Pricing

For more detailed description on pricing strategies and policies see: Pricing Strategies

Pricing is one of the four p's of the marketing mix. The other three aspects are product management, promotion, and place. It is also a key variable in microeconomic price allocation theory.

Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. Automated systems require more setup and maintenance but may prevent pricing errors.

Pricing involves asking questions like

• How much to charge for a product or service? While this is the way most businesses think about pricing, since it focuses on what the business sells, the real question is how much do customers value what they are buying?
• What are the pricing objectives?
• Do we use profit maximization pricing?
• How to set the price?: (cost-plus pricing, demand based or value-based pricing, rate of return pricing, or competitor indexing)
• Should there be a single price or multiple pricing?
• Should prices change in various geographical areas, referred to as zone pricing?
• Should there be quantity discounts?
• What prices are competitors charging?
• Do you use a price skimming strategy or a penetration pricing strategy?
• What image do you want the price to convey?
• Do you use psychological pricing?
• How important are customer price sensitivity and elasticity issues?
• Can real-time pricing be used?
• Is price discrimination or yield management appropriate?
• Are there legal restrictions on retail price maintenance, price collusion, or price discrimination?
• Do price points already exist for the product category?
• How flexible can we be in pricing? : The more competitive the industry, the less flexibility we have.
  • The price floor is determined by production factors like costs (often only variable costs are taken into account), economies of scale, marginal cost, and degree of operating leverage
  • The price ceiling is determined by demand factors like price elasticity and price points
• Are there transfer pricing considerations?
• What is the chance of getting involved in a price war?
• How visible should the price be? - Should the price be neutral? (ie.: not an important differentiating factor), should it be highly visible? (to help promote a low priced economy product, or to reinforce the prestige image of a quality product), or should it be hidden? (so as to allow marketers to generate interest in the product unhindered by price considerations).
• Are there joint product pricing considerations?
• What are the non-price costs of purchasing the product? (eg.: travel time to the store, wait time in the store, dissagreeable elements associated with the product purchase - dentist -> pain, fishmarket -> smells)
• What sort of payments should be accepted? (cash, cheque, credit card, barter)

A well chosen price should do three things:

• achieve the financial goals of the firm (eg.: profitability)
• fit the realities of the marketplace (will customers buy at that price?)
• support a product's positioning and be consistent with the other variables in the marketing mix
  • price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product
    • price will usually need to be relatively high if manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns
    • a low price can be a viable substitute for product quality, effective promotions, or an energetic selling effort by distributors

From the marketers point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumer surplus to the producer.

The effective price is the price the company receives after accounting for discounts, promotions, and other incentives.

Customer Factors [[1]]

The major determinant of prices will be what the consumer is prepared to pay, which is in turn related to a number of other factors:

• Demand

• Benefits

• Value

• Distribution

Customer demand

Following from economic theory, and assuming a steady supply - as is often the case - variations in customer demand should result in changes in price. This is most obvious in the commodity markets, such as that in oil: for example, consumers reduced their demand for oil to such an extent following the massive 1973 price rises that there was eventually a glut and prices were forced down again. It is also evident in other markets, such as that for housing, which have alternating periods of boom or bust; often seasonally related. Holiday markets are closely tied to the seasons, in particular to the school holidays, and the prices reflect this. The railways operate a similar approach, but on a daily basis, with high `rush-hour' prices, but `off-peak' bargains.

In the non-profit sector, such surges in demand may be controlled, at least to some extent, by allowing queues to lengthen (as happens for cosmetic surgery).

Customer benefits

The more important or desirable the benefits, the more the consumer will be prepared to pay. Thus, there is the basic `commodity price' which would be paid for any product of an identical type; assuming that there was perfect competition. Beyond this there is the `premium price' which consumers will pay for the additional benefits they believe the specific brand will give them. This emphasizes the importance of understanding which are the most important benefits in the eyes of the consumer since these are the very ones which will justify a premium price.

Customer value

These benefits are conceptualized as the `value' that the customer sees in the product and, in theory, there should be a balance between this and the price asked'.

This `perceived value' can then be matched against the price on offer, to see whether the purchase is worth making. This theory does at least recognize that different buyers, or groups of buyers, may have different motivations.

In this `model' the 'rational' consumer is seen to weigh up all the benefits and determine what they are worth. This idea also lies behind the economists' theories of supply and demand. It is assumed that each `consumption bundle', which may be made up of a number of different goods, offers the consumer a specific value of 'utility'. Different combinations of goods may offer the consumer the same amount of utility, so that a line can be drawn on a graph, linking these points of equal utility. This is called an 'indifference curve', since the consumer is believed to be indifferent between any of these choices - they are all equally attractive. Few workable indifference curves have been produced, and it is not normally a viable basis for pricing.

Paradoxically, price itself is often seen as a measure of quality: the higher the price the higher the quality is presumed to be. As Erickson and Johansson's research showed:

"The price-quality relationship appears to be operating in a reciprocal manner. Higher priced cars are perceived to possess (unwarranted) high quality. High quality cars are likewise perceived to be higher priced than they actually are."

The theoretical balance of `perceived value' and price can also be used to apply this element of the 4 Ps to non-profit organizations. In these cases the `perceived value' may be used instead of `price'. Thus, the hospital consultants, who have a large degree of control over the disposition of resources (and as a result, over the queues) in a state health service could (and perhaps should) take into account the patients' `perceived value' of the various treatments, rather than just their own view of the medical needs. In the light of this it might, for example, be found that increasing the proportion of resources devoted to minor surgery (rather than that dealing with life-threatening ailments) would increase the overall `satisfaction' of the patients as a whole. Without asking the patients (which is a central concept of marketing) which choice they would make, at least in terms of `perceived value', it is difficult to see how their total `satisfaction' could be maximized.

The position is `social marketing' is inevitably more complex. William Novell commented that:

"... the complex objectives of social marketers usually compel them to focus on price reduction. That is they seek primarily to reduce the monetary, psychic, energy, and time costs incurred by consumers when engaging in desired social behaviour ... much of the time, the social marketer cannot manipulate price and simply tries to convince the target market that the practical benefits outweigh the barriers, or costs."

Price and the distribution channel [[2]]

In many situations the producer simply 'cannot' determine the final price to the end-user or consumer. The intermediaries in the distribution channel will apply their own pricing strategies, which may be totally unrelated to those of the producer --and may even be contradictory. Thus the distributor may even choose to absorb any price increases which the producer imposes. IBM found itself with a price war on its hands in the PC market, not because that was what IBM wanted - indeed, it was totally in contradiction to IBM's policies - but because that was what its dealers chose to do. On the other hand, he may equally ignore a price decrease which the producer has introduced (to improve penetration of the product, say) to increase his own profit, again with the result that the consumer sees no difference.

Market Factors [[3]]

Other factors in the market may also have an important impact, and may often be the ultimate determinant of prices:

• Competition

• Environment

Competition

Apart from the competence of the supplier, in terms of the ability to match price to the consumers' `perceived value', the major factor affecting price is probably competition. What the direct competitors, in particular, charge for their comparable products is bound to be taken into consideration by the consumers if not by the producers.

One response to price competition should be to examine if there are ways of `managing' it to reduce its impact, and to signal to competitors that your response is not aggressive'.

Environment

The wider environment can also have its impact. Whether the economy is booming or in recession may have a direct impact on what consumers can afford to spend; although in recent years this effect often seems to have been very selective, mainly hitting those supplying capital goods to industry, while consumer sales, to those still in work, have (except in the greatest depths of recession) continued to rise.

Then despite governments' suggestions to the contrary, there are also all the various aspects of legislation which constrain freedom to move prices. At the very least, there is often the veiled threat of interest from those agencies that are responsible for monitoring `fair trading' and monopolies hanging over those who are especially effective in managing their price competition. The possibility of such regulatory intervention should never be discounted.

Geographical Pricing [[4]]

Where transport costs are important, and particularly where there are widely separated populations (as there are in the USA), then geographical location may become a factor in pricing. There are a range of strategies to cope with this:

• uniform pricing - the same price is offered at all locations, regardless of delivery costs. This is the most widely applied policy in consumer goods markets; not least because it is easiest to apply, in terms of the paperwork created.

• FOB (free on board) - the cost of all transport is charged to the customer (this is more likely to be found in industrial

markets).

• zone pricing - the price is different for each geographical region, or `zone', to incorporate the average transport costs incurred in shipping to that region.

There are, of course, other possible regional pricing policies. Not least of these are regional variations to allow for the strengths of local, regional, competitors.

Pricing `New Products' [[5]]

The time when an organization is most free to determine the price of its products or services is when they are launched. Once the price has been set, so has a precedent. In the event of any future changes consumers will not have only the competitive prices as a comparison, but they will also have the previous prices as a 'very' direct point of reference. This makes it very difficult to make substantial changes to the prices of existing products or services. Consumer reactions may be severe if they think they are being taken advantage of.

The new product may be entering an existing market. If this is the case then price will be just one of the positioning variables. On this basis, the price will be carefully calculated to position the brand exactly where it will make the most impact - and profit. At a less sophisticated level, perhaps, the producer of a new brand will decide which of the existing price ranges - cheap or expensive - the product or service should address. A supplier entering a mass consumer market can simply go to the local supermarket, or specialty store, and see what prices are already accepted. In industrial markets it may be much more difficult to obtain competitive prices, even where published price lists are available, since these are often only the starting point for negotiations which result in heavy discounts.

In the case of a totally new product or service, the pricing exercise will be that much more difficult; for there are no precedents to indicate how the consumer might behave, and this is an area where market research is notoriously inaccurate. In the end it will have to be a judgement decision, as to what `perceived value' the consumer will put on the offering.

Pricing Strategy

Within these limits, however, there are two main approaches possible for a new product, and to a lesser extent for an existing one:

Skimming

One approach is to set the initial price high, to `skim' as much profit as possible, even in the early stages of the product life-cycle. This is particularly applicable to new products which, at least for some time, have a monopoly of the market because the competitors have not yet emerged, and is a pattern often seen in the 'introduction' of new technology. The price is then reduced, possibly in stages, gradually to expand demand, until it reaches a competitive level just before the competitors enter the market. This is a fine judgement, though; and it is interesting to note that in the case of video-recorders it was the late-comers, with competitive prices, who actually swept the board.

The rationale behind skimming (sometimes called `rapid payback') is normally quite simply that of maximizing profit. But there may occasionally be another motive - that of maximizing the image of `quality'. This is a policy which holds in consumer markets such as the upper end of the perfume trade: for example, sales of Chanel Number 5 would probably not increase dramatically if the price was reduced. But it can just as easily apply in industrial markets. It is the foolish consultant who asks for a low price, because the client will probably think that the quality is comparably low.

As indicated above, the danger of a skimming policy is that a high price encourages other manufacturers to enter the market, because they see that sales revenue can quickly cover the expense of developing a rival product. Even if your prices are not exorbitant you may still need, therefore, to plan for a steady reduction in price as competitors appear and you recover some of your launch costs. Such a price reduction will normally be helped by economies of scale.

Penetration policy

On the other hand, a manufacturer could choose the opposite tactic by adopting a penetration pricing policy; and, indeed, this was the very successful policy behind the 1980s move of Japanese corporations into a number of existing markets. Here an initial low price might make it less attractive for would-be competitors to imitate innovations, particularly where the technology is expensive; and it encourages more customers to buy the product soon after its introduction, which hastens the growth of demand and earlier economies of scale. The main value of this policy is that it helps to secure a relatively large market share and increase turnover while reducing unit costs; so that the price domination can be maintained and extended. Its major disadvantage lies in lost opportunities for higher profit margins.

Under this broad category, however, there are a number of more specific policies:

• Maximizing brand/product share - This justification is sometimes made in terms of maximizing sales growth; particularly in new markets where competitive activity is less evident.

• Maximizing current revenue - The assumption is that higher sales automatically lead to higher profits, although in practice most products are more sensitive, in terms of profit, to price than to volume.

• Survival - For some organizations, maximizing revenue by price-cutting may be seen as the only way to survive. This is the philosophy of despair.

Practical Pricing Policies [[6]]

The problem is that very little of the pricing theory which has been described above has any great value in practical pricing. As Alfred Oxenfeldt said:

"The current pricing literature has produced few new insights or exciting approaches that would interest most businessmen enough to change their present methods. Those executives who follow the business literature have no doubt broadened their viewpoint and become more explicit and systematic about their pricing decisions; however, few, if any, actually employ new and different goals, concepts or techniques ... Most authors deal with pricing problems unidimensionally, whereas most businessmen must generally deal with price as one element in a multidimensional marketing program."

Pricing Roulette [[7]]

In fact, practical pricing can be reduced to just one key decision. Much the same as Russian Roulette is played with a revolver, suppliers often play Pricing Roulette with the market. The odds are a little better - research indicates that only a tenth of markets indulge in commodity pricing (where there is one live round out of six in the revolver). The end effect may be much the same, however, if the spin of the chamber lands on a commodity based market - it is often tantamount to commercial suicide!

If the products or services are treated as commodities, and if prices reflect this, then you MUST do the same in order to survive, even in the short term. You have no pricing choice. You must hope that the situation changes at some time in the future, when you can make a reasonable profit, but in the short term you can only reduce costs to staunch the bleeding.

Fortunately, as mentioned above, 90% of the markets are not commodity based. Here you can use all the tools of marketing to obtain a price premium. So if, as is usually the case, the market is not commodity based, your should adopt price maximisation rules.

This is one of the very few situations in marketing where there are no grey areas, no spectrum of options.

This is not to say that a drive for reduced costs, which is typically initiated by commodity-pricing, should be abandoned. There must always be an awareness that commodity-pricing may one day emerge into your market, even if this would be near suicidal for all involved. The organisation has (while making its investments in the future), therefore, to develop a cost structure which will enable it to survive even this eventuality - and in the meantime it will reap even higher levels of profit.

For the great majority of markets suppliers can count on achieving more than the base commodity price. The difference is known as the 'price premium';

Price Premium

This simply states that you can usually achieve a premium price, above the commodity price level. This is a simple concept, but a useful one - not least because it acts as an antidote against the very strong temptation to indulge in price-cutting.

The premium may be justifies by a variety of factors; including those such as image, quality, differentiation positioning etc, which have already been discussed. The exact reason for the premium is not important, it will vary from situation to situation. What is crucial is that you recognise it as a possibility, and work to maximise it. The evidence is that around a quarter (24%) of organisations already successfully follow a strategy of setting premium (or even luxury) prices. Perhaps more - of those who are not caught in commodity markets - ought to follow their example; and earn more profit for very little extra effort!

If you avoid the pitfall of commodity-pricing, along with that of the many 'guaranteed' techniques of pricing offered by academics and consultants, most pricing then turns out to be relatively simple. This is because most products or services are either existing 'products' with a know track record, or are new products entering markets where there already are similar products with known track records.

Rules of Thumb [[8]]

Despite the theory described earlier, prices are most often set by one of a number of more pragmatic `rules of thumb':

Cost plus

The starting point for most pricing exercises is an examination of the cost of the product or service. In practice, such `cost plus' pricing is probably the most common initial approach. Indeed, in something like a quarter (26%) this is also the finishing point! This may be understandable where the price list contains hundreds of items; although, under those circumstances, it is highly debatable whether the `cost' for each item represents anything more than an estimate.

Paradoxically, `cost plus' pricing seems to suggest that inefficiency (which would lead to a higher unit cost) should be rewarded. The one area in which cost plus pricing is possibly justifiable is where the supplier has a long-term relationship, almost a partnership, with a customer (often the government). In these circumstances it is sometimes agreed that a certain level of profit (as a percentage of cost) is acceptable. But even here there has to be a question as to the efficiency of such a pricing policy, for the customer as well as for the supplier, since profit is supposed to be the main incentive (and the legal actions taken by government to recover unwarranted profits made by some defence contractors operating under these pricing policies seem to argue for some dissatisfaction).

Exactly what `cost' should be chosen is a matter of debate; although few producers actually do conduct such a debate, often selecting as their `cost' - by default - the first figure thrown up by their accounting system. Choosing what cost to apply and, more importantly, understanding the assumptions which lie behind it is an art; and one in which many marketers are unskilled.

`Marginal costs' (which avoid the problem of overhead allocation) may well be the most favourable approach for new products, but may leave gaps in terms of overhead recovery as the older products die. A judgement also has to be made as to the period over which any initial investment is to be recovered.

Competitive pricing

The other popular approach - used again by around a quarter (27%) of organisations - and the most usual form of pricing based on evidence from the market, is that where product prices are determined by reference to the prices of competitive products. This may well be realistic when the product is a follower rather than a market leader.

A sound appreciation of competitive actions, especially prices, is necessary for the most effective strategies to be formulated. The most effective marketing manager will, however, try to develop an 'understanding' of the various competitive positions; based on an appreciation of the customer needs. A market leader should take advantage of the power that position offers, and a niche marketer should be able to use that uniqueness of positioning to gain some control over prices.

In a `brand monopoly' the marketer may have a significant degree of control over prices. On the other hand, in a commodity market no control at all may be available. Once more, the marketer has to make a judgement as to the `price elasticity of demand' (in this case in the context of competitors' prices).

The position is usually more complex than participants allow for. Products or services, and in particular brands, are rarely identical. Each will have its special features; presumably developed by its management to meet some market need. Therefore, each may justify a premium; a degree of differentiation in its pricing. Setting the optimal premium is the subject of considerable skill - and not a little bravery.

The `easy' answer, chosen by many suppliers, is to match or preferably undercut their competitors. The problem is that all the participants can only have the lowest price if they all have the same price; and that is usually a commodity-based price, which is significantly lower than the price that should be achieved when products or services are marketed effectively.

In markets where there are many suppliers, the skill is in knowing what `premium' over the commodity price the chosen `marketing mix' will justify. In markets in which there are a limited number of major products or services it is arguable that an understanding of the psychology of the competitors is just as important.

A specific example of competitive pricing occurs in the retail sector, in which `loss-leader pricing' is sometimes employed. The prices of certain lines are deliberately set low - perhaps even making a loss, the line then becoming a `loss leader' - to attract customers into the store. The intention is that these customers will then also buy other lines, on which the real profit will be made. You should note that the practice may be invalidated by customers who realize what is happening, and ethical objections have resulted in the `loss leader' approach being made illegal in certain USA states.

Target pricing

In this case, the intention is not just to obtain a `profit' over costs, but is to obtain a reasonable `return on investment' (ROI). Therefore, the price has to be based on both the variable costs (as in `cost plus') and the capital employed (related to the sales value).

Historical pricing

One extension of cost plus pricing is to base today's prices on yesterday's. The annual round of price increases, for example, is based on last year's price uplifted by something approximating to the increase in the cost of living, or the true increase in costs - whichever is the higher.

Range pricing

The pricing for a given product may be decided by the range within which it fits. There may thus appear to be an inevitable logic, derived from the rest of the range. A 300 gram pack, for example, is expected to have a price somewhere close to the median of the 200 gram and 400 gram packs. A premium price on a member of a cut-price range would pose questions; and, at the other extreme, a cut-price entry into a luxury range might do severe damage to the quality image of that range.

A more specific example of range pricing comes from retailing, where it is often called `price lining'. In this case there are a limited number of pre-determined price points, and all items in a given price category are given a specific price, say $9.99. This also illustrates the `psychological' aspect of choosing certain price points; on the basis that customers will read $9.99 as $9 rather than the $10 it much more nearly is!

Market-based pricing

This is classically what marketing theory would require. It is sometimes called `perceived value pricing', because the price to be charged is demand to be a match to the value that the customer perceives the product or service to offer.

Clearly it is near ideal, because it is likely to be optimal in terms of obtaining the maximum premium on the commodity price; and very few suppliers price too high, with the great majority pricing too low. Indeed, although just over a quarter (27%) of organisations say they are committed to a strategy of pricing based on perceived value, only 15% implement this when it comes to the process of pricing itself.

This is also the ideal price in that it matches the `position' of the product to the customer's perceptions. Particularly in the luxury goods markets, the price is an element of the overall `description' of the product; and one which is seen as reflecting its quality. There are many examples of new luxury products which have performed badly until the price has been increased in line with the quality expected.

The problem is, of course, determining just what is the perceived value; or, more basically, finding out what price consumers will be willing to pay. Even in the mass consumer markets, where extensive research is undertaken, establishing optimal prices is difficult. It is not possible to ask market research respondents how much they would be willing to pay; because such research has almost invariably given wildly optimistic results.

Price positioning [[9]]

In addition to a determination of where the `market' price lies, a further decision needs to be taken, that of where the brand price is to be positioned in relation to the market price.

• Quality pricing - Some organizations make a conscious decision to deliberately price above the market average. This price is intended to demonstrate the quality, or even the luxury, of the product or service. Rolls-Royce is the example quoted most often, but Hilton Hotels, Sony and many of the cosmetic and perfume houses follow the same policy.

• Cut pricing - The organizations with the most obvious price positioning are those deliberately choosing to price below the market; since such cut prices are often the main element of their

marketing mix. Bic ballpoints and the Easyjet have been exponents of this approach.

Selective pricing

Some suppliers apply different prices for the same product or service:

• Category pricing - The supplier aims to cover the range of price categories (possibly all the way from cheap to expensive) with a `range' of `brands' based on the same `product' (repackaged, and possibly with some minor changes). This was particularly obvious when Unilever in the UK marketed `Square

Deal Surf' as price leader alongside `Persil'. It may be less obvious when suppliers run high-priced brands while at the same time supplying low-priced `own brands'.

• Customer group pricing - The ability of various groups to pay prices may be met by having different categories of prices: entrance fees and fares are o&ten lower for students and senior citizens.

• Peak pricing - The price is matched to the demand: high prices are demanded at peak times (the `rush hours' for transport, or the evening performances for theatres), but lower prices at `off-peak' times (to redistribute the resource demands by offering incentives to those who can make use of the services

off-peak).

• Service level pricing - The level of service chosen may determine the price. At its simplest, the buyer may pay for immediate availability rather than having to queue (or may pay more for the guarantee of a seat, by patronizing the first-class section of a train). This may be extended to levels of

`delivery'; the product may be available immediately, and gift wrapped, in an expensive store - or it may arrive some weeks later by post from a cheap mail-order house. There may also be levels of `quality' in delivery; for instance, seats in different parts of a theatre may have differing levels of access to the performance, although the basic `product' may be identical.

The last three of these are particularly prevalent in the service industries, where the supplier is in direct contact with the customer.

Above all, 'the main temptation to avoid is the assumption that price is the most important variable in the marketing mix'. Sometimes it may be, and you will obviously need to recognize that. But in 'most' situations it is not, and in many it may be a very minor consideration. Under these `typical' circumstances it is important to attend to the other elements of the marketing mix first, and then deal with price in this context.

Discounts [[10]]

Having set the overall price, the supplier then has the option of offering different prices (usually on the basis of a discount) to cover different circumstances. The types of discount most often offered are:

• trade discounts

• quantity discounts

• cash discounts

• allowances

• seasonal discounts

• promotional pricing

• individual pricing

• optional features

• product bundling

• psychological pricing

1. Trade discounts - Members of the supplier's distribution chain (retailers and wholesalers, for example) will demand payment for their services.
2. Quantity discounts - Those who offer to buy larger quantities of the product or service (again typically as part of the distribution chain, but also the larger industrial buyers) are frequently given incentives. In consumer markets this is more often achieved by larger pack sizes (or by banding together smaller packs) as `family or economy' packs. It is often deemed more cost-effective to offer extra product (`30 per cent extra free' or `13 for the price of 12') instead of reducing price; because the extra product represents only a marginal increase in cost to the supplier - and may push the user into using more (and even finding new uses).
3. Cash discounts. Where credit is offered, it is sometimes decided to offer an incentive for cash payment or for prompt payment (to persuade customers to pay their bills on the due date, although too often they take the discount anyway and still pay late).
4. Allowances - In the durable goods market suppliers often attempt to persuade consumers to buy a new piece of equipment by offering allowances against trade-in of their old one. Generally speaking, these are simply hidden discounts targeted at a group of existing `competitive' users.
5. Seasonal discounts - Suppliers to markets which are highly seasonal (such as the holiday market) will often price their product or service to match the demand, with the highest prices at peak demand.
6. Promotional pricing - Suppliers may, from time to time, wish to use a price discount as a specific promotional device.
7. Individual pricing - Under certain circumstances, it may be possible for a customer, even in a consumer market, to negotiate a special price; and such haggling is the essence of sales in some of the Mediterranean countries. It may also be the basis of some industrial and business-to-business selling. Here the pricing decision is left to the sales professional; often with disastrous effects on profit.
8. Optional features - The reverse of discounts may be that customers are offered a basic product to which they can add features, at extra cost (and often, unlike discounts, with much higher profit margins).
9. Product bundling - Alternatively, they might be offered a `bundle' of related products - such as a package of accessories with a camera - typically in this case at a reduced price, as compared with the prices of the separate items (although sometimes the separate items are not really sold apart from the special promotional `bundle').
10. Psychological pricing - Some suppliers deliberately set very high `recommended' prices in order to be able to offer seemingly very high discounts (`massive savings') against them. However, this policy may rebound when consumers realize what is happening - and, in any case, such tactics are now often subject to regulation, and may even be illegal.

Portfolio [[11]]

If, as is likely, the organization has a portfolio of products, it can follow different pricing policies on each; balancing these against each other, so that the overall impact is optimized. In any case, such pricing may be forced upon it. A `problem child' may fail to become a `star'; and if it is not to be immediately discontinued, its price will probably need to be raised so that it can be `milked' to retrieve some profit cover from the situation.

Looking at the portfolio in more general terms, it may even be possible to run two or more very similar brands with different pricing policies. Thus one can be in the mainstream of the market and at a reasonably high price, as is Unilever's Persil detergent, while another is quite specifically targeted at a lower price to cover those consumers who are particularly price conscious; as Unilever's `Square Deal Surf' very obviously was for a number of years.

The portfolio approach is a powerful one, not least because it can `underwrite' any attempts to set a high-price policy by differentiation; balancing the risk of such experiments against the security offered by the brand remaining in the lower price position. Such a higher-price policy often succeeds, not infrequently against the expectations of most of those involved. 'The portfolio approach, however, is only available to those who have the financial resources, and the position in the market, to make it worthwhile'.

Product line pricing

Another variation may be that the pricing of one product or service has an impact upon others supplied by the organization:

• Interrelated demand - The price of one product may affect the demand for another. They may be complementary (for example, the computer and the software that runs on it), so that an increase in one part of the `package' results in demand for both falling. They could, however, be alternatives; as already mentioned, Procter & Gamble have a range of detergents, and increasing the price of one may switch demand to another.

• Interrelated costs - Sometimes the products use the same facilities (the same car assembly line may produce a range of models) or may be derivations of the same process (so that petrol and heating oil are different `fractions' of crude oil, and one cannot be produced without the other). In these circumstances, changing sales volumes can obviously have knock-on effects on other costs.

Pricing strategies under these circumstances can be complex; and are usually a matter of judgement.

Segmentation and product positioning

The `classical' techniques for obtaining higher prices are those of positioning and segmentation. By creating a distinct segment which the brand can dominate, the producer hopes that the price can be controlled. Indeed, unlike some of the more theoretical approaches, experience shows that this can often be achieved in practice (Apple, with its own special `niche', was able to stand out against the cut-throat pricing which infected the rest of the PC market).

Creating a brand `monopoly'

Most of the economic thinking which lies behind the theory of price elasticity of demand revolves around `perfect competition' (which, in the economic context, usually means exclusively price-based competition). On the other hand, it can be argued that one of the main objectives of the marketer is to create a monopoly for the brands that he or she manages.

The ideal outcome would be that the brand was so differentiated from its competitors that the customer would not choose these other brands, even if the first choice brand was not available. The marketer wants to see the consumer enter the supermarket determined to buy Heinz Baked Beans, not just a suitable variety of ordinary baked beans.

A variation of this process, in the industrial purchasing sector, was described by Webster and Wind:

"The constrained choice model concentrates on the fact that most supplier selection decisions involve choosing from a limited set of potential vendors. Potential suppliers in this set are `in' while all other potential suppliers are `out'. Constraints on the set of possible suppliers can be imposed by any member of the buying organization which has the necessary power ... The source loyalty model assumes that inertia is the major determinant of buying behaviour and stresses habitual behaviour."

Another element (which sometimes leads to the constrained choice model) is that of `perceived risk'. As Cyert and March explained:

"The perceived risk model emphasizes the buyer's uncertainty as he evaluates alternative courses of action ... buyers are motivated by a desire to reduce the amount of perceived risk in the buying situation to some acceptable level, which is not necessarily zero."

Something approaching this view surely led to the once famous motto `Nobody ever got fired for buying IBM'.

REFERENCES

• F. E. Webster Jr and Y. Wind, 'Organizational Buying Behaviour' (Prentice-Hall, 1972)
• R. M. Cyert and J. G. March, 'A Behavioral Theory of the Firm' (Prentice-Hall, 1963; Blackwell, 1992)
• G. M. Erickson and J. K. Johannson, The role of price in multi-attribute product evaluations, 'Journal of Consumer Research', vol. 12 (1985)
• W. D. Novell, Newbusiness or social marketing, 'Handbook of Modern Marketing', ed. V. P. Buell (McGraw-Hill, 2nd edn, 1986)
• A. R. Oxenfeldt, The differential method of pricing, 'European Journal of Marketing', vol. 13, no. 4 (1979).

See also

• marketing
• marketing management
• markup (business)
• microeconomics
• price
• price fixing
• variable pricing
• resale price maintenance
• sales promotion
• yield management
• production, costs, and pricing
• road pricing
• industrial organization
• suggested retail price
• pricing strategies
• predatory pricing