Price is real but its perception is subjective. If marketers understand how customers interpret the price; they will keep their prices more firm and less negotiable.
In no other city in India can you rely on public taxi service as you can in Mumbai. You get a taxi within minutes; on most streets. You dont ask the cabbie how much he will charge before getting into it. You do not need to haggle when you get down - you only need see the meter. You don’t feel ripped off. May be that is why the market for cab-travel is more developed in Mumbai.
When the customers feel that the pricing in a market is fair and well-managed, customers tend to come oftener to such markets. When you want to develop a product category, it helps if the price is standardised.
Many markets remain undeveloped precisely due to this reason. Take the example of toy market. I was the CEO of a toy company called Funskool once; and I remember discussing pricing practices with my Marketing Head Raghavan Shrinivasan and my Sales Head Ashok Samant. The prices fluctuate so much between different stores for the same toy that this uncertainty drives the customers away from the market and they land up buying some other gift! The funny thing is that a toy customer generally feels she is charged unreasonably even if a dealer has given her a genuinely low price. No wonder the Indian toy market has remained underdeveloped.
Is a fixed price better than a price open for negotiation? I say, yes. In the TV market, a few years ago, almost no one quoted the best price upfront. They got “quotations” from different dealers and played one dealer against another. In those days, the dealers did not display their real rates, but only official ones, on the models. When the customer came in, they “sized up” the customer and accordingly played the game. Soon, the dealers realised that when the customer walked out to get another quote, she may never came back. So, many dealers have now changed their tactics and are giving their “best quote” upfront. Slowly, these new pricing tactics are sinking into the collective psyche of the customers and they are responding positively. The Francis Kanoi research showed that people are visiting less number of shops now compared to before - confidence in the product category is increasing.
In fact, laments from the sales people notwithstanding, I firmly believe that when the category is growing, one should generally not play the price card. When the category is growing, the product, it’s utility, and benefit to the customer must become the Centre of marketing attention. That is why in Eureka Forbes, where I headed marketing, we never ever gave any price discount. Any negotiability in price at the selling point distracts from the value of the product - and the sales conversation centres around the price - instead of the value.
For Direct marketing firms it is important to keep the prices steady because many of them sell "concept products" which have not been accepted by the masses yet. Such products can be sold only if the sales dialogue focuses on the product and its value and not on price.
Even if you are selling through a channel / network price clarity is equally important. There are dozens of examples among the FMCG crowd where giving more discounts to the trade only increases the price undercutting. This reduces the confidence of the dealers who start wondering whether the company or the wholesaler is the right source to buy from because the wholesaler’s price is better than the company’s prices. This reduces the hold of the sales force over the market. The sale of slow moving products suffers. The display and merchandising suffers. The relationship suffers.
I have noticed that firms which are trying to become more brand-oriented (as distinct from sales-oriented), find it difficult to tell their sales departments that they should reduce the schemes and discounts. It is not only a question of money but also of customer confidence. The more the price fluctuation, less the brand confidence.
What do you think? Comments, agreements, brickbats, views are welcome.
8 comments:
Palekar saab,
Its an interesting point of view you have put forth. You have argued well about "Value" rather than Price being the centre stage in the sale (esp. in case of direct marketing companies), whereas we must also not forget that "Value" being offered by a company is not the "Value" as perceived by the Customer.
I for one have always felt that some of the direct marketing companies have actually been fleecing customers. Reasonably Good quality at higher than highest prices. Except maybe Tupperware and Eureka Forbes, I would put others like Amway etc. in the same category. The "Value" claimed to be offered by these companies often cannot be demonstrated by the scientific method.
Again I would like to think that its the market which would determine whether fixed pricing will work. Its akin to 'Perfect Competition'. As a Seller one can sell as much as one want at the given price point and same for Buyer as well.
Regards,
Santosh
EMP Batch 20
Dear Santosh & Palekar Sir,
I support Santosh's views, as Value & beauty lie in the eyes of Beholder. Also it becomes very difficult at times to justify pricing for value received by customer.
I will tell you way to do it....
Santosh, if you read the First line of this post, you will find example of TAXI "Meter Pricing"
This Meter Pricing is getting so common today, is actually variant of value based pricing.
Some of the Examples of Instance Based Pricing:
1) Google AdWords - Pay Per Click
2) Digital Ad Agencies - Cost per Lead
3) Mobile Phone - Cost per minute / pulse
4) Internet ISP - Cost per MB Downloaded
5) Mumbai Taxi - Pay per meter
This types of pricing appears desirable and it is also non-negotiable,
And the best part is, it extracts value from the customer without pinching him, it is win-win.
My Company 'adoroi.com' is into Enterprise Software for "Response driven advertisers" and even we have adopted this "pay per use" pricing, it is not only easy for client to understand, but they also love it because :
1) They pay only if they get the value promised (desired action).
2) Unlike other Enterprise software companies, our pay per use pricing comes out of OPEX and not CAPEX. And is a big competitive advantage.
Well not all & every company can adopt this kind of pricing, and there is a middle path, "Pay Per User", Which is actually a small CAPEX expense per user per month/yr.
In all such a kinds of pricing, Value OR Desired action is actually measured and agreed by the client before hand.
More over there are also Price Matrix for such pay per use plans - More you use...price goes lower. "You can change over to a Optimal price plan".
Here every thing seems to be sold at price, but all is just a VALUE & USAGE driven price.
it is "Nor Negotiable" - "Nor Fixed"...!!!
it is "Variable pricing"...
Thanks & Best Regards,
Mitesh L Thakker
FMB-3, SYB-1.
SPJIMR - Alumni
/JG
I have realised that customers are so addicted to negotiating prices that they do not believe you when you quote a 'reasonable price'. Often, it leads to a situation where either you lose the customer or negotiate. Negotiation gives them a feeling of 'victory'.
Prof Palekar, should I conclude that we should not negotiate prices with customers?
SCKalia
Dear SC, standardization or price helps in B2C markets and where the product is standardized. In B2B markets, where the product is customized, it may not work. If you want, please write to me on skpalekar@hotmail.com
Sir, I am convinced with your arguement about value based marketing and not price based marketing. But there is one factor that needs to be taken into account - Even if we want to impose a fixed price and market the product based on its valueadd, what if the competitor wants to plays the price card and woo the customers? What should be our approach? Would we still not negotiating on our prices? My view, I would still prefer to continue with value based marketing provided my product has an USP attached to it - What if the product is a standard one?
Another interesting fact that emerged from your blog was the ability of the dealers preferring to buy from the wholesalers rather than the company itself (owing to the price discount offered to the wholesaler). Theres an interesting case that I wanted to share with you, We had 3 OEMs that were fighting for their space all across India and they all had a almost-similar equipments and each of them used our product as an integral part of their equipment. During their efforts to woo their customers, they would always play the price cards and ultimately one of the threee would win the race. The interesting part of the story was that the winner between those three would come back to us and ask for a price discount since he had already quoted a lower price to the customer. The end result was that as suppliers we were facing the brunt even if any of the 3 OEMs won the bid. Strategically our company decided not to offer a price discount, regardless of the final equipment discount that was offered to the customer. Also the company mediated and brought the three OEMs to a discussion platform, explained to them as to how all 3 of them and our companies are losing money because of the price war. In fact a solution was brought about where in the all India operations were divided into 3 zones and each of these 3 zones were to be handled by one of the 3 OEMs and focussed on combating other competitors and ofcourse, by offering value addition to the equipments.
Abhijit, I love your question.
Let us not even discuss customized products because, for these, the price is negotiated before you accept the order and by that time a good discussion has happened and both sides are well engaged to each other. Nevertheless, even in B2B, many times the customer does not fully understand the value of what the seller is offering. For example, very few salespersons can explain how a high quality material used in the making of the product will benefit the customer. To the extent he cannot, the customer will be reluctant.
Even for standard products the value is in the understanding of the customer and not into what the factory has put into the product. As the head of marketing at Eureka Forbes I have seen it time and again (in fact the whole Rs 1000 Crore business is built on it) that a vacuum cleaner for which a housewife is reluctant to even consider buying it – at the beginning of the sales call – lands up buying it willingly at a price double that of a similar model on the retail shelf.
Keep in the mind that the value of a product is subjective – entirely in the mind of the customer. Hence the importance of selecting the right customer – for whom you create value – and then having a “value creating dialogue” (this is important – the salesperson’s dialogue should be more focused on customer needs and less on product features. Whereas the traditional selling tells exactly opposite – selling fridge to an Eskimo and all that nonsense).
When your marketing people cannot locate the right customer, or when your offer is not suitable, or when your salespersons cannot have value-creating-dialogues; we come to the last resort – of dropping the price. PRICE IS IMPORTANT – BUT YOU SHOULD USE IT AS LAST RESORT. Of course, how to administer the price, channel margins, territories, price lists, schemes etc is a different matter.
Nice dispatch and this mail helped me alot in my college assignement. Gratefulness you as your information.
Having professional interest in Negotiations, I read some books on pricing and associated concepts in economics. Understanding pricing requires clarity about concept of Value(economists have studied it for almost 200 years now), Market reality (demand-supply, demographics, cost of doing business in the geography), Customer behavior and Marketing strategy (positioning)
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