khozema_original it report

8/6/2019 Khozema_original It Report

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PRICE TACTICS[Type the document subtitle]

5/24/2011Grizli777

Submitted to: Ms. Noreen

Submitted by:

Khozema Moiz Ali

Zeeshan Ahmed


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AKNOWLEDGEMET

First of a l l I bow my head in f ront of Almighty Al lah with

grat i tude. After that I would l ike to take this opportunity

to thank you for giv ing me and my group member an

opportunity to explore, analyze, di scuss and recommend

on cr i t ical issues of pr ice in the market. Your cont inuous

support , guidance and helping att i tude has made this

project easier for us to prepare on t ime with maximum

effect iveness. Besides my advisor, I would also thank to

my group mate who took the t i me and trouble dur ing the

last few days to speak to me about the ways thi s text ,

could be fur ther improved and also wi l l ing to help me to

gather the necessary data and informati on needed for th is

report . We have also had this opportuni ty to learn

Business Communicat ion ski l ls f rom you, which hashelped us to a greater extent in creat ing this r eport to the

almost exact requirement of a professional business

report . In the end, once again I would thank you for your

heightened interest and support in gett ing this r eport

done r ight with minimum errors.


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ABSTRACT


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INTRODUCTION

Pr ice is considered as the second market ing mix tool .

Pr ice is one of the most important factor in market ing

strategy. To set the r ight pr ice i s one oft marketer s most

di f f icul t task. I f the companys pr ices a product below i ts

cost, then prof i ts wi l l suffer , so the right pr ic ing strategy

is one that del ivers both the valu e to the customer and

prof i t to the company. Pr ice can sometimes al ternat ivelyrefer to the quant i ty of payment requested by a sel ler of

goods or services, rather than the eventual payment

amount. This requested amount is of ten cal led the asking

pr ice orsell ing price , whi le the actual payment may be

cal led the transaction price or traded price . L ikewise,

the bid pr ice orbuying price is the quant i ty of payment

offered by a buyer of goods or services, al though this

meaning is more common in asset or f inancial markets

than in consumer markets. Costs se t the f loor for the

pr ice but the goal is not always to minimize cost. Infarct ,

many f i rms can invest hi gher costs so that they can claim

higher pr ices and margins. The key is to manage the

spread between costs and pr ice. I t s mean that how much

the company makes for the customer value i t del ivers.


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PRODUCT POSITION

Pr ic ing strategies usual ly changes as the product passes

through i ts l i fe cycle. This ar t ic le focuses on the changes

occur in pr ices due to change in the PLC stage.

Therefore, companies must set their pr ices according to

l i fe cycle stages and the

stages are as fol lows:

INITIAL STAGE GROWTH STAGE

MATURITY STAGE

DECLINING STAGE

INITIAL STAGE:

This stage starts when the new product is f i rst launched.

At th is stage sales are very l ow, prof i ts are negat ive or

low due to low sales & high distr ibut ion and promotion

expense. Much money is needed to at tract distr ibutors

and bui ld their inventor ies. Promotion spending is

relat ively high to inform consumers about the new

product.

Pr ic ing strateg y is very crucial at th is stage because of-

no past data or comparisons are avai lable. Therefore, f i rm

can go for Cost Plus Pricing1 .

1

Is that type of pricing when the selling price is little bit high then a cost price. Forexample : Cost Price is 10/ unit and the Selling price is 10.5/ unit.


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GROWTH STAGE:

I f the new product sat isf ies the market, i t wi l l enter a

growth stage, in which sales wi l l star c l imbing quickly.There is an increase in the number of competi tors le ads

to increase in the number of distr ibut ion out lets. Prof i ts

increases due to increase in sales. Company uses several

strategies to sustain rapid market growth as long as

possible. Firm also improve their product qual i ty and adds

new product features and models.

Now again i t is a di f f icul t task for the company to set the

pr ice for the products. Therefore, now company choosesthe Market Penetration Pricing strategy .2

MATURITY STAGE:

At some poi nt , a product sales g rowth wi l l s low down ,

and the product wi l l enter a matur i ty stage. The slow

down is sales growth results in many producers with many

products to sel l . In turn, th is o vercapacity leads to greater

competi t ion. Al though the sales are stable at th is stage

due to too much competi t ion. Competi tors begin marking

down pr ices, increasing their advert is ing and sales

promotions, and increase their product develo pment

budgets to f ind better versions of product. T hese stepslead to a drop in prof i t . Some of the weaker c ompeti tors

start dropping out, and the industry eventual ly contains

only wel l - establ ished competi tors.

2Setting a low price for a new product in order to attract a large number of buyers

and a large market share.


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Al though many produc ts in the mature st age appear to

remain unchanged for long per iods, most successful ones

are actual ly evolving to meet changing consumer needs.

Therefore, they should considermodifying the market3,

product and etc.

MATURITY STAGE:

At th is stage sales decl ine f or many reasons; inclu ding

technological advances, shi f ts in consumer tastes and

increased competi t ion. As sal es and prof i ts decl ine many

f irms withdraw from the market. In th is s i tuat ion f i rms sel l

their products in a very low pr ice . Al though the company

knows that there is a too much l oss to sel l the products

below from the marginal cost but they are used the cut

pr ice strategy in th is stage.

For these reasons, companies pay more attent ion to their

aging products4. Therefore, the management must

decide to reenter into the market with change i n the

product s outward appearance and feature, otherwise the

company cannot f ight against with too many competi tors

in the market.

3The company tries to increase the consumption of the current product. It may look

for new users and new market segments.4 A product which is already exists into the market only it wants more attention togenerates more profits and sales.


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PRICING OBJECTIVE

Every market ing task including pr ic ing should be directedtowards a goal, so marketers s hould decide on their

pr ic ing object ive before determining the Pr ice i tse l f . Yet ,

surpr is ingly very few f i rms consciously establ ish a pr ic ing

object ive. There are three main pr ic ing goals:

I . PROFIT ORIENTED

I I . SALES ORIENTED GOALS

I I I . STATUS QUO GOALS

PROFIT ORIENTED:

Pr ices are set with the aim of maximizing the prof i t

return on each sale or on theamount invested.

Woolworth and many

other f i rms, set pr ice to

achieve a required net

prof i t on each sale. Other

f i rms might set pr ices to achieve a certain rate of

return on investment.

The pr ic ing object ive of making as much money as

possible prof i t maximizat ion can be considered

over the short term or long term rum. Most o f the

f i rms, may take a long er v iew, might be prepared to

earn less then maximum prof i ts in i t ia l ly then look toincrease pr ices when their product is establ ished.


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SALES ORIENTED GOALS:

Firms might not seek to maximize their prof i ts but to

increase sales volume or to mainta in or increase marketshare.

Pr ic ing may be set to achieve viable operat ional

level of sales. When Virgin Blue entered Austral ian

air t ravel market foe example, they set pr ices wel l

below the prof i ts maximizat ion levels in order to

achieve viable passengers load.

In growing markets, such as th ose for computers

and technology based products, compani es want

large share in order to gain added bargaining power

with suppl iers, so they down the product cost or

project a document appearance to consumers.

In other s i tuat ion, f i rms might set pr ices to use upexcess product ion capacity or to gain the benef i ts

from economies of sales.

STATUS QUO GOALS:

The aim in this case of status goals might be stabi l i zes

pr ices or to meet competi t ion

Status quo is of ten the goal in industr ies where

the product is highly standardized e.g. (steel,

petrol and etc) and one large f i rm is acted,

histor ical ly, as a leader in sett ing pr ices. Smal ler

f i rms in these industr ies simply fol low the

leadership pol icy in order to meet competi t ionwhi le sett ing their own pr ices.


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Many other f i rms consciously pr ice their product

to meet the competi t ive market pr ice. This pol icy

gives management an easy means of avoiding

dif f icul t pr ic ing decis ion.

A status quo goal may, of cour se, st i l l be

accompanied by aggressive market ing strategies

in other aspects of the mix-products, distr ibut ion

and special ly promotion, so this type of approach

is cal led non pr ice competi t ion.


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PRICINGIN DIFFERENT TYPE OF

MARKETSThe sel ler s pr ic ing freedom var ies with di f ferent types of

markets. Economists recognize four types of markets,

each present ing a di f ferent pr ic ing chal lenge.

UNDERPURE COMPETITION:

The market consists of many buyers and sel lers t rading in

a uniform commodity such as wheat, copper and f inancial

secur i t ies. No single buy er or sel ler has much effect on

the going market pr ice. A sel ler cannot charge more than

the going pr ice, because buyers can obtain a s much as

they need at that pr ice. Nor woul d sel lers charge less

than the market pr ice, because the y can sel l a l l they wantat th is pr ice. I f pr ice and prof i ts r ise, new sel ler can

easi ly enter into the market. In a purely competi t ive

market, market ing research, product development,

pr ic ing, advert is ing and sales promotion play l i t t le or no

role. Thus, sel lers in th ese markets do not spend much

t ime on market ing strategy.


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UNDERMONOPOLISTIC COMPETITION:

The market consists of

many buyers and

sel lers who trade over

a range of pr ices rather

than a single market

pr ice. A range of pr ices

occurs because sel lers

can di f ferent iate their of fers to buyers. Ei ther the physicalproduct can be var ied in qual i ty, features or sty le or the

accompanying services can be var ied. Buyers see

dif ferences in sel ler s product and wi l l pay di f ferent pr ices

for them. Sel lers try to develop di f ferent iated offers for

di f ferent customer segments and in addit ion to pr ice,

freely use branding, advert is ing and personal sel l ing to

set their of fers apart .

UNDER OLIGOPOLISTIC COMPETITION:

The market consists of few sel lers who are highly

sensit ive to each other s pr ic ing and market ing strategies.

The product can be uniform (steel, a luminu m) or no

uniform (cars, computers) . There are few sel lers because

it is di f f icul t for new sel l er to enter into the market. Each

sel ler is aler t to competi tor s strategies and moves. I f a

steel company slashes i ts pr ice by 10%, buyers wi l l

quickly switch to this suppl ier . The other steelmakers

must respond by lower ing their pr ice s or increasing their pr ices.


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PURE MONOPOLY:

The market consists of one sel ler . The sel ler may be a

government monopoly ( the postal service), a pr ivate

regulated monopoly (a power company), or a pr ivate non

regulated monopoly (DuPont when i t introduces nylon).

Pr ic ing is handled di f ferent ly in each case. In a regulated

monopoly, the government permits t he company to set

rates that wi l l y ie ld a fa ir return. Non-regulated

monopol ies are free to pr ice at what the market wi l l bear.However, they do not charge the ful l pr i ce for a number of

reasons:

A desire not to at tract competi t ion.

A desire to penetrate the market faster with a low

pr ice.

A fear of government regulat ions.


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ANALYZING DETERMINENTS OF

PRICEThere pr ices are seven main fact ors to consider when

sett ing. They combine the internal with the external, the

tangible with the intangible a nd these are as fol lows:

COSTS

CUSTOMER

COMPETITION

CONDITION

CONTEXT

CACHET

CONFIDENCE

COSTS:

Costs are the foundat ion of pr ice. T hey are internal and

tangible, and are the easiest to calculate and control . In

determining a pr ice, the key i s to f ind a point that covers

those costs and maximizes prof i t .

CUSTOMERS:

This is an external and fair ly intangible factor. People are

prepared to pay what a product is worth to them. Th e net

result is that a customer usual l y has an idea of a fair

pr ice that they are prepared to pay for a product or

service. I t may be possible to persuade them to go above

this, but that requires somethi ng extra from you in theform of added value.


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COMPETITION:

I f you have competi t ion, i t is necessary to of fer a s imi lar

or lower pr ice to theirs, unless you can show that your

customers perceive clear ly that your product is in some

way super ior . However, i f you hold a monopoly ( i f only in

a given local i ty) , you c an name your own pr ice. Whether

the customers accept that pr ic e is another matter .

Remember that a competi tor is not necessar i ly someone

sel l ing the same product. I t may be a product that is

simi lar or at least an ac ceptable subst i tute. For example,

i f wine is s igni f icant ly overpr iced, many wine dr inkers

might switch to beer.

CONDITIONS:

This covers the complex area of discounts, credit

arrangements, del ivery, f ree gi f ts, warranty, stagedpayments, loyalty bonuses, and so on. Some of these

ideas are largely ways of adding value and of disguising

direct pr ice and qual i ty comparisons. Remember,

however, that they al l come out of t he same pot. You must

cost them careful ly and a ccount for them al l in your

calculat ions.

CONTEXT:

There are t imes when your product is worth more to

customers. This i s ei ther because the value to them is

greater l ike fans in a heat wave or the res a shortage

of supply. Abraham Lincoln i s reputed to have said that

the best way to make money out of a gold rush was to,

Go to the goldf ie lds and sel l every shovel you can carry.


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CACHET:

Cachet is beyond calculat ion. There is no logic behind i t

but people can pay ten, even a hundred t imes more for a

part icular fashionable brand or label than for a gener ic

product, which is ident ical in al l other respects.

Unfortunately, there is no rel iabl e way of predict ing in

advance which products wi l l be so fashionable. However,

you can inf luence your brand image to some e xtent by

your market ing and distr ibut ion.

CONFIDENCE:

This is the biggest intangible of al l . I t is of ten said that

pr ic ing is a conf idence tr ick. Many smal l businesses badly

under-pr ice their products and services for just th is

reason they cannot bel ieve people wi l l pay them

anymore! On the other hand, there is a natu ral suspicionof those who are too cheap.

However, i f such conf idence is part of your strategy, you

wil l have to go al l the way i f you are to carry i t of f . One

consultant was comfortably busy when she was invi ted to

chair an industry conference. I t was something she didnt

want to do, so she said, My dai ly rate is [double her

usual rate] , hoping this woul d put the organizer of f . His

reply was Fine. Does that include expenses?


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PRICING STRATEGIES

A proper business plan is very crucial ; a plan wi l l de cideyour overal l strategy in which pr ic ing strategy plays an

important role in order to achieve sales and prof i ts. Many

factors that af fect companys pr ic ing decis ions. Therefore,

company must understand or fo l low some pr ic ing

strategies which are discussed below:

1. Market skimming pr ic ing.

2. Market penetrat ion pr ic ing.

3. Opt ional-product pr ic ing.

4. Psychological pr ic ing.

5. Internat ional pr ic ing.

MARKET SKIMMING PRICING:

Sett ing a high pr ice for a new product to generate

maximum revenues from the market that are wi l l ing to pay

higher pr ice; the company makes fewer but more

prof i table sales.

I t makes sense only under certain condit ions:

y The product s qual i ty must support i ts higher pr ice.

y Enough buyers must want the product at th at pr ice.

y Competi tor should not be able to enter into the

market and cut the high pr ice.


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MARKETPENETRATIONPRICING:

Sett ing a low pr ice for a n ew product in order to at tract

large number of buyers and large market share .

I t a lso makes sense only under certain condit ions:

y The market must be high pr ice sensit ive so that low

pr ice produces more market growth.

y The low pr ice must help to keep out the competi t ion.

y

The penetrat ion pr ice must maintain i ts lowerposit ion.

OPTIONALPRODUCTPRICING:

The pr ic ing of opt ional or accessory products along with

a main product.

For example:

y A car buyer may choose a GPS navigat ion system

and Bluetooth wireless communicat ion.

y When you order a new PC, you can select any array

of hard dr ives, software or etc.

Therefore, pr ic ing these opt ions is very di f f icul t because

companies must decide that which i tem is to include in

the base pr ice and which i tem is to of fer as opt ions.


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PSYCHOLOGICALPRICING:

A pr ic ing strategy that con sider the psychology of pr ice

and not s imply the economics; the pr ice is used to saysomething about the product.

For example:

A bott le of perfume that costs Rs. 4000 may contain

only Rs. 400 worth of scent, but some people are

wi l l ing to pay Rs. 4000 because this pr ice indicates

something special .

INTERNATIONALPRICING:

Cost plays an important role in sett ing internat ional

pr ices. Therefore, companies that market their products

internat ional ly must decide what pr ices to charge in the

dif ferent countr ies.

The pr ice that a company should charge in a specif ic

country depends on many factors:

y Economic condit ion.

y

Competi t ive si tuat ions.y Laws and regulat ion.


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Development of wholesaling and retail ing system

EFFECTS OFCHANGEINPRICE:

After developing their pricing structures and strategies,

companies often face situations in which they must init iate

price changes or respond to price changes by competitors.

INITIATE PRICE CHANGE:

In some cases, the company may find it desirable to initiate

either a price cut or a pri ce increase. In both cases, it mustanticipate possible buyer and competitor reactions.

INITIATE CUTPRICE:

Several s i tuat ions may lead a f i rm to consider cutt ing i ts

pr ice. One such circumstance is excess capacity. Another

is fa l l ing demand in the face of strong pr ice competi t ion.

In such cases, the f i rm may aggressi vely cut pr ices to

boost sales and share. A company may al so cut pr ices to

use the low pr ice as a promotion.

INITIATE PRICE INCREASES:

A successful pr ice in crease can great ly improve prof i ts.

For example, i f the companys prof i t margin is 3 percentof sales, a 1 percent pr ice increase wi l l boost prof i ts by

33 percent i f sales volume is un affected. A major factor in

pr ice increases is cost inf lat ion. Rising costs squeeze

prof i t margins and lead companies to pass cost increases

along to customers. Another factor leading to pr ice

increases is over demand: W hen a company cannot

supply al l that i ts customers need, i t may raise i ts pr ices,


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How can the f i rm ant ic ipate the l ikely react ions of i ts

competi tors? The problem is complex because, l ike the

customer, the competi tor can interpret a company pr ice

cut in many ways. I t might th ink the company is t ry ing to

grab a larger market share, or that i t s do ing poor ly and

trying to boost i ts sales. Or i t might th ink that the

company wants the whole industry to cut pr ices to

increase total demand.


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PRICE ELASTICITY / SENSITIVITY

Elasticity is the extent to which demand varies with price.The higher the pri ce; the lower the demand. But the range

of change is neither l inear nor predictable, and it varies

dramatically for different products and markets.

MAXIMIZING PROFIT:

Elast ic i ty is the key to maximizing overal l prof i t . So

even though i t may be a guesst i mate , t ry to assess

the elast ic i ty of demand for yo ur product over a

range of pr ices. Assess also your costs, f ixed and

var iable over a l ikel y range of demand. Then draw

up a simple spreadsheet to compute the result ing

gross prof i t . The results may surpr i se you. Crude

though the calculat ions may be, they can so metimes

highl ight dramatical ly the fol ly of cutt ing (or rais ing)

pr ices.

The next step is to t ry to est imate pr ice sensit iv i ty

by using sl ight ly di f ferent sets of f igures in your

spreadsheets. You may f ind that changing one

dimension has relat ively l i t t le ef fect, whi le tweaking

another has enormous repercussions. This is

especial ly t rue when operat ing at low margins.

When forming a pr ic ing strategy, use a spreadsheet

to run through as many models a s you can. Cost

your product pessimist ical ly, and then calculate how

much you wi l l make, or lose, at di f ferent pr ices withdi f ferent levels of sales.


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Here are some simple examples to i l lustrate the effect of

pr ice/demand in di f ferent types of market.

ELASTICDEMAND COMMODITY:

Price 8 9 10 11 12 13 14 15

Cost 8 7.5 7 7 7 7 7 7

Margin 0 1.5 3 4 5 6 7 8

Demand 130 120 110 100 90 80 65 50

Profit 0 180 330 400 450 480 455 400

Fixed

overhead

200 200 200 200 200 200 200 200

Net

profit

200 -20 130 200 250 280 255 200

The costs increase as demand reaches the limit of

production. Profit peaks over quite a wide price band.

INELASTICDEMAND SPECIALTY:

Price 8 9 10 11 12 13 14 15

Cost 7 7 7 7 7 7 7 7

Margin 1 2 3 4 5 6 7 8

Demand 102 106 103 100 97 94 90 92

Profit 102 212 309 400 485 584 630 736

Fixed

overhead

200 200 200 200 200 200 200 200

Net

prof

it

-98 12 109 200 285 364 430 536


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SCENARIOS

Ryan air:

3ULFLQJORZDQGSURXGRILW

Ire lands Ryan air , Europes

most prof i table air l ine, wants

to make air t ravel f ree. Not

free as in f ree from regulat ion,

but f ree as in zero cost. By

the end of the decade, he

promises, more than half of

our passengers wi l l f ly f ree.

Even without f ree f l ight s, Ryan air has become one of

Europes most popular carr iers. Last year i t f lew 42.5

mil l ion passengers to more than 100 European

dest inat ions. The air l ines sales of more than $3.6 bi l l ion

were up 32 percent over the previous year, and prof i ts

surged 33 percent. And al though i ts average fare is just

$87 compared with U.S. low cost leader Southwest $107,

Ryan air s net margins are 21 percent, t r ip le southwest s

7 percent. Given the prospects of r is ing fuel costs,

economic dips, and other t roubled t imes ahead for the

air l ine industry, Ryan air seems wel l posi t ioned to

weather the storm.

Ryan air s f rugal cost structure makes even cost-

conscious Southwest look l ike a reckless spender. In


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addit ion, the Ir ish air l ine charges for v ir tual ly everything

except t ickets, f rom baggage check- in to seat-back

advert is ing space.

Ryan air s low-cost strategy is modeled after Southwest s.

We want to be known as the W al-Mart of f ly ing. He

says. Like the giant retai ler , Ryan air is constant ly on the

lookout for new ways to cut costs for example, by

removing seat-back pockets to reduce weigh t and

cleaning expense. Passengers reap the benef i ts of such

savings in the form of lo wer fares. Ryan air a lso sel ls

more than 98 percent of i ts t i ckets onl ine, cutt ing down on

administrat ion costs and travel agent commissions.

Upon arr ival at some out-of- the-way airport , Ryan air wi l l

sel l you a bus or t rain t icke t into town. The company gets

commissions from sales of Hertz rental cars, hotel rooms,

ski packages, and travel insurance. Last year, such

anci l lary revenues rose 36 percent to $332 mil l ion. Every

chance they get, Ryan air t r ies to squeeze just that l i t t le

bi t of extra margin out of i t s passengers, says an

industry consultant.


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Avari Hotel:

Managing p rofits with sma r t pricing

The hotel industry

in Lahore is fa ir ly

competi t ive.

Avari s major

competi tor , Pear l

Cont inental Hotel ,is s i tuated only a

ki lometer away.

Both the f ive-star hotels compete he ad to head for the

premium customers. They di f ferent iate themselves by

offer ing super ior services, better ambiance, and spacious

and luxur ious rooms. Yet pr ice cont inues to play an

important role in customers choice.

We simply cannot af ford to have low occupancy rates.

Therefore, we have broadly segmented our market in a

way that we can cater to a wide ra nge of customers with

varying pr ice and service requirements. This pr ic ing

method al lows us to cast our net wide, improve ouroccupancy and eventual ly our prof i ts.

Simi lar to the pract i ce in the industry room pr ices at Avar i

star t with the establ ishment of the rack rate. The rack

rate forms the basis for determining di f ferent rates for al l

other customer segments. Avar i s management has

segmented i ts c l ientele into s ix broad categor ies. walk-


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ins, business and corporate cl ients, diplomats,

government of f ic ia ls, tour groups, and air l ines.

Walk- in customers are usual l y not regular hotel

guests and hence are offered higher rates, c los er to

the rack rate.

The business and corporate segment is the most

attract ive segment, account ing for almost 70 percent

of room occupancy. Given the current economic

slowdown, i t has become fair ly pr ice sensit ive.

Diplomats are a special segment who seek a high

level of personal ized service and yet are relat ively

pr ice sensit ive. Avar i of fers special rates for th is

group.

The government segment includes federal and

provincial government of f icers on off ic ia l tours as

wel l as their internat ional v is i tors. Due to l imitat ions

on the travel l ing and boarding al lowance of

government of f ic ia ls, they are offered special pr ices.

Tour groups, t ravel agents, and air l ines are offeredanother set of pr ices. These are discounted

signif icant ly f rom the rack rate.

khozema_original it report

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