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Module 1: Prodotti e Prezzi

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Pricing Strategies

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Now, when you are pricing a product for the first time what happens? It becomes a real
problem when you are pricing a product for the first time. In order to illustrate this whole
scenario I have taken a simple equation. So, you are looking at the quantity that is to be
that is produced, and then giving an equation for the demand. Let us say this equation is
like this Q is equal to 1000 minus 4P. Now you how does the cost function represented
itself? The cost function represent itself as C equal to F plus V times Q. What is this F? F
stands for the fixed cost, V stands for the unit variable cost, Q for the quantity.
So, when you look at cost function your cost function is characterized by C equal to F
plus VQ. Now, suppose you are given equation let us say for this cost function like 6000
plus 50 Q then how does your revenue come? The revenue is a is you obtain the revenue
by multiplying the price of the product with the quantity sold. So, the R will be equal to
P into Q, then what will be the total profits? The total profits will be nothing, but the
total revenue minus the total costs. So, Z or the Z representing the total profits will be R
minus C.

Now, suppose we have to determine the relationship between Z and P. How do you do
that? You can solve all these 1, 2, 3 and 4 equations. So, take that Z as R minus C. What
is R? R is P Q minus C, then what is this C? Substitute this for C P Q minus of 6000 plus
say 50 Q, then what do you get? You again substitute for your Q you get this equation.
What is likely to happen? If you see this equation becomes minus 56000 plus 1200
minus 4 P square you solve this equation, the second differential is likely to give you
what should be the price that should be charged.
So, if you solve this equation you will get for P equal to 150 your profits will be at 34000
which is the highest, this I represented to you when I looked at the differential calculus
earlier in the previous classes. So, the same equation I am using it for pricing the
product. So, when your P is equal to 150 your profits is at the highest that is 34000
which is what the company will be very happy at, so this is what characterizes the
product.
(Refer Slide Time: 03:58)

So, when we are looking at a when you are looking at the next type of pricing this is
called mark up pricing. What is this mark up pricing? You look at a target pricing that is
you say this is the cost which has which I have invested in producing this product, I must
and should get this type of profits on this, that is the rate of return on its total cost at an
estimated volume. This was being practiced by General Motors and still practiced for a

very long time ok. So, because of the terrific competition General Motors finds it
difficult to do this target pricing now.
The second one which you look at is demand oriented pricing take the cinema tickets,
suppose you want a balcony ticket; balcony tickets always priced higher. Why? Because
you are seeing the cinema from a distance; so, the front class where you are exposed
directly to the screen the noise everything then what is going to happen your that price of
that particular tickets or the class of tickets will be lower ok.
So, this is what is represented by this demand oriented pricing. So, this is in fact, this was
referred to by one of the ministers very recently when he said, the first day 3 movies
recorded 120 crores; that means, to say the movies where full right from first seat to the
last seat. So, you had a pricing which was very successful for all these movies 3 movies
which came in initial. So, the price discrimination suppose if you discriminate the price
that is for one customer you charge one price and other customer you charge a different
price, then it is likely to disrupt the customer goodwill.
So, it rises a ethical questions that this man is not, this company is not, or the firm is not
a ethical marketer. It keeps on changing its prices depending on who is purchasing the
product, but sometimes it does not really matter because you may charge different prices
on product version; example is the fridge. Suppose, it is at one door fridge you may
charge a particular price, it is a two door fridge you may charge a particular price or it
can be different prices on place like the cinema tickets the front and the back.
Or it can be different prices on time basis; suppose you are travelling by train in peak
hour some of these peak hour traffic especially in the Western countries their price is
very high. Unless and until there is a need you should not travel as an individual
customer in the peak hour that is you are likely to be charged at least 3 times more than
the on peak hour.
So, the best example for this would be your ticket prices on the leads to London route in
the United Kingdom. So, it is normally said it is normally considered your 6 o’clock to
8:30 from leads is a peak hour traffic. So, when you are boarding a train in this peak hour
traffic you are charged very heavily, suppose if you are a monthly user of this then it
peters down it comes down. So, makes you not highly susceptible to this peak hour

traffic. So, this is what is practiced in the United Kingdom and also in many other
western countries.
(Refer Slide Time: 08:32)

Now, you want to change the price of a product. How do you go about it? You changed
the price of a product depending on the price elasticity of demand. What is price
elasticity of demand? It is the percentage of change in quantity demanded divided by the
percentage change in price. How do you represent it? It is represented by E q p in of Q 1
minus Q naught that is a first time period the 0 time period, Q 1 minus Q naught divided
by Q naught, then the price in the first time period P 1 minus P naught in the zeroth time
period then divided by P 0.
So, you as you introduce the product you had a prize the first slot of time say 1 month
later you had a different price, then why how should you go about this price change. You
can look at the price elasticity of demand when you look at their price elasticity of
demand you say I change the price what is going to happen to the quantity demanded.
Is it going to be higher or is it going to be lower so, depending on that you can say the
elasticity of demand was based on price E q p is represented by this. Suppose the less the
elastic of the less elastic is the demand, then how what should be the strategy of the
marketer? It pays for him to raise the price. When does this happen? When there are few
or no substitutes or competitors. Take the example of this Dove soap, when it was

initially introduced in to the market it was priced at a particular rate about 30 to 35
rupees.
Now, if you look at the dove soap it is not coming to you at less than 45 rupees, but users
of this Dove soap think that there is no substitute for Dove in the marketplace, Dove is a
class a part compared to other soaps. Similarly you look at Pears that is also the users of
Pears think that it is a class apart from the other soaps which are in the marketplace.
Then sometimes you may be the buyer as a buyer you mean do not readily notice the
higher price; the price might be changed little, say 25 paisa 50 paisa, you do not notice it
immediately unless and until you are told in your house a why are you paying more.
So, this happens when you are not noticing the higher price, but if it is an ever used
product like the milk even a 1 rupee higher price is noticed why it is being charged 1
rupee higher. Many times buyers change their buying habits slowly and search for lower
prices, suppose you are user of this product you increase the price of these products price
has increased, but still you may not like to change this product it is has changed does not
matter.
I am not changing the price of this product take the example of car servicing, if you have
taken a good branded car like Maruti or some other this thing you are in spite of this
service stations of this car many times charging higher, you would like to go to the same
Kalyani motors only. Let him service the car, there is a certain garage which may have to
be opposite Kalyani motors only which is charging a lower price, but still you would
prefer that you do not want to change this habit of getting your car serviced from an
authorized service dealer.
So, sometimes you think that price rise is justified by quality improvement. So, suppose
your product’s price has increased; you may tend to think that this product is
differentiated better by their improved quality in the marketplace.

(Refer Slide Time: 13:42)

So, these are some of the things which buyers give justification for the increase in price
ok, and which the manufacturers capitalize on. There is one more aspect which you have
to look at with respect to price changes, you change the price what are the competitor do
he is not just going to keep quiet. He will do what is called price variation that is changes
coming from the competitor, it may be represented by this term called conjectural price
variation.
It is represented by this equation V A of small t equal to P capital B t minus P B t minus
1 divided by P A of small t minus P A of t minus 1. What does this stand for? V A t
stands for the change in competitor B’s price during period t as a proportion of company
A’s price during period t. So, you had the B pricing the product at a particular rate in
time period t vis a vis the t minus 1 period divided by A of a this A priced during t and
the t minus 1 period.
So, this is how you have to suppose you have changed the price of this product from
increased it by rupees 1, but you are competitor increases it only by say 50 paisa; this is
what I brought out through the game theory models in the earlier classes. Sometime it is
it may be better of both of you to rise the price, both of you might make profit. Suppose
it is a what do you call single competitor scenario, but no longer is it a single competitor
scenario in the market place it is a complex scenario. When it is a complex scenario of so
many players all marketing analytical models come into play.

So, you push in so, many analytics into conjectural price variation models. So, it is not
one it has so, many players and the model takes different variations depending on how
you are looking at it. There is something called a product line pricing. What is this
product line pricing? There may be various products which are interrelated in demand,
then pricing is very difficult, suppose it is an interrelated product. So, suppose let us say
you are using a pencil along with that pencil eraser might also be required.
So, how do you price these types of products which are interrelated in demand? So,
engineers are very fond of using these types of different types of erasers, they should be
erasing these things what they do on the drawings very nicely. Similarly, they are very
fond of using very standard pencils which give them very accurate depictions as well.
So, sometimes this product line pricing may difficult since various products are
interrelated in demand, that is cross elasticity and are cost. So, it may be related
interrelated in demand or in cost and subject to varying degrees of competition.
So, if you looked that how the TV’s graduated. So, if you looked at the color TV and the
black and white TV, when the black and white TV was in home you never found any
difference between one black and white TV and another black and white TV. Now, when
the color TV started coming into the marketplace you found that color is a natural TV ok.
So, how naturally it is being projected many times used to wonder. So, all the people
were who are coming in a drama or in a cinema they were looking very good.
So, initially people used to wonder whether all this cinema heroes and heroines are so,
good to look at. So, when you looked at them face to face only you will know whether is
good or not good, but this color TV is use to present them or still present them in a
wonderful manner ok.

(Refer Slide Time: 18:36)

Now, I present to use a few product line pricing principles, I have taken two detergents
and I have given the what do you call this for detergent 1 this cost is 10 for labor, for
detergent 2 it is 15 let us say. Similarly material cost, overhead cost all these costs. Now,
what is the method of pricing you can adopt for this particular detergent 1. Suppose you
adopted the full cost price, then it is labor cost plus material cost plus overhead cost this
could be one pricing.
The other method of pricing could be based on incremental cost that is 1 plus 2 labor
plus material or it could be on conversion cost that is again labor plus overhead cost ok.
So, if you adopted that you may find when you look at the markups that you should do
for this detergents, suppose you looked at full cost pricing with a 20 percent markup
detergent 1 and detergent 2 get priced at the same level 42 and 42. So, this should be
actually 30 15 for the detergent 1, 25 25 for the detergent 2; similarly 10 for the
detergent 1 and 15 for the detergent 2 in the labor cost.
So, the incremental cost if you look at the incremental cost pricing. When you in do this
at 40 percent markup detergent 1 becomes 42 that is detergent 2 becomes 35 that is
detergent 1 becomes 7 rupees more compared to detergent 2. Suppose you adopt the
conversion cost pricing and you do a markup of 180 percent then what is going to
happen? Detergent 2 will become 1 will become 42 detergent 2 will become 70.

So, if you are the producer of detergent 2 you are better off doing the incremental cost
pricing, if you are a producer of detergent 1 whether you are doing full cost pricing, or
incremental cost pricing, or conversional cost pricing it really does not matter. So, all the
owners for changing are changing the strategies of pricing falls on detergent 2
manufacturer only ok.
(Refer Slide Time: 21:18)

Now, if you look at the marketing life cycle, this marketing life cycle can be visualized
as, if you see you have the brand your brand coming in. The first thing is what you do
with respect to advertising and awareness, second is the merchandising, third is the sales
and service. The fourth is the sales transaction, the fifth is the transaction processing, the
sixth is the fulfillment, the seventh is the post sales service, then the eighth is the real
marketing.
So, you have a customer at the central place the brands revolving around the customer.
So, advertising and sale awareness, merchandising, then sales service, sales transaction,
transaction processing, then fulfillment, post sales service and marketing all this coming
and representing what we call the marketing life cycle ok. You go through a marketing
life cycle using all these things with respect to any product or product line as well.

(Refer Slide Time: 22:43)

We now come into what is called the relationship marketing, what is this relationship
marketing? You are going through 5 phases, 1 is making aware of the product or the
market of the brand, then the part is recognized that they may be suitable exchange
partners tentative interaction takes place. Then when you explore what happens? Trial
purchase may take place, the relationship has not really formed up, it is fragile. Five sub
phases are proposed one is attraction, communication and bargaining, development and
exercise of power and development of relationship norms and development of
expectations.
This is what happens when you are using a startup firm to come out with products, you
are exploring different avenues for your marketing and so, many people come and start
doing this relationship marketing. And, try to say that yes this we will see that all these
products which are brought by you are having the desired this thing in the marketplace.
So, they go through all the stages, the phase 3 is expansion: the range and depth of
mutual dependence increases. The five sub phases at phase 2 also operate in this phase.
Your fourth stage is commitment where you are looking at call loyalty, customer or
seller loyalty has been achieved. The parties cease active research for alternative
partners. The three measurable criteria’s of commitment or inputs durability and
consistency, this is in fact, how you evaluate a channel member also.

The last stage is where you dissolve this relationship marketing that is dissolution may
take place at any phase of the relationship, that is the relationship need no developed
need develop no further than awareness. The process of relationship or even today not
very well understood.
(Refer Slide Time: 25:07)

For a successful relationship marketing you require a supportive culture, a good internal
marketing; you should understand your customer expectations, you should have a
sophisticated customer database. And, you should have a new organizational structures
and rewards schemes as the market progresses. This is what you are finding with
reference to different TV operators right now in India, you have the Airtel service
provider, you have the what do you call the Videocon service provider, you have the
TATA Sky, you have the Sun so, many people all of them are buying for a market share.
So, if you are using Videocon you may get a call from TATA Sky saying that these
packages are being offered would you like to switch over from Airtel to TATA Sky. So,
these things are becoming really common in the Indian market place now, all this makes
the job of relationship marketing very important.

(Refer Slide Time: 26:31)

And all this is represented by this diagram, that is you have the investor loyalty and there
is a two way relationship between the customer loyalty and the investor loyalty. The
centre portion representing the business loyalty and there is again a two way interaction
between the investor loyalty and the employer loyalty and again between the employer
loyalty and the customer loyalty.
(Refer Slide Time: 27:11)

So, you should have a good internal marketing in place to see that this relationship
marketing succeeds, all this brings you to the role of the product manager. So, you

should have a product manager in your organization, this product manager is the one
who plans, implements and monitors the results. Suppose it is a consumer product you
may have fewer products then he has to spend more time on advertising and sales
promotion. Suppose, it is an industrial product, he should be well versed with the
technical aspects, the design inputs and he should spend more time with lab and
engineering person.
So, he should be willing to interact with them. For an organization it would be better to
have a product manager because it gives certain advantages. One is it can result in a cost
effective marketing mix, it can result in quicker reactions to market problems. It can also
ensure that your smaller brands are not neglected so, you put enough time, adequate time
on the smaller brands also. Suppose, you are an young executive it can be a good training
for this young executive in all areas of company operations, you interact with all
practically everyone in the organization starting from production down to marketing.
So, as a product manager you have a free entry into all these different departments and
you have a free access to information which is not easily possible in other roles in a
company. So, this product manager enjoys this type of this information access in an
organization can be very useful for him to device strategies ok.
(Refer Slide Time: 29:27)

Having a product manager would be a great advantage for the person who enters an
organization as a product manager, because you will get exposure to almost all the

departments in the organization. But, along with that there are some if you want to call
them negatives, some negatives are also there like they have access to information in
almost all the departments of the company, but most of the times these product managers
are not given enough authority. In other words they cannot override the authority of the
people in the functional areas; at best they can make some suggestions.
But there is no guarantee that this suggestions should be taken by the personnel in the
functional areas. The other point which comes next to this product managers is they
become experts in their product, but they rarely become experts in any functions with
respect to their product they become experts. For the organization it is a costly exercise,
because you should have number of persons acting as product managers for their
different products. Most of these product managers they hold on for a short time, you
cannot expect them to be a long time employee of the organization.
So, this is one of the things which the organizations try to keep in their mind when they
say will have a product manager, suppose you he becomes an expert and he wants to
leave within an year. Then the organization would have invested a considerable amount
on him, he becomes an expert in their product in his particular product, but the next time
his services will not be there for the company. So, organization sometimes are vary of
having too many product managers also.
In contrast to this product managers now organizations are looking at product managers
to product team approach, that is you have a product manager, you have under him as
assistant product manager and then under him a product assistant or whatever you want
to call that. So, this is this can form a vertical product team, what happens when you
have a team approach that is somebody wants to leave the organization also, there is a
buffer which is available with the organization which can take care of the activities of the
product managers group for some time.
You can also have a triangular product team where you have a product manager; under
him you have the market research person and the communication specialist. You can also
have a horizontal product team approach where you have the product manager under him
you have the research person, you have the communications person, you have the sales
manager, you have the distribution specialist, you have the engineering department, you

have the finance department, that is the engineering personnel, finance personnel; all in
this horizontal product team approach which you can adopt.
So, the result is there is why are you doing this team approach? As I mentioned the team
approach provides the organization sufficient cushion. So, the product manager's
activities are keenly observed by all the people working under him, and if for some
reason the product manager wants to leave the organization then the product team will
take over for sometime before you have one more product manager in position.
So, this is the advantage of having a product manager, becoming a product manager in an
organization. Sometimes some of the negatives with respect to the organization and also
with reference to the individual, we are seen individual not enough authority given you;
he cannot overwrite the functional areas authority. They become experts in their product,
but for the organization they are a costly exercise, many times do not hold on for a long
time only for a short time.
So, in order to have cushion you can instead of one product manager to product team
approach where you have a buffer coming in the form of the assistance product manager
or the product assistant in the vertical production team. In the vertical product team, in
the triangular product team it can be product manager under him the market research
person the communication specialist.
Under the horizontal product team you have the research, communication, then the sales
then the distribution, then the engineering people, then the finance people, all coming
under the product manager; closely observing what the product manager is really doing,
or what is the type of ideas contribution which is coming in from him, so that in case of
need some buffer is available to the organization.