 اسلام علیکم خواتحیم حضرات، وصین ایساً ویلکھمس you لیکٹر number 38 of the brand management MKT624 at a virtual university of Pakistan. We are into pricing. I started talking about strategic pricing in order to leverage your brand in the previous lecture. And I talked about how the brands can charge a premium, but there are certain conditions which are to be fulfilled before the brand is in a position to start charging premium. And those conditions could basically stem from the strength of the brand. In other words, if the brand is strong, you are in a position to charge premium, if the brand is not strong, you are not in a position to charge premium, it is a very simple relationship. But then the question which really arises is what is the right model for the one company to undertake its pricing strategy. And since the whole discussion is all about strategic considerations when it comes to the brand management, we have to look into all those things. And there are certain drivers which we considered are very important and that allow us to go for a good level of pricing and especially premium. Back to what should be the right model for the one company to go for pricing its brands. The model which generally is in practice all over the world, most of the businesses is cost based. And I did point out for the one fact that there are companies that really are not very careful about working out their pricing while they work with this model only because they work with something which is bare minimum. And the reason they work with bare minimum requirements is that they would just like to make sure that as long as they can generate the right returns in a net profit to sales ratio and net profit to investment ratio and so on and so forth. And they end up having a positive cash flow. Everything is fine and we don't really have to do anything with pricing. Let us be conservative and let us not go for something which may be perceived by the customer as something very aggressive and something unacceptable. Companies resort to those standards which are very conventional and traditional. What really happens under this model is that could you work out your costs at a certain margin and then through all the successive stages of the channel system. Margin's are added to the costs to different members of the channel and the final price is bugged out by the time the product gets into the hand of the final consumer. So in other words it is like you have bugged out cost as X. X plus one is your pricing and you sell at that price to your distributor because he adds to his margin which is going to be in your price which is his cost plus one and so on and so forth down the line at every successive stage a margin is added and price relating to that particular phase is bugged out and get a sold to the next party and that becomes next parties cost. So this is the way the traditional model works. I shall be talking about the different strategies under the cost based model just to see how we can make the right most decisions by taking into consideration the right strategic elements so that we do not end up making any mistakes in the working order of prices. But I will start with the other model for the time being which call the market based model. Market based model refers to the pricing which is worked out in the model. Now what this essentially means is that you look at your customer, your brand's positioning and your competition and then decide what should be your pricing. But what is important under this model is that you've got to have the very good knowledge of your customer and your competition. Well you can go through the different kinds of research models in order to identify your customers profile and the buying behavior and the buying criteria. Why they buy and how they buy and what they buy and what are the preferences and so on and so forth. But when it comes to competition it offers certain complications and certain challenges which are to be surmounted before you really can build that element into your pricing model. Understand your competition really calls for a lot of market intelligence which you may not be able to generate to the level that you are satisfied with in terms of taking into consideration various factors for your pricing. So therefore we can say that unless our understanding of the customer and the competition is complete we can but we may not be able to go for the right market based price. In general you can put it like this that if your competition is selling something for 150 and you start considering a market price of something like 140 or 45 meaning in the neighbourhood of your competitor's pricing and then you could work it backwards all the way through the margins and back to the cost and then work out what is the net margin that basically is what market based pricing refers to. So in other words the market based pricing has an inverse relationship with the cost based pricing whereas the cost based pricing starts within the company and you start working with the costs first and then add up your margins and then be satisfied and content with a certain level of pricing. And then market based pricing starts in the market by taking into account what competition is doing and by taking into account what the customer is willing to pay or may be willing to pay and then you work backwards right down to the company level and then decide the pricing. Under the market based model you take into account what your customers needs and take the sensitivities and the competing products. On the basis of all these you create is superior value to your product and offer that your customer at a price acceptable to him or her. Customer sensitivity is one of the fundamentals in this pricing model because it is not that we follow competition only for the sake of following it. It is done on the basis of a certain method and it has to be that way. If the customers are sensitive to paying beyond a certain point but you must not go beyond that and that is where the market information and market intelligence comes into play and the significance of that can hardly be emphasized at this juncture. Let us now discuss few strategies for the market based model one by one for your renewed understanding. The reason I say the renewed understanding because you might have learned these strategies in one of your basic courses but how these strategies fit into the model here in a very strategic context let us talk about that. First of all we have the strategy of what marketing people call skim pricing. It works under the circumstances of higher differentiation with the meaning the product has got to be very highly differentiated and it must offer the company a very strong competitive advantage. They prefer to be sustainable advantage. You keep on charging that premium until the time competition really catches up. When competition catches up then the pricing model changes and you might have to do something with your pricing in terms of certain adjustments. The second model which is involved in relation to the market based strategy is the value in use pricing. Now this model basically relates to the consumer goodables basically and by value in use what really means is the value of the product right from the time you buy it to the time you buy it. To the time of the completion of the life cycle of the product. So in other words this strategy really relates the product life cycle and the fact is that all the strategies that I'm talking about relate the various stages of products life cycles and therefore have got to be taken into that particular light. So this value in use the pricing strategy relates to consumer goodables and what you do is because you take into account the value of the product from the time that it is bought to the time the product completes its life cycle. Now what this essentially means is that there are certain costs which you have to incur meaning which customers could have to incur in terms of using the product throughout its life cycle and that cost is incurred in relation to the maintenance. You have to pay to people who come to service those products for example air conditioners or you have to pay for the spare parts which you have to buy from time to time in order to maintain those products cars for example motorbikes. So there could be a long list of these kinds of products. The objective here is to understand that the cost which customers incur during various phases of the use of the product until the time either the product is discarded or resold there is a certain cost and that cost keeps on accumulating. So if customer thinks that the economic benefit which the customer is going to enjoy more in case of one particular product as far as the value in use is concerned in comparison with competition then the customer would go for your brand. So in other words you as the marketing people must be aware of the value in use concept which basically relates to not only the initial price of the product at which you sell the product but also the costs which keep on incurring during the life cycle of that product. And if you think that the value in use of your brand offers superior economic benefit to customers in relation to your competing products then your pricing is right. You can take examples of those cars which have a very good resale value for example and the cost of maintenance which you require in order to maintain a certain model. There are the models which are very attractive and which are durable which also have the design appeal but then the value in use may not be that high only because of high maintenance costs. So with the help of these examples I believe that the concept of value in use VIU pricing is clear to all of us. Another pricing strategy is segment pricing. This basically relates to the market segments and that is something which I have been talking about very frequently. Different customers within the segment even can have different needs and I will tell you with the help of an example why. So therefore you have got to have different types of pricing packages for those customers within one particular segment or for that matter what you can do is you can divide the segment into sub segments in relation to pricing and you can classify as segment A, segment B, segment C and can offer those customers different pricing packages. Let us take the example of a cell phone company which sells connections. Why is it that the cell phone connection companies that cell connectivity offer the various packages in terms of incoming calls and terms of outgoing calls for the meaning that there are customers who really emphasize on making calls and there are customers who really have their basic concern about incoming calls and then there are customers who like to use their telephones or their connections during the night time. So knowing your customer and knowing your customer's needs and knowing what competition is doing and knowing the sensitivities of those customers you come up with the different packages within the same segment and that is what you call segment pricing. What is important in segment pricing is also the fact that the economic value which you offer your customer must not be compromised. If the economic value or the economic benefits which the customer is deriving out of the service that you offer are outweighed by a competing offer then there has to be something wrong with your pricing. And you must start reconsidering your pricing strategy or the method for that matter all over again. Now this doesn't really mean that you have to bring about a strategic change. Your customers never get bored of the strategies which you have and by the same token the you people as managers within the companies should not be bored by the strategies. It is the execution or it is the tactical side which offers the boredom to your customers at times. And whenever you think that that stage is the setting in that you should be sensitive to that and going to get into a reconsideration of your tactical moves. Another method is what marketing people call strategic account pricing. Now this pricing method basically concerns large accounts for the meaning large customers. You are into industrial selling for example and you have various kinds of customers and various levels of customers. And you can segment the market by the good old principle of 80-20. Let us talk about that that 80% of your volume is constituted by 20% of your customers. What you can do is you can bring about certain classifications within that 80% of the volume meaning 20% of your customers. And going to go for those customers which are the prime prime customers. And you develop a relationship on long term basis with those customers by offering a price which is a better price than the one you offer others. Now you may start questioning that this is not the premium price because you are charging others a higher price. Where as you are charging these top most parties are something which is the lower in price and you are offering that for the sake of relationship. Well you do that because you have to develop a long term relationship and what happens is in down times when things may not be as the rosy for the industry. You may talk those customers into either going to keep on giving the same price or maybe convince them into offering you a better price because you have been good to them all along your relationship period. This again is very strategic in nature. What you are trying to achieve is a long term strategic relationship with your prime buyers. And again I would say that the concept of economic value must be taken into consideration that you have to offer value to your customers which cannot be surpassed by your competition. And that is how you maintain a good relationship with your customers. Now it is not only a better pricing level which keeps your customers very loyal to your company or towards your brand. It has to be so many other considerations because had it been only for the price then the drivers towards loyalty would not have worked the way that they do work. And the way I explained those with the help of a market research model. So relationship marketing comes in and takes a very important seat here. If not the driver's seat a very important seat which really allows you to look into the right most considerations why and when to go for this kind of pricing method. The other one under the market based model is what marketing people call plus one pricing. Plus one pricing applies in mature market conditions under market conditions in which all products carry good benefits for customers. What could be those conditions? Well you can take the example of the car market. You can take the example of other consumer doodibles like electronic equipment, the computers, the musical equipment and so on and so forth. There are so many different brands offering a good customer value and it only is a question of choice. Why you choose the one brand over another one is a separate kind of a discussion which we've been holding every now and then. But the fact remains that the plus one pricing works under conditions in which most of the products offer good customer value and good benefits. What happens under these conditions is that very strong brands they become very sensitive about the positioning they have in the market. They know that the positions they have are fully occupied in the minds of the customers and therefore they are in a position to charge a premium under this pricing method. And I would like to draw your attention back to the car model which I talked about and one of the lectures about positioning. Well there's a car which appeals to safety and there's a car which appeals to very high performance and there's a car which appeals to comfort and luxury. When that is considered very sensitively by the marketing people they start thinking in terms of plus one meaning everybody is offering what is a plus. But we certainly have something which is plus one. So even if other models or other brands are charging premium pricing our pricing has got to be the market premium plus one. And it is because of that reason they charge a price which is much higher than the price which comparable models are competitive offerings to carry in the marketplace. And the fact is that if you draw a comparison in terms of the specifications there may not be very great differences. So the only difference which is there is in the minds of the customers and that certainly has a background. The company has succeeded in occupying that position. So if you have achieved that position you are in a position so to say to charge what they call plus one pricing. In other words it is just the one feature which is the extra in terms of one product or one brand which really allows that brand to go for the price premium under this method. So these are a few of the strategies which the marketing people are going to have to themselves while they work for pricing under the market based pricing model. Let us now move on to the cost based model meaning the strategies that we have to ourselves while working under this model. Before I start talking about what cost based model is let us look at a few of the fundamentals that we have to be aware of and we have to be very sensitive to before we work out of a pricing on the basis of cost based model. First of all look we have to have a very clear understanding of the cost drivers and the value of the product. Now these are the two strategic elements which are of very high importance I repeat of very high importance when it comes to the cost based model. Because remember one thing under the cost based model there is no one fixed price. And I gave you the example of a product which you sell for over 100 and maybe shortly after launching of the product you may start realizing that you should have launched that at 110. So this is one example which says it all why cost based model has to be given extra consideration while you work with the different pricing strategies. You must know what the cost drivers are and you must know what the value of the product is. It is the value of the product of which most of the companies are not really aware of. You'll be surprised to know that many companies are not really aware of the fact as to how good their product is. Now this is not to say that every time every company or any company coming up with a certain product or a certain plan that does come up with something out of this world. What I'm saying is that in most of the cases what happens is that you create a quality product and then you hesitate to go for the right most price. Only because you are very sensitive to the market reaction and you may not take into account all the opportunities which may present themselves to you in terms of charging the right price only because you do not fully realize the value of your own product the way it is realized by the customer. So in other words the realization on your part has got to be very compatible with a rather congruent with the perception of the customer. You must assess the product the way the customer assesses it. You might be wondering how is that possible that there is a gap between the customer's perception and the company's assessment of its own brand. But that's the way it does happen in the market only because like I said companies like to be or prefer to be conservative. My lesson to you here is not to be extra aggressive. All I'm saying is that you do not really have to be extra conservative when it comes to pricing. So in other words the attention to the product benefits and the customer value really enables you to charge more and earn more and then be able to achieve all your objectives and that is what pricing is all about. Market based pricing may look like the preferred approach to pricing but the fact remains that it may not be very ideal under many circumstances and in many situations and that really calls for the need to have cost based model. The cost of the base model has to its core the manufacturing costs which we incur during the process of manufacturing and we add to that our margin and then come up with a pricing at which we sell to our distributors or dealers for that matter. And what happens there on is that at every successive stage of the channel the mechanism of added margins takes place and the process goes on until the product finally reaches into the hands of the final customer. So this is what cost based model is but I will repeat that we have got to be very careful with the elements of the customer value. Not only the cost drivers but also the customer value that we have to keep into account while working out of a pricing strategy on the basis of a cost based model. The cost based pricing model is generally applied in those markets where the differentiation is minimal. The meaning is that it is not as high as it is in those markets which are premium price markets and where consumer doodables really call for a great differentiation or even consumer consumables call for a very high level of differentiation. It is because of the low level of differentiation that are going to become very sensitive about any price increase or about any increment of price that we may start considering in terms of finalizing the price. The first strategy that we can talk about is the floor pricing. Now floor pricing as the name suggests is the lowest possible price a company can charge. What happens under this pricing method is that the companies come up with a bare minimum price meaning by adding a bare minimum level of margin to the costs and come up with a pricing which keeps the company some pre considered and preconceived returns like the 20% return on investment. This is the one example or 15% on sales and companies think to themselves as long as we are in a position to achieve all this because we are doing okay and the price is right. Such a price and such a policy is not a reflection of the reality in the market. This is just a benchmark which we use in order to generate certain results and this is the pricing strategy which may deprive the company of certain attractive opportunities of better pricing and therefore floor pricing is a pricing method which should be avoided. The next one is cost plus pricing. Cost plus pricing basically is what the cost based method is all about. The meaning you add certain margin to the cost and pass it on to the next stage and the process goes on until it reaches the final consumer. What is important here is that we should not go for cost plus pricing by compromising number one the company profitability and also customer value because when we get into this pricing method the chances are we are compromising quality here and there. If the company is convinced that quality is not compromised meaning the customer value is offered to the fullest in relation to the pricing level and the profitability is also decent then cost plus pricing may be the right strategy under circumstances that dictate that strategy. I am not saying that this should be adopted but every time we start looking into the pricing method reduce costs mean higher margins and under this kind of pricing strategy what the companies generally do is they like to go for high volumes and lower costs and it is because of the objective of achieving lower costs that at times we start compromising the performance of the brand. If the performance is not compromised everything is fine and if high volumes are achieved and also performance is delivered then it is not a bad strategy. But if the high volumes are achieved at the cost of performance and also at the cost of profitability then this may call for a reconsideration. Yet another method of pricing that we consider under the model of cost based pricing is the penetration price. Penetration pricing this method is employed mostly under those conditions when you have a lot of growth taking place in the market. What happens is you want to be a part of that growth and in order to grow fast you lower your prices in a bid to post the very high volumes. The high volumes give you the high and the share of the market and going by the scale economies what happens is you lower your costs. When you lower your costs that really offset the impact of the lower pricing to some extent but then you've got to be very sensitive about not getting into the zone which is kind of a gray zone and which is just about the border of being profitable and not being profitable. So if you want to go for penetration go for a pricing level which is not dangerous. This pricing method is employed in markets where the level of differentiation is the minimal and in which customers are very highly priced. Sensitive because if the customers are not sensitive there's no reason for you to go for a lower price for the sake of high volumes. There are other methods to increase the volumes even at a price which otherwise could be higher than in a prescribed by this particular strategy. So another character of this particular market in which this strategy works is a lot of manufacturers and easy entry. It is not very difficult for people to enter the market which essentially means that this market doesn't really deal with high tech things. It deals with the level of technology which really allows so many different entrants or potential entrants to enter the market. Under this pricing strategy the powerful companies of that matter the dominant players always have an advantage because they have a leadership role and they have a very high share of the market. They are selling high volumes. They can further lower the price and cause a shake out because if the industry is not really a high technology industry and it attracts so many different players the chances are not all the players are financially very strong and therefore the powerful one or the major ones can really bring about a crowding out in this kind of a market and when that happens it really rationalizes because there are so many marketing practices within this kind of a segment. The other one as part of the cost based pricing strategy or pricing model is what you may call harvest pricing. Now this kind of pricing method is undertaken when you are dealing with a brand which is almost dying and which is making the way for another brand or some improvement meaning an innovative product. What happens is that you have a brand which is going down, it is declining and you still have to have it in the market because you cannot have disgruntled customers. Whatever customers you are left with and you are going through all the complications of the supply chain but you are manufacturing it in the first place and then making sure that the brand gets into the warehouses and to the hands of the distributors on to the retailers and then on to a select few customers. So in order to hasten the decline of the brand and create the stage for its successor you increase the price and you increase the price by a fair way in a big margin in order to discourage the customers from buying it. What happens is the volume goes further down but the contribution improves. It is automatic when the price goes up the contribution margin has to increase and that increased margin really justifies the existence of that particular brand at whatever level it exists and then it only is a question of time when that is overtaken or that is replaced by an improved version and naturally you would like to go for an improved version when you are fully prepared with all the preliminaries. So that is all about the different strategies which you can bring into play in relation to the cost based pricing method. We have learnt market based pricing and cost based pricing. We should be in a position to relate the different strategies to our situations whatever those are and wherever we are. What I am saying is that 8 or 9 different strategies that fall under the two respective methods should be able to drive us towards the solution to the pricing problem. But at the same time I would say that there is not one particular answer to the situation that we might find ourselves in. So it may be a combination of the different strategies that you may have to employ in order to come up with the right most pricing. But the fact remains that the market based pricing starts from the market where you give a very high consideration to the competition with your customers with the sensitivities and your brand positioning and work all the way back to the margins and to the manufacturing process. Whereas under the cost based method the costing starts at the end of the manufacturing process where you take into consideration all the cost drivers and then go through a successive process of adding margins and keep doing that until you reach the final consumer. It is wonderful to have premium pricing because that offers you the better profitability and high margins. But then the volumes may not be very high and you might start pondering what to do because you may like to go for very high volumes. Conversely if you go for the cost based pricing the volumes may be very high but the profitability may not be in that zone where you really want it to be. All you have is the very good benchmarks which allow you to go for the financial returns which are bare minimum for the company to achieve its objectives. Therefore there is no one set answer to the different situations in which you will find yourself while you are working in a practical field for your different brands and it has to be based on meaning the decision for pricing has to be based on a few fundamentals and those fundamental considerations are summarized in the following form. And of course these fundamental considerations are based on the understanding that we already have developed. I am just going to summarize for you so that you are in a position to make the right most decision for pricing. Why? Because the most important objective is that you do not undervalue your brand, you do not undersell it and you do not really deny yourself the opportunity of charging the right price. Even if it is not the premium price you must not deny yourself the opportunity of the right price. So with that objective let us now take a look at the fundamental considerations which I am going to summarize for you in the light of the discussion that we have had so far. First of all differentiation is the guide. Level of differentiation defines for the company the kind of pricing it should go for. And here I would like to say all over again that it is the strategies of segmentation along with differentiation to define your pricing patterns. If you go back to the illustration that I gave you for the fast food product with the meaning sandwiches you will immediately realize what I am talking about. So with the help of that graphic illustration you can look into the various pricing points in relation to differentiation. If a market calls for a very high level of differentiation then of course you have to come up with something very innovative and you are going to charge the price accordingly and the chances are that you will go for a premium price. If you are operating in a segment which really is not very sensitive to the elements of differentiation then you will go for a price which is cost based and you certainly would like to go for a very high volumes and still would like to make sure that there is a balance between those volumes and your profitability. You really have to as a point of summary apart from differentiation you really have to touch base with both the models and then see which situation really is the most appropriate for you in terms of your pricing model. Like I said earlier you have something like eight or nine different strategic ways of going about pricing. One of the ways has got to fit into your requirements and you make your decision accordingly. The other point of the summary is the contribution margin. Contribution margin keeps popping up again and again because this is something extremely important. Let me also tell you while I summarize things for you that it is not going to be the basic job of a brand manager to ensure the contribution margin of a product. Brand managers and marketing managers certainly are going to be very important in terms of suggesting the right level of pricing but then the decision is going to be taken collectively by the marketing people and by the people in finance and then you also have to have the ok from the top management for the final pricing but it is extremely important for you to understand the strategic implications of the level of contribution which a brand offers to the company. So therefore you've got to be very sensitive to the different price points where they offer different levels of contribution and the level has got to be very compatible with your strategic goals. So in other words a combination of volume and contribution margin has got to be achieved in a way that it really fulfills all the strategic objectives that is the lesson. Another point of summary is that high volume and low price must not affect contribution margin negatively. Well this is an extension of the point which I have just discussed. Meaning that you should not be carried away by the concept of high volumes to the point that it starts affecting your contribution margin negatively because if you have negative contribution you are into an outright loss situation and what is the beauty of business if you are into a loss situation only because you are getting into that because you want to trade very high volumes with profitability. So never do that however if there is a very pressing argument given by the sales people that you have to have very high sales volume because you would like to have a very high share of the market and thereby will have a leadership role which is going to fulfill certain strategic maneuverings which will lead to fulfillment of goals that you might consider it to a certain extent but not definitely at the cost of profitability. Another point of summary is that you have to assess the perceived value on part of the customer. So whatever model you are going to employ you have got to fully realize what really is the level of value which you are offering. So do not create a gap between the way the customer perceives your product and the way you assess the value of that product. Meaning the customer value which you are offering has got to be very equal to the way your customer is perceiving it because otherwise you are going to miss the opportunity of charging the right most price. May that be the market based model or may that be the cost based model. In both the cases instead of charging 150 why should you charge 145 or in case of cost based model instead of charging 110 why should you charge the 100. So you have got to be very sensitive to the pricing level in relation to the market sensitivities and the profitability of the company. Having said all that the last point of summary I would tell you is that you have got to stay within the mainstream pricing and that is something which is very easy to comprehend and that is you have got to stay within the two limits meaning the lowest limit of pricing within that particular segment and the highest the limit of pricing in that particular segment where ever you fit in make sure that you do not under sell that is the greatest lesson of this topic on pricing. With this our lecture on pricing comes to a conclusion and we have fulfilled one more strategic phase of the brand management process. Thank you very much for your listening and patience and I look forward to talking with you in the next lecture. Allah Hafiz