Analysis of Price Discrimination - Research Paper Example

Analysis of Price Discrimination The dynamics of change is so uncertain that it sets up entirely new consumption patterns and hence new paradigms in the context of marketing. Marketing changes are always linked to the profile of the consumer and methods of consumption. Winners will invariably be those companies that are offering more value for the customer’s money. The satisfaction level for a service or a product is crucial information for the producers of the product or service. And it forms the base for some of the most important decisions taken by the manufacturer/ service provider. A product can be priced in many ways depending upon the cost of manufacturing, the cost of reaching out to customers, the income levels of market segment etc. Product pricing also depends on the availability of competitors in the market and certain rules and regulations of the land. Price discrimination is generally resorted for deeper penetration into the marketplace, to attract more customers from competitors or to attract certain segments. Price discrimination also might be used as a predatory pricing tactic, for setting prices below cost to certain customers, to harm competition at the supplier’s level. At times this leads to legal battles. Price discrimination, also known as differential pricing may be defined as the practice by a company of charging different prices to the same buyer or to different buyers for the same commodity or service without corresponding difference in cost. This way we can define three classes of discrimination; First degree Discrimination: Company charges the same buyer a different price for each unit bought (example: different prices if the customer asks for 10 pieces or a dozen pieces). Second degree discrimination: The company charges different prices for blocks of units instead of for individual units e.g. different rates charged by an electricity undertaking for light and fan, for domestic power and for industrial use. Third degree discrimination: As long as the demand elasticities among different customers are unequal, it will be profitable for the company to group the customers into separate classes according to elasticity, and charge each class a separate price. Some example of price discrimination: Airlines offering huge discount on the destinations towards not very popular routes. Cinema and theater halls offering discounted tickets to students. Car rental firms cutting prices at weekends. Hotel offering discounted weekend breaks. Air-conditioner and refrigerator companies offering discriminatory pricing during winters. Travel agencies offering discounts for families during the school holidays. Computer manufacturers offering bargain prices when they go for newer versions and intend to offload the existing version quickly. Or sometimes when newer versions arrive in market simultaneously from more than two manufacturers, then also to attract the customer we see price wars. Newspapers companies offering invitation prices for long duration or during weekends. Broadly speaking, a company resorts to price discrimination; To increase revenue: This generally happens during the final quarter/ months of the financial year, when the company feels that it could garner more profits to make the balance sheet little more impressive. To offload excess capacity: Sometimes when a company expands its manufacturing/ production facilities, it doesn’t find enough customers for its products and services. In such cases just to recover the production costs and to keep running the newer facilities, the company resorts to price discrimination. To invite newer customers: To broaden market base the company tends to give away products for ‘taste session’. If the new customer likes it, he is bound to come back. To beat the competitors: In fact no company resorts to price discrimination if there’s no other player in the market place to compete. A monopoly doesn’t call for price discrimination for the simple reason that the company has no alternative and it keeps skimming the customers. Therefore it is advantage customers in Price Discrimination. If there is elasticity of demand: i.e. the demand keeps varying depending upon season or any other factor. Sometimes demand for a product also varies depending on the festivities round the corner or any big event is round the corner. For example, Soccer World cup being held in Germany this year is giving a definite boost to sports goods. It’s the time for sporting goods manufacturers to think over. Baseball, Soccer, Cricket etc. season also give a reason to sport lovers for a better bargain. If the company is able to segregate the market into segments: This requires a thorough study and analysis of the market and segmenting it depending upon the consumer profile etc. In general there are many ways to price a product; Premium Pricing: Using a high price where there is uniqueness about the product or service. This approach is used where a substantial competitive advantage exists. Generally this strategy is used for premium/ luxury products, which give a separate identity to the consumer. Cash rich customers don’t mind paying more if due attention is paid to their comforts and egos. Penetration Pricing: This is the pricing strategy for competition. The prices are kept artificially low in order to gain market share. Here the management expresses his desire to take the competition head-on. Enough cash cushion is required for such types of pricing, because at times even the manufacturing costs are not recovered. Once achieved, the price is increased. Economy Pricing: This is a studied and well analyzed pricing. The cost of marketing and manufacture are kept at a minimum. This type of pricing is often termed as safe pricing to make both ends meet. Supermarkets often have economy brands for soups, spaghetti, etc. Price Skimming: This strategy once again comes into play when relatively monopolistic conditions exist in the market. Or when the company makes highly innovative product available and consumer is ready to shell out anything for prestigious goods. This types of pricing is often driven by the belief that price is not the only factor affecting purchase decision and value conscious consumers are willing to pay a premium for superior features. Such pricing gives good returns in short duration. Company charges a high price because it has a substantial competitive advantage. High prices can be enjoyed in short duration when there is relatively inelastic demand. This type of pricing has a disadvantage though. It gives an opportunity to the competitors, which later results in reduction in prices. But till then the company had skimmed enough. To what extent the competitor is allowed to consolidate depends on the marketing strategies. Pricing decisions also depend on the five distinct stages in the life of a product: Introduction Growth Maturity Saturation, and Decline While introducing a new product the company may be quite unsure about the acceptance of this product as neither they know about its market nor there is any established demand for it. Therefore depending upon the kind of market research the company had done, it may decide for a high initial price (skimming price) or a low penetration price. Pricing decisions for a mature products depend upon the symptoms (if any) of competitive degeneration, a weakening of preference for the leading brand etc. It is advisable to discover when the product is about to enter the mature category and then to reduce price when the first symptoms appear. After saturation and decline companies want to get rid of and price may be dropped to extent of recovering the transportation and storage costs. Retailers generally know their costs much more accurately than do most manufacturers. So pricing decisions on their part are comparatively easier. They have the advantage as they sell directly to the ultimate consumers. They often resort to ‘team pricing’ as well, i.e. they will assign special roles to various products they sell. Some items may be used as promotional items which are priced and advertised with the prime purpose of attracting customers, others may be intended to make up for the low margins obtained on promotional items. For price discrimination to work it has to be ably supported by other walks of management. Human Resources: There should not be detrimental turnover in the human resources. Lowering the prices should not have an effect on the existing salaries and benefits of the workforce. In fact there should be sufficient encouragement for them to come out with quality products to meet the excess demands. The management is strategically using Price discrimination to gain more market access. Under such circumstances the human resources have a very crucial role to play. The dealer network too plays a key role during such times. If some discounts are passed on to the dealer/ distributor, then he is bound to recommend his customers accordingly. Media Campaign: The price wars started by the company must reach the targeted customers so that they can take advantage of it. Such media campaigns are very short and swift in nature. The Print or Electronic media campaigns have to be attractive and inviting. In general, Radio jingles or TV commercials are the best option during the working days, as it can reach them even while driving a car. Print advertisements help during weekends. It is worthwhile here to note that the price discrimination strategy and the type of media campaign have to be in sync with each other. For example if resorting to skimming pricing then the ad campaign may star a Hollywood star or a Golfer. But penetration pricing requires someone with whom a common man can easily identify himself. Feedback and Analysis: Taking stock of the aftereffects on a regular basis is very important. It has to be done almost on a daily basis. Just in case there are circumstance going against the campaign, then company can resort to it regular pricing. It is not unusual that if a company resorts to discrimination pricing then competitors move the legal forum. Some smart and cash rich companies take advantage of even such legal suits. They continue to offer discriminatory prices to customers and at the same time they contest the legal batter with competitors. This way they get media mileage and publicity, which further helps in their reaching more eyes and ears. That’s exactly what the aim of advertisement campaigns is. Feedback is also required to determine how long the current strategy will work or to prepare for such campaigns in future as well. Commitment: Commitment is important while intending to establish in the market. There are some brands, which make sell their goods, earn profits and then disappear. The gullible consumer is often trapped by the lucrative advertisements and promises, which turn out to be merely a bundle of lies. Commitment to quality and commitment to the consumers helps in raising the confidence level of the consumer. Established brands think of a long-term relationship with consumers and the discounted pricing is also considered an investment towards establishing this relationship. Certain goods require after sales services as well and the consumer has to come back to the company for such services. If he feels satisfied he’ll prefer to upgrade or have another consumer item from same company in future. Such loyal customers often prove to be great brand ambassadors. Commitment is often reflected in the entry strategy. Multinationals entering emerging markets prefer to form joint venture with local partners for a variety of reasons. These include their ability to influence public policy, to leverage existing products as well as marketing and sales capabilities. Forming joint ventures also allows them quick access into an unexplored market. Resources: http://www.ftc.gov/bc/compguide/discrim.htm http://www.marketingteacher.com/Lessons/lesson_pricing.htm http://www.tutor2u.net/business/marketing/pricing_strategy_skimming.asp http://www.tutor2u.net/economics/content/topics/monopoly/price_discrimination.htm Read More