PRICING DECISIONS

All business aim their goal on maximizing their profit and increasing their market share. But, at the same time, they make sure that their pricing favours the customer buying decisions. Thus, ‘smart pricing’ is a very important technique to meet this need, but it is not an easy decision to make.

Bingo learnt its pricing lessons from the failed pricing strategy of Frito Lays. Lays increased its price from Rs.10 per 35 grams to Rs. 15 per 45 grams. Since this affected sales, they went back to their old pricing methods. Bingo priced its 16 SKUs at Rs. 5, 10 and 20 per pack and maintained a consistent pricing strategy. This pricing strategy, along with its product differentiation, helped Bingo grow successful in the market.

The factors that affect pricing are given below,

Cost: Price is used as a frame of reference to the quality of the product. To produce a quality product, the sellers spend a lot on making. The selling price thus becomes proportional to the cost price of the product.

Marketing: The money that is spent on marketing is always expected to return when sales happens. Thus, the marketing costs also influence the pricing of any product.

Distribution Channels: When products are sold through intermediaries, the list price is expected to reflect the margins that they require. Sometimes list prices will be high because middlemen want higher margins. But some retailers can afford to sell below the list to customers. They run low-cost operations and can manage with lower margins. They pass on some port of their own margins to customers.

Competition: A company should be able to anticipate reactions of competitors to its pricing policies and moves. Competitors can negate the advantages that a company might be hoping to make with its pricing policies.

Consumer needs: Pricing also depends on what the consumer expects out of our product. Giving them too much for the price will reduce revenues and giving less will not help customer retention.

Setting the price

A firm sets the price of the product/ service that it offers when it builds the idea and research for that product. There are 6 steps that are followed during any pricing decisions,

Step 1: Selecting Pricing Objectives

As a first step, the seller will decide where they want to position themselves in the market. The clearer their objective, the easier it is for them to price.

·         The Bingo brand of chips was launched by ITC on 14th March 2007 with an aim to capture at least 25 percent market share of the Rs 2000 crore branded snack market within five yrs with an aggressive pricing strategy.

·         Presently the relative market share of Bingo is 16% (Lays 45%).

·         They tried to be on par with the leading market players (Lays, Kurkure) by maintaining pricing their products at Rs 5, Rs. 10 and Rs.20. For the competitive edge they tried to offer more weight.

·         To recover the manufacturing cost, transportation cost, distribution and sales cost,etc.

Step 2: Determining the Demand

There is usually an inverse relationship between price and demand. The higher the price, the lower is the demand.

Step 3: Estimating costs

The demand sets a cap to the company for its production costs. The company will want to charge a price that covers the production costs.

Step 4: Analysing Competitors’ cost, prices and offers

Within the range of all the demand and production costs, a company takes into account, the competitors’ pricing strategies before they decide on their pricing. If a competitor offer more features in the same price, the company should make efforts to offer more within the same production costs, or cut down value from its own price.

·      The pricing strategy adopted by Bingo is a clever one. Bingo is priced the same as the Lays brand of chips at Rs10 for a 35g packet and Rs5 for the smaller one. By adopting a consistent pricing strategy and by offering higher margins to the retailers Bingo has won the retailers’ hearts.

Step 5: Selecting the pricing method

The three C’s of pricing summarises the major contributing factors price setting. Companies include the pricing method that include one or more of these consideration.

·      Reference pricing

Bingo priced itself at Rs. 10 for 45 grams as compared to Lays which was Rs. 15 for 45 grams. This gave them an edge to grab in market share.

·      Price cues

It followed odd number discounting i.e. 33% extra

·      Competition based pricing

Step 6: Selecting the Final Price

Company sets their final price with consideration of additional factors that are not mentioned above, like marketing campaigns, gain and risk share pricing and impact of pricing on other parties.

·      Since the initial objective of Bingo was to capture 25% market share but now keeping in mind the increasing inflation rate and production costs it will have to sooner or later re-price its products.

·      But it should wait for the market leader to take the initiative in this context.

·      It should also reduce the quantities it is offering and other discounts.