Chapter 5: Identifying the pricing constraints.

1. Chapter 5:Identifying the pricing constraints.

2. Learning outcomes After this study unit, you should be able to: • Discuss the main areas affecting price constraints; • Explain the different strategies for price in the product life cycle; • Identify three examples of unethical price behaviour; • Explain the impact of competitive structure on pricing; • Discuss the main marketing related constraints; • List and explain the four new product launch strategies; • Explain the four strategic objectives relevant for a competitive marketing strategy.

3. Introduction • The setting of price must be done with extreme care and needs to be looked at from many different stakeholder positions- such as consumers, government, communities, regulators and interest groups. • Various factors/constraints may influence the determination of the price for a product or service. • It is the task of the marketing manager to take into consideration the influence of these variables on the ultimate pricing of the product or service. • The aim of the chapter is to explain the factors that could exert an influence on the determination of a price for a product or service.

4. Pricing constraints Source: Adapted from Hoffman, K..D. Marketing best practices. 2nd edition. South Western: Mason. P513.

5. The age of the industry or the stage of the product life cycle (PLC)

6. Ethical considerations • Predatory pricing - A term that has been generally accepted to mean that a price is set, usually below cost, so as to drive the competition out of business. • Price fixing - When two or more companies conspire to keep prices at a certain level. • Horizontal price fixing - When competitors agree to fix prices. • Vertical price fixing - A supplier that tries to force channel members to keep a certain price level

7. The business environment • The general economic conditions (growth rates, inflation rate, exports versus imports, crime rates) prevailing in South Africa are a very important constraint, depending on the type of product or service being sold. • For some basic commodities like petrol (and beer!) the demand would be largely insensitive to general economic conditions. • Luxury goods like jewellery, diamonds and mink fur coats are more sensitive to economic fluctuations and a lack of disposable income. • A period of economic decline is characterised by a resultant increase in price sensitivity by the consumer. Price becomes a major concern for consumers and price wars between retailers are prevalent

8. Legal considerations • Legal considerations are an important consideration, particularly when buying fixed assets and buying on credit –such as a property or a car. • The government exerts an influence on the final price that you pay for your car by means of a car deposit that is required, and the payback period. • A maximum interest rate (LADOFCA rate) • Value-Added-Tax (VAT) • Acts such as the Consumer Protection Act, the RICA act, and the act determining the petrol price in South Africa constrain the ability of marketers and produces to do what they want with pricing.

9. Competitors • Monopoly - The monopolist has the ability to charge what the market can bear, but most monopolies now are regulated monopolies. • Oligopolies - here the industry is characterized by a few big players, and there are significant barriers to enter for a competitor. • Monopolistic - They tend to prefer non-price competition, though a different price than the competition could be set. • Perfect competition - here there are many sellers.

10. Marketing Decisions Affecting the Setting of Price • The positioning strategy. • This marketing decision revolves around deciding on the target market and on the differentiation strategy that is being followed. • The price variable of the marketing mix can be used to help establish a differential advantage in the targeted market segments. • In South Africa, retailers such as Mr Price and Shoprite have chosen to market to segments where the consumers seek value for their money, and position their value proposition directly at those segments. • Luxury game lodges such as SabiSabi, position themselves through the premium price that they charge, and to appeal to a more well-to-do segment of the market for game viewing and tourism

11. Marketing Decisions Affecting the Setting of Price cont… • New product launch strategies.

12. Marketing Decisions Affecting the Setting of Price cont… • Product line strategy • The existing product lines and price points need to be considered, as well as the different levels of value/pricing which consumers look for in the market. • Woolworths, as an example, often follow a good, better, best approach in terms of a value/product offer with correlating levels of price. • Toyota, where the price points in the market are reflected in the specific ranges of product- such as Etios, Yaris, Aygo, Yaris, Auris, and Corolla.

13. Marketing Decisions Affecting the Setting of Price cont… • Competitive marketing strategy • The build objective means that the organization wants to grow, so this would indicate a lower price to penetrate the market. • When the competitive approach is to hold then the marketer could follow a strategy of matching the competitor pricing and not be the price leader, but rather follow the market pricing levels. • When the objective is to harvest the marketer is looking for profit margin, so again the pricing would tend to be premium. • If the marketer is attempting to reposition a brand the pricing decision needs to follow and support the move.

14. Marketing Decisions Affecting the Setting of Price cont… • Channel management strategy • Marketers have to be aware of both the consumer needs and expectations of the target market and the needs and expectations of the distribution channels that get the product/brand to the consumer. • Their objectives, and the ability of the product/brand to help them to achieve their profit objectives, must be considered. • If you require mass distribution then the distributors ability to take a slice of the selling price must be considered, otherwise a more direct channel may have to be considered.

15. Marketing Decisions Affecting the Setting of Price cont… • International marketing strategy • The marketers in international markets have many factors to consider, such as legal requirements, protectionist actions such as tariffs, and international competitors to consider. • Parallel importing - where a product attractively priced to enter a market where income levels are low, for example, are imported back into the marketer’s home country and sold at an advantageous price. • Grey imports - Products can be sourced from the approved distributor of the product in a country, but may also be sourced in another country from non-approved distributors. These are then brought into a country and sold at a good price compared to locally-sourced products.

16. Summary • The marketer has to be able to utilise the information sources a business has in order to be able to distil the essence of the environment they are in. • The next decision is the choice of a target market, and the specific positioning to gain advantage. • In this chapter we introduce you to some of the typical constraints you'll find in business, and also went through some of the marketing related factors.