The firm also has to see what the stage of the PLC is. During introduction they can either choose to skim or penetrate the market. The firm would do the former if the product has a strong USP, is technologically advanced or trendy or is operating in a niche market. Penetration will be done if the demand is elastic or the good is an FMGC. At the maturity stage the company may choose to skim the market instead of penetrating, because it has created brand loyalty; or it can penetrate the market instead of skimming, because the product faces competition or new technology has been introduced. The Nokia 7610 was for Rs 30,000 when it was first introduced but is now available for Rs 20,000. At the decline stage, most firms will set a low price for their products to sell all the remaining stock.
A firm will also have to look if it is established and then price its products. Catering to a mass market and penetration requires a lot of resources, because of extensive advertisements, capital intensive production methods, etc, so only if a company is well-established and has enough finance can it penetrate the market. If the firm is new, or the product is new the company may set a high price to recover its R&D costs.
A pricing policy also depends on the state of an economy. If the country is facing a boom, there are low taxes or interest rates, the consumers have more disposable income and can afford to pay a high price, but the firm will only set a high price if the competitors are doing it too. Conversely if there is a recession in the economy, high taxes and interest rates or a high level of inflation, consumers will have less spending power and would spend money on inferior and low-priced good. In Pakistan, where 50 Million people live below the poverty line and inflation for the month of February was 10%, there is more demand for low priced products. If the firm is importing raw material, and the currency appreciates the firm will have to set a lower price.
A firm also has to bear in mind its position in the market when pricing a product. If it is a market leader and has a large market share, it can charge a high price because it may have a good reputation and customer loyalty. For example even after then introduction of various mp3’s players, the Apple iPod’s price has not been changed because Apple is a market leader and the iPod’s quality is superior. If the company is a market challenger it will set a price lower than the market leader. For example Rite Biscuits set a lower price than Oreos. If the strategy is to follow the leader, then the same price will be set. For example, Haleeb sets the same price as the market leader, Nestle, for its juices.
If the product is operating in a mass market then it will need to have a lower price, because of competition and it may be achieving economies of scale. But if it is operating in a niche market then the prices can be high, because of the exclusivity the brand offers. This can be seen in the differences of the prices of Emporio Armani and Old Navy.
The pricing strategy will also have to be in-line with the corporate objective. If it is profit maximization, then a high price will be set. But if it is survival or sales revenue maximization (depending on the elasticity) then a firm would like to set a lower price.
A firm can also indulge in value-pricing by catering to people of high-social class and if it has brand loyalty. This can be seen with the exorbitant prices of Harry Winston diamonds.
A firm will also have to see if there are any legal constraints imposed by the government. If there is a price floor (minimum price) or ceiling (maximum price) then the firm cannot exceed these.
Using the BCG matrix a firm will have to see what type of a product it is and follow the respective strategy, if it is a cash-cow or star a high price can be set. But if it is a dog or problem child a low price should be kept. A firm can see the lowest possible price it can set through marginal costing, and this can be used in sales and discounts.
A firm will also have to bear in mind its production method. If the good is being mass produced and is standardized by the flow method, then the company must be reaping technical and purchasing economies of scale, and a low price can be set. However if the good is customized through job or batch production, and offers variety, a high price can be charged. This can be seen through the difference in the prices of Suzuki cars, which are mass produced and Aston Martin cars, which are tailored to a consumers needs.
Keeping these factors in mind a decision can be made.
