Pricing Strategies for Developing Markets (PDF)

## Part 3: Design of a customer-oriented marketing strategy and mix ### Chapter 9: Pricing- Understanding and capturing customer value **Author's Comment**: * When and how should a company change its price? What happens if costs increase, eroding profits? What happens if the economy goes down a...

## Part 3: Design of a customer-oriented marketing strategy and mix ### Chapter 9: Pricing- Understanding and capturing customer value **Author's Comment**: * When and how should a company change its price? What happens if costs increase, eroding profits? What happens if the economy goes down and customers become more price-sensitive? Or what if a major competitor raises or lowers its prices? * As Figure 9.5 suggests, companies face many pricing options. However, it is simply the result of higher costs of selling in another country - additional operating costs, product modification, shipping and insurance, import duties and taxes, currency fluctuations, and physical distribution. Price has become a key element in the international marketing strategies of companies trying to enter developing markets, such as China, India and Brazil. Consider Unilever’s pricing strategy for developing countries: 19 * It used to be a way to sell a product in developing markets - put on a local tag and sell for high prices to the wealthy. Unilever - the manufacturer of brands like Dove, Lipton and Vaseline - changed that. Instead, they cultivated a group of followers among the world's poorest consumers by reducing the size of their product presentations to set a price that even those living on $2 per day could afford. This strategy was born about 25 years ago when Unilever's subsidiary in India found that their products were out of reach of millions of Indians. To lower the price while generating profit, Unilever developed single-use packages for everything from shampoo to detergent, costing pennies per package. Small and affordable packs made the company's top brands accessible to the world's poor. Today, Unilever continues to successfully woo cash-strapped consumers. * Therefore, international prices present some unique problems and complexities. We will discuss international pricing issues in more detail in Chapter 15. ## Price Changes After developing their pricing strategies and structures, companies often find themselves in situations where they need to initiate price changes or respond to competitor’s price changes. ## Initiating price changes In some cases, the company may decide to initiate a price cut or increase. In both cases, they should anticipate buyers’ and competitor’s reactions. ## Initiating price cuts Several situations could lead the company to consider price cuts: excess capacity, falling demand due to strong price competition, and a weak economy, for example. In such cases, companies may significantly cut prices to boost sales and market share. But as airlines, fast-food, and auto industries have learned in recent years, price reductions in a capacity-heavy industry could lead to price wars as competitors try to cling to market share. * The company could also cut prices in a push to dominate the market through lower costs. The company could start with lower costs than their competitors, or cut prices in hopes of generating market share that will further reduce costs through higher volume - for example, Lenovo uses an aggressive low-cost, low-price strategy to boost its share of the PC market in developing countries. ## Initiating price increases A successful price increase could significantly boost profits. For example, if the company’s profit margin is 3% of sales, a 1% price increase will boost profits by 33% if sales volume remains unchanged. An important factor in price increases is the cost of inflation - rising costs squeeze profit margins and lead companies to pass cost increases onto customers. Another factor leading to price increases is excess demand - when a company cannot supply all that its customers need, it can either raise prices, ration its products, or both. Consider the global oil and gas industry today. * When increasing prices, the company should avoid appearing speculative. For example, when gasoline prices rise quickly, angry customers often accuse major oil companies of profiting at the expense of customers. Customers have long memories and may eventually abandon companies or even entire industries that they perceive as charging excessive prices. In extreme cases, perceptions of speculation can lead to even increased government regulation. * There are a few techniques to avoid such problems. One way is to create a sense of fairness around any price increase. Price increases should be supported by company statements explaining to customers why prices are rising. Whenever possible, the company should consider ways to handle higher costs or demand without raising prices. For example, they may find alternative and more cost-effective production or distribution methods. They may reduce the product or substitute less expensive ingredients instead of increasing the price, just as ConAgra did in an effort to keep their Banquet frozen dinners at $1. Or they could “unbundle” their market offering - removing features, packaging, or services, and pricing the elements that previously formed part of the offer. 20 ## Buyer reactions to price changes Buyers don’t always interpret price changes in a straightforward way. A price increase that typically leads to lower sales could have some positive implications for buyers. For example, what would you think if Rolex raised the price of their latest model watch? On the one hand, you might think the watch is even more exclusive or better made. On the other hand, you might think that Rolex is simply greedy for charging whatever the market will bear. Similarly, consumers might view a price cut in many ways. For example, what would you think if Rolex suddenly lowered their prices? You might think that you’re getting a better deal on an exclusive product. More likely, however, you would think that they've cut quality, and the luxurious image of the brand could be tarnished. A brand’s price and image are often closely linked. A price change, especially a price cut, can negatively impact how consumers perceive the brand. ## Competitor reactions to price changes A company considering a price change should be concerned about competitor reactions as well as their customer reactions. Competitors are most likely to react when there are few companies involved, when the product is homogenous, and when buyers are well informed about the products and prices. * How can a company anticipate likely competitor reactions? The problem is complex because, like a customer, a competitor could interpret a price cut by the company in many ways: they might think the company is trying to capture more market share, that the company is struggling and trying to boost sales, or that the company wants the entire industry to lower prices to boost overall demand. * The company must guess how each competitor will probably react. If all competitors react the same, it’s as if there’s only one typical competitor to analyze. In contrast, if competitors don’t react in the same way - perhaps because of their size, market share, or policies – individual analysis is needed. However, if some competitors match the price change, there’s a good reason to expect the rest to do so as well. ## Responses to price changes Here, we flip the question and ask how a company should respond to a competitor’s price change. The company should consider several issues: why did the competitor change the price? Is the price change temporary or permanent? What will happen to the company’s market share and profitability if they don’t respond? Will other competitors respond? * Figure 9.5 shows ways a company can assess and respond to competitor’s price reductions. Imagine that the company learns that a competitor has cut their prices and decides that this price reduction is likely to harm their sales and profits. They could simply maintain their current price and profit margin. The company might think they won’t lose too much market share or that they would lose too much profit if they cut their own prices. Or they could decide to wait and respond when they have more information about the effects of the competitor’s price change. However, waiting too long to act could allow the competitor to gain more momentum and confidence as their sales increase. * If the company decides that effective action can and should be taken, they could choose any of the four responses. First, they could cut their price to match the competitor. They might decide that the market is price-sensitive and that they would lose significant market share to the lower-priced competitor. However, cutting prices will reduce the company’s profits in the short term. Some companies could also reduce the quality of their products, services, and marketing communications to maintain profit margins, but this will ultimately hurt their market share in the long term. The company should try to maintain quality while implementing price cuts. * Alternatively, the company could maintain its price but increase the perceived value of its offering. They could improve their communications by highlighting the relative value of their product over the lower-priced competitor. The company may find it cheaper to maintain prices and spend money to improve perceived value than cutting prices and operating on a thinner margin. Or the company could improve quality and raise prices, moving their brand to a higher price-value position - higher quality creates more value for the customer, which justifies the higher price. In turn, the higher price keeps the company’s profit margins higher. * Finally, the company could launch a “fighting brand” – a lower-priced brand by adding a lower-priced item to the line or creating a separate low-priced brand. This is necessary if the particular market segment that is lost is price-sensitive and doesn’t respond to arguments for higher quality. Starbucks did this when they acquired Seattle’s Best Coffee, a brand positioned as “affordable-premium,” which is more appealing to working-class customers than the premium brand image of Starbucks. Seattle’s Best Coffee typically costs less than the parent Starbucks brand. As such, it competes more directly with Dunkin’ Donuts, McDonald’s, and other mass premium brands through its franchise and partnership outlets with Subway, Burger King, Delta, AMC Theatres, cruise lines, and others. On supermarket shelves, it competes with private label brands and other mass premium brands like Folgers Gourmet Selections and Millstone. 21 To counter private label brands and other low-price competitors in a tighter economy, P&G turned several of their brands into fighting brands - Luvs disposable diapers provide parents with “premium leak protection for less than the more expensive brands.” In addition, P&G offers basic value versions of several of its major brands. For example, Charmin Basic “provides the perfect balance of performance and price,” and Bounty Basic is “practical, not expensive.” However, companies must be careful when introducing fighting brands as they can tarnish the image of the main brand. In addition, while they can attract budget buyers and keep them from switching to lower-priced rivals, they can also steal business from the company’s higher-margin brands. ## Public policy and pricing Price competition is a cornerstone of our free market economy. In price-setting, companies are not always free to charge whatever price they want. Numerous federal, state, and even local laws govern the rules of fair play in price-setting. Businesses should also consider broader social concerns regarding prices. For example, in setting their prices, pharmaceutical companies must balance their development costs and profit goals against the sometimes life-or-death needs of consumers for prescriptions. * The most important pieces of US legislation relating to price-setting are the Sherman Act, Clayton Act, and Robinson-Patman Act, which were initially passed to prevent monopolies and control business practices that could unfairly restrict commerce. Since these federal laws only apply to interstate commerce, some states have adopted similar provisions for companies operating locally. * Figure 9.6 shows the main public policy issues in price-setting. These include potentially harmful price-setting practices within a specific channel level (price-fixing and predatory pricing) and across different channel levels (maintaining the retail price, discriminatory pricing, and deceptive pricing). 22 **Author's Comment**: * Pricing decisions often face social and legal constraints. For instance, consider the pharmaceutical industry - are the rapid rises in prescription drug prices justifiable? Are pharmaceutical companies unfairly lining their pockets at the expense of consumers who have few alternatives? Should the government intervene? The main public policy issues in price setting take place on two levels – pricing practices within a particular channel level ==End of OCR for page 4==