Solutions to Assignments
MBA and MBA (Banking & Finance)
MMPC-006 - Marketing Management
MMPC-006/TMA/JULY/2022
Question No. 3.
(a) Discuss the various factors that affect the Pricing decisions in a firm. Explain the three cost oriented pricing approaches that a firm can use in pricing their products/services.
Pricing decisions are usually determined by cost, demand and competition. We shall discuss each
of these, factors separately. We take demand first.
Demand
The popular `Law of Demand' states that "higher the price; lower the demand, and vice versa,
other things remaining the same''. In season, due to plentiful supplies of certain, agricultural
products, the prices are low and because of low prices, the demand for them increases
substantially. You can test the validity of this law yourself in your daily life. There is an inverse
relationship between price and quantity demanded. If price rises, demand falls and if the price
falls, the demand goes up. Of course, the law of demand assumes that there should be no change
in the other factors influencing demand except price. If any one or more of the other factors, for
instance, income, the price of the substitutes, tastes and preferences of the consumers,
advertising, expenditures, etc. vary, the demand may rise in spite of a rise in price, or
alternatively, the demand may fall in spite of a fall in price. However, there are important
exceptions to the law of demand.
There are some goods which are purchased mainly for their `snob appeal'. When prices of such
goods rise, their snob appeal increases and they are purchased in larger quantities. On the other
hand, as the price of such goods falls, their snob appeal and, therefore, their demand falls.
Diamonds provide a good example.
In the speculative market, a rise in prices is frequently followed by larger purchases and a fall in
prices by smaller purchases. This is specially applicable to purchases of industrial raw materials.
More important than the law of demand is the elasticity of demand. While the law of demand
tells us the direction of change in demand, elasticity of demand tells us the extent of change in
demand. Elasticity of demand refers to the response of demand to a change in price.
It is necessary for the marketer to know what would be the reaction of the consumers to the
change he wishes to make in the price. Let us take some examples. Smokers are usually so
addicted to smoking that they will not give up smoking even if prices of cigarettes increase. So
also the demand for salt or for that matter of wheat is not likely to go down even if the prices
increase. Another example of inelastic demand is the demand for technical journals, which are
sold mainly to libraries. On the other hand, a reduction in the price of television will bring in
more than proportionate increase in demand. Some of the factors determining the price-elasticity
of demand are the nature of the commodity, whether it is a necessity or luxury, extent of use,
range of substitutes, urgency of demand and frequency of purchase of the product.
The concept of elasticity of demand becomes crucial when a marketer is thinking of lowering his
price to increase the demand for his product and to get a larger market share. If the increase in
sales is more than proportionate to the decline in price, his total sale proceeds and his profits
might be higher. If the increase in sales is less than proportionate, his total sales proceeds will
decline and his profits will definitely be less. Thus knowledge of the elasticity of demand for his
products will help a marketer to determine whether and to what extent he can cut the prices or
pass on the, increase in costs to the consumer.
It may also be noted that the price elasticity of demand for a certain commodity and the price
elasticity of demand for a certain brand of that commodity may be radically different. For
example, while the demand for cigarettes as such, may be highly inelastic, the price elasticity of
demand for Four Square or ‘Charms’ may be highly elastic. The reasons for this are weak brand
loyalty and the availability of substitutes.
Competition
The degree of control over prices which the sellers may exercise varies widely with the
competitive situation in which they operate. Sellers operating under conditions of pure
competition do not have any control over the prices they receive. A monopolist, on the other
hand, may fix prices according to his discretion. Sellers operating under imperfect competition
may have some pricing discretion. The marketer, therefore, needs to know the degree of pricing
discretion enjoyed by him. Let us take up each of these cases individually.
Perfect competition is said to exist when (i) there are a large number of buyers and sellers, (ii)
each purchasing and selling such a small quantity that their withdrawal from the market will not
affect the total demand and supply, (iii) the products sold by sellers are homogeneous in nature.
In pure competition, all that the individual seller can do is to accept the price prevailing in the
market, i.e. he is in the position of a Price Taker. If he wants to charge a higher price, buyers will
purchase from other sellers. And he need not charge less since he can sell his small supply at the
going market price,
Under monopoly, a single producer has complete control of the entire supply of a certain
product/service offering. IRCTC (Indian Railway Catering and Tourism Corporation) and HAL
(Hindustan Aeronautics Limited) are examples of monopoly. The main features of monopoly are
(i) there is only one seller of a particular good or service and (ii) rivalry from the producers of
substitutes is so remote that it is almost insignificant. As a result, the monopolist is in a position
to set the price himself. Thus, he is in the position of a Price Setter.
However, even in the case of monopoly, there are limits to the extent to which he can increase
his prices. Much depends on the elasticity of demand for the product. This, in turn, depends on
the extent of availability of substitutes for the product. And in most cases, there is rather an
infinite series of closely competing substitutes. Even railways and telephones organisations must take into account potential competition by alternative services-railways may be substituted by
motor transport and telephone calls by telegrams during the eighties. Today, it’s SMS on mobile
phone and other gadgets. The closer the substitute and greater the elasticity of the demand for a
monopolist's product, the less he can raise his price without frightening away his customers.
High price of oil has led to development of alternative sources of energy.
Oligopoly is a market situation characterised by a few sellers, each having an appreciable share
in the total output of the commodity. Examples of oligopoly are provided by the automobiles,
cement, tyre, oil & gas, aluminum & steel, cable TV services, cellular phone services, airline
services, cigarettes, and a host of other product/commodities. In each-of these industries, each
seller knows his competitors individually in each market.
Each oligopolist realises that any change in his price and advertising policy may lead rivals to
change their policies. Hence, an individual firm must consider the possible reactions of the other
firms to its own policies. The smaller the number of firms, the more interdependent are their
policies. In such cases, there is a strong tendency towards close collaboration in policy
determination both in regard to production and prices. Thus, oligopolists follow the philosophy
of `live and let live'. Two examples of this may be mentioned here. In response to tenders invited
by the Director General of Civil Supplies and Disposals, the three principal manufacturers of
storage batteries, viz. Chloride India, Standard Batteries and AMCO Batteries, quoted almost
identical prices.
Oligopolistic industries are usually characterised by what is known as price leadership-a situation
where firms fix their prices in a manner dependent upon the price charged by one of the firms in
the industry, called the price leader. The price leader has lower costs and adequate financial
resources, a substantial share of the market and a reputation for sound pricing decisions. Price
leaders with the strongest position in the market may often increase their prices with the hope that competitors will follow suit. Price followers may delay raising their prices in the hope of
snatching a part of the market share away from the leader.
Duopoly is a form of oligopoly where a market is characterized by two companies trying to
dominate the market by competing with each other, thereby reducing the chances of a
monopolistic market condition examples of duopolies in Indian market are Zomato vs. Swiggy
both are into the business of online food ordering platforms, Ola vs. Uber are cab aggregators
offer passenger transportation services and Flipkart vs. Amazon both being e-commerce
companies/online stores offering a wide range of merchandise to the customer at their doorstep.
Monopolistic competition is a market situation, in which there are many sellers of a particular
product, but the product of each seller is in some way differentiated in the minds of consumers
from the product of every other seller. None of the sellers is in a position to control a major part
of the total supply of the commodity but every seller so differentiates his portion of the supply
from the portions sold by others, that buyers hesitate to shift their purchases from his product to
that of another in response to price differences. At times, one manufacturer may differentiate his
own products. Consumer products, consumer durables, automobiles (both two wheelers & cars)
banking and NBFC’s, software development services and telecom services fall under the
purview of this category.
Product differentiation is more typical of the present day economic system, than either pure
competition or monopoly. And, in most cases, an individual firm has to face monopolistic
competition. It tries to maintain its position and promote its sales by either (i) changing its price
and indulging in price competition, or (ii) intensifying the differentiation of its product, and/or
(iii) increasing its advertisement and sales promotion efforts.
ROLE OF COSTS IN PRICING
There is a popular belief that costs determine price. It is because the cost data constitute the
fundamental element in the price setting process. However, their relevance to the pricing
decision must neither be underestimated nor exaggerated. For setting prices, apart from costs, a
number of other factors have to be taken into consideration. Demand is of equal, and, in some
cases, of greater importance than costs. An increase in cost may appear to justify an increase in
prices yet the demand situation may not permit such an increase. On the other hand, an increase
in demand may make increase in prices possible, even without any increase in costs.
Very often, price determines the cost that may be incurred. The product is tailored to the
requirements of the potential consumers and their capacity to pay for it. Decades ago when radio
manufacturers in India realised that if they have to capture the mass market prevailing in India,
they have to price it at low level which could be done only by reducing costs-reducing the
number of wave-bands in the radio. And now a single wave radio is available at around Rs. 100.
Given the price, we arrive at the cost working backwards from the price consumers can afford to
pay. Over a period, cost and quality are adjusted to the given price.
If costs were to determine prices, why do so many companies report losses? There are marked
differences in costs as between one producer and another. Yet the facts remains that the prices
are quite close for a somewhat similar product. This is, if anything, is best evidence of that costs
are not the determining factor in pricing.
PRICING METHODS
After discussing the various considerations affecting pricing policies, it would be useful to
discuss the alternative pricing methods most commonly used. These methods are:
1. Cost-plus or Full-cost pricing
This is most common method used in pricing. Under this method, the price is set to cover costs
(materials, labour and overhead) and a predetermined percentage for profit. The percentage
differs strikingly among industries, among members-firms and even among products of the same
firm. This may reflect differences in competitive intensity, differences in cost base and
differences in the rate of turnover and risk. In fact, it denotes some vague notion of a just profit.
What determines the normal profit? Ordinarily margins charged are highly sensitive to the
market situation. They may, however, tend to be inflexible in the following cases: (i) they may
become merely a matter of common practice, (ii) mark-ups may be determined by trade associations either by means of advisory price lists or by actual lists of mark-ups distributed to
members, (iii) profits sanctioned under price control as the maximum profit margins remain the
same even after the price control is discontinued. These margins are considered ethical as well as
reasonable.
In India, cost-plus method is widely used. There are two special reasons which could explain its
wide use in India.
i. The prevalence of sellers'
market in India makes it possible for the manufacturers to pass on the increases in costs to the consumers.
ii. Costs plus a reasonable margin of profit are taken into consideration for the purposes of
price fixation in the price-controlled industries in India. Thus, this method has the tacit
approval of the Government.
iii. To conclude, cost-plus is a pricing convention relying on arbitrary costs and arbitrary
mark-ups. It is adopted because it is simpler to apply.
2. Pricing for a rate of return, also called target pricing
An important problem that a firm might have to face is one of adjusting the prices to changes in
costs. For this purpose the popular policies that are often followed are as under:
i. Revise prices to maintain a constant percentage mark-up over costs.
ii. Revise prices to maintain profits as a constant percentage of total sales
iii. Revise prices to maintain a constant return on invested capital.
3. Marginal cost pricing
Both under full-cost pricing and the rate-of-return pricing, prices are based on total costs
comprising fixed and variable costs. Under marginal cost pricing, fixed costs are ignored and
prices are determined on the basis of marginal cost. The firm uses only those costs that are
directly attributable to the output of a specific product.
With marginal cost pricing, the firm seeks to fix its prices so as to maximise its total contribution
to fixed costs and profit. Unless the manufacturer's products are in direct competition with each
other, this objective is achieved by considering each product in isolation and fixing its price at a
level which is calculated to maximise its total contribution.
4. Going rate pricing
Instead of the cost, the emphasis here is on the market. The firm adjusts its own price policy to
the general pricing structure in the industry. Where costs are particularly difficult to measure, this may seem to be the logical first step in a rational pricing policy. Many cases of this type are
situations of price leadership. Where price leadership is well established, charging according to
what competitors are charging may be the only safe policy.
It must be noted that `going-rate pricing' is not quite the same as accepting a price impersonally
set by a near perfect market. Rather it would seem that the firm has some power to set its own
price and could be a price maker if it chooses to face all the consequences. It prefers, however, to
take the safe course and conform to the policy of others.
5. Customary pricing
Prices of certain goods become more or less fixed, not by deliberate action on the sellers' part but
as a result of their having prevailed for a considerable period of time. For such goods, changes in
costs are usually reflected in changes in quality or quantity. Only when the costs change
significantly the customary prices of these goods are changed.
Customary prices may be maintained even when products are changed. For example, the new
model of an electric fan may be priced at the same level as the discontinued model. This is
usually so even in the face of lower costs. A lower price may cause an adverse reaction on the
competitors leading to a price war so also on the consumers who may think that the quality of the
new model is inferior. Perhaps, going along with the old price is the easiest thing to do.
Whatever be the reasons, the maintenance of existing prices as long as possible is a factor in the
pricing of many products.
If a change in customary prices is intended, the pricing executive must study the pricing policies
and practices of competing firms and the behavior and emotional make-up of his opposite
number in those firms. Another possible way out, especially when an upward move is sought, is
to test the new prices in a limited market to determine the consumer reaction.
(b) Enterprises are sensing the need to become more integrated in their marketing communication efforts. Discuss with an example where you have been a part of the integration process or may have come across the said integration.
In any communication process several elements and steps
are involved. In the context of marketing communication, a manufacturer or company or brand
is the source (or sender), while prospective or existing consumers are at the receiver of the
communication. Message is the product information or details which are to be communicated to
the target group in a creative and interesting way. The channel is various media options such as
newspapers, TV, radio, magazines, hoardings etc. which can be used to reach the target
audience. The success of a marketing communication activity depends on a company’s ability to
convey the message effectively in a manner in which the customers should understand and
interpret the intended message. A marketing communication is considered effective if it
achieves its objectives such as increased sales, improved brand recall, increased awareness etc.
This is equivalent to the feedback, as discussed in the process of communication.
Having accepted as one of the important ‘P’s of marketing mix, marketing communication is
synonymous to Promotion and the elements include (Advertising, Publicity, Sales Promotion
and Personal Selling) which are employed by the firm for the purpose of awareness creation,
image building, and for sales all the four methods constitute promotional mix elements. Every
one of us does come across various promotional mix elements on a daily basis. When we read
newspaper in the morning or watch news channel or watch our favorite TV show or watch
music videos on YouTube, or visit a nearby shop or store to buy some product, when we go to a shopping mall for shopping or entertainment, the hoardings on the street, wall paintings,
banners, posters while traveling by road; we come across these elements of promotional mix
viz. Advertising, Publicity, Public Relations (PR), and Sales Promotion messages etc. In simple words, Integrated Marketing Communication (IMC) brings together all the tools of
marketing communication to direct consistent messages to a firm’s consumers. It is the strategic
integration of all the elements of promotional mix and other marketing activities (such as event
marketing, sponsorships, BTL activities, digital marketing etc.) to send consistent messages to
the buyers of a company’s products or services.
According to Smith, Berry and Pulford (1999), IMC is: “The strategic analysis, choice,
implementation and control of all elements of marketing communications which efficiently,
economically and effectively influence transactions between an organization and its existing and
potential customers, consumers and clients.”It is strategic because it is affected by the way in
which an organization aims to achieve its long-term goal. An IMC process carefully chooses,
execute and manage various elements to influence customers’ buying behavior”. IMC may also
be defined as a process that involves planning, conception, integration and implementation of a
variety of marketing communication activities to influence the behavior of the target group. Let
us understand it with a simple example.
Assume that a company manufactures gearless scooters and has recently launched a new model
by the brand name ‘Drivo’. You happen to see their full-page advertisement in the morning
newspaper. On your way driving to your office, you notice a big hoarding while waiting at a
traffic signal. Further, while surfing your social media account during lunch at office, you come across a pop-up ad of ‘Drivo’. While leaving office for home, you see that a guy is sitting beside
a canopy tent which is installed in the parking of your office building. On close observation you
find the newly launched ‘Drivo’ inside the canopy tent. Finally, at home, while watching cricket
match on TV, you see a 30-sec advertisement of ‘Drivo’ during commercial break.
The above is a hypothetical example to explain how a brand makes all attempts to reach their
potential market segments with messages and being visible by using all the elements of the
promotion mix. This explains clearly what IMC is all about. In this case, the company was using
a combination of various tools (Advertising, Digital Marketing, and BTL activity, Outdoor etc.)
to communicate to their potential consumers in awareness creation about the brand Drivo and to
persuade them to consider purchasing.
Each IMC tool has its own strategic and tactical importance in the whole marketing
communication process and promotional efforts pertaining to the firm’s product or service
offering. However, when all these tools (as depicted in Table 2) are used in the right
combination and proportion, then the impact of the communication will be visible and its
effectiveness becomes measurable.
Let us now look at each of the IMC tool and understand their role and importance in brief:
a) Media Advertising is generally best suited for products or services targeted at mass
markets and require huge budgets. It is one-sided communication and hence,
customer feedback is not received. We regularly come across advertisements in TV,
radio, newspapers, magazines etc. which falls under the category of Media
Advertising.
b) With the advent of new emerging communication and mobile technologies
advertising through modern media viz. internet, social media, mobile etc. is gaining
momentum. This falls under the category of Digital Marketing.
c) While you travel by road, then you are bound to come across various hoardings,
banners, wall paintings, advertisements on buses or taxies etc. This is another
important IMC tool and known as OOH (Out-of-Home). OOH is mainly useful for
local or regional brands which intend to promote their offerings and wish to persuade
consumers of that town or region to buy them.
d) Further, you must have seen wall hangings, posters, in-store banners while visiting
shopping mall, departmental stores. This is another element of IMC tools i.e. Pointof-Sale (POS) Advertising. They are helpful to trigger impulse purchases of the
products or services of different brands which are available at the store for sale.
e) As an IMC tool, sales promotion is another important element which is helpful in
generating immediate sale. It is defined as ‘short term incentives given to customers
and channel partners to boost sales’. Promotional messages related to offers such as
Buy 2, Get One Shirt Free, 20% Off on ‘X’ Pizza Brand, Exchange Your Old Watch
with New ‘Y’ Watch etc. are some of the examples of sales promotion activities
initiated by a company or brand to create desire in the customer’s mind so that he /
she buys the product or service.
f) Further, events are great way to socialize and reach to the masses to inform and
persuade the target audience. They may be of various types ranging from charity,
shows, cultural events, games & sports and corporate events or celebrations etc each
of these serves a different goal. Similarly, sponsorship is financial association of a
company with other companies or events. It helps to create cross media ties and, in
forming and endorsing the brand image and values. For example, MPL Sports is the
new kit / apparel sponsor for Indian cricket team.
g) Another IMC tool, personal selling is generally used for selling or promoting
technical, industrial and referral products or in an institutional selling scenario.
In short, each IMC tool plays an important role in overall IMC strategy of a company or brand to
deliver a unified, consistent message to its target audience. And, in today’s business scenario,
IMC is inevitable because no company or brand can survive by using only one or two
promotional tools to send consistent communication to prospective or existing customers
Have you tried the magnifying glass and sun experiment in your childhood? When we hold a
magnifying glass under the sun, it concentrates the sun's light onto a small area and makes the
sun’s heat much stronger. This may make a flammable object burn. This small experiment
explains the importance of IMC in a very simple way. In a marketing communication scenario,
IMC acts as a magnifying glass which integrates various marketing and promotional tools to
ensure synergy and avoid duplication
An IMC strategy integrates various marketing communication tools to maintain communication
consistency and ensure resource optimization. There are different online and offline communication tools which make a communication about a product or service to reach out to
target group in many ways. In order to ensure clarity of a brand’s message about a product /
service, integration of all the tools becomes crucial. The importance of IMC approach is growing
continuously consistently both among the large as well as small firms. It’s being adopted among
the marketers of both consumer as well as B2B products and service businesses. IMC is really
helpful as it makes a firm’s marketing communication program more efficient and effective. An
IMC strategy offers several benefits such as it ensures consistent and clear communication,
optimizes resource utilization, avoids replication, helps to have competitive edge and
consolidates a brand’s image and public perception also.
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