Pricing can be a creative marketing tool in a country like India, where purchasing power is limited. Let us see how some firms and industries have used buyer-oriented pricing by segmenting the market and understanding the behaviour of each segment. This means finding the "value" each segment places on product features and designing pricing creatively to deliver VFM.
The strategy of appealing to different segments has long been employed by airlines. Indeed, they could not have survived if they had not had different sections like first class, business class and the economy. If they were to offer the service to only the first class passengers, they would soon shut down for lack of passengers. On the other hand, serving only the discounted fare class will mean lack of sufficient revenue to survive. The planes keep flying because the managements have recognised the differences amongst buyers -- in the benefits important to them and the value they place on those benefits.
Similarly in media buying, those agencies who can anticipate their needs in advance make an "up-front-buy" (meaning several months in advance) and negotiate handsome discounts of up to 60 per cent. Vacationers who plan and book hotel rooms early (or in off-season) get steep discounts.
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Can such creativity in pricing be applied to other products? Suppose we take a consumer durable. Can we can design a price option that is, say, 25 per cent less than the normal, but for which the customer will have to pay up-front or a year before delivery? We can visualise marketers reacting such a drastic price reduction suggestion with horror. However, there are merits in this scheme.
The first reason for the marketer to try such a price scheme is this. You get 75 per cent of the money for a year sans interest. If you rotate this money even four times in this period, you have more than made up the shortfall. In fact, you make an extra profit. Suppose you make just 10 per cent profit on every revenue turn. Then after four turns the revenue generated is 0.75 x 1.1 x 1.1 x 1.1 x 1.1 =1.098. This is about 10 per cent more than what one would get in a straight deal.
Also consider that many durables companies give 2-3 per cent cash discounts to their dealers for prompt payments which save 30-45 days in payment time. If the financial logic is sound here, then we are just multiplying the cash discount and the payment time by a factor of 10 (25 per cent discount for an advance payment of one year). In order to make the scheme more attractive from the customer point of view; we can design his deposit to earn cash returns, which can be paid out of the extra 10 per cent we will generate in the four turns. Thus, your customer, by placing his money with you, purchases your goods at a 25 per cent discount as well as earn a return of, say, 6 per cent which can be in the form of gifts or in cash.
Some finance men have suggested that this price reduction is a loan taken on a 25 per cent interest. This is scandalous. Instead, this is a creative pricing strategy to sell to a large market with poor buying power. While buying power is low, an average Indian can wait endlessly. Patience is in our blood.
The third reason is the classical economic theory of elasticity of demand. In price-sensitive India, there is a huge pent-up desire but little money with which to buy. Such schemes will create demand. Added demand brings down costs by spreading fixed overheads. The fourth reason is that by promoting such schemes in the media there is a possibility of selling directly to the consumer by bypassing the middlemen, and saving on those margins. Fifth, inventory costs come down as the goods are produced just when they are required. Sixth, production planning and control can be efficient as firm orders exist. Seventh, purchasing can also be cost effective, as firm production schedules are known in advance. Eighth, cash flows improve. Positive cash flows have assumed an importance that is as great as making profits in today's business scenario. Finally, it is also a way to differentiate yourself from the competition. The more choices you give to the customer (in modes of payment) the more power and flexibility he has.
Many cellular companies have introduced cash cards that are given on advance payment by mobile phone subscribers. The cardholders get handsome discounts like no monthly rentals. That's a neat strategy to encourage in an industry plagued by non-payment of bills.
In fact, the dot.com companies are going further. A Calcutta based ISP, Caltiger.com is currently offering free, unlimited Internet usage in several cities. The ISP will get his revenue from advertisement banners that will be constantly seen on the subscribers' PC. What is a little irritation for a free forever offer? (The latest news is that right in the first week, Caltiger.com had so many surfers wanting to become its subscribers that their servers crashed.) There are lessons to be learnt from this example for other communication media providers like VSNL. can make its ISD rate much cheaper than now.
Going much further than Caltiger.com are the internet websites who pay you for logging on to them. Take Chequemail. The Mumbai-based private Net company offers a cut of its ad revenue to users of its e-mail service. "There's no catch," they declare. "Just check your mail and take home the moolah." Chequemail has a user base of 50,000. Similarly, elabh.com pays you for the amount of time spent on the website. pacfusion.com has this concept of points that you collect as you surf. These points are redeemable in a wide variety of products like CDs, air tickets, books etc. Basically the concept the new economy teaches us is that you have to reward your customer for being loyal to you.
In the same spirit, J&J is offering its "Acuvue" disposable contact lenses free for the first time. They will get nothing now, but once the customer gets used to the concept, he will buy the product many times over. And the accessories like the liquids that are required to be put in the eye and clean the lenses.
Another lesson that "Acuvue" gives us is the touch-feel-sample-use sequence of purchase. This is important to many products. Contact lenses are one of them. Most customers do not realise what they are missing out on until they try out the product. Their need is latent and dormant. By providing the product free for a few days, the potential of the product becomes apparent. Then, many of the free users have got to buy the product.
Another creative pricing strategy can be learned from BHEL. At its Jhansi plant, BHEL makes electric locomotives. Now, the only customer they have is Indian Railways, which does not have any budget to buy locos. BHEL has started leasing out the locos it must make to keep its Jhansi plant running. Indian Railways happily pays for the locos on the basis of a monthly rent.
Just like a loco, there are many products that a customer needs but cannot afford. Marketers can look into the possibility of whether the product can be "rented" out to the customer. The customer pays for it as he uses it and earns from it.
Tieing the purchase of one good with another is a creative way of pricing. We have all heard of Homemaker series offered by Philips where a TV, fridge and steam iron combination jointly come at a steep discount. But the really creative idea has come from HDFC. It offers discounts on cement bags, having tied up with Lakshmi Cements. In a way, the house builder is a "captive customer" and HDFC is in a unique position to help market cement bags. Thus, Lakshmi Cements gets a large market by tieing up with HDFC. It bypasses middlemen and passes on the savings to the customer and a cut to HDFC.
In the era of e-commerce, we will soon see "auctions" as a pricing option. A passenger wishing to go to London from Delhi will put on the auction-site, his bid price. Any airline on that sector may accept the bid or negotiate with him. For an airline flying empty, any revenue is better than none. For the passenger, any seat in any class in any plane is better than no travel. In fact, such a website called lastminute.com has already been launched by an airline. Such "bids" and "offers" will lead to easy liquidation of inventory for marketers and enable bargain acquisitions for customers. The flow of information and many suppliers and buyers on auction sites will create conditions of "perfect competition" in such markets. This will lead to lower prices that will be still be accepted by marketers due to higher volumes and elimination of middleman commissions.
In the coming days of hyper competition, pricing models like cost plus or market share or follow-the-leader cannot be the prescription to success. In fact, there cannot be a single set of rules for a market full of varied segments of buyers who value the product and the pricing differently. It is the recognition of these differences that leads to a keen awareness of who the buyers are, why they buy and how they can make their payments. This study of consumer motivation and behaviour can lead to the design of specific pricing strategies, which requires imagination and creativity.