PRICING

• Pricing is defined as the: ‘Determination of a selling price of the

product or service produced.’
• Transfer pricing refers to the pricing of goods and services within a
multi-divisional organisation. For example, goods from the production
division may be sold to the marketing division. Equally, goods from a
parent company may be sold to a foreign subsidiary.
• The price of an offering is a key element of an organisation’s
marketing mix. The mix comprises price, product or service, place of
distribution and promotion factors. These factors communicate with
potential customers and influence the consumer’s perception of the
offering
• In determining price, organizations should be aware of their mission
and objectives, together with costs and constraints.
• Organizations may adopt one of several pricing strategies. These
include cost-plus pricing, discount pricing, penetration pricing, pre-
emptive pricing, prestige pricing, price skimming and target pricing.
• The price, once set, should support the achievement of the
organisation’s mission. The price(s) set and pricing practices may vary
between markets, market segments and geographical regions. They
also vary over time, according to customer wants and organisational
objectives
• In the case of transfer pricing, the choice of price affects the division
of total profit among different parts of the company. It can be
advantageous to choose transfer prices so that, in book keeping
terms, most of the profit is made in a low tax country. However, most
countries have tax laws and regulations that limit how transfer prices
can be set.
APPLICATION
In setting price, producers of goods and services need to take a number
of different issues into account. The key factors to consider include:
• production costs (labour, materials, overheads)
• distribution costs
• marketing costs
• competition pricing and activity
• perceived value (by the customer)
• government influence
• trade requirements
• volume targets (high price/low volume versus low price/high volume).
There are a number of tried and tested
pricing strategies:
PRICING STRATEGY DEFINITION
Penetration pricing Enter market with special offer pricing to get market share quickly. This was used
by utilities entering deregulated European markets.
Discount pricing Tactically reducing price occasionally to steal competitor share
Skim the cream Start with a high price to get the early adopters and then gradually reduce. This
happens in technology markets such as PCs and Hi-Fi
Premium pricing Adopt a platform of high prices and stick to it, for example, Rolex watches.

Cost plus pricing Doesn’t work in a dynamic market but sometimes used in government contracts
or controlled economies.
Going rate Fitting the market price of competitors with like-for-like comparison.

Target pricing Fixing price by market segments or distribution channels

There are a number of tried and tested
pricing strategies:
PRICING STRATEGY DEFINITION
Price discrimination For example, fixing a price too high (or too low) to exclude certain customers. For
instance, some airport customers will pay extra to park in the short term or
business car park while others won’t
Quantum pricing Fix price high and lowering until sales occur. For instance, Amazon Internet
model.
Odd number pricing Psychologically, ending a price with a nine makes it appear disproportionately
cheaper. For example, £4.99 seems considerably cheaper than £5.00.

*In the supply chain, there is great flexibility in pricing if the customer is not the end user. One example is the
traditional retailer model where the seller can discuss discounts, margins, buy-in incentives, promotions and
offers to influence stocking levels
INTERNATIONAL PRICING
• “Pricing is actually a pretty simple and straight forward thing. Customers will not
pay literally a penny more than the true value of the product.”– Ron Johnson, the
former Chief Executive Officer of J. C. Penney [New York Time, 2013].
• Don’t sell yourself short. No one will value you. Set a fair price for you, your book,
your services, whatever it is that you have to offer. Most of us set way too low a
price. Put it a little higher than you would normally be inclined to do. The worst
that can happen is someone will come along and steal it.” ― John Kremer, 1001
Ways to Market Your Books: For Authors and Publishers.
• “If you’re not worried that you’re pricing it too cheap, you’re not pricing it cheap
enough.” Roy H. Williams
 The 7 C’s of International Pricing Strategy
• 1. Costs: Comprehensive understanding of all costs related to offering
the product, including development, creative, production,
distribution, storage, advertising, manpower, and so on. International
transportation and related costs like freight, insurance & handling
lead to increase in costs. And then there is TAX. There could be
custom duty and turnover tax like the local GST or VAT which could
result in an escalating price
• 2. Competitors: Comprehensive and up-to-date analysis of your
competitors’ in the international marketplace – competing products,
brand, and prices as well as where your brand is positioned relative to
those competitors.
• 3. Customers: Customers overseas will have a different perception of
the value of the product as compared to domestic markets due to
many differential cultural and other factors. It should also be noted
that customers today are able to instantly compare their prices with
domestic prices on the internet.
• 4. Cultural Differences: The international pricing decision requires a
comprehensive understanding of the overseas markets culture as well
as the wants and needs of its inhabitants, including their perceptions
of the value of your brand and products and your competitors’ brands
and products.
• 5. Channels of Distribution: Lengthening channels of distribution
means that more people are going to be handling your product
including importers and wholesalers which causes not just cost
escalation but increases distribution complexities.
• 6. Currency Rates – The complexities of multiple currencies which are
subject to exchange rate fluctuations plus conversion costs.
• 7. Control by Government: Governmental and bureaucratic controls
and regulations can be onerous and complex, like in China and even
some European countries. Some countries have price control over
some products like pharmaceuticals, fuel and food.
INTERNATIONAL PRICING STRATEGIES –
Ensuring that your ‘Price is Right?’
• Skimming in the International Market
• Skimming as we know is the setting of the highest possible initial
price for a new product and then lowering it progressively over time.
This strategy is best for short term profit maximization and is only
possible for differentiated products for which there is no credible
competition in the short run. In the International market the success
of this strategy depends on factors like the demand in the local
market, customer preferences, purchasing power etc. Apple, which
seems to have mastered the art of skimming the market by
introducing a new iPhone model every year, adopts this policy across
all international markets.
Sliding-Down the Demand Curve
• Sliding down the demand curve like skimming starts with the highest
possible initial price but then as technology and competition
increases move quickly down the demand curve to optimise your
profit while remaining competitive. In the international market
Samsung seems to be adopting this strategy in respect of its range of
phones. Like Apple it skims the top end of the market segment by
pricing its latest products high (but lower than Apple) and as the
technology improves or as other Android phones are produced with
similar features, it quickly reduces its prices to grab customers at the
lower end. Thus, it combines skimming with competitive pricing by
sliding down the demand curve to attract buyers in successively lower
price segments of the market.
Penetration Pricing in the International
market
• Penetration pricing is the opposite of skimming in that the initial
price is set very low to get the largest international market share.
Internationally penetration pricing can allow profitable companies to
gain access to market share in foreign countries. However, the trade
policies of the foreign government would need to be considered as
they might deem the low-priced products to be dumping or anti-
competitive and in breach of their local legislation. As opposed to
Apple, most manufactures of Android phones have a strategy of
penetrating the International market.
Pre-emptive and extinction pricing strategies
• Preemptive and extinction strategies are similar to penetration pricing
policies in that they set the price very low in order to fight
competition. Pre-emptive international pricing strategy sets the price
very low so that new entrants to the international market find it
uneconomical to enter that market. The example of Nintendo Wii
which was first to enter the gaming market, intentionally set a low
price to capture the market as a pre-emptive strategy against Sony
which was to launch its Playstation. Extinction international pricing
strategy is a strategy of driving away existing competitors by setting a
low price that makes the business of competitors unviable. This could
lead to a price war and is a risky strategy – it could also lead to
breaching of ‘anti-dumping or fair competition’ legislation in some
countries.
Skimming the Market v Penetration Pricing
Strategy
• Should a firm go for Skimming or Market Penetration pricing? This
decision depends on the answer to two important inter-related
questions:
• Do you have a differentiated
product?
• Is the demand for your product
elastic or inelastic?
Differential Pricing in International markets
• As discussed above, customers in different international markets have
differing value perceptions of a product as well as differing purchasing
power. Besides this there could be other local factors discussed above
which could affect the pricing of a product. A differential pricing
strategy is a ‘horses for course’ approach allowing the firm to charge
different prices across different international segments.
• Differential pricing can be used by a multinational firm where it wants
to pursue different pricing strategies in different markets. For
example, a firm using differential pricing may pursue skimming in one
geographical market and penetration pricing in another
Example of differential pricing in International
market
• Sensodyne – Repair & Protect toothpaste
• Prices in different countries:
• Ireland – AU$9 – Manufactured in Ireland
• Australia – AU$10 – Manufactured in Ireland
• India – AU$4 – Manufactured in India
• Thailand – AU$6.60 – Manufactured in India
• Indonesia – AU$3.50 – Manufactured in China
• Philippines - AU$6.508 - Manufactured in China
The price differential can be explained by the following factors:
• Cost – Manufacturing is cheaper in China & India than Ireland.
• Transportation costs & Custom Duties – this accounts for part of the
difference in the price of the same product in India & Thailand (the
other being purchasing power discussed next).
• Purchasing power – Purchasing power of consumers in Ireland &
Australia is higher than the purchasing power of customers in India &
Indonesia with Thailand somewhere in between.
• Competition and Substitute products – ‘Sensodyne Repair & Protect’
is a differentiated product and is priced accordingly at a higher price
than competing products.
• Other factors like customer preferences and needs are considered
while fixing prices in various markets. This finally comes down to
adjusting your price to ensure that the consumer in that market
perceives that the product is ‘worth the price’.
• It should be noted that whereas such price variations are easily
maintainable for FMCG products with a relatively low price it would
be harder for highly priced items like iPhones as this would create a
profitable grey market for traders as explained below.
• Problem of Grey Markets caused by Differential Pricing in
International Markets:
• “If Americans could legally access prescription drugs outside the
United States, then drug companies would be forced to re-evaluate
their pricing strategy.” Chuck Grassley
• Grey markets also exist due to non-availability of the product in some
countries – like the example of infant milk formula from Australia
which was systematically bought by Chinese students from the
supermarkets to be sent to China where there is a shortage of good
quality infant milk.
Foreign exchange fluctuations and the pricing
decision
• One of the risk factors in international business are volatile currency markets.
Foreign exchange rates can fluctuate drastically, and this can impact the pricing
decision. The firm has to make a strategic decision to either increase prices with
an unfavourable change in exchange rate or to absorb the resultant loss. This
decision will depend on the product the company is selling, the customers
willingness to absorb the increase and its market positioning in comparison to its
competitors. An example of how currency changes affects the international
pricing decisions is from the Australian luxury car market in the pre-euro era. At
one time the Australian Dollar depreciated against the DM / Pound Sterling /
Japanese Yen and Italian Lira but appreciated against the Swedish Kroner. This put
a downward pressure on the profitability of the German cars Mercedes, BMW &
Audi, the Japanese Lexus, the Italian Alfa Romeo and the British Jaguar at the
same time increasing the profit margins of the Swedish Volvo & Saab.
• The cars affected by the unfavourable exchange rate all increased
their prices to maintain profitability. The two Swedish car
manufacturers had three pricing options:
• Keep prices the same as before and enjoy the increase in profits
driven by the favourable exchange rate as well as the competitive
benefit offered by a price lower than the competitors.
• Increase the prices to increase profitability even more.
• Decrease prices and try to get a larger market share while maintaining
the same profit margin.
• Volvo chose to keep the same price whereas the Saab reduced its
price to pass the exchange rate benefit to its consumers. However,
the price decrease backfired on Saab as it lost its prestige position as
a luxury car. The question that needs to be asked is – if the other car
manufacturers could raise the prices without a decrease in demand
why did they need to wait for an adverse exchange rate to raise
prices? Had they all priced their cars too low?
Prestige Pricing & Price as an indicator of
quality in International Markets
• “We knew how much these people were paying for cocaine—and the
more coke cost, the more people wanted it. We applied the same
marketing plan to our budding catering operation, along with a
similar pricing structure, and business was suddenly very, very good.”
– Anthony Bourdain
• The experience of the Cocaine business (albeit illegal) which Anthony Bourdain draws upon to use
as a pricing model for his successful catering business, indicates that many customers consider
price as an indicator of quality. So, while fixing a pricing strategy at any level the firm should be
careful as to not go low enough for customers to doubt the quality of their product.
• For products like Rolex watches and Louis Vuitton bags that fall in the luxury goods market, the
element of prestige pricing needs to be considered. In the example referred to above when Saab
dropped its price in Australia to pass on the advantage of exchange rate gains to its customers, it
inadvertently lost its reputation as a luxury car.
CONCLUSION
• “Pricing is the moment of truth – all of marketing strategy comes to
focus on the pricing decision.” – Raymond Corey
What is a Push Marketing Strategy?
• A push marketing strategy, also called a push promotional strategy,
refers to a strategy in which a firm attempts to take its products to
consumers – to “push” them onto consumers. In a push marketing
strategy, the goal is to use various active marketing techniques to
push their products to be seen by consumers, sometimes right at the
point of purchase. One of the main objectives with push marketing is
to reduce to as small as possible the amount of time that elapses
between the customer seeing a product and making a purchase
decision to buy the product.
• Push marketing is more concerned with gaining an immediate sale
than with fostering relationships that create brand loyalty.
Examples of Using a Push Marketing Strategy
With a push marketing strategy, the firm takes the product
to consumers. Consumers are introduced to, or reminded of, the
product through any of several available push marketing methods:
• Direct selling to customers – e.g., a car salesman who meets
customers in the company’s auto showrooms
• Point of Sale displays (POS)
• Trade show promotion
• Packaging designs to encourage a purchase
Illustration of a Push Marketing Strategy
Advantages
• Push marketing is useful for manufacturers that are trying to establish
a sales channel and are seeking distributors to help with product
promotion.
• It creates product exposure, product demand, and consumer
awareness about a product.
• Demand can be more forecastable and predictable, as the producer is
able to produce and push as much or little product to consumers.
• Economies of scale can be realized if the product is able to be
produced at scale due to high demand.
Disadvantages
• It requires an active sales team that is able to work/network actively
with retailers and distributors.
• Poor negotiating power with retailers and distributors; the producers
are the ones asking retailers to stock their products, and the product
may be a new one and, therefore, not yet established as a profitable
item for retailers to stock.
• Again because the product may be new, it may be difficult to
accurately forecast demand.
• Initial marketing efforts are likely to be expensive, and because they
are more focused on securing a one-time purchase than on building
customer relationships and loyalty, the results may be short-lived.
What is a Pull Marketing Strategy?
• A pull marketing strategy, also called a pull promotional strategy,
refers to a strategy in which a firm aims to increase the demand for
its products and draw (“pull”) consumers to the product. Pull
marketing strategies revolve around getting consumers to want a
particular product. A pull marketing strategy can be used by itself or
in conjunction with a push marketing strategy.
• In a pull marketing strategy, the goal is to make a consumer actively
seek a product and get retailers to stock the product in response to
direct consumer demand.
• Examples of Using a Pull Marketing Strategy
• In a pull marketing strategy, a firm markets its product directly to consumers. The
consumers then seek out the products to purchase. There are several pull
marketing methods available today, including:
• Social media networks
• Word of mouth
• Media coverage
• Sales promotions and discounts
• Advertising
• Email marketing
Illustration of a Pull Marketing Strategy
Advantages
• Able to establish direct contact with consumers and build consumer
loyalty
• Stronger bargaining power with retailers and distributors
• Focuses on creating brand equity and product value
• Consumers are actively seeking out the product, which removes much
of the pressure of conducting outbound marketing
• Can be used to test a product’s acceptance in the market and obtain
consumer feedback on the product
Disadvantages
• Usually works effectively only when there is high brand loyalty
• Lead time is long, as consumers are comparing alternatives before
making a purchase
• Requires creating high demand for a product, which can be difficult in
a highly competitive marketplace landscape
• Requires strong marketing efforts to convince consumers to actively
seek out the product (they may, instead, just decide to settle for
whatever similar product a retailer has in stock, rather than insisting
on getting your product)
Strategic Financial Management?
• Strategic financial management is a term used to describe the process
of managing the finances of a company to meet its strategic goals.
• It is a management approach that uses different techniques and
financial tools to devise a strategic plan.
• Strategic financial management ensures that the strategy chosen is
implemented to achieve the desired goals.
Strategic Versus Tactical Financial
Management
• The term "strategic" refers to financial management practices that are
focused on long-term success, as opposed to "tactical" management
decisions, which relate to short-term positioning. If a company is
being strategic instead of tactical, then it makes financial decisions
based on what it thinks would achieve results ultimately—that is, in
the future; which implies that to realize those results, a firm
sometimes must tolerate losses in the present.
The Elements of Strategic Financial
Management
1. Planning
• Define objectives precisely.
• Identify and quantify available and potential resources.
• Write a specific business financial plan.
2. Budgeting
• Help the company function with financial efficiency, and reduced waste.
• Identify areas that incur the most operating costs, or exceed the budgeted cost.
• Ensure sufficient liquidity to cover operating expenses without tapping external
resources.
• Uncover areas where a firm may invest earnings to achieve goals more effectively.
3. Managing and Assessing Risk
• Identify, analyze, and mitigate uncertainty in investment decisions.
• Evaluate the potential for financial exposure; examine capital
expenditures (CapEx) and workplace policies.
• Employ risk metrics such as degree of operating leverage calculations,
standard deviation, and value-at-risk (VaR) strategies.
4. Establishing Ongoing Procedures
• Collect and analyze data.
• Make financial decisions that are consistent.
• Track and analyze variance—that is, differences between budgeted
and actual results.
• Identify problems and take appropriate corrective actions.
Four Broad Areas of Financial Strategy
• 1. Evaluating Financial Performance
• 2. Financial Forecasting
• 3. Capital Structure Planning:
• 4. Other Financial Considerations:
• There are many financial activities and decisions that may influence
strategic planning.
Some of these include the following:
• i. Cash flow budgets,
• ii. Budgetary control activities,
• iii. Marginal costing and profit planning,
• iv. Cost of capital and equity financing,
• v. Leverages,
• vi. Corporate restructuring and diversification,
• vii. Acquisitions.
Components of a Financial Strategy
• Component # 1. Financing Decision:
Broadly speaking, finance may be available from two sources:
i. External – The external sources of funds may consist of equity capital and/or
borrowed capital. Ownership capital may be raised by issue of (a) equity shares, or
(b) preference shares. Borrowed capital, on the other hand, can be raised by issue
of debentures, term loans, public deposits, and other loans and credits.
ii. Internal – Internal funds are generated by way of retention of profits’ (keeping
free reserves) and provision of depreciation on fixed assets.
The finance manager must ensure that funds are provided at a reasonable cost and
with minimum risk. He has to decide about the optimal financing mix (mix of debt
and equity) or capital structure of the organisation.
Component # 2. Investment Decisions:
For a successful, safe and profitable investment decision, the
following factors must be considered:
• i. Hurdle rate – Investment strategy seeks to maximize the firms’ wealth. It must
provide for a minimum rate of return or cut-off rate that must be earned to gain
reasonable profit. Hence, an organisation’s financial strategy must clearly state
the hurdle rate for a particular project.
• ii. Capital rationing – Capital rationing policy sets limits on the firm’s planned
investment for a specific year based on the amount of cash available.
• iii. Risk factor – Risk factor should also be considered while making investment
decisions. On the basis of risk analysis, a project can be judged as highly risky or
low risky. Financial strategy can provide clear guidelines about the risks involved
in the projects.
• Component # 3. Dividend Decisions
• Component # 4. Working Capital Management
• Component # 5. Cash Flow Management
• Component # 6. Managing Growth and Risks