Saturday, June 14, 2008
The Pricing dilemma on brands
Price. Exciting Price!
Q: Pricing has always boggled me. How do marketers price their products? What’s the logic at play?
A: Jayanth, pricing decisions are largely as personal as the product or service is. There is really no one formula most marketers use, but it is useful to look at some ways that most dabble with.
The typical and traditional brand will toy around first with the Cost-based pricing system of yore. This simply means price your brand of tooth-pick based on what it costs to make it. If your tooth-pick is a simple balsa-sliced output, work out the stable-state cost of Balsa wood in the market, work out all input costs that would include processing, curing, slicing and sharpening of wedge. Add packaging costs. Add the cost of selling and distribution and most certainly the cost of advertising. The cost of capital to finance the entire operation as well. Add labour. Add transportation cost to that. Add the cost of wastage as well. Add literally every cost there is to think of.
This would then be the cost-based method. Add a margin to it, and the price of your end pack of branded tooth-pick is ready.
And then there are market price-based systems which most marketers use. You are just about to launch this exciting range of lingerie. You look around in the market excitingly, peek at the competition and check out the prevailing prices marketers are realizing. You then bench-mark your product quality somewhere out there on the scale of availability of competing products. You arrive at a price. You hold the price.
What-the-market-can-bear systems abound as well. These add premiums. The cost of the product may be all of twenty two rupees, and competing market offerings may be at the level of fifty five rupees. You decide to price your brand of packaged, branded Neem sticks (for daily morning dental hygiene use) at all of a hundred rupees.
There is no cost-based rationale here at work. No market-price based logic as well. The product is unique, has no competitors in the same category, is looking for an up-grade from the category of plain old and boring tooth-paste to Neem twigs, and the category is a buzz-category of the future, where it will be politically and fashionably correct to be seen brushing teeth with Neem sticks. You then price at a peg that you wish to. You price at a level of what the market can bear.
You could be an exciting predator as well. Predatory pricing would mean you pricing your brand of Gingley Oil 10 per cent below the cost price. In terms of prevailing market-price of competitors, it could as well be all of 40 per cent cheaper.
A predator will price his product below the cost of production even. This is a short term measure though. The predator will aspire to vanquish competition swiftly with his better product at a cheaper price formula. He will go on for all of 18 months, by which time the prevailing competitor has collapsed. He will then slowly raise the bar of his prices, till he reaches not only a break-even, but a whopping profit as well.
Watch out though! Most countries have very stringent predatory pricing laws.
Scarcity pricing. Out here, you will price based on degree of scarcity of the product. Your branded Onion will become more and more expensive as the commodity gets scarce. Milk powder brands will become more expensive when there is scarcity of liquid milk in a market and cheaper when there is plenty of availability.
Input based pricing. This is an exciting one. The theory is simple. Base the price of your product basis the quantum of inputs that went into its making.
Take coffee beans for instance. Calculate keenly how much of water went into its making. Calculate similarly how much of water goes into the growing of sugar-cane. Calculate the same for tomatoes, potatoes and Yam. If tough old yam takes the least bit of water and sugarcane takes the most, the price of sugarcane per comparable unit, will be the highest and Yam will be the cheapest.
This in many ways is the best way of pricing anything. Remember, water is a scarce resource. How was that resource managed to achieve the end output of potato or coffee or Yam? This in many ways is a very socially-equitable method of pricing as well. Remember, water is but one input you consider. You will need to take every other input there is as well.
Jayanth, there are twenty-nine other methods of contemporary pricing, but we will leave that for another day. This column can take only so much.
Q: Who, what or which is the most important change agent in Indian markets today?
-Shobha Rajaratnam, Mumbai
A: Shobha, you are either a lawyer, teacher or counter-intelligence agent. Your question-language tells it all!
Very simply put, the most important entity in Indian marketing today is the consumer. Nothing and nobody is more important in markets than consumers. Everything else is predictable. The consumer is not.
Q: Do mascots play a crucial role in the existence of the brand? In today's
context, was it sensible to pare off Gattu's association with Asian Paints or
Harish Bijoor is a business strategy specialist and CEO, Harish Bijoor Consults Inc.