community. Segmentation
or positioning, in particular, is an especially valuable
technique for ensuring that the `perceived value' offered to
groups is maximized.
The position is `social marketing' is inevitably more complex.
William Novell - 14 - comments that:
... the complex objectives of social marketers usually compel
them to focus on price reduction. That is they seek primarily to
reduce the monetary, psychic, energy, and time costs incurred by
consumers when engaging in desired social behaviour ... much of
the time, the social marketer cannot manipulate price and simply
tries to convince the target market that the practical benefits
outweigh the barriers, or costs.
Price and the distribution channel
In many situations the producer simply 'cannot' determine
the final price to the end-user or consumer. The intermediaries
in the distribution channel will apply their own pricing
strategies, which may be totally unrelated to those of the
producer --and may even be contradictory. Thus the distributor
may even choose to absorb any price increases which the producer
imposes. IBM found itself with a price war on its hands in the PC
market, not because that was what IBM wanted --indeed, it was
totally in contradiction to IBM's policies --but because that
was what its dealers chose to do. On the other hand, he may
equally ignore a price decrease which the producer has introduced
(to improve penetration of the product, say) to increase his own
profit, again with the result that the consumer sees no
difference.
AUDIT 9.5
What are the major benefits which your organization's customers
balance against price?
What is the perceived value of its main products or services? Is
this significantly higher then the actual prices, and if so,
why?
The other factors in the market may also have an important
impact, and may often be the ultimate determinant of prices:
Market factors
Competition
Environment
Competition
Apart from the competence of the supplier, in terms of the
ability to match price to the consumers' `perceived value', the
major factor affecting price is probably competition. What the
direct competitors, in particular, charge for their comparable
products is bound to be taken into consideration by the consumers
if not by the producers.
The framework for the analysis of and response to competition, in
general as well as price terms, was once again covered in chapter
4. This showed that there were means of managing competition,
even price competition, so that its impact on profits could be
minimized.
'Another response to price competition, therefore, should be to
examine if there are ways of `managing' it to reduce its impact,
and to signal to competitors that your response is not
aggressive'.
Direct competition may be rare in the non-profit sectors, but
indirect competition is not; and many of the same techniques can
be applied. If, say, you are trying to attract people to keep-fit
classes you may have to persuade them that the `value' of these
is greater than that of an alternative, which may be a session of
bingo.
The wider environment can also have its impact. Whether the
economy is booming or in recession may have a direct impact on
what consumers can afford to spend; although in recent years this
effect often seems to have been very selective, mainly hitting
those supplying capital goods to industry, while consumer sales,
to those still in work, have (except in the greatest depths of
recession) continued to rise.
Then despite governments' suggestions to the contrary, there are
also all the various aspects of legislation which constrain
freedom to move prices. At the very least, there is often the
veiled threat of interest from those agencies that are
responsible for monitoring `fair trading' and monopolies hanging
over those who are especially effective in managing their price
competition. The possibility of such regulatory intervention
should never be discounted.
AUDIT 9.6
Are the markets of your organization price-competitive?
What actions has your organization taken to manage such
competitive price activity? What actions do you think it should
take?
What legislation affects its prices? What future regulations
might apply?
Where transport costs are important, and particularly where there
are widely separated populations (as there are in the USA), then
geographical location may become a factor in pricing. There are a
range of strategies to cope with this:
uniform pricing --the same price is offered at all locations,
regardless of delivery costs. This is the most widely applied
policy in consumer goods markets; not least because it is easiest
to apply, in terms of the paperwork created.
FOB (free on board) --the cost of all transport is charged to
the customer (this is more likely to be found in industrial
markets).
zone pricing --the price is different for each geographical
region, or `zone', to incorporate the average transport costs
incurred in shipping to that region.
There are, of course, other possible regional pricing policies.
Not least of these are regional variations to allow for the
strengths of local, regional, competitors.
The time when an organization is most free to determine the price
of its products or services is when they are launched. Once the
price has been set, so has a precedent. In the event of any
future changes consumers will not have only the competitive
prices as a comparison, but they will also have the previous
prices as a 'very' direct point of reference. This makes it
very difficult to make substantial changes to the prices of
existing products or services. Consumer reactions may be severe
if they think they are being taken advantage of.
The new product may be entering an existing market. If this is
the case then price will be just one of the positioning
variables. On this basis, the price will be carefully calculated
to position the brand exactly where it will make the most impact
-- and profit. At a less sophisticated level, perhaps, the
producer of a new brand will decide which of the existing price
ranges -- cheap or expensive -- the product or service should
address. A supplier entering a mass consumer market can simply go
to the local supermarket, or specialty store, and see what prices
are already accepted. In industrial markets it may be much more
difficult to obtain competitive prices, even where published
price lists are available, since these are often only the
starting point for negotiations which result in heavy discounts.
In the case of a totally new product or service, the pricing
exercise will be that much more difficult; for there are no
precedents to indicate how the consumer might behave, and this is
an area where market research is notoriously inaccurate. In the
end it will have to be a judgement decision, as to what
`perceived value' the consumer will put on the offering.
Within these limits, however, there are two main approaches
possible for a new product, and to a lesser extent for an
existing one:
One approach is to set the initial price high, to `skim' as much
profit as possible, even in the early stages of the product life-
cycle. This is particularly applicable to new products which, at
least for some time, have a monopoly of the market because the
competitors have not yet emerged, and is a pattern often seen in
the 'introduction' of new technology. The price is then
reduced, possibly in stages, gradually to expand demand, until it
reaches a competitive level just before the competitors enter the
market. This is a fine judgement, though; and it is interesting
to note that in the case of video-recorders it was the late-
comers, with competitive prices, who actually swept the board.
The rationale behind skimming (sometimes called `rapid payback')
is normally quite simply that of maximizing profit. But there may
occasionally be another motive -- that of maximizing the image of
`quality'. This is a policy which holds in consumer markets such
as the upper end of the perfume trade: for example, sales of
Chanel Number 5 would probably not increase dramatically if the
price was reduced. But it can just as easily apply in industrial
markets. It is the foolish consultant who asks for a low price,
because the client will probably think that the quality is
comparably low.
As indicated above, the danger of a skimming policy is that a
high price encourages other manufacturers to enter the market,
because they see that sales revenue can quickly cover the expense
of developing a rival product. Even if your prices are not
exorbitant you may still need, therefore, to plan for a steady
reduction in price as competitors appear and you recover some of
your launch costs. Such a price reduction will normally be helped
by economies of scale.
On the other hand, a manufacturer could choose the opposite
tactic by adopting a penetration pricing policy; and, indeed,
this has been the very successful policy behind the move of
Japanese corporations into a number of existing markets. Here an
initial low price might make it less attractive for would-be
competitors to imitate innovations, particularly where the
technology is expensive; and it encourages more customers to buy
the product soon after its introduction, which hastens the growth
of demand and earlier economies of scale. The main value of this
policy is that it helps to secure a relatively large market share
and increase turnover while reducing unit costs; so that the
price domination can be maintained and extended. Its major
disadvantage lies in lost opportunities for higher profit
margins.
Under this broad category, however, there are a number of more
specific policies:
'Maximizing brand/product share'. This justification is
sometimes made in terms of maximizing sales growth; particularly
in new markets where competitive activity is less evident.
'Maximizing current revenue'. The assumption is that higher
sales automatically lead to higher profits, although in practice
most products are more sensitive, in terms of profit, to price
than to volume.
'Survival'. For some organizations, maximizing revenue by
price-cutting may be seen as the only way to survive. This is the
philosophy of despair.
The circumstances generally favouring the skimming and
penetration policies are summarized below:
Skimming <> Penetration
Prices are likely to be inelastic<>Prices are likely to be
elastic
The product or service is new and unique<>Competitors are likely
to enter the market quickly
There are distinct segments<>There are no distinct segments
Quality is important<>Products will be undifferentiated
Competitive costs are unknown<>Economies of scale apply
AUDIT 9.7
For which products or services has your organization adopted a
skimming policy?
For which products or services has your organization adopted a
penetration policy?
What were the results in each case? Were the decisions correct?
What would your own recommendations have been, and why?
The problem is that very little of the pricing theory which has
