Project Report On Change in Strategy that Companies follow During Rise in Prices

Submitted to :- Prof. Pankaj Upadhayay

Submitted by :- Nidhu Anand Ritu Sahewalla Bhaskar Sharma

ACKNOWLEDGEMENTS
Apart from our efforts , the success of this project depends largely on the encouragement and guidelines of many others. I take this opportunity to express my gratitude to the people who have been instrumental in the successful completion of this project.

I would like to show my greatest appreciation to Prof. Pankaj Upadhayay. We can t say thank you enough for his tremendous support and help. We feel motivated and encouraged every time we attend his lecture. Without his encouragement and guidance this project would not have materialized.

The guidance and support received from all the friends in IIPM Gurgaon who contributed and are contributing to this project, was vital for the success of the project. We am grateful for their constant support and help.

BHASKAR SHARMA RITU SAHEWALLA NIDHU ANAND

Table of Contents

1.0 EXECUTIVE SUMMARY------------------------------------------------------------------------1.1 Objective-------------------------------------------------------------2.0 Introduction To Project -----------------------------------------------------------------------2.1 Definition 2.2 Demand pull and Cost pull Inflation 2.3 Causes of Inflation 3.0 INFLATION IN DIFFERENT INDUSTRIES---------------------------------------------------------------------3.1 Inflation in Automobile Industry 3.2Inflation in F.M.C.G 3.2 Inflation in Electronics Industry 4.0 MARKETING STRATEGY DURING INFLATION----------------------------------4.1Strategy of Automobile Industry 4.2Strategy of Electronics Industry 4.3Strategy of F.M.C.G 5.0 DATA COLLECTION------------------------------------------------------------6.0 RESULT & CONCLUSION-----------------------------------------------------7.0 REFERENCES ..

Objective :From time to time we come across instances where businesses are not realizing their full potential when setting prices. Sometimes this can mean missed revenue, in other cases it can have a negative effect on the brand sending a mixed message of what it stands for. In either case profits can be lost. In this research paper , we take a look at the key factors to consider when reviewing your pricing strategy. Price is the only revenue generating element amongst the 4ps,the rest being cost centers. Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. Automated systems require more setup and maintenance but may prevent pricing errors. In setting pricing policy, a company estimates the demand curve, the probable quantities it will sell at each possible price. It estimates how its costs vary at different levels of output . In this paper , we also study situations when companies often face situations where they may need to cut or raise prices. The firm facing a competitor's price change must try to understand the competitor's intent and the likely duration of the change. So here we are taking example of 3 Industries i.e Automobile Industry, FMCG & Electronics Industry, which change there pricing strategy during rise in the prices or in inflation. Our main objective is to learn how these industries change there pricing strategy during Inflation.

Introduction :-

Strategic Planning
Plans and planning. Plans are needed to clarify what kinds of strategic objectives an organization would like to achieve and how this is to be done. Such plans must consider the amount of resources available. One critical resource is capital. Microsoft keeps a great deal of cash on hand to be able to jump on opportunities that come about. Small startup software firms, on the other hand, may have limited cash on hand. This means that they may have to forego what would have been a good investment because they do not have the cash to invest and cannot find a way to raise the capital. Other resources that affect what a firm may be able to achieve include factors such as:
y y y y

Trademarks/brand names: It would be very difficult to compete against Coke and Pepsi in the cola market. Patents: It would be difficult to compete against Intel and AMD in the microprocessor market since both these firms have a number of patents that it is difficult to get around. People: Even with all of Microsoft s money available, it could not immediately hire the people needed to manufacture computer chips. Distribution: Stores have space for only a fraction of the products they are offered, so they must turn many away. A firm that does not have an established relationship with stores will be at a disadvantage in trying to introduce a new product.

Plans are subject to the choices and policies that the organization has made. Some firms have goals of social responsibility, for example. Some firms are willing to take a greater risk, which may result in a very large payoff but also involve the risk of a large loss, than others. Strategic marketing is best seen as an ongoing and never-ending process. Typically:
y

y y

The organization will identify the objectives it wishes to achieve. This could involve profitability directly, but often profitability is a long term goal that may require some intermediate steps. The firm may seek to increase market share, achieve distribution in more outlets, have sales grow by a certain percentage, or have consumers evaluate the product more favorably. Some organizations have objectives that are not focused on monetary profit e.g., promoting literacy or preventing breast cancer. An analysis is made, taking into consideration issues such as organizational resources, competitors, the competitors strengths, different types of customers, changes in the market, or the impact of new technology. Based on this analysis, a plan is made based on tradeoffs between the advantages and disadvantages of different options available. This strategy is then carried out. The firm may design new products, revamp its advertising strategy, invest in getting more stores to carry the product, or decide to focus on a new customer segment. After implementation, the results or outcome are evaluated. If results are not as desired, a change may have to be made to the strategy. Even if results are satisfactory, the firm still needs to monitor the environment for changes.

Levels of planning and strategies. Plans for a firm can be made at several different levels. At the corporate level, the management considers the objectives of the firm as a whole. For

example, Microsoft may want seek to grow by providing high quality software, hardware, and services to consumers. To achieve this goal, the firm may be willing to invest aggressively. Plans can also be made at the business unit level. For example, although Microsoft is best known for its operating systems and applications software, the firm also provides Internet access and makes video games. Different managers will have responsibilities for different areas, and goals may best be made by those closest to the business area being considered. It is also more practical to hold managers accountable for performance if the plan is being made at a more specific level. Boeing has both commercial aircraft and defense divisions. Each is run by different managers, although there is some overlap in technology between the two. Therefore, plans are needed both at the corporate and at the business levels. Occasionally, plans will be made at the functional level, to allow managers to specialize and to increase managerial accountability. Marketing, for example, may be charged with increasing awareness of Microsoft game consoles to 55% of the U.S. population or to increase the number of units of Microsoft Office sold. Finance may be charged with raising a given amount of capital at a given cost. Manufacturing may be charged with decreasing production costs by 5%. The firm needs to identify the business it is in. Here, a balance must be made so that the firms scope is not defined too narrowly or too broadly. A firm may define its goal very narrowly and then miss opportunities in the market place. For example, if Dell were to define itself only as a computer company, it might miss an opportunity to branch into PDAs or Internet service. Thus, they might instead define themselves as a provider of information solutions. A company should not define itself too broadly, however, since this may result in loss of focus. For example, a manufacturer of baking soda should probably not see itself as a manufacturer of all types of chemicals. Sometimes, companies can define themselves in terms of a customer need. For example, 3M sees itself as being in the business of making products whose surfaces are bonded together. This accounts for both Post-It notes and computer disks. A firms mission should generally include a discussion of the customers served (e.g., Wal-Mart and Nordstroms serve different groups), the kind of technology involved, and the markets served. Several issues are involved in selecting target customers. We will consider these in more detail within the context of segmentation, but for now, the firm needs to consider issues such as:
y y y y

The size of various market segments; How well these segments are being served by existing firms; Changes in the market e.g., growth of segments or change in technology; How the firm should be positioned, or seen by customers. For example, Wal-Mart positions itself as providing value in retailing, while Nordstrom s defines itself more in terms of high levels of customer service.

The Boston Consulting Group (BCG) matrix provides a firm an opportunity to assess how well its business units work together. Each business unit is evaluated in terms of two factors: market share and the growth prospects in the market. Generally, the larger a firms share, the stronger its position, and the greater the growth in a market, the better future possibilities. Four combinations emerge:

y y

y y

A star represents a business unit that has a high share in a growing market. For example, Motorola has a large share in the rapidly growing market for cellular phones. A question mark results when a unit has a small share in a rapidly growing market. The firm s position, then, is not as strong as it would have been had its market share been greater, but there is an opportunity to grow. For example, Hewlett-Packard has a small share of the digital camera market, but this is a very rapidly growing market. A cash cow results when a firm has a large share in a market that is not growing, and may even be shrinking. Brother has a large share of the typewriter market. A dog results when a business unit has a small share in a market that is not growing. This is generally a somewhat unattractive situation, although dogs can still be profitable in the short run. For example, Smith Corona how has a small share of the typewriter market.

Firms are usually best of with a portfolio that has a balance of firms in each category. The cash cows tend to generate cash but require little future investment. On the other hand, stars generate some cash, but even more cash is needed to invest in the futurefor research and development, marketing campaigns, and building new manufacturing facilities. Therefore, a firm may take excess cash from the cash cow and divert it to the star. For example, Brother could harvest its profits from typewriters and invest this in the unit making color laser printers, which will need the cash to grow. If a firm has cash cows that generate a lot of cash, this may be used to try to improve the market share of a question mark. A firm that has a number of promising stars in its portfolio may be in serious trouble if it does not have any cash cows to support it. If it is about to run out of cashregardless of how profitable it is is becomes vulnerable as a takeover target from a firm that has the cash to continue running it. A SWOT (Strengths, Opportunities, Weaknesses, and Threats) analysis is used to help the firm identify effective strategies. Successful firms such as Microsoft have certain strengths. Microsoft, for example, has a great deal of technology, a huge staff of very talented engineers, a great deal of experience in designing software, a very large market share, a well respected brand name, and a great deal of cash. Microsoft also has some weaknesses, however: The game console and MSN units are currently running at a loss, and MSN has been unable to achieve desired levels of growth. Firms may face opportunities in the current market. Microsoft, for example, may have the opportunity to take advantage of its brand name to enter into the hardware market. Microsoft may also become a trusted source of consumer services. Microsoft currently faces several threats, including the weak economy. Because fewer new computers are bough during a recession, fewer operating systems and software packages. Rather than merely listing strengths, weaknesses, opportunities, and threats, a SWOT analysis should suggest how the firm may use its strengths and opportunities to overcome weaknesses and threats. Decisions should also be made as to how resources should be allocated. For example, Microsoft could either decide to put more resources into MSN or to abandon this unit entirely. Microsoft has a great deal of cash ready to spend, so the option to put resources toward MSN is available. Microsoft will also need to see how threats can be addressed. The firm can earn political good will by engaging in charitable acts, which it has money available to fund. For example, Microsoft has donated software and computers to schools. It can forego temporary profits by reducing prices temporarily to increase demand, or can hold out by maintaining current prices while not selling as many units.

Criteria for effective marketing plans. Marketing plans should meet several criteria:
y

y y y

The plan must be specific enough so that it can be implemented and communicated to people in the firm. Improving profitability is usually too vague, but increasing net profits by 5%, increasing market share by 10%, gaining distribution in 2,000 more stores, and reducing manufacturing costs by 2% are all specific. The plan must be measurable so that one can see if it has been achieved. The above plans involve specific numbers. The goal must be achievable or realistic. Plans that are unrealistic may result in poor use of resources or lowered morale within the firm. The goals must be consistent. For example, a firm cannot ordinarily simultaneously plan improve product features, increase profits, and reduce prices.

One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features, channel decisions, and promotion. Price is the one element of the marketing mix that produces revenue; the other elements produce costs. Prices are perhaps the easiest element of the marketing program to adjust; product features, channels, and even promotion take more time. Price also communicates to the market the company's intended value positioning of its product or brand. A well-designed and marketed product can command a price premium and reap big profits.

Motivation : Developing strategy is one thing-managing the change process to embed that strategy in the organization is quite another. The truth is that implementing effective pricing strategy involves changing the expectations and behaviors of all of the actors involved in the sales process. Customers must learn that they will be treated fairly and that abusive purchase tactics will not be rewarded with ad hoc discounts. Sales must learn that they will be rewarded for closing deals that increase firm profitability rather than using price as a tactical lever to increase sales volume. Finance must learn to look beyond cost as a determinant of price to better understand the tradeoffs between price, cost, and market response. Financial incentives are, without question, one of the most powerful levers for behavioral change among salespeople.

What a price should do : A well chosen price should do three things: Achieve the financial goals of the company (e.g., profitability) Fit the realities of the marketplace (Will customers buy at that price?) Support a product's positioning and be consistent with the other variables in the

marketing mix price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product Price will usually need to be relatively high if manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns A low price can be a viable substitute for product quality, effective promotions, or an energetic selling effort by distributors From the marketers point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumer surplus to the producer. A good pricing strategy would be the one which could balance between the price floor(the price below which the organization ends up in losses) and the price ceiling(the price beyond which the organization experiences a no demand situation). Understanding Pricing Price is not just a number on a tag or an item : Price is all around us. You pay rent for your apartment, tuition for your education, and a fee to your physician or dentist. The airline, railway, taxi, and bus companies charge you a fare; the local utilities call their price a rate; and the local bank charges you interest for the money you borrow. The price for driving your car on Florida's Sunshine Parkway is a toll, and the company that insures your car charges you a premium. The guest lecturer charges an honorarium to tell you about a government official who took a bribe to help a shady character steal dues collected by a trade association. Clubs or societies to which you belong may make a special assessment to pay unusual expenses. Your regular lawyer may ask for a retainer to cover her services. The "price" of an executive is a salary, the price of a salesperson may be a commission, and the price of a worker is a wage. Finally, although economists would disagree, many of us feel that income taxes are the price we pay for the privilege of making money. Throughout most of history, prices were set by negotiation between buyers and sellers. "Bargaining" is still a sport in some areas. Setting one price for all buyers is a relatively modern idea that arose with the development of large-scale retailing at the end of the nineteenth century. F. W. Woolworth, Tiffany and Co., John Wanamaker, and others advertised a "strictly one-price policy," because they carried so many items and supervised so many employees. Today the Internet is partially reversing the fixed pricing trend. Computer technology is making it easier for sellers to use software that monitors customers' movements over the Web and allows them to customize offers and prices. New software applications are also allowing buyers to compare prices instantaneously through online robotic shoppers. As one industry observer noted, "We are moving toward a very sophisticated economy. It's kind of an arms race between merchant technology and consumer technology. Traditionally, price has operated as the major determinant of buyer choice. This is still the case in poorer nations, among poorer groups, and with commodity-type products. Although

nonprice factors have become more important in recent decades, price still remains one of the most important elements determining market share and profitability. Consumers and purchasing agents have more access to price information and price discounters. Consumers put pressure on retailers to lower their prices. Retailers put pressure on manufacturers to lower their prices. The result is a marketplace characterized by heavy discounting and sales promotion. How Companies Price : Companies do their pricing in a variety of ways. In small companies, prices are often set by the boss. In large companies, pricing is handled by division and product-line managers. Even here, top management sets general pricing objectives and policies and often approves the prices proposed by lower levels of management. In industries where pricing is a key factor (aerospace, railroads, oil companies), companies will often establish a pricing department to set or assist others in determining appropriate prices. This department reports to the marketing department, finance department, or top management. Others who exert an influence on pricing include sales managers, production managers, finance managers, and accountants. Executives complain that pricing is a big headacheand one that is getting worse by the day. Many companies do not handle pricing well, and throw up their hands at "strategies" like this: "We determine our costs and take our industry's traditional margins." Other common mistakes are: Price is not revised often enough to capitalize on market changes; price is set

independently of the rest of the marketing mix rather than as an intrinsic element of marketpositioning strategy; and price is not varied enough for different product items, market segments, distribution channels, and purchase occasions. Others have a different attitude: They use price as a key strategic tool. These "power pricers" have discovered the highly leveraged effect of price on the bottom line. They customize prices and offerings based on segment value and costs. The importance of pricing for profitability was demonstrated in a 1992 study by McKinsey & Company. Examining 2,400 companies, McKinsey concluded that a 1 percent improvement in price created an improvement in operating profit of 11.1 percent. By contrast, 1 percent improvements in variable cost, volume, and fixed cost produced profit improvements, respectively, of only 7.8 percent, 3.3 percent, and 2.3 percent. Effectively designing and implementing pricing strategies requires a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices. Price Supply

Demand Quantity Fig : Graph showing how the supply and demand for the goods generally affects prices Because there is a relationship between price and quantity demanded, it is important to understand the impact of pricing on sales by estimating the demand curve for the product. For existing products, experiments can be performed at prices above and below the current price in order to determine the price elasticity of demand. Inelastic demand indicates that price increases might be feasible.

Pricing in Competitive Markets:

Law of Demand: all other factors being the same, higher prices will lead to lower quantities being demanded. Price Elasticity of Demand(e) = % change in Quantity Demanded / % change in Price. Break Even Point: Point of zero profits, i.e., TR = TC. BEP Quantity: F/[P - UVC]

Consider this Matrix

There are many ways to price a product which have been discussed in detail in the paper. Premium Pricing. Penetration Pricing. Economy Pricing. Price Skimming. Psychological Pricing. Product Line Pricing. Optional Product Pricing. Captive Products Pricing . Product Bundle Pricing. Promotional Pricing. Geographical Pricing. Value Pricing.

Successful pricing strategy must be built on a solid analytical foundation which goes well beyond high-level customer values or competitive anecdotes. It requires quantified models of customer decision-making, competitive economics, and segmented internal economics.

Common pricing mistakes :

Pricing is too cost oriented. Companies do not take enough account of the overall market demand and consumer psychology. Prices are not revised often enough to take advantage of changed conditions in the marketplace. Prices are set independently of the rest of the marketing plan. Prices are not varied enough for different product items and market segments. Prices are set to match or better a competitor without justification or analysis. Objectives in Setting Price : Increase profits Attract new customers Maintain current customers Increase profit per customer Introduce new product

Generate cash Improve ROI How to Attract New Customers : Introductory coupons / discounts provide incentive maintain reference price Trial offers increase familiarity reduce risk P r o b l em perceived as unfair Maintain Current Customers : Meet competition matching prices add to bundle (as long as customers want it!) Create barriers to exit contracts / subscriptions automatic billing phone numbers (no longer in the U.S.) family plans

Provide loyalty programs frequent flyer Starbuck cards Increase Profit per Customer : Increase prices reduce product? (candy bar pricing) justify/ notify / base on costs

 Adjust product mix sales incentives for more profitable business Adjust customer mix teenagers vs. seniors Charge for extras whats valuable to customer and cheap to company Get money up front Prepaid subscriptions

CONCERNS IN SETTING PRICE :4 C s Compitition Customer

Cost

Custom

PRICING MODELS : Cost-based Pricing Value-based Pricing Flat-Rate Pricing Ala-Carte Pricing Two-Part Pricing Peak Load / Congestion Pricing Dynamic Pricing

Cost-based vs. Value-based Cost Based Value Based 1. Most Common pricing method 1. Optimal Profits 2. Easiest Pricing Method 2. Requires Research 3. Considered Fair 3. Complicated to administer 4. Difficult to allocate fixed costs 4. Can be considered unfair 5. Sub-optimal Profits Flat-Rate Pricing Single rate per time period:

P R OS : provides unlimited use increases use simple to explain & bill popular with customers / low risk C ONS : difficult to predict average price unfair in that some people subsidize others fair in that charges are predictable

Ala-Carte Pricing Variable rate depending on use: P R OS : considered fair greater choice greater control C ONS : more difficult to explain more difficult to bill more risk

Two-part Pricing I Combines flat rate plus variable: e.g., monthly fee plus cost per minute (declining?) P R OS spreads costs more fairly C ONS perceived as hassle u np r edi c ta bl e Two-Part Pricing II Combines down-payment & flat rate per month: P R OS : covers fixed costs immediately spreads customers costs fits customers monthly budget generates financing revenues predictable / low risk C ONS : increases total cost to customer

 requires long-term billing Peak Load / Congestion Pricing Variable rate depending on time of day or week: P R OS : spreads use encourages use in unpopular time considered fair easy to explain

C ONS : difficult to bill

Dynamic Pricing Variable rate for each customer: P R OS : maximizes profit per customer C ONS : difficult to implement requires detailed demand schedule difficult to explain considered unfair

Consumer Psychology and Pricing Many economists assume that consumers are "price takers" and accept prices at "face value" or as given. Marketers recognize that consumers often actively process price information, interpreting prices in terms of their knowledge from prior purchasing experience, formal communications (advertising, sales calls, and brochures), informal communications (friends, colleagues, or family members), and point-of-purchase or online resources. Purchase decisions are based on how consumers perceive prices and what they consider to be the current actual pricenot the marketer's stated price. They may have a lower price threshold below which prices may signal inferior or unacceptable quality, as well as an upper price threshold above which prices are prohibitive and seen as not worth the money. Understanding how consumers arrive at their perceptions of prices is an important marketing priority. Here we consider three key topicsreference prices, price-quality inferences, and price endings. REFERENCE PRICES

Prior research has shown that although consumers may have fairly good knowledge of the range of prices involved, surprisingly few can recall specific prices of products accurately. When examining products, however, consumers often employ reference prices. In considering an observed price, consumers often compare it to an internal reference price (pricing information from memory) or an external frame of reference (such as a posted "regular retail price"). All types of reference prices are possible. Sellers often attempt to manipulate reference prices. For example, a seller can situate its product among expensive products to imply that it belongs in the same class. Department stores will display women's apparel in separate departments differentiated by price; dresses found in the more expensive department are assumed to be of better quality. Reference-price thinking is also encouraged by stating a high manufacturer's suggested price, or by indicating that the product was priced much higher originally, or by pointing to a competitor's high price. Clever marketers try to frame the price to signal the best value possible. For example, a relatively more expensive item can be seen as less expensive by breaking the price down into smaller units. A $500 annual membership may be seen as more expensive than "under $50 a month" even if the totals are the same When consumers evoke one or more of these frames of reference, their perceived price can vary from the stated price. Research on reference prices has found that "unpleasant surprises"when perceived price is lower than the stated pricecan have a greater impact on purchase likelihood than pleasant surprises. PRICE-QUALITY INFERENCES Many consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes and expensive cars. A $100 bottle of perfume might contain $10 worth of scent, but gift givers pay $100 to communicate their high regard for the receiver. Price and quality perceptions of cars interact. Higher-priced cars are perceived to possess high quality. Higher-quality cars are likewise perceived to be higher priced than they actually are. When alternative information about true quality is available, price becomes a less significant indicator of quality. When this information is not available, price acts as a signal of quality. Some brands adopt scarcity as a means to signify quality and justify premium pricing. Some automakers have bucked the massive discounting craze that shook the industry and are producing smaller batches of new models, creating a buzz around them, and using the demand to raise the sticker price. Waiting lists, once reserved for limited-edition cars like Ferraris, are becoming more common for mass-market models, including Volkswagen and Acura SUVs and Toyota and Honda minivans.

PRICE CUES Consumer perceptions of prices are also affected by alternative pricing strategies. Many sellers believe that prices should end in an odd number. Many customers see a stereo amplifier priced at $299 instead of $300 as a price in the $200 range rather than $300 range. Research has shown that consumers tend to process prices in a "left-to-right" manner rather than by rounding. Price encoding in this fashion is important if there is a mental price break at the higher, rounded price. Another explanation for "9" endings is that they convey the notion of a discount or bargain, suggesting that if a company wants a high-price image, it should avoid the odd-ending tactic. One study even showed that demand was actually increased onethird by raising the price of a dress from $34 to $39, but demand was unchanged when the price was increased from $34 to $44. Prices that end with "0" and "5" are also common in the marketplace as they are thought to be easier for consumers to process and retrieve from memory. "Sale" signs next to prices have been shown to spur demand, but only if not overused: Total category sales are highest when some, but not all, items in a category have sale signs; past a certain point, use of additional sale signs will cause total category sales to fall. Setting the Price A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters bids on new contract work. The firm must decide where to position its product on quality and price. Most markets have three to five price points or tiers. Marriott Hotels is good at developing different brands for different price points: Marriott Vacation ClubVacation Villas (highest price), Marriott Marquis (high price), Marriott (high-medium price), Renaissance (medium-high price), Courtyard (medium price), Towne Place Suites (medium-low price), Fairfield Inn (low price). The firm has to consider many factors in setting its pricing policy. We will describe a six-step procedure: Selecting the pricing objective; Determining demand;

Pricing Strategy 1 Estimating Cost 2 Analysing Compititor Costs, prices, and offers. 3 Selecting the pricing method

4 Selecting the final price

Pricing Over Product Life Cycle :

Step 1: Selecting the Pricing Objective The company first decides where it wants to position its market offering. The clearer a firm's objectives, the easier it is to set price. A company can pursue any of five major objectives through pricing: survival, maximum current profit, maximum market share, maximum market skimming, or product-quality leadership. SURVIVAL Companies pursuesurvival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business. Survival is a short-run objective; in the long run, the firm must learn how to add value or face extinction. MAXIMUM CURRENT PROFIT Many companies try to set a price that willmaximize current profits. They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment. This strategy assumes that the firm has knowledge of its demand and cost functions; in reality, these are difficult to estimate. In emphasizing current performance, the company may sacrifice longrun performance by ignoring the effects of other marketing-mix variables, competitors' reactions, and legal restraints on price. MAXIMUM MARKET SHARE Some companies want to maximize their market share. They believe that a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive. Texas Instruments (TI) has

practiced this market-penetration pricing. TI would build a large plant, set its price as low as possible, win a large market share, experience falling costs, and cut its price further as costs fall. The following conditions favor setting a low price: The market is highly price sensitive, and a low price stimulates market growth; Production and distribution costs fall with accumulated production experience; and A low price discourages actual and potential competition. Penetration: Starts at lowest possible price PROS: penetrates market quickly , keeps out competition CONS: creates low reference price , misses full profit potential MAXIMUM MARKET SKIMMING Companies unveiling a new technology favor setting high prices to maximize market skimming. Sony is a frequent practitioner of marketskimming pricing, where prices start high and are slowly lowered over time. When Sony introduced the world's first high-definition television (HDTV) to the Japanese market in 1990, it was priced at $43,000. So that Sony could "skim" the maximum amount of revenue from the various segments of the market, the price dropped steadily through the yearsa 28-inch HDTV cost just over $6,000 in 1993 and a 42-inch HDTV cost about $1,200 in 2004. Market skimming makes sense under the following conditions: A sufficient number of buyers have a high current demand; The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear; The high initial price does not attract more competitors to the market; The high price communicates the image of a superior product. Skimming: Adjusts prices down over time: PROS: skims off maximum profit for each segment & establishes high reference price CONS: attracts competition, difficult to administer PRODUCT -QUALITY LEADERSHIP A company might aim to be theproduct quality leader in the market. Many brands strive to be "affordable luxuries"products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not be out to consumers reach.

ESTIMATING DEMAND CURVES Most companies make some attempt to measure their demand curves using several different methods. Statistical analysis of past prices, quantities sold, and other factors can reveal their

relationships. The data can be longitudinal (over time) or cross-sectional (different locations at the same time). Building the appropriate model and fitting the data with the proper statistical techniques calls for considerable skill. Price experiments can be conducted. Bennett and Wilkinson systematically varied the prices of several products sold in a discount store and observed the results. An alternative approach is to charge different prices in similar territories to see how sales are affected. Still another approach is to use the Internet. An e-business could test the impact of a 5 percent price increase by quoting a higher price to every fortieth visitor to compare the purchase response. However, it must do this carefully and not alienate customers, as happened when Amazon pricetested discounts of 30 percent, 35 percent, and 40 percent for DVD buyers, only to find that those receiving the 30 percent discount were upset. Surveys can explore how many units consumers would buy at different proposed prices, although there is always the chance that they might understate their purchase intentions at higher prices to discourage the company from setting higher prices. In measuring the price-demand relationship, the market researcher must control for various factors that will influence demand. The competitor's response will make a difference. Also, if the company changes other marketing-mix factors besides price, the effect of the price change itself will be hard to isolate. Nagle presents an excellent summary of the various methods for estimating price sensitivity and demand. PRICE ELASTICITY OF DEMAND Marketers need to know how responsive, or elastic, demand would be to a change in price. Consider the two demand curves in Figure . With demand curve (a), a price increase from $10 to $15 leads to a relatively small decline in demand from 105 to 100. With demand curve (b), the same price increase leads to a substantial drop in demand from 150 to 50. If demand hardly changes with a small change in price, we say the demand isinelastic. If demand changes considerably, demand iselastic. The higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction. Demand is likely to be less elastic under the following conditions: There are few or no substitutes or competitors; Buyers do not readily notice the higher price; Buyers are slow to change their buying habits; Buyers think the higher prices are justified. If demand is elastic, sellers will consider lowering the price. A lower price will produce more total revenue. This makes sense as long as the costs of producing and selling more units do not increase disproportionately.

It is a mistake to not consider the price elasticity of customers and their needs in developing marketing programs. In 1997, the Metropolitan Transit Authority in New York introduced a new purchase plan for subway riders that discounted fares after passes were used 47 times in a month. Critics pointed out that the special fare did not benefit those customers whose demand was most elastic, suburban off-peak riders who used the subway the least. Commuters' demand curve is perfectly inelastic; no matter what happens to the fare, these people must get to work and get back home. Price elasticity depends on the magnitude and direction of the contemplated price change. It may be negligible with a small price change and substantial with a large price change. It may differ for a price cut versus a price increase, and there may be a price indifference band within which price changes have little or no effect. A McKinsey pricing study estimated that the price indifference band can range as large as 17 percent for mouthwash, 13 percent for batteries, 9 percent for small appliances, and 2 percent for certificates of deposit. Finally, long-run price elasticity may differ from short-run elasticity. Buyers may continue to buy from a current supplier after a price increase, but they may eventually switch suppliers. Here demand is more elastic in the long run than in the short run, or the reverse may happen: Buyers may drop a supplier after being notified of a price increase but return later. The distinction between short-run and long-run elasticity means that sellers will not know the total effect of a price change until time passes. Step 3: Estimating Costs Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. Yet, when companies price products to cover full costs, the net result is not always profitability. TYPES OF COSTS AND LEVELS OF PRODUCTION A company's costs take two forms, fixed and variable. Fixed costs (also known as overhead) are costs that do not vary with production or sales revenue. A company must pay bills each month for rent, heat, interest, salaries, and so on, regardless of output. Variable costs vary directly with the level of production. For example, each hand calculator produced by Texas Instruments involves the cost of plastic, microprocessor chips, packaging, and the like. These costs tend to be constant per unit produced. They are called variable because their total varies with the number of units produced. Total costs consist of the sum of the fixed and variable costs for any given level of production. Average cost is the cost per unit at that level of production; it is equal to total costs

divided by production. Management wants to charge a price that will at least cover the total production costs at a given level of production. To price intelligently, management needs to know how its costs vary with different levels of production. Take the case in which a company such as TI has built a fixed-size plant to produce 1,000 hand calculators a day. The cost per unit is high if few units are produced per day. As production approaches 1,000 units per day, the average cost falls because the fixed costs are spread over more units. Short-run average cost increases after 1,000 units, because the plant becomes inefficient: Workers have to line up for machines, machines break down more often, and workers get in each others' way . ACCUMULATED PRODUCTION Suppose TI runs a plant that produces 3,000 hand calculators per day. As TI gains experience producing hand calculators, its methods improve. Workers learn shortcuts, materials flow more smoothly, and procurement costs fall. The result, as Figure 14.4 shows, is that average cost falls with accumulated production experience. Thus the average cost of producing the first 100,000 hand calculators is $10 per calculator. When the company has produced the first 200,000 calculators, the average cost has fallen to $9. After its accumulated production experience doubles again to 400,000, the average cost is $8. This decline in the average cost with accumulated production experience is called the experience curve or learning curve. Now suppose three firms compete in this industry, TI, A, and B. TI is the lowest-cost producer at $8, having produced 400,000 units in the past. If all three firms sell the calculator for $10, TI makes $2 profit per unit, A makes $1 per unit, and B breaks even. The smart move for TI would be to lower its price to $9. This will drive B out of the market, and even A may consider leaving. TI will pick up the business that would have gone to B (and possibly A). Furthermore, price-sensitive customers will enter the market at the lower price. As production increases beyond 400,000 units, TI's costs will drop still further and faster and more than restore its profits, even at a price of $9. TI has used this aggressive pricing strategy repeatedly to gain market share and drive others out of the industry. Experience-curve pricing, nevertheless, carries major risks. Aggressive pricing might give the product a cheap image. The strategy also assumes that competitors are weak followers. It leads the company into building more plants to meet demand, while a competitor innovates a lower-cost technology. The market leader is now stuck with the old technology. Most experience-curve pricing has focused on manufacturing costs, but all costs can be improved on, including marketing costs. If three firms are each investing a large sum of money in telemarketing, the firm that has used it the longest might achieve the lowest costs. This firm can charge a little less for its product and still earn the same return, all other costs being equal. ACTIVITY-BASED COST ACCOUNTING

Today's companies try to adapt their offers and terms to different buyers. A manufacturer, for example, will negotiate different terms with different retail chains. One retailer may want daily delivery (to keep inventory lower) while another may accept twice-a-week delivery in order to get a lower price. The manufacturer's costs will differ with each chain, and so will its profits. To estimate the real profitability of dealing with different retailers, the manufacturer needs to use activity-based cost (ABC) accounting instead of standard cost accounting. ABC accounting tries to identify the real costs associated with serving each customer. It allocates indirect costs like clerical costs, office expenses, supplies, and so on, to the activities that use them, rather than in some proportion to direct costs. Both variable and overhead costs are tagged back to each customer. Companies that fail to measure their costs correctly are not measuring their profit correctly and are likely to misallocate their marketing effort. The key to effectively employing ABC is to define and judge "activities" properly. One proposed timebased solution calculates the cost of one minute of overhead and then decides how much of this cost each activity uses. TARGET COSTING Costs change with production scale and experience. They can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing. Market research is used to establish a new product's desired functions and the price at which the product will sell, given its appeal and competitors' prices. Deducting the desired profit margin from this price leaves the target cost that must be achieved. Each cost elementdesign, engineering, manufacturing, salesmust be examined, and different ways to bring down costs must be considered. The objective is to bring the final cost projections into the target cost range. If this is not possible, it may be necessary to stop developing the product because it could not sell for the target price and make the target profit. To hit price and margin targets, marketers of 9Lives brand of cat food employed target costing to bring their price down to "four cans for a dollar" via a reshaped package and redesigned manufacturing processes. Even with lower prices, profits for the brand doubled.

Step 4: Analyzing Competitors' Costs, Prices, and Offers

Within the range of possible prices determined by market demand and company costs, the firm must take competitors' costs, prices, and possible price reactions into account. The firm should first consider the nearest competitor's price. If the firm's offer contains features not offered by the nearest competitor, their worth to the customer should be evaluated and added to the competitor's price. If the competitor's offer contains some features not offered by the firm, their worth to the customer should be evaluated and subtracted from the firm's price. Now the firm can decide whether it can charge more, the same, or less than the competitor. But competitors can also change their prices in reaction to the price set by the firm. Step 5: Selecting a Pricing Method Given the three Csthe customers' demand schedule, the cost function, and competitors' pricesthe company is now ready to select a price. The three major considerations in price setting : Costs set a floor to the price. Competitors' prices and the price of substitutes provide an orienting point. Customers' assessment of unique features establishes the price ceiling. Companies select a pricing method that includes one or more of these three considerations. We will examine six price-setting methods: markup pricing, target-return pricing, perceived-value pricing, value pricing, going-rate pricing, and auction-type pricing. MARKUP PRICING The most elementary pricing method is to add a standard markup to the product's cost. Construction companies submit job bids by estimating the total project cost and adding a standard markup for profit. Lawyers and accountants typically price by adding a standard markup on their time and costs. TARGET-RETURN PRICING In target-return pricing, the firm determines the price that would yield its target rate of return on investment (ROI). Target pricing is used by General Motors, which prices its automobiles to achieve a 15 to 20 percent ROI. This method is also used by public utilities, which need to make a fair return on investment. PERCEIVED-VALUE PRICING An increasing number of companies now base their price on the customer's perceived value. They must deliver the value promised by their value proposition, and the customer must perceive this value. They use the other marketing-mix elements, such as advertising and sales force, to communicate and enhance perceived value in buyers' minds. Perceived value is made up of several elements, such as the buyer's image of the product performance, the channel deliverables, the warranty quality, customer support, and softer attributes such as the supplier's reputation, trustworthiness, and esteem. Furthermore, each potential customer places different weights on these different elements, with the result that some will be price buyers, others will be value buyers, and still others will be loyal buyers. Companies need different strategies for these three groups. For price buyers, companies need to offer stripped-down products and reduced services. For value buyers, companies must keep innovating

new value and aggressively reaffirming their value. For loyal buyers, companies must invest in relationship building and customer intimacy. VALUE PRICING In recent years, several companies have adopted value pricing: They win loyal customers by charging a fairly low price for a high-quality offering. Among the best practitioners of value pricing are IKEA and Southwest Airlines. In the early 1990s, Procter & Gamble created quite a stir when it reduced prices on supermarket staples such as Pampers and Luvs diapers, liquid Tide detergent, and Folger's coffee to value price them. In the past, a brandloyal family had to pay what amounted to a $725 premium for a year's worth of P&G products versus private-label or low-priced brands. To offer value prices, P&G underwent a major overhaul. It redesigned the way it developed, manufactured, distributed, priced, marketed, and sold products to deliver better value at every point in the supply chain. Value pricing is not a matter of simply setting lower prices; it is a matter of re-engineering the company's operations to become a low-cost producer without sacrificing quality, and lowering prices significantly to attract a large number of value-conscious customers. An important type of value pricing is everyday low pricing (EDLP), which takes place at the retail level. A retailer who holds to an EDLP pricing policy charges a constant low price with little or no price promotions and special sales. These constant prices eliminate week-to-week price uncertainty and can be contrasted to the "high-low" pricing of promotion-oriented competitors. In high-low pricing, the retailer charges higher prices on an everyday basis but then runs frequent promotions in which prices are temporarily lowered below the EDLP level. The two different pricing strategies have been shown to affect consumer price judgmentsdeep discounts (EDLP) can lead to lower perceived prices by consumers over time than frequent, shallow discounts (highlow), even if the actual averages are the same. In recent years, high-low pricing has given way to EDLP at such widely different venues as General Motors' Saturn car dealerships and upscale department stores such as Nordstrom; but the king of EDLP is surely Wal-Mart, which practically defined the term. Except for a few sale items every month, Wal-Mart promises everyday low prices on major brands. "It's not a short-term strategy," says one Wal-Mart executive. "You have to be willing to make a commitment to it, and you have to be able to operate with lower ratios of expense than everybody else." Some retailers have even based their entire marketing strategy around what could be called extreme everyday low pricing. Partly fueled by an economic downturn, once unfashionable "dollar stores" are gaining in popularity: The most important reason retailers adopt EDLP is that constant sales and promotions are costly and have eroded consumer confidence in the credibility of everyday shelf prices. Consumers also have less time and patience for such time-honored traditions as watching for supermarket specials and clipping coupons. Yet, there is no denying that promotions create excitement and draw shoppers. For this reason, EDLP is not a guarantee of success. As supermarkets face heightened competition from their counterparts and from alternative channels, many find that the

key to drawing shoppers is using a combination of high-low and everyday low pricing strategies, with increased advertising and promotions. GOING-RATE PRICING In going-rate pricing, the firm bases its price largely on competitors' prices. The firm might charge the same, more, or less than major competitor(s). In oligopolistic industries that sell a commodity such as steel, paper, or fertilizer, firms normally charge the same price. The smaller firms "follow the leader," changing their prices when the market leader's prices change rather than when their own demand or costs change. Some firms may charge a slight premium or slight discount, but they preserve the amount of difference. Thus

minor gasoline retailers usually charge a few cents less per gallon than the major oil companies, without letting the difference increase or decrease. Going-rate pricing is quite popular. Where costs are difficult to measure or competitive response is uncertain, firms feel that the going price is a good solution because it is thought to reflect the industry's collective wisdom. AUCTION-TYPE PRICING Auction-type pricing is growing more popular, especially with the growth of the Internet. There are over 2,000 electronic marketplaces selling everything from pigs to used vehicles to cargo to chemicals. One major purpose of auctions is to dispose of excess inventories or used goods. Companies need to be aware of the three major types of auctions and their separate pricing procedures. English auctions (ascending bids). One seller and many buyers. On sites such as Yahoo! and eBay, the seller puts up an item and bidders raise the offer price until the top price is reached. English auctions are being used today for selling antiques, cattle, real estate, and used equipment and vehicles. After seeing ticket brokers and scalpers reap millions by charging what the market would bear, Ticketmaster Corp. began auctioning the best seats to concerts in late 2003 through its Web site. Dutch auctions (descending bids). One seller and many buyers, or one buyer and many sellers. In the first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts the price. In the other, the buyer announces something that he wants to buy and then potential sellers compete to get the sale by offering the lowest price. Each seller sees what the last bid is and decides whether to go lower. FreeMarkets.com helped Royal Mail Group pic, the United Kingdom's public mail service company, save approximately 2.5 million pounds in part via an auction where 25 airlines bid for its international freight business. Sealed-bid auctions. Would-be suppliers can submit only one bid and cannot know the other

bids. The U.S. government often uses this method to procure supplies. A supplier will not bid below its cost but cannot bid too high for fear of losing the job. The net effect of these two pulls can be described in terms of the bid's expected profit. Using expected profit for setting price makes sense for the seller that makes many bids. The seller who bids only occasionally or who needs a particular contract badly will not find it advantageous to use expected profit. This criterion does not distinguish between a $1,000 profit with a 0.10 probability and a $125 profit with a 0.80 probability. Yet the firm that wants to keep production going would prefer the second contract to the first. Step 6: Selecting the Final Price Pricing methods narrow the range from which the company must select its final price. In selecting that price, the company must consider additional factors, including the impact of other marketing activities, company pricing policies, gain-and-risk-sharing pricing, and the impact of price on other parties. IMPACT OF OTHER MARKETING ACTIVITIES The final price must take into account the brand's quality and advertising relative to the competition. In a classic study, Farris and Reibstein examined the relationships among relative price, relative quality, and relative advertising for 227 consumer businesses, and found the following:

Brands with average relative quality but high relative advertising budgets were able to charge premium prices. Consumers apparently were willing to pay higher prices for known products than for unknown products. Brands with high relative quality and high relative advertising obtained the highest prices. Conversely, brands with low quality and low advertising charged the lowest prices. The positive relationship between high prices and high advertising held most strongly in the later stages of the product life cycle for market leaders. These findings suggest that price is not as important as quality and other benefits in the market offering. One study asked consumers to rate the importance of price and other attributes in using online retailing. Only 19 percent cared about price; far more cared about customer support (65 percent), on-time delivery (58 percent), and product shipping and handling (49 percent) COMPANY PRICING POLICIES The price must be consistent with company pricing policies. At the same time, companies are not averse to establishing pricing penalties under certain circumstances. Airlines charge $150 to those who change their reservations on discount tickets. Banks charge fees for too many withdrawals in a month or for early withdrawal of a certificate of deposit. Car

rental companies charge $50 to $100 penalties for no-shows for specialty vehicles. Although these policies are often justifiable, they must be used judiciously so as not to unnecessarily alienate customers. Many companies set up a pricing department to develop policies and establish or approve decisions. The aim is to ensure that salespeople quote prices that are reasonable to customers and profitable to the company. Dell Computer has developed innovative pricing techniques. GAIN-AND-RISK-SHARING PRICING Buyers may resist accepting a seller's proposal because of a high perceived level of risk. The seller has the option of offering to absorb part or all of the risk if it does not deliver the full promised value. Consider the following. STEALTH PRICE INCREASES With consumers stubbornly resisting higher prices, companies are trying to figure out how to increase revenue without really raising prices. Increasingly, the solution has been through the addition of fees for what had once been free features. Although some consumers abhor "nickeland-dime" pricing strategies, small additional charges can add up to a substantial source of revenue. The numbers can be staggering. Fees for consumers who pay bills online, bounce checks, or use automated teller machines bring banks an estimated $30 billion annually. Retailers Target and Best Buy charge a 15 percent "restocking fee" for returning electronic products. Credit card late paymentsup by 11 percent in 2003exceed $10 billion in total. The telecommunications industry in general has been aggressive at adding fees for setup, change-of-service, service termination, directory assistance, regulatory assessment, number portability, and cable hookup and equipment, costing consumers billions of dollars. By charging its long-distance customers a new 99-cent monthly "regulatory assessment fee," AT&T could bring in as much as $475 million. This explosion of fees has a number of implications. Given that list prices stay fixed, they may result in inflation being understated . They also make it harder for consumers to compare

competitive offerings. Although various citizen groups have been formed to pressure companies to roll back some of these fees, they don't always get a sympathetic ear from state and local governments who have been guilty of their own array of fees, fines, and penalties to raise necessary revenue. Companies justify the extra fees as the only fair and viable way to cover expenses without losing customers. Many argue that it makes sense to charge a premium for added services that cost more to provide, rather than charge all customers the same amount regardless of whether or not they use the extra service. Breaking out charges and fees according to the services involved is seen as a way to keep the basic costs low. Companies also use fees as a means to weed out unprofitable customers or change their behavior. Some airlines now charge passengers $50 for paper tickets and $25 for every bag over 50 pounds. Ultimately, the viability of extra fees will be decided in the marketplace and by the willingness of consumers to vote with their wallets and pay the fees or vote with their feet and move on. IMPACT OF PRICE ON OTHER PARTIES Management must also consider the reactions of other parties to the contemplated price. How will distributors and dealers feel about it? If they do not make enough profit, they may not choose to bring the product to market. Will the sales force be willing to sell at that price? How will competitors react? Will suppliers raise their prices when they see the company's price? Will the government intervene and prevent this price from being charged? While Wal-Mart's relentless drive to squeeze out costs and lower prices has benefited consumers, the downward price pressure is taking a big toll on suppliers such as Vlasic. ADAPTING THE PRICE Companies usually do not set a single price, but rather a pricing structure that reflects variations in geographical demand and costs, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts, and other factors. As a result of discounts, allowances, and promotional support, a company rarely realizes the same profit from each unit of a product that it sells. Here we will examine several price-adaptation strategies: geographical pricing, price discounts and allowances, promotional pricing, and differentiated pricing. Geographical Pricing (Cash, Countertrade, Barter) In geographical pricing the company decides how to price its products to different customers in different locations and countries. Price Discounts and Allowances Most companies will adjust their list price and give discounts and allowances for early payment, volume purchases, and off-season buying. Companies must do this carefully or find that their profits are much less than planned.

Discount pricing has become the modus operandi of a surprising number of companies offering both products and services. Some product categories tend to self-destruct by always being on sale. Salespeople, in particular, are quick to give discounts in order to close a sale. But word can get around fast that the company's list price is "soft," and discounting becomes the norm. The discounts undermine the value perceptions of the offerings. Some companies in an overcapacity situation are tempted to give discounts or even begin to supply a retailer with a store brand version of their product at a deep discount. Because the store brand is priced lower, however, it may start making inroads on the manufacturer's brand. Manufacturers should stop to consider the implications of supplying products at a discount t retailers because they may end up losing long-run profits in an effort to meet short-run volume goals. When automakers get rebate-happy, the market just sits back and waits for a deal. When Ford was able to buck that trend, it achieved positive results. Promotional Pricing Companies can use several pricing techniques to stimulate early purchase: Loss-leader pricing. Supermarkets and department stores often drop the price on wellknown brands to stimulate additional store traffic. This pays if the revenue on the additional sales compensates for the lower margins on the loss-leader items. Manufacturers of loss-leader brands typically object because this practice can dilute the brand image and bring complaints from retailers who charge the list price. Manufacturers have tried to restrain intermediaries from loss-leader pricing through lobbying for retailprice-maintenance laws, but these laws have been revoked. Special-event pricing. Sellers will establish special prices in certain seasons to draw in more customers. Every August, there are back-to-school sales. Cash rebates. Auto companies and other consumer-goods companies offer cash rebates to encourage purchase of the manufacturers' products within a specified time period. Rebates can help clear inventories without cutting the stated list price.

Low-interest financing. Instead of cutting its price, the company can offer customers low-interest financing. Automakers have even announced no-interest financing to attract customers. Longer payment terms. Sellers, especially mortgage banks and auto companies, stretch loans over longer periods and thus lower the monthly payments. Consumers often worry less about the cost (i.e., the interest rate) of a loan and more about whether they can afford the monthly payment. Warranties and service contracts. Companies can promote sales by adding a free or lowcost warranty or service contract.

Psychological discounting. This strategy involves setting an artificially high price and then offering the product at substantial savings; for example, "Was $359, now $299." Illegitimate discount tactics are fought by the Federal Trade Commission and Better Business Bureaus. Discounts from normal prices are a legitimate form of promotional pricing. Promotional-pricing strategies are often a zero-sum game. If they work, competitors copy them and they lose their effectiveness. If they do not work, they waste money that could have been put into other marketing tools, such as building up product quality and service or strengthening product image through advertising. Differentiated Pricing Companies often adjust their basic price to accommodate differences in customers, products, locations, and so on. Lands' End creates men's shirts in many different styles, weights, and levels of quality. A men's white button-down shirt may cost as little as $18.50 or as much as $48.00. Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs. In first-degree price discrimination, the seller charges a separate price to each customer depending on the intensity of his or her demand. In second-degree price discrimination, the seller charges less to buyers who buy a larger volume. In third-degree price discrimination, the seller charges different amounts to different classes of buyers, as in the following cases: Customer-segment pricing. Different customer groups are charged different prices for the same product or service. For example, museums often charge a lower admission fee to students and senior citizens. Product-form pricing. Different versions of the product are priced differently but not proportionately to their respective costs. Evian prices a 48-ounce bottle of its mineral water at $2.00. It takes the same water and packages 1.7 ounces in a moisturizer spray for $6.00. Through product-form pricing, Evian manages to charge $3.00 an ounce in one form and about $.04 an ounce in another. Image pricing. Some companies price the same product at two different levels based on image differences. A perfume manufacturer can put the perfume in one bottle, give it a name and image, and price it at $10 an ounce. It can put the same perfume in another bottle with a different name and image and price it at $30 an ounce. Channel pricing. Coca-Cola carries a different price depending on whether it is purchased in a fine restaurant, a fast-food restaurant, or a vending machine. Location pricing. The same product is priced differently at different locations even though the cost of offering at each location is the same. A theater varies its seat prices according to audience preferences for different locations.

Time pricing. Prices are varied by season, day, or hour. Public utilities vary energy rates to commercial users by time of day and weekend versus weekday. Restaurants charge less to "early bird" customers. Hotels charge less on weekends. The airline and hospitality industries use yield management systems and yield pricing, by which they offer discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires. Airlines charge different fares to passengers on the same flight, depending on the seating class; the time of day (morning or night coach); the day of the week (workday or weekend); the season; the person's company, past business, or status (youth, military, senior citizen); and so on. That's why on a flight from New York City to Miami you might have paid S200 and be sitting across from someone who has paid $1,290. Take Continental Airlines: It launches 2,000 flights a day and each flight has between 10 and 20 prices. Continental starts booking flights 330 days in advance, and every flying day is different from every other flying day. At any given moment the market has more than 7 million prices. And in a system that tracks the difference in prices and the price of competitors' offerings, airlines collectively change 75,000 prices a day! It's a system designed to punish procrastinators by charging them the highest possible prices. The phenomenon of offering different pricing schedules to different consumers and dynamically adjusting prices is exploding. Most consumers are probably not even aware of the degree to which they are the targets of discriminatory pricing. For instance, catalog retailers like Victoria's Secret routinely send out catalogs that sell identical goods except at different prices. Consumers who live in a more free-spending zip code may see only the higher prices. Office product superstore Staples also sends out office supply catalogs with different prices. Some forms of price discrimination (in which sellers offer different price terms to different people within the same trade group) are illegal. However, price discrimination is legal if the seller can prove that its costs are different when selling different volumes or different qualities of the same product to different retailers. Predatory pricingselling below cost with the intention of destroying competitionis unlawful. Even if legal, some differentiated pricing may meet with a hostile reaction. Coca-Cola considered raising its vending machine soda prices on hot days using wireless technology, and lowering the price on cold days. Customers so disliked the idea that Coke abandoned it. For price discrimination to work, certain conditions must exist. First, the market must be segmentable and the segments must show different intensities of demand. Second, members in the lower-price segment must not be able to resell the product to the higher-price segment. Third, competitors must not be able to undersell the firm in the higher-price segment. Fourth, the cost of segmenting and policing the market must not exceed the extra revenue derived from price discrimination. Fifth, the practice must not breed customer resentment and ill will. Sixth, the particular form of price discrimination must not be illegal . Initiating and Responding to Price Changes

Companies often face situations where they may need to cut or raise prices. INITIATING PRICE CUTS Several circumstances might lead a firm to cut prices. One is excess plant capacity: The firm needs additional business and cannot generate it through increased sales effort, product improvement, or other measures. It may resort to aggressive pricing, but in initiating a price cut, the company may trigger a price war. Companies sometimes initiate price cuts in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors or it initiates price cuts in the hope of gaining market share and lower costs. A price-cutting strategy involves possible traps: Low-quality trap. Consumers will assume that the quality is low. Fragile-market-share trap. A low price buys market share but not market loyalty. The same customers will shift to any lower-priced firm that comes along. Shallow-pockets trap. The higher-priced competitors may cut their prices and may have longer staying power because of deeper cash reserves. Initiating Price Increases : A successful price increase can raise profits considerably. For example, if the company's profit margin is 3 percent of sales, a 1 percent price increase will increase profits by 33 percent if sales volume is unaffected. This situation is illustrated in Table 14.5. The assumption is that a company charged S10 and sold 100 units and had costs of $970, leaving a profit of $30, or 3 percent on sales. By raising its price by 10 cents (1 percent price increase), it boosted its profits by 33 percent, assuming the same sales volume. A major circumstance provoking price increases is cost inflation. Rising costs unmatched by productivity gains squeeze profit margins and lead companies to regular rounds of price increases. Companies often raise their prices by more than the cost increase, in anticipation of further inflation or government price controls, in a practice called anticipatory pricing. Another factor leading to price increases is over demand. When a company cannot supply all of its customers, it can raise its prices, ration supplies to customers, or both. The price can be increased in the following ways. Each has a different impact on buyers. Delayed quotation pricing: The company does not set a final price until the product is finished or delivered. This pricing is prevalent in industries with long production lead times, such as industrial construction and heavy equipment. Escalator clauses. The company requires the customer to pay today's price and all or part of any inflation increase that takes place before delivery. An escalator clause bases price increases on some specified price index. Escalator clauses are found in contracts for major industrial projects, like aircraft construction and bridge building. Unbundling. The company maintains its price but removes or prices separately one or

more elements that were part of the former offer, such as free delivery or installation. Car companies sometimes add antilock brakes and passenger-side airbags as supplementary extras to their vehicles. Reduction of discounts. The company instructs its sales force not to offer its normal cash and quantity discounts. A company needs to decide whether to raise its price sharply on a one-time basis or to raise it by small amounts several times. Generally, consumers prefer small price increases on a regular basis to sudden, sharp increases. In passing price increases on to customers, the company must avoid looking like a price gouger. Companies also need to think of who will bear the brunt of increased prices. Customer memories are long, and they can turn against companies they perceive as price gougers. A vivid illustration of such reactions was the experience of Marlboro, Philip Morris's leading cigarette brand. Factors Leading to Less Price Sensitivity: The product is more distinctive. Buyers are less aware of substitutes. Buyers cannot easily compare the quality of substitutes. The expenditure is a smaller part of the buyer's total income. The expenditure is small compared to the total cost of the end product. Part of the cost is borne by another party. The product is used in conjunction with assets previously bought. The product is assumed to have more quality, prestige, or exclusiveness. Buyers cannot store the product.

MARKETING STRATEGIES TO AVOID RAISING PRICES Given strong consumer resistance to price hikes, marketers go to great lengths to find alternative approaches that will allow them to avoid increasing prices when they otherwise would have done so. Here are a few popular ones. Shrinking the amount of product instead of raising the price. (Hershey Foods maintained its candy bar price but trimmed its size. Nestle maintained its size but raised the price.) Substituting less expensive materials or ingredients. (Many candy bar companies substituted synthetic chocolate for real chocolate to fight price increases in cocoa.) Reducing or removing product features. (Sears engineered down a number of its

appliances so they could be priced competitively with those sold in discount stores.) Removing or reducing product services, such as installation or free delivery. Using less expensive packaging material or larger package sizes. Reducing the number of sizes and models offered. Creating new economy brands. (Jewel food stores introduced 170 generic items selling at 10 percent to 30 percent less than national brands.) Several techniques help consumers avoid sticker shock and a hostile reaction when prices rise: One is that a sense of fairness must surround any price increase, and customers must be given advance notice so they can do forward buying or shop around. Sharp price increases need to be explained in understandable terms. Making low-visibility price moves first is also a good technique: Eliminating discounts, increasing minimum order sizes, and curtailing production of low-margin products are some examples; and contracts or bids for long-term projects should contain escalator clauses based on such factors as increases in recognized national price indexes. "Marketing Memo: Marketing Strategies to Avoid Raising Prices" describes other means by which companies can respond to higher costs or over demand without raising prices. REACTIONS TO PRICE CHANGES Any price change can provoke a response from customers, competitors, distributors, suppliers, and even government. CUSTOMER REACTIONS Customers often question the motivation behind price changes. A price cut can be interpreted in different ways: The item is about to be replaced by a new model; the item is faulty and is not selling well; the firm is in financial trouble; the price will come down even further; the quality has been reduced. A price increase, which would normally deter sales, may carry some positive meanings to customers: The item is "hot" and represents an unusually good value. COMPETITOR REACTIONS Competitors are most likely to react when the number of firms are few, the product is homogeneous, and buyers are highly informed. Competitor reactions can be a special problem when they have a strong value proposition. How can a firm anticipate a competitor's reactions? One way is to assume that the competitor reacts in a set way to price changes. The other is to assume that the competitor treats each price change as a fresh challenge and reacts according to self-interest at the time. Now the company will need to research the competitor's current financial situation, recent sales, customer loyalty, and corporate objectives. If the competitor has a market share objective, it is likely to match the price change. If it has a profit-maximization objective, it may react by increasing the advertising budget or improving product quality. The problem is complicated because the competitor can put

different interpretations on a price cut: that the company is trying to steal the market, that the company is doing poorly and trying to boost its sales, or that the company wants the whole industry to reduce prices to stimulate total demand. Responding to Competitors' Price Changes How should a firm respond to a price cut initiated by a competitor? In markets characterized by high product homogeneity, the firm should search for ways to enhance its augmented product. If it cannot find any, it will have to meet the price reduction. If the competitor raises its price in a homogeneous product market, other firms might not match it unless the increase will benefit the industry as a whole. Then the leader will have to roll back the increase. In nonhomogeneous product markets, a firm has more latitude. It needs to consider the following issues: Why did the competitor change the price? To steal the market, to utilize excess capacity, to meet changing cost conditions, or to lead an industry-wide price change? Does the competitor plan to make the price change temporary or permanent? What will happen to the company's market share and profits if it does not respond? Are other companies going to respond? What are the competitors' and other firms' responses likely to be to each possible reaction? Market leaders frequently face aggressive price-cutting by smaller firms trying to build market share. Using price, Fuji attacks Kodak, Schick attacks Gillette, and AMD attacks Intel. Brand leaders also face lower-priced private-store brands. The brand leader can respond in several ways: Maintain price. The leader might maintain its price and profit margin, believing that It would lose too much profit if it reduced its price, It would not lose much market share, and It could regain market share when necessary. However, the argument against price maintenance is that the attacker gets more confident, the leader's sales force gets demoralized, and the leader loses more share than expected. The leader panics, lowers price to regain share, and finds that regaining its market position is more difficult than expected. Maintain price and add value. The leader could improve its product, services, and communications. The firm may find it cheaper to maintain price and spend money to improve perceived quality than to cut price and operate at a lower margin. Reduce price. The leader might drop its price to match the competitor's price. It might do so becauseIts costs fall with volume,

It would lose market share because the market is price sensitive, and It would be hard to rebuild market share once it is lost. This action will cut profits in the short run. Increase price and improve quality. The leader might raise its price and introduce new brands to bracket the attacking brand. Launch a low-price fighter line. It might add lower-priced items to the line or create a separate, lower-priced brand.

Inflation
Factors of Inflation Inflation is defined as the rate (%) at which the general price level of goods and services is rising, causing purchasing power to fall. This is different from a rise and fall in the price of a particular good or service. Individual prices rise and fall all the time in a market economy, reflecting consumer choices or preferences and changing costs. So if the cost of one item, say a particular model car, increases because demand for it is high, this is not considered inflation. Inflation occurs when most prices are rising by some degree across the whole economy. This is caused by four possible factors, each of which is related to basic economic principles of changes in supply and demand: 1. 2. 3. 4. Increase in the money supply. Decrease in the demand for money. Decrease in the aggregate supply of goods and services. Increase in the aggregate demand for goods and services.

Demand pull and Cost pull Inflation

Demand-Pull Inflation Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the macroeconomy: households, businesses, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, they compete to purchase limited amounts of goods and services. Buyers in essence bid prices up , again, causing inflation. This excessive demand, also referred to as too much money chasing too few goods , usually occurs in an expanding economy.

Cost-Pull Inflation Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation. Cost-push inflation basically means that prices have been pushed up by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation).

INFLATION IN DIFFERENT INDUSTRIES

Inflation and Automobile Industry

The automobile industry achieved 15-18 per cent of growth during the last five years, but the growth rate has dipped to single digit since the last year. The big reason behind cooling of sales is the Cost-Push Inflation of more than 12%. The industry depends largely on metal and oil prices, both of which have increased sharply from the last year . With crude touching 140$/barrel mark inflation tossed above 12% and daunted the growth rates of the industry. This sector is facing the damage both from demand and cost side, the input cost has gone up and the demand has fallen because of soaring fuel prices.

Inflation and FMCG Industry

The last few years were a golden period for the FMCG industry. The economy was growing at a faster rate, imput prices were low, and inflation was low. This year the food inflation is very high around 12%, and the raw material cost has increased upto 15 to 20 percent compared to last year. The operating margins which are typically about 20 percent in the last few years have seen a drop to almost 16 percent. High food inflation has an adverse affect on the FMCG industry. People will spend less money on discretionary items which will hit he FMCG industry. They say the fate of HUL is dependent on the monsoons. A good monsoon will not give any inflation worries and also increases the consumption power creating demand for hair oil, biscuits, soaps, shampoos, laundry, and toilet soaps. High input costs

High input costs are another worry for existing woes. The cost of milk powder and sugar has gone up by 35 percent and 19 percent YOY and Nestle India is really struggling on its margins. The wheat used in ITCs biscuits is up 10-15 percent thi year, the Copra used by Marico cost 10 percent more, the coconut and palm kernel oil used by Godrej Consumer has risen by 15-20 percent, and the menthol used by Emami has gone up by 20 percent. The heavy rains in Kerala might have caused the cost of Copra to increase and it doesnt seem to be temporal. So, maintaining the margins this year is a tough task. Some of the FMCG players say that they will not increase the price of Low Unit Packs (LUPs) but may increase the prices of higher priced stock-keeping units (SKUs). The packaging cost which is very important in the FMCG sector has shot up by around 10 percent this year. They are expected to stay that way caused by the strong crude prices at $80 per barrel. Rural Market is the way Urban Markets are showing lower growth as compared to the rural hinterland. It is estimated that the big daddy Hindustan Unilever (HUL) gets almost 50 percent of their revenue from rural India , and Dabur gets almost 55 percent, and Marico gets 25 percent of their revenue from rural India. The Urban Markets are saturated with more and more competitors and less margins for the companies. For example, Toothpaste has a rural penetration of 40 percent as against 72 percent in the Urban areas. The underpenetrated categories such as toothpaste can be taken advantage of by companies like Colgate and HUL. Colgate started an initiative to educate people about the advantages of toothpaste and influence conversions from toothpowder and others. The volume growth in such categories will be fast.Shampoos showed a growth of 8.9 percent (Jan to May10) compared with an urban volume growth of 2.5 percent. The government schemes which have been launched over the past few years had helped in increasing the disposable income, in turn the purchasing power of rural India. Schemes such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) which aim to put around Rs. 40,000 crores in the hands of the rural poor, leaves a large population with higher disposable incomes. This leads to some basic changes in the consumption patterns of greater consumption of personal care and above basic food requirements.

Inflation in Electronics Industry

The buzz around cell phones has suddenly gone missing. Inflation is taking a toll on sales of mobile phones, and this has sent both manufacturers and retailers into a tizzy. Not only have the launch of new products been postponed, retailers are not even in the mood to stock new products. Retailers say that the demand for cell phones has dropped dramatically in the past one month.

Retailers point out that though a substantial part of the total consumer spending consists of electronic products, especially cell phones, the rise in prices of other products has negatively affected this category.

Future Group CEO Kishore Biyani said, "The cell phone segment has seen a dip in demand. According to our estimate, the dip is around 20-25 per cent." That perhaps explains why mobile companies have hit the panic button. For handset makers, the total sale of both high-end and low-end phones have been affected. "However, the low-end cell phones are not affected as badly as their high-end counterparts because people who have to buy a new cell phone are lowering their budget and going for basic models," said a senior executive with a mobile company. Many retailers have cut down on stocking high-end cell phones. However, some of them desist from attributing the plummeting sales to inflation. "We have a growth of about 15 per cent each month and it is down to 3 per cent for March. But I think this is more due to the share market than anything else," says The MobileStore CEO and director Rajiv Agrawal. On the other hand, a majority of handset makers say that the rising inflation fears have so far failed to dent their product pricing for the India market. Meanwhile, industry experts feel that inflation may actually lead to new models to come in at a lower price point. According to a pan-India distributor for mobile phones, it is actually good news for users who are waiting for an iPhone or a Nokia Tube, as the current market scenario may actually lead to these models coming to India at lower price points due to a drop in the purchasing power of consumers. Says Motorola India marketing head Lloyd Mathias, "We see demand surging for the mid-tier models priced Rs 7,000-10,000." While in the short-term, handset makers are saying that they are yet to see any drastic impact, they feel that there could be tightening of purses from the middle income group if prices in the country continue to rise.

MARKETING STRATEGY DURING INFLATION :Automobile Industry :The government and the industry have followed different policies to combat inflation. Some of these policies have adversely affected the Industry where some have benefited the industry. 1. Monetary Policy Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping inflation at a low level, normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum. High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. Effect: The interest rates on auto loans increased to 15-16% from 12-13% and banks are hesitating to give the loans because of fear of delinquency and customers also avoided to take loan at increased interest rate. The auto sector of India saw good growth rates because of good credit facilities available at optimum interest rates but as the interest rate shot up there is decline in the demand. Industry Specific Policy was to support their own financial institutions and increase in the cash discounts to attract customers. These financial institutions offered loans at less interest rates so that customers do not shy away. 2. Ban on Commodities Export Recently another major step taken by the government was ban commodities export so as to keep their prices down. Steel which is a major raw material used by the auto sector have gone up significantly ,keeping this in eye the industry deferred their contracts and hedged the commodities so as to keep their cost low. This is done by taking forward and future contracts on that commodity index.

3. Alternative Fuel Cars

The auto industry recently came out with cars that can run on alternative fuels like CNG and LPG because of the rising fuel prices. The customers of India are very much price sensitive any increase in the fuel prices directly or indirectly hit their pockets and the auto industry is very much

dependent on fuel prices. The industry came out with the alternative fuels because they are cheap and gives better mileage than the traditional fuels (petrol and diesel) so that running cost for price sensitive customers can be reduced.

4. More Variants

Every big player of the industry came out with more number of variants to attract customers by providing base models at low prices. The market has seen the increased demands for small cars as they are more fuel efficient and requires less initial cost, players like General Motors, Skoda who were primarily in operating in the luxurious segment also launched cars for economic segment also.

5. Better Technology

Auto manufacturers are today using the improved engines in the car to increase the efficiency and make them more economical. New improved engines are providing better mileage and good driving experience.

6. Deferred

Expansion Plans

As the cost of capital has gone up the industry has deferred it s plan for expansion in capacities for the time when it will come down. They are looking toward improving the efficiency of their installed capacities by more standardization of work.

7. Increased

Exports

As the demand is going down the players have decided to export the cars and sell less domestically. Maruti Suzuki coming with A-star has decided to export the significant part of production to other countries so that they can increase their margins.

8. Increase in Prices

Although when demand is decreasing no player would like to increase the prices but due to sharp increase in input prices they are forced to pass it on to customers. Auto manufacturers have increased prices on some models.

9. Reducing Wage Bill

It is not an easy step to reduce the wage bill but if inflationary pressure continues the companies have to resort to reducing wage bill by laying off the employees and decreasing the salaries. Currently many companies have decided to delay their recruitment plans to control their wage bill.

10. Increase in Marketing

The companies like Maruti and Hyundai are coming out with new models and are hoping that sales will pick up in the coming festive months. They are focusing on better marketing to increase the sales despite of current inflationary pressure.

FMCG Indutries :1. Increase in price: Due to increase in raw material prices, many companies were forced to increase their prices and pass on the cost to the consumers. a) HUL: Hiked the price of its detergent bar Surf Excel (120 g) earlier known as Rin Supreme from Rs 13 to 15. They have also increased some of their toilet soap brands b) Tea Companies: Tata Tea and Duncans Tea have also hiked prices for select brands in their stables. Even regional players like Royal Girnar and Soceity Tea have increased prices of their brands to compete with national players c) Britannia: Hiked the price of its popular brand Britannia NutriChoice Digestive from Rs 14 to 15. Some companies have been able to maintain the prices. Parle Agro has not changed the price of Frooti in spite of upward pressure on prices. It may be easy to increase the prices of premium products but in case of popular products, the preferred choice is between reducing grammage and maintaining the same price points or introducing another price point to suit consumer pockets. 2. Introduction of lower SKUs: To prevent down trading, the companies have introduced packs with lower SKUs so that per unit purchase does not pinch the consumer s wallet. With that companies are sharpening their focus on the existing smaller packs and increase their availability. a) Henkel: Introduced a new 400 gm pack of Henko washing powder at Rs 40 and withdrawn the 500 gm pack that used to sell for Rs 46. As quoted by Henkel, A family of four requires only 400-425 gm of washing powder in a month. We withdrew the 500 gm packs as they were making consumers spend more and consume more . They have reintroduced Pril liquid for Rs 50 (425 gm bottle), down from Rs 55 (500 gm). They recently brought out its popular Fa deodorant in 75 ml and Margo soap in 40 grams. b) Procter & Gamble: P&G has reduced the pack size of its flagship detergent brand Tide from 1 kilo to 850 gm while maintaining the price point at Rs 62. They have also also reduced the size of its 500 gm to 480 gm at the same price. c) Gujarat Cooperative Milk Marketing Federation: Amul introduced 25 gm packs of butter few months back, which is now registering higher sales than the traditional 100 gm and 500 gm packs. Same has happened to their milk powder. They used to sell more of traditional packs of 200 gm, 500 gm and 1 kg, with the 500 gm packs selling the most. In the recent scenario, 25 gm and 50 gm packs are selling in higher numbers. As an outcome, companies are registering faster offtake in the mid-sized packs.

3. Cost Cutting Strategies: While companies resorted to price hike, many companies are exploring ways to cut down cost. a) Companies are busy in strengthening their distribution and logistics, by bringing in more efficiency and innovation in the supply chain. Companies are closely monitoring their stock levels and loading patterns b) Soap companies have shifted to cheaper options of raw materials to source their products at a competitive price. c) Some companies have cut down their spends on advertisement 4) Mergers and Acquisitions: The turmoil in global markets seems to have a favorable impact on Indian FMCG majors acquisition. While many big FMCG companies find this situation an ideal opportunity to go for acquisitions, there are others who are cautious to invest in M&A. CK Ranganathan, chairman & managing director, CavinKare Pvt Ltd said that the global melt down will have a favorable impact for Indian companies acquisition plans. According to him, it s an opportunity for them to acquire companies as they get good value for money. The current financial crisis may offer more opportunities because of better valuation. 5) Restructuring to leverage synergies: With the power of one strategy, PepsiCo is aligning its beverages and snacks businesses under a common leadership. This will help them to maximize synergies of the two businesses across key functions such as procurement, agriculture and production, which will lead to production efficiencies. This will help them to minimize the price hike.

Electronics Industry :Cost Cutting Strategies: While companies resorted to price hike, many companies are exploring ways to cut down cost.

More Variants
Every big player of the industry came out with more number of variants to attract customers by providing base models at low prices

Better Technology
Mobile manufacturers are today using the improved technology in mobiles to increase the efficiency and make them more economical. Corperate Tie- up :- They start differentiating the market to get more corporate clients.

Special Schemes :- To attrach more customer they start giving the special discount schemes.

DATA COLLECTION

Primary Data:

Gathered information by asking different groups of people about their views on Inflation and the marketing & pricing strategy of different industries during rise in the prices.

Secondary Data:

Secondary data is one which already exists and is collected from the published sources. The sources from which secondary data was collected are :

1. Internet 2. Newspapers and Magazines 3. Marketing Strategy Books

CONCLUSION : 1. Despite the increased role of nonprice factors in modern marketing, price remains a critical element of the marketing mix. Price is the only element that produces revenue; the others produce costs. 2. In setting pricing policy, a company follows a six-step procedure. It selects its pricing objective. It estimates the demand curve, the probable quantities it will sell at each possible price. It estimates how its costs vary at different levels of output, at different levels of accumulated production experience, and for differentiated marketing offers. It examines competitors' costs, prices, and offers. It selects a pricing method. It selects the final price. 3. Companies do not usually set a single price, but rather a pricing structure that reflects variations in geographical demand and costs, market-segment requirements, purchase timing, order levels, and other factors. Several price-adaptation strategies are available: (1) geographical pricing; (2) price discounts and allowances; (3) promotional pricing; and (4) discriminatory pricing. 4. After developing pricing strategies, firms often face situations in which they need to change prices. A price decrease might be brought about by excess plant capacity, declining market share, a desire to dominate the market through lower costs, or economic recession. A price increase might be brought about by cost inflation or overdemand. Companies must carefully manage customer perceptions in raising prices. 5. Companies must anticipate competitor price changes and prepare contingent response. A number of responses are possible in terms of maintaining or changing price or quality. 6. The firm facing a competitor's price change must try to understand the competitor's intent and the likely duration of the change. Strategy often depends on whether a firm is producing homogeneous or nonhomogeneous products. Market leaders attacked by lower-priced competitors can choose to maintain price, raise the perceived quality of their product, reduce price, increase price and improve quality, or launch a low-priced fighter line.

Refrences Marketing Management by kotler &Keller Marketing Management Planning Implimentation and control www.google.com www.wikipedia.com