Pricing Principles and Practice of Waltons Prizm 110

2013

ALADINS MARKETING 16TH BATCH

Page |2

Pricing Principles and Practice of Waltons Prizm 110 Prepared For: Moutushi Tanha Assistant Professor Course Teacher Pricing Theory & Practice

Prepared By: Group: Aladins Batch: 16th Name Abu Mohammad Zamilur Rahman Fasiul Hoque Fahim S. M. Zahidur Rahman Md. Mihrab Anjum Avijit Ghosh Dastidar MD. Arif Al Hasan

Roll 177 29 45 73 97 173

Department of Marketing University of Dhaka

Date: 13th May 2013

Page |3

Walton Prizm 110

Page |4

Table of content

Critical factors in the pricing decision of Prizm 110.. 5 Price structure of Prizm 110 ................5 Ethics in pricing of Prizm 110: . .7 Price of Prizm 110 as part of the marketing mix: 6 Price of Prizm 110 as purchasing information: ................7 Price of Prizm 110 as a marketing stimulus: . ..8 How consumer interprets price of Prizm 110: .9 Price-quality relationship: .. 9 Prizm 110 and Bazaz CT 100 fall in which price ranges?.....................................11 Reference prices used by Walton in Prizm 110: ...11 Odd-even pricing is not mandatory: ...11 Impact of costs on pricing of Prizm 110: .11 Cost Structure Pricing-Prizm 110: ..12 Allocation of Costs: .13 Forecasting costs: ..13 Cost concepts related to Prizm 110:.13 Structural factors influencing costs of Prizm 110:..14 Pricing Approach of Prizm 110: 14 Prizm 110 - cost oriented pricing :..15 Weakness of Prizm pricing strategy:.15 How important is cost for Prizm Pricing:15 The pricing environment:..16 Pricing strategy:16 Discounts and allowances:...17 Prizm 110 in the international market:..18 Subassemblies and parts:....19 Inflation and price control:..19 Conclusion:..20

Page |5

Critical factors in the pricing decision of Prizm 110: Customer valuation: Rather than compete on price alone, marketers must think in terms of total value as perceived by the customer, or the combination of features and experiences that create a total customer perception of value. What a customer will pay for a product depends on physical features, complementary features and symbolic features. Physical features of Prizm 110 include

Engine Type Ignition System Engine Displacement Battery Voltage Starting Method Transmission Dimension (LxWxH) Fuel Tank Braking Method(F/R) Dead Weight Rated Power (kw/r/min) Clutch Wheel Base(mm) Tyre Size (F/R)

Single Cylinder, 4-stroke Air-cooling CDI 107cc 12 v Remote Control / Electric & Kick start 4 gears 1970X810X1295 16L Hydraulic/Drum 117.5kg. 5.5/7500 Wet-type, rear clutch plate system 1270mm 2.75-17/3.00-17

Complementary features of Prizm 110 include delivery, technical support, guarantee etc. Symbolic features of Prizm 110 include low cost, patriotism and to some extent prestige. Market targets: For Prizm 110, Walton targets people who earn a medium amount. It does not target rich and poor segments of the market. Middle class customers are Waltons main target. Competitive dynamics: Prizm 110 fights with its competitors using low price. The competitors (Bazaz) reaction in pricing of Prizm 110 is very important. Sometime Walton provides discounts. Then Bazaz tries to reduce their price through discounts. Pricing strategies: Walton uses cost based pricing for Prizm 110. In viewing price from the standpoint of cost means management ignores the marketplace and concerns itself solely with covering costs incurred in manufacturing and distributing the product, plus a return on investment.

Page |6

Price structure of Prizm 110:

A price structure is defined as a series of the price levels that represent how a product will be priced. These price levels allow flexibility in pricing by providing variations in price. Walton does not sell Prizm 110 directly to the customers. They sell it to the distributors outlets adding a certain margin with the cost of producing Prism 110. The distributors then sell directly to the customer. Walton gives 6% discount to the distributors. Distributors, sometimes, give 1% or 2% discount to the customers. The list price of Prizm 110 is BDT 1, 10,000.

List price Less 6% discount Price level (Distributors)

BDT 1, 10,000 6,600 1, 03,400

List price Less 2% discount Price level (Customers)

BDT 1, 10,000 2,200 1, 07,800

So, profit of the outlet is (1, 07,800 1, 03,400) = BDT 4,400.

Ethics in pricing ofPrizm 110:

Walton imports engine and tires of Prism 110 from other countries. So, failure of engine or tire can cost customers more. There is a disproportionately high price for replacing these parts.

Page |7

Price of Prizm 110 as part of the marketing mix:

In using a marketing mix, the emphasis is on the fit of the elements or, in other words, the relationship of the elements with one another as they impact the total marketing programme. These interactions or interrelationships can be thought of in terms of consistency, integration and leverage. Consistency is the logical and useful fit between elements. Prizm 110 is a medium quality product with a low price and mass distribution. Integration is the active, harmonious interaction among the elements of the marketing mix. Prizm 110 does not use extensive advertising because of low selling price. Walton sometimes uses promotional pricing for Prizm 110 by combining lower price with advertising. Leverage in the marketing mix is obtained by using each element to the best advantage in support of the total mix. For Prizm 110, promotion pricing in form of rebates is more effective at building market share than either heavy advertising or improved distribution.

Price of Prizm 110 as purchasing information:

The price of a product is subjected to different interpretations and utilization by consumers in making purchase decisions. Whether or not price provides information to the purchaser depends upon the inferred relationship between price and the product, and also the reliability of the relationship. Typically, both the strength of the relationship and its dependability will increase disproportionately from staples, through shopping goods, to positional goods (Prizm 110).

Page |8

LOW

Reliability of price/quality relationship

HIGH

LOW

STAPLES

Strength of price/quality relationship

SHOPPING GOODS

HIGH

POSITIONAL GOODS ( Prism 110)

We can see that strength and reliability of price/quality relationship is high for positional products (Prizm 110). Generally, positional products will have higher prices. Customers think high price is an indicator of high quality and low price is an indicator of low quality. Because of low price of Prizm 110, compared to other motorbikes, customers perceive it as a low quality product. But the fact is they provide average product at a low price.

Price of Prizm 110 as a marketing stimulus:

Price, along with various forms of promotion, act to stimulate consumer response in terms of sales. Promotional pricing is used by Walton through short-term price cuts, discounts & contests.

Page |9

How consumer interprets price of Prizm 110:

Consumers interprets price of Prizm 110 based on two factors Time Implications: As a general rule, customers consider delays in getting the product a time cost. As a consequence, products that are readily available will often command a premium price as a trade-off with time costs. Prizm 110 is a readily available product. As the price of Prizm 110 is lower compared to other similar products in the market, customers perceive it as a low quality product. Psychological Implications: Consumers rely on price in differentiating between products and forming impressions of product quality. Because of low price customers perceive Prizm 110 as a low quality product. The assumption is that the lower-priced brand lacks certain qualities, features, or customers service benefits to which are attached certain risks.

Price-quality relationship:
If it is possible to measure quality, then quality differences can be compared to price differences. To do this, we should know the meaning of value. Value can be determined by deducting price/cost of obtaining the product from features/benefits. Comparative value can be determined using the following formula

(QH - QL)/QL Cv = (PH PL)/PL

Where, CV is the comparative value or the relative difference in value between a higher-priced product (H) and a lower-priced product (L). QH is the quality dimension of L. P H is the price of H, and PL the price of L.

P a g e | 10

Now we will find out the comparative values for comparisons between Prizm 110 and Bazaz CT-100.

BRAND

QUALITY RATING

LIST PRICE (TK)

Prism 110
Bazaz CT-100

67
63

110000
120000

The comparative value for Prizm 110 and Bazaz CT-100 is computed as follows:

Cv =

(67-63)/63 (110000-120000)/120000

= =

0.063492 -0.083333

-0.761908247

The comparative value -0.76 means that for every additional taka that is spent in buying Prizm 110 rather than Bazaz CT-100, the comparative value decrease is BDT 0.76.

P a g e | 11

Prizm 110 and Bazaz CT 100 fall in which price ranges?

An acceptable price range extends the perception of value in a product to a series of prices with an upper and a lower boundary. Willingness to buy a product is higher within the range than above or below the range. Prizm 110 and Bazaz CT 100 are in BDT 100000 - BDT 150000 price range.

Reference prices used by Walton in Prizm 110:

Walton use the reference price to invite comparisons with the current discounted price. This is to help the purchaser determine savings in purchasing the product.

110000
With 6% discount NOW

103400
Odd-even pricing is not mandatory:
Walton does not believe in odd pricing. They price their products on the basis of the cost of producing the product and a certain percentage of margins.

Impact of costs on pricing of Prizm 110:

How cost affect pricing and in turn margin is necessitated by two conditions The first is Global Competition; no market is safe from competitive pressure that could dampen margins and negatively impact market share. Knowledge of the cost structure and behavior of costs, along with market information, provides the flexibility to respond to competitive threats more effectively than across the board price reductions. Second, an almost constant stream of new ways to contain costs and become more cost effective has changed the bases of competition in practically every market.

P a g e | 12

In WALTON, they priced their Prizm-110 bike based on cost plus method that symbolizes cost savings with better quality and brand image as they import the engines and some other parts from abroad. Their lower price gives them a competitive edge over their competitors. If they price higher than that of their competitors it will kick them out of the market. On the contrary pricing too low may dampen their customers perception about their product quality and may not let them recover their fixed and variable costs in total that as a result might impact their profitability. WALTON doesnt distribute directly to their final customers, except their prime corporate clients. WALTON distributes their bikes through different outlets. OUTLET owners or Retailers dont get any salary from WALTON; rather they get a commission on their purchase their volume. And thus WALTON generates profit from selling. Outlet owners on the other hand sell to the end users at different prices with different promotional discounts to attract their customers. As a result price may vary from outlet to outlet.

Cost Structure Pricing-Prizm 110:

Knowledge of cost structure and behavior lays the foundation for effective decisions regarding pricing. Essential to effective pricing is the ability to recognize and identify all the elements of cost, fixed and variable, predictable and unpredictable, current and future, that may be part of the total process of developing, manufacturing and marketing a product. Price set that is insufficient to cover the total cost might affect the profitability of the firm. WALTON to avoid this problem, price their bikes based on its total cost at different steps of production procedure. WALTON imports the engine and main parts of the bike from abroad at a low vat. They built some other additional parts and physical structure here in their factory. Then they assemble all the parts and built the final product ready to use. Before pricing the final product they consider all the costs involved in these steps including import cost, duties, production cost at factory, labor cost, distribution cost and sum up them to identify the total cost involved. Then include a desirable markup determined by their top management and deliver them to the retailers and outlet owners. Thus they earn profit and cover their costs. Their comparatively low price gives them an advantage to protect their market position.

P a g e | 13

Allocation of Costs:
Allocation of costs for the purpose of pricing is not a simple task. Basically firms follow 2 types of cost allocation method. These are summarized below: Allocation of costs based on activities of the firm: The theory behind such a system is that virtually all exist to support the production and delivery of todays products. Cost allocation on the basis of key determinants of competitive advantage: Based on the competitive advantages provided to the customers like features, quality, speed of delivery and convenience. WALTON allocates the cost of production basing their activities related to the total production and distribution. Their cost allocation activities include: Import cost and duties, Local factory and labor costs, assembling costs, distribution to the retailers and outlets costs and taxes & vat. Forecasting costs: Past costs are less important than current costs, and current costs are less important than what costs will be in the future. The challenge in making a pricing decision is to anticipate those categories of the cost structure that are more likely to change in the future. Walton Prizm 110 also emphasize in future costs, they also emphasize on customer demand and want to satisfy customer as much as they can.

Cost concepts related to Prizm 110:

Fixed costs and variable costs: Fixed costs are the cost of being in business for a period of time and only vary from a time period to time period. Variable cost has a direct relationship to the level of activity. This kind of cost can be called unit cost. Walton does have this kind of costs but they do not want to disclose this kind of information to the public. Incremental costs: Incremental cost can be increase because of change in managerial decision making. Walton also contains these kinds of cost because time to time they change the managerial decision.

P a g e | 14

Structural factors influencing costs of Prizm 110:

Economies associated with volume: In looking at the effect of volume on costs, it is necessary to consider the concepts of capacity, scale, and experience. There are several reasons why utilization of capacity impacts product costs: 1. The variable costs accompanying increasing volume are relatively small or inconsequential in comparison with fixed cost. 2. The savings from purchasing needed materials, supplies, and service in quantity. 3. The savings from utilization of unproductive time, for example manufacturing machinery will have less down time. 4. More efficient utilization of manpower in all areas of the firm.

Economies of scope: Economies of scope bring efficiencies based on variety rather than volume. Economies of scope exist where the same price of machinery can produce multiple products more cheaply in combination than separately. Walton is also doing this type of activity.

Outsourcing and balancing: Normally a business will retain longer production runs and shift by outsourcing and balancing shorter production runs. It is not uncommon for the larger firm to provide the machinery and equipment to be used by the smaller firm.

Pricing Approach of Prizm 110:

Cost oriented pricing is used by Walton Company for Prizm 110.Walton always emphasizes on supreme priority to achieve customer satisfaction. To achieve this they always try to price their bike Prizm low. Their main target is local market. Local customers are very much price sensitive. But they also have to survive. So they first consider their cost and adding certain markup to cover cost and make profit.

P a g e | 15

Prizm 110 - cost oriented pricing :

Walton always tries to produce their bike because the lower cost of Prizm gives them competitive advantage. Walton price Prizm bike based on total cost considering fixed and variable cost. WALTON imports the engine and main parts of the bike from abroad at a low vat. They built some other additional parts and physical structure here in their factory. Then they assemble all the parts and built the final product ready to use. Before pricing the final product they consider all the costs. Prizm price= Total cost + 10% profit on investment (Mark up) Walton uses cost oriented pricing not only to earn immediate profit but also attract customer. As Walton is a new company and its products are also new, it uses market penetration strategy.

Weakness of Prizm pricing strategy:

It ignores other marketing environment like as Walton price is low it can be viewed as not up to level product. Because this a automobile product price portrays its quality. Sometime Walton cannot fulfill its desired volume. Its low cost or pricing technique based on cost cannot consider competitors product price like Bazaz, Hero Honda and Waltons brand image is not so good so it will give a poor image to Walton.

How important is cost for Prizm Pricing:

Cost is very important for Walton pricing for its bike .Because as competitive automobile market in Bangladesh where Indian bike position is very better .so as new Bangladeshi company Walton has to consider its cost and also has to make sure that it can survive in the market. As Bangladeshi customer is price sensitive so for Walton costs are very important. Through flexible cost oriented pricing over it all products Walton can achieve success in market competition and changes in customer behavior.

P a g e | 16

The pricing environment:

Pricing and segmentation strategy: It has been said earlier that the Walton is following cost oriented pricing in their pricing strategy. We all know that the all customers cannot be the target audiences. So the marketer should divide the market into different segments. Market can be segmented in different ways. Walton segments the market according to the income class of the customers. Basically they target the middle class customers. The main motto of the Walton is to provide a quality bike within the income range of the customer. They offer the model prizm110 at 110000 where the others bikes in the market with same features costs at least 160000tk. As a result the middle class customers choose the model instead of others.

Pricing objectives: Overall company objectives can be guided to pricing objectives. The pricing for the model prizm110 has some objectives. The common objectives of pricing should be like: Achieve a specific target return on investment or on net sales. Maintain or enhance a market share Meet or prevent competition Maximize profits Stabilize prices

Pricing strategy:
The Walton mainly focuses on maintaining or enhancing a market share for the model prizm110. They set a lower price than competitors as they can grab the market of the middle class customers. They also do profits but their main focus remains in their market share. They are trying to attract the customers with their low pricing policy. Mainly there are many pricing strategies. Like: Skimming pricing Prestige pricing Penetration pricing Expansionistic pricing Preemptive pricing Extinction pricing

P a g e | 17

Walton uses penetration pricing for the model prizm110. Penetration is a low price strategy designed to infiltrate markets and achieve a large market share for the firm. Walton uses this strategy to grab the market share. They set a low price for the model as their production cost is lower than their competitors. They offer a same quality in contrast with the competitors. Walton set the price below the competitors price as they can attract the middle class customers. This is possible only because Walton can produce the bike in a very low cost then the competitors. In Bangladesh the other companies mainly import bikes from foreign companies. But Walton import only some engines and parts. As a result they have to give little duty on that and they can sell the bike in a very low price. They are using penetration pricing in this way.

Discounts and allowances:

Walton use discount and allowances in different steps in the selling. Walton sells the bike to the dealers or distributors. They give discounts and allowances to them to boost up the sales. The dealers give discounts to the final customer according to their profit plan. Walton makes profit by selling bike to the dealers and dealers make it profitable by selling to the customers. Walton sometimes gives discounts to the customers through their outlets.

There are many types of discounts and allowances offered by the dealers or manufacturers. Like: Quantity discounts Noncumulative quantity discounts Cumulative quantity discounts Trade discounts Seasonal discounts Promotional discounts Cash discounts

P a g e | 18

Walton offers quantity discounts to their dealers. A quantity discount is a reduction from the list or suggested price that is granted to encourage volume purchases .These discounts may be based either on the number of units purchased by the dealer or on the dollar volume of the purchase. Walton offers quantity discounts to the dealers in different ways. Sometimes it is in percentage of sales and sometimes on dollar volumes.

Walton gives promotional discounts to their dealers. Sometimes it is in the form of cash or in the form of a sweepstakes. Walton offers a free bike with their orders. Sometimes give cash volume with the total sales volume.

Cash discount is offered by the dealers to the customers. In Hatirpul outlet; they offer 2200tk cash discount to the customers in every purchase of the model 110 with a brand new Walton pressure cooker. Outlet in Narayanganj offers 6% discount with every purchase of the model. In different outlets, dealers offer different type of discounts to the customers.

Prizm 110 in the international market:

Most of the firms want to do business in international markets. The chance of gaining profit is huge in the international market. The most compelling reasons for entering the global market place are the sheer size of the market place and the limitless opportunities present. One of these opportunities is the leveraging of R&D investment. Walton BD does business with many of their products. Their main market is in the Middle East. But still now Walton does not export motorcycles to the foreign markets. So there is no chance to do business with the model prizm110. Walton only does business with the product in the domestic market. Regulatory and political environments faced by the Walton Prizm 110: The legal and political environment in every country in which a firm hopes to do business will impact significantly the pricing decisions. The most obvious are tariffs and duties. As Walton import parts and engines for producing motorcycles; they have to give tariffs or duties. This tariffs and duties create impact on the pricing decisions. Other trade barriers like boycott, quota, blocked currency, exchange permits are not faced by Walton.

P a g e | 19

Tariffs and duties: As Walton has to import parts and engines of prizm110; they have to give tariffs on it. The rate of tariff or duty is about 3 or 4%. Because of this low rate of duties, the Walton can offer prizm110 in a very low price. The tariffs for the prizm110 can be calculated as follow:

Subassemblies and parts:

Walton purchases most of the parts and materials locally and avoids import duties completely.

Inflation and price control:

Walton has to face the problems of inflation in their pricing strategies. As Bangladesh is facing inflation often in their monetary environment, Walton has to face this. Because of the fluctuation of the inflation rate their profit margin change in frequent times.

As Walton do not export Prizm 110 in the international market, they dont have to face the terms like monopoly pricing, different pricing alternatives, transfer pricing and others.

P a g e | 20

Conclusion:

Walton can give Prizm 110 at a low price because of their low cost. They produce most of its parts locally. Walton imports only engine and tires from outside the nation. Thats the main reason why Walton can charge low price. As it is a positional product, customers may think that it lacks value because of low price. But the main fact is they can charge low because of their low cost.

Thank You.