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Price as a marketing tool

Shunu Sen

I am a student of management, and a question that has been baffling me for quite some time now is: Do frequent price cuts have a positive or negative effect on the image of the company, and don't you think that such frequent price cuts leave the customer feeling cheated because he thinks that he has paid more than the product's worth? Also, don't you think that the same customer will be reluctant to go back for any other offering from the same company.

A recent example that comes to my mind is that of Akai; the company was offering music systems at a discount in exchange for an old system at Rs 2,990, and after a fortnight it slashed the exchange price to Rs 2,490 for the same music system. D on't you think that this price cut may have left some customers who bought the system at Rs 2,990 feeling cheated, and would have developed a negative image about the company?

- Ashish Mehta, on e-mail

Price is one of the most effective marketing tools an organisation has to promote a product or service. It is not just a tactical tool for fighting competition. More importantly, it conveys an image of the brand, affects demand, and can be a tool for com petitive and target market segmentation. A carefully designed pricing strategy enables an organisation to respond to business conditions and opportunities.

In a recent column I had tackled the value positioning issue wherein I had explained that there are just five different types of price positions that represent how consumers perceive a brand and the value derived from it. They are: premium -- where the b rand cost much more, but is a lot better; mainstream -- reasonably priced, but a lot better; economy -- you get what you pay for; bargain -- costs less, but a lot, lot better; and rip-off -- costs more and is not good.

In my perception what is dangerous for any brand, say, as in the case of Akai, is to get associated as a `discount' brand, which uses price-slashing tactics to attract more and more consumers. While in the short term the brand may manage to get sales, us e of price cuts over and over again will affect the brand's perceptions in the long run.

Price cuts which are then announced month after month and keep varying all the time will definitely affect the perception amongst the brand's potential consumers. Definitely, a brand which keeps resorting to discounts or `sales' and not even in the conte xt of a competitive strategy will lose its aspirational value. However, I must say that the exchange scheme of `old for new', made popular by Akai when it was a brand marketed by Baron, was a runaway marketing success.

In the consumer electronics category, most new products when launched, for example, the plasma TV, are at the high end of the market and with time the prices start dropping. I am sure we all are familiar with the home PC getting more affordable and findi ng a place in several SEC A households. Hence, a gradual drop in prices does not really play a role in the perception of the brands in this case, but in actually increasing the penetration of the product.

I would also like to point out some critical aspects in pricing of a product. The first step in selecting the proper pricing strategy is to determine the marketing objective for the product or service. An individual product or service may have more than one objective and this will most likely change over time depending on the product life cycle. For example, the objective of a new product may be building market share or providing a member service. As the product matures, the objective may change to use the product or service to attract new members.

Moreover, it is imperative that the pricing strategy incorporates the notion that price should be based on the value of the product or service to the consumer. Pricing follows directly in line with the brand's position in the market, and clearly, if the price does not generate the desired or necessary profits, then changes must be made or the product line discontinued. Price is the only element in the marketing mix that produces `revenue'. The other elements produce `costs'.

Marketers must exercise caution when they resort to price cuts under competitive pressures. A good marketer needs to focus on actually building the desensitising factors or price insensitivity by creating significant consumer loyalties. This works best w hen products are backed by outstanding personal selling or excellent after-sales service which makes the consumers prefer the brand despite the price premium.

(The author is CEO, Quadra Advisory, a strategic marketing consultancy. Readers may send in their questions on marketing issues to The Editor, Business Line, 859, Anna Salai, Chennai-600002 or e-mail them to bleditor@thehindu.co.in)