Rajagopal. Marketing Dynamics: Theory and Practice

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Marketing Dynamics: Theory and Practice

steps. At each interval it calculates that the

stock price will move either up or down with a

given probability and also by an amount

calculated with reference to the stock’s

volatility, the time to expiry and the risk free

interest rate. A binomial distribution of prices

for the underlying stock or index is thus

produced. On expiry the option values for each

possible stock price are known as they are equal

to their intrinsic values. The model then works

backwards through each time interval,

calculating the value of the option at each step.

At the point where a dividend is paid (or other

capital adjustment is made) the model takes

this into account. The final step is at the current

time and stock price, where the current

theoretical fair value of the option is calculated.

Black Scholes Model

First proposed by Black and Scholes in a

paper published in 1973. This analytical

solution to pricing a European option on a non-

dividend paying asset formed the foundation

for much theory in derivatives finance. The

Black Scholes formula is a continuous time

analogue of the binomial model. The Black

Scholes formula uses the pricing inputs to

analytically produce a theoretical fair value

for an option. The model has many variations

which attempt, with varying levels of

accuracy, to incorporate dividends and

American style exercise conditions. However

with computing power these days the binomial

solution is more widely used.

PRICE-MARKET RELATIONSHIP

Although the fair value may be close to where

the market is trading, other pricing factors in

the marketplace mean fair value is used mostly

as an estimate of the option’s value. Moreover,

fair value will depend on the assumptions

Strategy Focus 4.2

Harley-Davidson Motorcycles – Pricing

Strategy

Harley-Davidson, Inc. is the parent company for the

group of companies doing business as Harley-Davidson

Motor Company, Buell Motorcycle Company and

Harley-Davidson Financial Services, Inc. Harley-

Davidson Motor Company, the only major U.S.-based

motorcycle manufacturer, produces heavyweight

motorcycles and offers a complete line of motorcycle

parts, accessories, apparel, and general merchandise. Buell

Motorcycle Company produces sport and sport-touring

motorcycles. Harley-Davidson Financial Services, Inc.

provides wholesale and retail financing and insurance

programs to Harley-Davidson dealers and customers.

Harley-Davidson enjoyed a monopoly in the motorcycle

industry for many decades. In the 1970’s, Japanese

manufacturers flooded the market with high quality, low

priced bikes. From 1973 - 1983, Harley’s market share

went from 77.5% to 23.3% with Honda having 44% of

the market by 1983. Harley-Davidson could not compete

on price against the Japanese motorcycle producers, so it

had to establish other market values and improve quality.

Harley-Davidson quickly learned it could not compete

with the foreign manufacturers on cost. Not only did

Honda have a low priced product, it was able to defeat

Harley in advertising. Therefore, Harley developed a

strategy of value over price. This was created through the

development of mini-niches and the heavy construction

of the parts. Japanese manufacturers used plastic while

Harley used steel, which is able to be rebuilt and rebuke.

Harley was careful not to exceed demand in production of

their motorcycles. Currently, people must wait six to

eighteen months for a new motorcycle and the price for a

year-old Harley is 25% to 30% higher than a new one. By

not being able to meet demands, an attitude of must-have

has developed. Therefore, Harley has plans to double

capacity to 200,000 motorcycles annually by 2003.

Retail sales of Harley-Davidson® motorcycles for the

year 2003 grew 8.8 percent in the U.S., 6.7 percent in

Europe, and 9.0 percent in Japan compared to 2002.

Based on the information currently available, Harley-

Davidson’s full year market share for the 651cc and up

segment is expected to grow in all of the Company’s

major markets.

Source: Harley-Davidson USA

www.harley-

davidson.com

Pricing Strategy

159

regarding volatility levels, dividend payments and so on that are made by the person using the pricing

model. Different expectations of volatility or dividends will alter the fair value result. This means that

at any one time there may be many views held simultaneously on what the fair value of a particular

option is. In practice, supply and demand will often dictate at what level an option is priced in the

marketplace. Traders may have a fair value on an option to get an indication of whether the current

market price is higher or lower than fair value, as part of the process of making a judgment about the

market value of the option.

Volatility

Volatility figure input into an option-pricing model reflects the assumptions of the person using

the pricing model. Volatility is defined technically in various ways, depending on assumptions made

about the underlying asset’s price distribution. For the regular option trader, it is sufficient to know

that the volatility a trader assigns to a stock reflects expectations of how the stock price will fluctuate

over a given period of time. Volatility is usually expressed in two ways: historical and implied. Historical

volatility describes volatility observed in a stock over a given period of time. Price movements in the

stock (or underlying asset) are recorded at fixed time intervals (for example every day, every week,

or every month) over a given period. More data generally leads to more accuracy. Implied volatility

relates to the current market for an option. Volatility is implied from the option’s current price, using

a standard option-pricing model. Keeping all other inputs constant, you can put the current market

price of an option into any theoretical option price calculator and it will calculate the volatility implied

by that option price.

PRICING STRATEGIES MANAGEMENT

Changes in the marketing environment may require a review of the prices of products already in the

market. For example, an announcement by a large firm that it is going to lower its prices makes, it

necessary for other firms in the industry to examine their prices. A review of pricing strategy may

also become necessary because of shifts in demand. An examination of existing prices may lead to

one of three strategic alternatives:

• Maintaining the price,

• Reducing the price, or

• Increasing the price.

If the market segment from which the company derives a big portion of its sales is not affected

by changes in the environment, the company may decide not to initiate any change in its pricing

strategy and maintain the status quo in the prices. The strategy of maintaining price is appropriate in

circumstances where a price change may be desirable, but the magnitude of change is indeterminable.

If the reaction of customers and competitors to a price change cannot be predicted, maintaining the

present price level may be appropriate.

There are three main reasons for lowering the prices. Firstly, the prices as defensive measure

may be cut in response to competition. To successfully compete in mature industries, many companies

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reduce prices following a strategy that is often called value pricing. For example, in view of the

slipping profit margins and lower customer counts, McDonald’s cut prices under pressure from

major rival companies like Burger King, Wendy’s, and Taco Bell. A second reason for lowering

prices is offensive in nature. A company that follows this strategy is Home Depot; the largest home

repair chain in USA. The policy of everyday low prices has enabled the company to grow into US$

4 billion chain of 150 stores, mostly in the Sunbelt. Home Depot’s goal is to go national with US $20

billion in sales at more than 350 locations by the year 2005. The recession in USA during the early

1990s caused consumers to tighten belts and to be more sensitive to prices. Sears, therefore, adopted

a new pricing policy whereby prices on practically all products were permanently lowered. The

company closed its 824 stores for two days to remark price tags and to implement its “everyday low

pricing” strategy. A number of other companies, such as Wal-Mart and Toys “R” Us also pursue this

strategy by keeping prices low year-round, avoiding the practice of marking them up and down.

Consumers like year-round low prices because constantly changing sale prices makes, it hard to

recognize a fair deal. Similarly, fast-food chains have started offering “value” menus of higher-

priced items.

Last reason for price-cutting may be a response to customer need. If low prices are a prerequisite

for inducing the market to grow, customer need may then become the pivot of a marketing strategy,

all other aspects of the marketing mix being developed accordingly. An increase in price may be

implemented for various reasons. First, in an inflationary economy, prices may need to be adjusted

upward in order to maintain profitability. During inflation all types of costs go up and for adequate

profits, an increase in price becomes necessary. How much the price should be increased is a matter

of strategy that varies from case to case. Conceptually, the price should be increased to such a level

that the profits before and after inflation are almost equal. An increase in the price should also take

into account any decline in revenue caused by shifts in demand due to price increases. Strategically,

the decision to minimize the effects of inflationary pressures on the company through price increases

should be based on long-term implications in order to achieve a short-run advantage.

Downside of increasing price may be illustrated with reference to coffee. Let us say that there

is a segment of customers who ardently drink Maxwell House coffee. In their minds, Maxwell

House has something special. If the price of Maxwell House goes up (assuming that the prices of

other brands remain unchanged), these coffee drinkers may continue to purchase it because the

brand has a virtual monopoly over their coffee-drinking behaviour. There is a limit, however, to what

these Maxwell House loyalists will pay for their favourite brand of coffee. Thus, if the price of

Maxwell House is increased too much, these customers may shift their preference. The extent of

the increase in price , however, depends on many factors. Each competitor has a different optimum

price level for a given end product for a given customer group. It is rare that such optimum prices are

the same for any two competitors. Each competitor has different options based on different cost

components, capacity constraints, financial structure, product mix, customer mix, logistics, culture,

and growth rate. The competitor with the lowest optimum price has the option of setting the common

price; all others must follow or retreat. However, the continued existence of competitors depends on

each firm retreating from competition when it is at a disadvantage until each competes primarily in a

“competitive segment,” a monopolistic situation where it has an advantage compared to all others.

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161

This unique combination of characteristics, matched with differentials in the competitive environment,

enables each firm to coexist and prosper in its chosen area (i.e., where it has monopolistic control).

Prices may also be increased to segment the market. A high priced soft drink company may

launch its product for executives. This brand may be differentiated as one that provides stamina and

invigoration without adding calories. To substantiate the brand’s worth and make it appear different,

the price may be set at double the price of existing soft drinks. Hewlett-Packard Company operates

in the highly competitive pocket calculator industry, where the practice of price-cutting is quite common.

Hewlett-Packard thrives by offering high-priced products to a select segment of the market. Strategic

pricing is one of the most powerful sources of profits and growth. Yet, in recent years, it has been the

least exploited driver of shareholder value. Few manufacturers review their pricing systematically.

Most set prices reactively. Some extrapolate from history, and for others it’s just a hunch. Today the

need for strategic pricing is greater than ever. Pressures from price-sensitive consumers on one side,

and a forceful and consolidating retail trade on the other, have resulted in significant price rollbacks

on everything from cigarettes to cereal. Some claim the rollbacks have been good for business, but

the net result has been considerable profit erosion. Pricing now is little more than a plug to make our

plan numbers.” The implementation of strategic pricing can provide following advantages.

• Boost total profitability by pricing based on consumers’ long-term demand elasticity

• Increase sales of a company’s most profitable products

• Improve the profitability of noncore businesses

• Stop price leaks by monitoring price concessions

• Create competitive advantage that is hard to imitate

Regaining control of prices, however, won’t be easy. In most organizations, pricing power is

diffused among many players making countless decisions across multiple functions and locations.

Today no manager knows precisely what portion of any list price is actually realized. That means he

or she can’t position the product for the greatest return while making pricing decisions. It is necessary

for the senior managers to rethink all aspects of pricing—strategies, tactics, processes, and capabilities—

from the ground up. To succeed, the team must integrate four activities, as discussed below:

Product’s Value Equation

Every product has an implied value equation, which takes into account the relationship between

its quality, convenience, and price. This relationship will vary for different consumer segments. The

team’s first job is to analyze their products’ value equations and benchmark them against the

competitior’s. The team should investigate

• Product positioning, which includes brand value, relative share position, and private-label

development

• Competitive landscape, which includes the pricing supply curve, relative cost structure, and

market discipline (leaders and followers)

• Consumer motivation, which includes segmentation of needs and benefits, long-term price

elasticity, the impulse-buying dynamic, and life-cycle profitability in each segment

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Objective is to ensure that the pricing structure supports the value equation as well as captures

the full value of any advantages in cost, quality, or service. We call this “pricing to your sweet spot.”

If, for instance, the product is the only one of its kind to feature a warranty that consumers particularly

value, it should be priced accordingly. Such a strategy goes beyond traditional pricing tactics to

recognize the value of a product that can be realized in the marketplace.

Plug in the Price Leaks

Generic pricing often conceals differences in the cost of serving customers and can distort the

net profitability delivered by channel, customer, and product. The SWAT team must discover the

price leaks where profits are being lost. This involves tracking all the contractual and non contractual

discounts, promotions, and other costs of serving customers (such as finance charges, warehousing

and delivery costs, and administrative costs) that siphon off revenues.

Price leaks can be found throughout the company. Often, they are hidden in unexpected places

or misperceived as the cost of doing business with customers. These “costs” should be examined

with the same de-averaging tools that accountants and manufacturers use to examine product

profitability. Once the team determines the true profitability of each account, opportunities for strategic

pricing will surface. Companies that have systematically plugged their leaks have seen their profits

increase by as much as 25 percent.

Negotiate Prices for Profits

Integrating the pieces of the pricing puzzle will also reveal opportunities to improve the productivity

of promotions. In recent years, promotions have increased, and spending on off-invoice discounting,

price exceptions, promotional allowances, merchandising funds, and rebates have grown dramatically.

Too often, promotions amount to price leaks rather than investments. Although some promotions pay

off, many merely transfer value to retailers and to consumers who forward-buy. Negotiating deals by

using simplistic rules of thumb, such as number of cases shipped to retailers, can be misleading and

expensive. Instead, negotiations and, for some retailers, payments should be based on true incremental

volume actually sold to consumers. The company should review trade spending to determine the total

return on investment. It also needs to determine its promotion strategy in the context of the retailer’s

pricing strategies. Differences in retailer pricing strategies (everyday low prices versus high-low

pricing, for instance) and the margins that retailers take on various products will significantly affect

a manufacturer’s negotiating power and posture.

Process Streamlining

No pricing strategy will work for long without a well-managed process. The company should

reach down in the organization, define clear roles and responsibilities, and make sure that the right

information is always available to the people who need it. Several parts of the organization play a role

in pricing, but it takes executive clout to synchronize all the levers, nail down the tactical side, and

make the tough strategic decisions. A few companies have already moved in this direction by appointing

a pricing board or council to integrate pricing data and streamline decisions. This doesn’t centralize

authority over pricing as much as manage the dissemination of information that others need in order

to make the right decisions. The council monitors movement in the price of raw materials and analyses

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portfolio mix, account-pricing strategy, and profitability. Based on this information, the company

redesigned its pricing structure and renegotiated its trade deals and rebate programs to focus on

performance. It also established a new process for authorizing price exceptions. In addition to helping

the company win back control over its prices, the streamlined process saved costs by eliminating

rework and reducing administrative expenses. As a result, many companies increased its bottom line

by several percentage points.

It’s hard to believe, but Mercedes Benz is the only car maker to have introduced over six

variants in India within a year. This makes one wonder what the size of the super-premium

segment is. Estimates say, under 2,000 cars. Mercedes Benz, itself, sold 800 cars in the

calendar year 2000, in India. Meanwhile, direct competitor BMW sold only about 100. The

essential difference between the two is that BMW continues to import CBUs (completely

built units) through its two dealers for India, a much longer process, (and therefore a limited

service network), whereas Mercedes has had a manufacturing facility here for four years, set

up with an investment of Rs 600 crore. Working in a market that is limited does not deter

Jurgen Ziegler, managing director, Mercedes India: “The idea was to establish India as a

quality manufacturing base for world markets. We never expected the Indian market for such

luxury cars to be really big.” Initially, the company focused on exporting CBUs from India to

around 25 countries in the South African and East Asian markets. But in the last year, it has

stopped exports of cars, and has instead developed its 20-odd local vendors to supply parts

to its sister plants in Germany and the US. The company claims to have exported 200 million

deutsche marks worth of parts so far. It now plans to supply components for the entire

portfolio of Daimler products worldwide.

However, Mercedes now feels that it can bridge the gap between the premium luxury segment

(where cars such as the Hyundai Sonata, Honda Accord, Opel Vectra and Skoda Octavia are

likely to compete in therange of US$ 25000-35000 (approx.) and the super-premium segment

(US$ 45000 plus). The recently launched C-class Mercedes is supposed to be the product.

Mercedes feels that a customer would be willing to shell out an additional US$ 6500 (the

range starts at US$ 46000) just for the lure of the ‘three-pointer star’. The C-class comes in

two trim levels of Classic and Elegance. The latter comes equipped with a multi-function

steering wheel, alloy wheels and leather upholstery for a US$ 2000 more. It also has engine

choices of petrol and diesel. To aid further differentiation amongst the differentiated, Mercedes

will introduce the AMG range of body-styling kits to add on to the car. Of course, a Mercedes

customer can then graduate up the value chain by moving from the C-class to the E-class

(priced at around US$ 65000) and then all the way up to the S-class (priced at US$ 130,000).

Others too are joining the game. It remains to be seen, however, if the Indian consumer can

skip the D-segment entirely and move directly into the Mercedes segment. The pre-owned

cars scheme (refurbished used Indian Mercedes cars) will definitely addict the consumer to

the three-pointer star at prices as low as US$ 20000-22000 (approx.).

Ziegler, however, is not very happy with the Government’s decision to raise the duties on

imported cars to close to 110 percent. This puts a damper on Mercedes’ plans to introduce a lot

more imported models in the Indian market in CBU form. Presently, only the S-class from its

stable is in CBU form (with just 20-per cent local content). The company claims that the C-class

already has indigenous levels of over 50 percent, while the E-class (the oldest of the Mercedes

series in India) has 70 per cent. Additionally, Mercedes hopes to sell a few M-class, SLK, CLK

and other S-class imports as well. It also plans to market the Jeep range of vehicles in India,

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such as the Cherokee and Voyager from 2002 onward. The only stumbling block here is the

‘homologation charges’ that it has to pay per model of car that it brings in, which ranges from

US$ 20000-22000, at the ARAI, Pune. Therefore, the reluctance of all car companies, in fact, to

bring in their other international models; since volumes just won’t justify investments.

Although most companies have focused on cost reduction, strategic pricing has a much more

opportunity to boost profits by as much as 50 percent. These four questions can serve as a quick

audit of your pricing capabilities:

1. Do your competitors’ pricing strategies seem irrational or inconsistent, or could they be

part of a winning strategy?

2. Do you suspect price leaks, and if so, do you know where and how big they are?

3. Do you control all aspects of your pricing process?

4. Do you price by default or by design?

Strategic pricing is not a one-time tactic; it’s a fundamental restructuring of all activities that

affect pricing. That’s why it offers long-term, sustainable value. And there’s another, more subtle

benefit. Because the restructuring occurs deep within the organization, it is nearly impossible for

competitors to imitate.

PRICE CONTROL

Government rules and regulations pertaining to pricing should be considered while setting prices by

the foreign firm in a host country. Legal requirements of both the host country and the administration

of the host country must be satisfied. We have already discussed the legal aspects that affect marketing

decisions of a foreign firm in Chapter 6. The firm need to consider the provisions of antitrust laws of

the host country that would apply to any foreign pricing decision. A host country’s laws concerning

price setting may range from broad guidelines to product specific procedures for arriving at prices,

amounting to virtual control over prices. However, government regulations evolved over time and

may change during a firm’s operation.

Consumer Information Act, 1978 of Ireland prohibits false or misleading indications of the

price or the recommended price of goods, services or accommodation. The regulation on

pricing in the country suggests that a consumer is expected to pay for the product or

services what price he finds on it. The consumer should not have to pay any extra or

‘hidden’ charges. However, if a wrong price is marked on goods, the seller may be found

guilty of giving a false price indication but the buyer does not have the right to demand that

the goods be sold to them at the marked price. In other words a price ticket does not oblige

the seller to sell at the price marked. The Act also makes it an offence to give a false or

misleading indication of a previous price. If one price is stricken out and another has put in,

the previous price must be accurate. In the absence of any indication to the contrary the

goods in question must have been on sale in the same place at that previous price for at least

3 Michael Grindfors, Matthew A. Krentz and Henry M. Vogel , Boston Consultancy Group

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28 successive days in the previous three months. The Irish law envisages that all prices must

be indicated on or near the item or in such a position as to be easily read by the purchaser

while he or she is at the place where the item is for sale and the prices given for goods or

services must be stated as a single amount inclusive of tax. In the services marketing outlets

a list of beverages, their measure and the corresponding price must be displayed both near

the entrance and inside the premises as per the legal stipulations. Besides, where different

prices are charged in different parts of the premises they must be displayed in the different

parts of the premises.

Different countries resolve different rates of inflation, some like Israel and Argentina in the past

showing hyper-inflationary patterns by presenting the standard solution is selective price controls.

The price controls may signal the global marketer that prices can not be changed frequently in the

market and may pose a threat to normalize the profit of the firm in the situation of rising inflation. The

currencies of such countries will continuously be losing their value against stronger currencies, while

their governments will intervene in the workings of the financial system in order to bring some

stability to prices. Under price controls, increases in prices usually need to be officially sanctioned.

To obtain such sanction it is typically required that price increases be directly related to costs.

Accordingly, companies with exemplary accounting records tend to have a much better chance of

getting their requests for increases in price sanctioned. There are many types of price controls that

are exercised in the developing countries to protect the consumers. Of these, mention may be made

of price ceilings, which prevent prices from exceeding a certain maximum, and cause shortages.

Price floors, which prohibit prices below a certain minimum, cause surpluses. Suppose the supply

and demand for automobile tires are balanced at the current price, and that the government then

fixes a lower ceiling price. The number of tires supplied will be reduced, but the number demanded

will increase. The result will be excess demand and empty shelves. Although some consumers will

be lucky enough to purchase tires at the lower price, others will be forced to do without. However, In

terms of price discrimination, there are very few laws of the American Robinson-Patman type that

prohibit discrimination unless justified by cost savings. The issue of bribery surfaces easily. The firm

needs to get some legal advice on what is acceptable and what is not in the particular country.

BUILDING PRICING STRATEGIES

A firm’s best opportunity lies in differentiating the product. A differentiated product offers more

opportunity for increasing earnings through higher prices. Thus a company has to set-in the process

of pricing strategy carefully analyzing its marketing-mix strategies in the host country. The first step

in the process begins with determining the pricing objectives. This has to be done in reference to the

strategy of selection followed in identifying the market segments. Since, pricing is one of the sensitive

factors, the pricing objectives need to be carefully selected. Among many the major objectives

helping in formulating the pricing strategy are as under:

4 For details on consumer protection regulation in Ireland see European Consumer Centre-Dublin at http:/

/www.ecic.ie/consumer/misleading_info/mli_3.htm

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• In the stiff competitive market scenario some of the companies functioning with over

capacity and attempting to cater the shifting demands, often choose survival as the prime

objective. The companies with this objective generally slash prices for operational reasons

and do not look for any profit avenues. The company can survive with the price level

as long as, it could recover the variable costs and some of the fixed costs. However, it

would be difficult for the companies to get along with the survival pricing strategy in long-

run.

• It has been a common organizational behavior of the business firms to augment their profit

level to the maximum in a short span. The companies with such objective of maximizing

current profit set their prices accordingly. In this process the companies assess the demand

and costs associated with the alternative prices and formulate prices that generate maximum

profit in short-run.

• Some companies that reflect in their gross profit or revenue also choose maximum

sales realization. The maximization of revenue can be done by proper assessment of

the demand of products of the company. It is assumed by many managers that the

revenue generation is the only way for gaining more market share and so the high profit

in long-run.

• Many companies will be of the favor to push the prices of their products upward with

a view to skim the segmented markets. This strategy will help in building substantial buyers

segments with reasonably high demand for the product and initial high-price does not allow

more number of competitors to make entry. The high-price also helps the company to build-

up the quality image of their product. The entry of Kellogg’s in Indian market with their

breakfast cereal product line has the same objective. It is a product positioned in the class

market with high-price and skimming strategy. The high price added to the brand image

of the products and its company. Similarly, Surf Excel the detergent from Hindustan Lever

Limited, has adopted the market skimming strategy keeping the price comparatively higher.

The consumers of the high purchasing power segment largely accept the product. The

price of the product backed by the promotion wizards and quality added the high brand

image in the market.

• Company may also achieve the product-quality leadership in the market by effective price

intervention. The premium price strategy may earn high revenue for the company as well

as help in brand positioning among the existing top bracket. This would in long run lead

the company to become market leader.

• Besides, the manufacturing and marketing companies the price is also determined for the

services. The social work organizations formulate the pricing strategy on the basis of the

social price for the service. However most of the non-profit organizations fix-up the price

for the services with a view to recover the full cost thereof.

Pricing takes its own dynamics in the market in the long run. The problem of pricing is observed

generally when the firm is setting the price for the first time. This may happen when the company

gets into the new business, acquiring products, distribution and expansion of the market area. Price

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has direct relationship with the product quality and brand image. Higher product quality and brand

image would possess higher price. Such strategies are used for premium products while for the mass

market price the price level is kept low and the quality of the product is medium. The company may

place the products of medium quality and brand image in the average price bracket. Such pricing

strategy would help to position the product for the consumer segment of middle level income category.

In case the company desires to take its products to the mass market, it is necessary for the company

to deliver the goods and services at the low price. However, the quality and the brand image would

remain the same of medium quality. There exists the danger of all operations going sick in long term,

if the company further tends to lower down the quality of the product in order to reduce the price. It

may also hamper the brand image of the company to a large extent.

Company should also look into the price sensitivity factors associated with the price and demand

of the product. In general the price sensitivity of the product would be higher provided the demand

decreases in larger proposition to the increase in the price. This may happen when the product is

close to the substitutes. Example may be cited of the edible oils as the brand switching is very fast

and consumers are highly sensitive to the price rise. There happened 24 percent decrease in the

demand of groundnut oil of safal brand in Karnataka in India in response to 6 percent increase in the

oil price. On the contrary the consumers are less price sensitive in case of essential commodities like

cereals, gas, petrol etc. Nagle

has identified some factors affecting the price sensitivity of the

consumers. The consumers are less sensitive to the price of the products, (i) which have rare

availability and unique value (ii) when they have inadequate knowledge of the substitutes (iii) when it

is not possible to distinguish the attributes and quality of the product with the competing products (iv)

when the expenditure is lower to their income (v) when the total cost incurred to the end product by

the buyers will be less (vi) when the cost of the product is borne by the third party (vii) when the

product is of high quality, status and is exclusive, and (viii) when the buyer can not store the products

for long run at low prices viz., Fruits and vegetables, milk etc.

Company may look for the strategic options in determining the price of the product. Under the

circumstances of high customer loyalty and the possibility of losing good percentage of them to the

competitors, the company need not make any changes in the price and rather maintain the existing

price level. The company may gradually prune the consumer segments and increase the price.

However, in exigencies the company may raise the price to cover the rising cost but simultaneously

ensure quality improvement in the product. Such strategic option may lead the company for smaller

market shares and maintained profitability. The company may choose the strategy to maintain the

price and increase the quality of the products in view of long term increase in the profitability. It is

cheaper to maintain the price and increase the perceived quality of goods and services. The company

may also opt for cutting the price partly and increasing the perceived quality for maintaining the

existing market share. It is needed to offer high value for the goods and services by reducing the

price to some extent. This would help the company to win the confidence of the consumers and keep

5 Nagle Thomas T: The Strategy and Tactics Pricing, Prentice-Hall, Englewood Cliffs, New Jersey, Chapter

III, 1987.