3. A) What are the requirements of effective
B) Discuss the segmentation of corporate
marketing segmentation?
Answer:
Effective market segmentation takes effort. It is
not something that comes easily for any
business. It requires a great deal of skilled
research and effective implementation of
segmentation strategies. Mindful monitoring of
marketing strategy performance and adjustment
to the segmentation system is also necessary to
maintain the effectiveness of the strategies that
have been employed.
The requirements for effective market
segmentation are as follows:
a) Measurable: The size, needs, purchasing
power, and characteristics of the customers in the
segment should be measurable. Quantification
should be possible.
b) Divisible: The segments should be
differentiable. There must be clear-cut basis for
dividing customers into meaningful homogeneous
groups. They should respond differently to
different marketing mixes. There should be
differences in buyer's needs, characteristics and
behaviour for dividing in groups.
c) Accessible: The segment should be reachable
and serviceable. It should be accessible through
existing marketing institutions, such as
distribution channels, advertising media and sales
force. There should be middlemen to distribute
the products.
d) Substantial: The segment should be
substantial. It should be large enough in terms of
customers and profit potential. IT should justify
the costs of developing a separate marketing mix.
e) Actionable: It should be actionable for
marketing purposes. Organizations should be
able to design and implement the marketing mix
to serve the chosen segment.
Short Note:
Direct marketing is a very popular and widely
used method of informing people about products
and services. It's a method of contacting
customers and potential customers personally,
rather than having an indirect medium between
the company and the consumer, such as
magazine ads or billboards that are seen by the
general public. Direct marketing can take many
forms, including mail, telephone calls, emails,
brochures, and coupons. The information is
usually very broad and meant for a general
audience. Direct marketing works best for
products that have a wide appeal.
Direct marketing is often used to reach out to
existing, or past, customers. A key factor in the
success of any direct marketing campaign is what
industry experts refer to as a "call to action." In
other words, as a direct marketer you must offer
the people a benefit, whether it is money off their
next purchase, a limited time cost coupon, or, for
a non-profit, an invitation to an event or
membership reduction.
3.
Behavioral segmentation is considered most
marketing?
Market Segmentation
Market segmentation can be defined as the
process of dividing a market into different
homogeneous groups of consumers.
By segmentation, large heterogeneous markets
are divided into smaller segments that can be
managed more efficiently and effectively with
products and services that match to their unique
needs. So, market segmentation is beneficial
for the companies serving larger markets.
Criteria for selecting Market Segments
Measurable A segment should be measurable.
It means you should be able to tell how many
potential customers and how many businesses
are out there in the segment.
Accessible A segment should be accessible
through channels of communication and
distribution like: sales force, transportation,
distributors, telecom, or internet.
Durable Segment should not have frequent
changes attribute in it.
Substantial Make sure that size of your segment
is large enough to warrant as a segment and
large enough to be profitable
Unique Needs Segments should be different in
their response to different marketing efforts.
Consumer and business markets cannot be
segmented on the bases of same variables
because of their inherent differences.
Bases for Consumer Market Segmentation
There are number of variables involved in
consumer market segmentation, alone and in
combination. These variables are:
==Geographic variables
==Demographic variables
==Psychographic variables
==Behavioral variables
Geographic Segmentation
In geographical segmentation, market is
divided into different geographical units like:
==Regions (by country, nation, state,
neighborhood)
==Population Density (Urban, suburban, rural)
==City size (Size of area, population size and
growth rate)
==Climate (Regions having similar climate
pattern)
A company, either serving a few or all geographic
segments, needs to put attention on variability of
geographic needs and wants. After segmenting
consumer market on geographic bases,
companies localize their marketing efforts
(product, advertising, promotion and sales
efforts).
Demographic Segmentation
In demographic segmentation, market is
divided into small segments based on
demographic variables like:
=Age =Gender =Income =Occupation
=Education =Social Class =Generation
=Family size =Family life cycle
=Home Ownership =Religion
=Ethnic group/Race =Nationality
Demographic factors are most important factors
for segmenting the customers groups. Consumer
needs, wants, usage rate these all depend upon
demographic variables.
Psychographic Segmentation
In Psychographic Segmentation, segments are
defined on the basis of social class, lifestyle and
personality characteristics.
Psychographic variables include:
==Interests ==Opinions ==Personality
==Self Image ==Activities ==Values ==Attitudes
Behavioral Segmentation
In this segmentation market is divided into
segments based on consumer knowledge,
attitude, use or response to product.
Behavioral variables include:
==Usage Rate ==Product benefits
==Brand Loyalty ==Price Consciousness
==Occasions (holidays like mother’s day, New
Year and Eid)
==User Status (First Time, Regular or Potential)
favorable segmentation tool as it uses those
variables that are closely related to the product
itself.
Bases for Business Market Segmentation
Business market can be segmented on the
bases consumer market variables but because of
many inherent differences like
==Businesses are few but purchase in bulk
==Evaluate in depth
==Joint decisions are made
Business market might be segmented on the
bases of following variables:
Company Size: what company sizes should we
serve?
Industry: Which industry to serve?
Purchasing approaches: Purchasing-function
organization, Nature of existing relationships,
purchase policies and criteria.
Product usage
Situational factors: seasonal trend, urgency:
should serve companies needing quick order
deliver, Order: focus on large orders or small.
Geographic: Regional industrial growth rate,
Customer concentration, and international
macroeconomic factors.
3. C. Holding position of the market of what a
marketer should do?
A positioning strategy is a deliberate branding
plan or process that operates on the symbolic
levels of consumer consciousness, where
meanings and associations – even of individual
words – really hold weight. It is an organized
attempt for a brand to set itself apart from the
crowd and influence the way their target audience
perceives them. A solid market positioning
strategy is crucial to the vitality and longevity of a
company. The sooner marketer undertakes this
process, the better off his business organization
will be.
To hold market position a marketer should follow
seven basic steps listed below:
Draft a positioning statement — There are
four simple questions that will yield a set of basic
facts about the identity you have determined for
your company. The positioning statement is the
result of plugging those facts into a basic,
formulaic sentence structure.
Compare and contrast to identify your own
uniqueness — Differences between your own
messaging strategy and communication
channels, and those of your competitors reveal
openings in the market that your positioning
message should address.
Competitor analysis — Investigating and
analyzing the competition helps to determine the
strengths and weaknesses of your own business
measured against the competition. Understanding
the differences between a business and its
competitors is central to finding gaps in the
market that can be filled.
Determine current position -Determining
your existing market position is every bit as vital
as any competitor analysis. That’s because you
have to understand your own market position to
be able to properly compete for your share.
Competitor positioning analysis — An
accessory to the competitor analysis, competitor
positioning analysis identifies the conditions of
the market that influence how much power
competitors are able to exercise.
Develop a unique positioning idea —With all
the analytical data in hand, you should have a
better idea of who you are, who you are not, and
who your best audience is. It’s time to make a
statement about those facts.
Test the effectiveness of your brand
positioning — Testing methodology will consist
of qualitative and quantitative data gathering,
mainly determined by the steps prior to this, but
may also include focus groups, surveys, in-depth
interviews, ethnography, polls, etc.
Short Note:
Consumerism:
Consumerism is a social and economic order that
encourages the purchase of goods and services
in ever-greater amounts. Early criticisms of
consumerism are present in the works of
Thorstein Veblen (1899). Veblen's subject of
examination, the newly emergent middle class
arising at the turn of the twentieth century, comes
to fruition by the end of the twentieth century
through the process of globalization. In this
sense, consumerism is usually considered a part
of media culture.
The term "consumerism" has also been used to
refer to something quite different called the
consumerists movement, consumer protection or
consumer activism, which seeks to protect and
inform consumers by requiring such practices as
honest packaging and advertising, product
guarantees, and improved safety standards. In
this sense it is a movement or a set of policies
aimed at regulating the products, services,
methods, and standards of manufacturers,
sellers, and advertisers in the interests of the
buyer.
Product Life Cycle The product life cycle
describes the period of time over which an item is
developed, brought to market and eventually
removed from the market. The cycle is broken
into four stages: introduction, growth, maturity
and decline. The idea of the product life cycle is
used in marketing to decide when it is appropriate
to advertise, reduce prices, explore new markets
or create new packaging.
At the beginning of a product's life, it may have a
little to no competition in the marketplace, until
competitors start to emulate its success. As the
product becomes more successful, it faces
increasing numbers of competitors and may lose
market share, eventually declining.
The stage of a product's life cycle impacts the
way in which it is marketed to consumers. E-
Banking E-banking is a product designed for
the purposes of online banking that enables you
to have easy and safe access to your bank
account. E-banking is a safe, fast, easy and
efficient electronic service that enables you
access to bank account and to carry out online
banking services, 24 hours a day, and 7 days a
week. With this service you save your time by
carrying out banking transactions at any place
and at any time, from your home or office, all you
need is internet access. E-banking enables the
following:
==Accurate statement of all means available in
your bank account
==Statement of current account, credits,
overdrafts and your deposits
==Execution of national and international
transfers in various currencies
==Execution of all types of utility bill payments
(electricity, water supply, telephone bills, etc..)
==Carrying out customs payments
==Electronic confirmation for all transactions
executed by E-banking
==Management of your credit cards
Value Chain A value chain is a high-level model
developed by Michael Porter used to describe the
process by which businesses receive raw
materials, add value to the raw materials through
various processes to create a finished product,
and then sell that end product to customers.
Companies conduct value-chain analysis by
looking at every production step required to
create a product and identifying ways to increase
the efficiency of the chain. The overall goal is to
deliver maximum value for the least possible total
cost and create a competitive advantage.
A value chain is a company model that breaks
down the flow of production activities into five
categories. The aim of the value chain is to
increase profits by creating value at each of the
five product touch points so the value exceeds
the cost associated with the product.
2.a What is Brand Equity?
Brand equity is a marketing term that describes a
brand’s value. That value is determined by
consumer perception of and experiences with the
brand. If people think highly of a brand, it has
positive brand equity. When a brand consistently
under-delivers and disappoints to the point where
people recommend that others avoid it, it has
negative brand equity.
Positive brand equity has value:
==Companies can charge more for a product with
a great deal of brand equity.
==That equity can be transferred to line
extensions – products related to the brand that
include the brand name – so a business can
make more money from the brand.
==It can help boost a company’s stock price.
How Brand Equity Develops
Brand equity develops and grows as a result of a
customer’s experiences with the brand. The
process typically involves that customer or
consumer’s natural relationship with the brand
that unfolds following a predictable model:
==Awareness – The brand is introduced to its
target audience – often with advertising – in a
way that gets it noticed.
==Recognition – Customers become familiar with
the brand and recognize it in a store or
elsewhere.
==Trial – Now that they recognize the brand and
know what it is or stands for, they try it.
==Preference – When the consumer has a good
experience with the brand, it becomes the
preferred choice.
==Loyalty – After a series of good brand
experiences, users not only recommend it to
others, it becomes the only one they will buy and
use in that category. They think so highly of it that
any product associated with the brand benefits
from its positive glow.
2.b How can you develop brand equity
management system?
-Brand tracking studies provides a huge reservoir
of info- information concerning how best to build
and measure brand equity.
-However, the potential value of these research
efforts will not be realized unless proper internal
structure and procedures are put into place within
the organization to capitalize on the usefulness of
these information.
- Therefore, the establishment of brand equity
management system is a demand for today’s
brand management.
- Brand Equity Management System is a set of
organizational processes designed to improve the
understanding and use of the brand equity
concept within the firm.
- Three major steps need to be undertaken to
successfully implement the brand equity
management system.
Step-1: Brand Equity Charter
==The first step in establishing a brand equity
management system is to formalize the company
view of brand equity into a document called the
brand equity charter.
==The brand equity charter provides relevant
guidelines to marketing managers within the
company as well as key marketing partners
outside company.
==Common elements present in this charter are:
a. Define firm’s view of brand equity concept and
why its important.
b. Describe the scope of key brands past and
present.
c. Specification of actual and desired equity for
the brand at all relevant levels of the brand.
d. Explain the tracking system.
e. Explain some general strategies and policies
needed to manage the brand.
f. Outlines the design of marketing programs in
respect to creating brand equity.
g. Specify the proper treatment of the brand in
terms of trademark usage, packaging and
communications.
Step-2: Brand Equity Report
==The second step in establishing brand equity
management system is to assemble the results of
the tracking survey and other relevant
performance measures for the brand into a brand
equity report to be distributed to the management
on a regular basis.
==The report should provide descriptive
information as to what is happening with the
brand as well as diagnostic information as to why
it is happening.
==For instance, it should give information in
regard to product shipment and movement
through channels, relevant cost breakdown, price
and discount schedules, sales and market share
information etc.
Step-3: Brand Equity Responsibilities
==This step involves organizing the
responsibilities that is required to be undertaken
and fulfilled in order to ensure the proper
implementation of the management system.
==This step basically defines the organizational
responsibilities and processes with respect to the
brand such that constant and consistent nurturing
of the brand is made possible.
==This step identifies the internal and external
issues that need to be coordinated and managed
for the proper development of brand equity.
==-One of the internal task of this step is to
oversee the brand equity i.e. review brand
sensitive material, status of key brand initiatives
and projects, new product distribution and
strategies and resolve any conflicts.
==The final issue of deciding on how many
marketing partners (adjacency) and
intermediaries to deal with it.
==From a branding perspective dealing with one
ad-agency is advantageous as it ensures
consistency in dealing and treating the brand.
6a. The features to consider opening new bank
branch
1=Location. Anyone who’s ever worked in real
estate knows this concept – and what applies for
real estate applies for real banking success. Your
location and site selection impact your sales
volumes in a big way. Not only do you want to
locate in heavily trafficked retail areas, you also
want to select highly visible and accessible sites.
Hard corner stand-alone sites tend to out-perform
mid-block or in-line sites. Both types tend to out-
perform in-store or supermarket sites.
2=Don’t shortchange marketing. Spend some
money marketing the new site, whether through a
grand opening celebration with a contribution to a
local charity, or some other type of event.
3=Bridge to where you already have
customers. About half a typical branch’s sales
come from existing customers, so the other half
must originate from new customers. When you
open a new branch as an infill point within your
current footprint, it will likely outperform a new
branch in a new market that expands your bank’s
footprint.
4=New customers are critical, but not the only
reason for expansion. Conversely, opening a
branch in a new market where you don’t have an
existing customer base will lessen initial sales and
extend payback time for your capital investment.
In these cases, increase marketing efforts to
promote the new location.
5=Will an ATM substitute for a organizational boundaries and collecting relevant
branch? Consider deploying stand-alone,
deposit-taking ATMs as infill points in markets
where you have a decent branch network. They
only require about 5-10 percent of a branch’s
operating expenses and can help boost local
sales by as much as 15 percent in their trade
area.
6=Be wary of supermarket branches. While
they are less expensive to build and cost about
60-70 percent as much as a traditional branch to
operate, supermarket branches will only generate
40-50 percent of the revenue. Additionally you
have limited control over the grocery store: If they
close you close—often with little customer
notice—which could lead to regulatory issues.
7=Heavy up on sales staff. As a corollary to the
supermarket note, make sure you have plenty of
sales staff on hand from day one. Never open a
branch with only one seller, even if you have
limited initial transaction traffic.
8=Go big on signage. Wherever build, make
signage is as big and bright as you can get it.
Customers need to find the location. Some
municipalities and landlords limit the square
footage of signage, so plan carefully and consider
in-branch signage through the windows as a
complement to external signage.
9=Add drive-up lanes, but not drive-up
tellers. Find a site that offers a drive-up lane if
possible, especially in the colder Northeast and
Midwest markets—but place a drive-up ATM there
instead of a traditional teller. Lower operating
costs and increased transaction migration
outweigh any potential customer complaints. It’s
easier if you don’t offer a manned drive-up lane
from the beginning, rather than take it away later
by swapping in a drive up machine.
10=Get staff on board early. Hire the new
branch’s staff early and get them into the market,
talking to local businesses in order to “pre-sell”
accounts. It not only shows that your firm is
committed to the local neighborhood but also
helps ensure a good opening month.
6b. Categories of desk research in banking:
Desk research or popularly called
as secondary research is defined as the
Market research that is already covered as a
primary research and is compiled and ...
Commercial sources include research and trade
associations, such as CRISIL and
ICRA, banks and also other financial institutions,
and sometimes publicly traded
There are basically two types of desk
research techniques:
1=Internal Desk Research - Internal desk
research can be treated as the most reasonable
starting point of research for any organization.
Much Information could be generated internally
within the organization as a course of normal
process. Account related information which
indicates what type of products are sold, in how
much quantity and at what cost, sold to which
type of customers including their geographical
location and so on. The main advantage here in
performing internal desk research is that it
involves internal and existing organizational
resources to organize the collected data in such
a way that it is not only efficient but also usable.
Internal desk research is comparatively very
cheap and effective as internal recourses are
deputed and the expenditure in getting data from
outside is less.
2=External Desk Research - External Desk
Research involves research done outside the
information. These outside resources are
described below:
--Online Desk Research - There is incredible
amount of data available online on internet. It’s
important for organization to be information
specific while fetching out this information as
there are billions of pages available on internet.
There could be two approaches for digging out
the relevant information from internet, one is
directly browsing the specific information from
industrial, marketing or business sites and
extracting the information out of these sites.
Secondly, using the various search engines
like www.google.com, www.yahoo.com, www.inf
oseek.go.com, www.altavista.com etc, for
modulated searching. The important aspect here
is to refine the searching techniques in such a
way that results are promising and relevant. For
this it is necessary that the researcher should
know the importance of the research and follow
the guideline intellectually to reduce the efforts
made and time consumed in searching.
--Government published data - Government
usually publishes a great extent of data online
that can be used in the research process. This
data is related to social, financial and
economical aspects. The government websites
are mostly free to access and contains most
prominent information. Thus, this could be the
cheapest medium of gathering the information.
--Customer desk research - One of the best
and most prominent ways of extracting
information for research is directly
communicating with existing or prospect
customer. Customers are the one who are
considered the most informed as they are
actually using products and services and are
aware of the current market trends more than
any other. Hence the feedback and information
provided by customers is the most accurate and
useful data which can be used most effectively in
the further process of research.
Secondary research (or desk research) gathers
existing information through available sources.
Secondary research examples include:
==information on the internet
==existing market research results
==existing data from your own stock lists and
customer database
==information from agencies such as industry
bodies, government agencies, libraries and local
councils.
6c. A marketing information system (MkIS) is a
management information system(MIS) designed
to support marketing decision making. Jobber
(2007) defines it as a "system in
which marketing data is formally gathered,
stored, analysed and distributed to managers in
accordance with their informational needs on a
regular basis."
Some Steps to Creating an Effective Marketing
Information System
1. Start with the accounting system
A good place to start is the business system that
every business has – the Accounting system. The
information obtained from the accounting system
is typically enterprise-wide and at a macro level. It
usually does not give marketers, or their bosses,
the information necessary to (1) determine the
effectiveness of the organization’s marketing
efforts; (2) enable it to react quickly to real-time
crises and opportunities; or (3) respond rapidly to
competitive threats.
2. Market Information Form
To minimize paperwork, marketers can collect a
lot of the information from the above list on a
Market Information Form (or its electronic
equivalent). The information collected and how
this information is used is summarized below.
=Complaints. = Compliments
=New Product ideas. =Strategy feedback.
= Competition Information.
3. Lead Card
Leads are captured on a lead card or its
electronic equivalent. Sales people use the lead
card to follow up on a prospect’s interest with the
objective of closing the sale.
4. Hot List
An MIS report called the Hot List contains the
following information on “Hot” leads:
1. Prospect name.
2. Decision makers
3. Product or project proposed.
4. Proposal date.
5. Dollar-amount proposed.
6. Percent chance of closing in the current
period.
7. Expected Value
5. Promotion Effectiveness Report
As each sales person captures the promotion
source for each lead on the Lead Card, the
information automatically flows onto his or her
Promotion Effectiveness Report. Every time a
sales person gives a presentation or makes a
sale from a lead, that information is recorded on
the Promotion Effectiveness Report
6. Market Research
The systems above (Market Information Form,
Lead Card, Hot List and Promotion Effectiveness
Report) typically capture information in real time
and provide a lot of great information that help the
marketing function do a more effective job and
prove it to the CEO. Even so, this is not enough.
There are still holes in the information marketers
need. In an effort to plug these holes, there is one
big missing piece – Market Research. There are
two big categories of Market Research –
Secondary and Primary.
7. Secondary Research
Secondary research is simply research done by
others. Perhaps the greatest invention for
secondary research is the search engine.
Marketers can simply type in search terms in a
search window and browse the Internet for any
data related to those search terms.
8. Primary Research
When some big holes remain that still need to be
plugged, marketers will often do primary research,
which is their own research. Common forms of
primary research include surveys, focus groups,
experiments, and various forms of crowd
sourcing.
5. A) Discuss the price setting method.
4 Types of Pricing Methods – Explained
An organization has various options for selecting
a pricing method. Prices are based on three
dimensions that are cost, demand, and
competition.
The organization can use any of the dimensions
or combination of dimensions to set the price of a
product.
Figure-4 shows different pricing methods:
The different pricing methods (Figure-4) are
discussed below;
Cost-based Pricing:
Cost-based pricing refers to a pricing method in
which some percentage of desired profit margins
is added to the cost of the product to obtain the
final price. In other words, cost-based pricing can
be defined as a pricing method in which a certain
percentage of the total cost of production is
added to the cost of the product to determine its
selling price.
These two types of cost-based pricing are as
follows:
i. Cost-plus Pricing:
cost-plus pricing method, is a fixed percentage,
also called mark-up percentage, of the total cost
(as a profit) is added to the total cost to set the
price.
Cost-plus pricing is also known as average cost
pricing. This is the most commonly used method
in manufacturing organizations.
In economics, the general formula given for
setting price in case of cost-plus pricing is as
follows:
P = AVC + AVC (M)
AVC= Average Variable Cost
M = Mark-up percentage
AVC (m) = Gross profit margin
Mark-up percentage (M) is fixed in which AFC
and net profit margin (NPM) are covered.
AVC (m) = AFC+ NPM
ii. Markup Pricing:
Refers to a pricing method in which the fixed
amount or the percentage of cost of the product is
added to product’s price to get the selling price of
the product. Markup pricing is more common in
retailing in which a retailer sells the product to
earn profit.
It is mostly expressed by the following
formulae:
a. Markup as the percentage of cost=
(Markup/Cost) *100
b. Markup as the percentage of selling price=
(Markup/ Selling Price)*100
Demand-based Pricing:
Demand-based pricing refers to a pricing method
in which the price of a product is finalized
according to its demand. If the demand of a
product is more, an organization prefers to set
high prices for products to gain profit; whereas, if
the demand of a product is less, the low prices
are charged to attract the customers. The
success of demand-based pricing depends on the
ability of marketers to analyze the demand.
Competition-based Pricing:
Competition-based pricing refers to a method in
which an organization considers the prices of
competitors’ products to set the prices of its own
products. The organization may charge higher,
lower, or equal prices as compared to the prices
of its competitors.
The aviation industry is the best example of
competition-based pricing where airlines charge
the same or fewer prices for same routes as
charged by their competitors.
Other Pricing Methods:
In addition to the pricing methods, there are
other methods that are discussed as follows:
i. Value Pricing:
Implies a method in which an organization tries to
win loyal customers by charging low prices for
their high- quality products. The organization
aims to become a low cost producer without
sacrificing the quality.
ii. Target Return Pricing:
Helps in achieving the required rate of return on
investment done for a product.
iii. Going Rate Pricing:
Implies a method in which an organization sets
the price of a product according to the prevailing
price trends in the market.
iv. Transfer Pricing:
Involves selling of goods and services within the
departments of the organization. It is done to
manage the profit and loss ratios of different
departments within the organization.
5. B) The actual price setting should be based
on three features cost, demand, competition, -
Explain the statement.
3 Major Pricing Strategies – Customer
Demand-Based Pricing, Cost-Based Pricing,
Competition-Based Pricing
For every product, the company has to choose a
price. But determining the price can take many
ways. Most importantly, it should follow a
predetermined strategy. 3 major pricing strategies
can be identified: Customer demand-based
pricing, cost-based pricing and competition-based
pricing.
Customer demand-based Pricing – 3 major
Pricing Strategies
Good pricing usually starts with customers and
their perceptions of demand. Eventually, the
customer will decide whether a product is worth
its price or not. Therefore, we start with customer
demand. When customer buy a product, they
exchange something of demand (the price) to get
something of demand (the benefits of having or
using a particular product). Therefore, it is crucial
to understand how much demand consumers
place on the benefits they receive from the
product and setting a price that captures exactly
this demand.
This means that we cannot design a product and
marketing programme and then set the price.
Cost-based Pricing – 3 major Pricing Strategies
While in customer demand -based pricing,
customers’ perceptions of demand are key to
setting prices, in cost-based pricing the seller’s
costs are the primary consideration. Costs set
the floor for the price that the company can
charge. Therefore, cost-based pricing involves
setting prices based on the costs for producing,
distributing and selling the product. In order to
make some profit, a fair rate of return is added to
account for efforts and risks.
Some companies, such as Ryanair or Walmart,
pursue a low-cost strategy and aim to offer the
lowest prices. Other companies, such as Apple or
BMW, do not compete based on low prices. By
offering superior customer demand, they can
claim higher prices and margins – they pursue a
customer demand -based pricing strategy.
Competition-based Pricing – 3 major Pricing
Strategies
Finally, competition-based pricing involves setting
prices based on competitors’ strategies, costs,
prices and market offerings. In highly competitive
markets, consumers will base their judgments of
a product’s demand on the prices that
competitors charge for similar products. For
instance in the gasoline industry, competition-
based pricing is applied.
However, the company should ask several
questions. First of all, how does the company’s
market offering compare with competitors’ market
offerings in terms of customer demand?
Secondly, how strong are current competitors,
and what are their pricing strategies?
5. C) Describe strategies to adjust the price
Price Adjustment Strategies
Companies must adjust their basic prices to
account for differences in customers and
situations.
There are seven price adjustment strategies:
Discount and allowance pricing, segmented
pricing, psychological pricing, promotional pricing,
geographical pricing, dynamic pricing and
international pricing. Let’s examine the most
important price adjustment strategies
Discount and allowance pricing -- Reducing
prices to reward customer responses such as
paying early or promoting the product
Segmented pricing -- Adjusting prices to allow
for differences in customers, products or locations
Psychological pricing -- Adjusting prices for
psychological effect
Promotional pricing -- Temporarily reducing
prices to increase short-run sales
Geographical pricing-- Adjusting prices to
account for the geographic location of customers
Dynamic pricing-- Adjusting prices continually to
meet the characteristics and needs of individual
customers and situations
International pricing-- Adjusting prices for
international markets
Discount and Allowance Pricing – Price
Adjustment Strategies
The first one of the price adjustment strategies is
applied in a large share of businesses. Especially
in B2B, this price adjustment strategy is rather
common. Most companies adjust their basic price
to reward customers for certain responses, such
as the early payment of bills, volume purchases
and off-season buying.
Allowances refer to another type of reduction
from the list price. For instance, trade-in
allowances are price reductions given for turning
in an old item when buying a new one. Especially
in the car industry, trade-in allowances are very
common. Promotional allowances refer to
payments or price reductions to reward dealers
for participating in advertising and sales support
programmes.
Segmented Pricing – Price Adjustment
Strategies
Often, companies adjust their basic prices to
allow for differences in customers, products and
locations. In short: adjusting prices to account for
different segments. In segmented pricing, the
company thus sells a product or service at
different prices in different segments, even
though the price-difference is not based on
differences in costs.
Several different forms of segmented pricing
exist. Under customer-segment pricing, different
customers pay different prices for the same
product or service. Under product-form pricing,
different versions of the product are priced
differently, although the difference is not due to
cost differences.
Under location-based pricing, a firm charges
different prices for different locations, although
the cost of offering each location is the same.
Finally, under time-based pricing, the firm varies
its price by the season, the month, the day or
even the hour.
Psychological Pricing – Price Adjustment
Strategies
Another one of the price adjustment strategies is
psychological pricing. It refers to pricing that
considers the psychology of prices, not simply the
economics. Indeed, the price says something
about the product.
For instance, many consumers use price to judge
quality. However, this does not work forever.
When consumers can judge the quality of a
product by examining it or by calling on past
experience with it, price is less used to judge
quality. But when they cannot judge quality, price
becomes an important signal.
Promotional Pricing – Price Adjustment
Strategies
Promotion pricing calls for temporarily pricing
products below the list price, and sometimes
even below cost, to increase short-run sales.
Thus, companies try to create buying excitement
and urgency. Promotional pricing could take the
form of discounts from normal prices to increase
sales and reduce inventories. Also, special-event
pricing in certain seasons to draw more
customers could be used. Even low-interest
financing, longer warranties or free maintenance
are parts of promotional pricing.
Geographical Pricing – Price Adjustment
Strategies
The next one of the price adjustment strategies is
geographical pricing. In geographical pricing, the
company sets prices for customers located in
different parts of the country or world. Should the
company risk losing the business of more-distant
customers by charging them higher prices to
cover the additional shipping costs? Or should
the same prices be charged regardless of
location?
There are five geographical pricing strategies:
 FOB-origin pricing:
 Uniform-delivered pricing:
 Zone pricing:
 Base-point pricing:
 Freight-absorption pricing:
Dynamic Pricing – Price Adjustment
Strategies
Dynamic pricing refers to adjusting prices
continually to meet the characteristics and needs
of individual customers and situations. Thus,
prices were adjusted to the specific customer or
situation. Exactly at that point, dynamic pricing
starts. Instead of using fixed prices, prices are
adjusted on a day-by-day or even hour-by-hour
basis, taking many variables into account, such
as current demand, inventories and costs. In
addition, consumers can negotiate prices at
online auction sites such as eBay.
International Pricing – Price Adjustment
Strategies
international pricing. Companies that market their
products internationally must decide what prices
to charge in the different countries in which they
operate. The price that a company should charge
in a country can depend on many factors,
involving economic conditions, competitive
situations, laws and regulations, and the
development of the wholesaling and retailing
system. In addition, consumer perceptions and
preferences may vary from country to country,
calling for differences in prices. Without doubt,
costs play an important role in setting
international prices.