In this article we will discuss about:- 1. Pricing Methods in Rural Markets 2. Pricing Strategies in Rural Markets 3. Factors.
Pricing Methods in Rural Markets:
Much of pricing policy exists for perfect markets; it assumes that consumers have full information, are spoilt for choice, have easy access to goods, and that producers have flexible resources to increase supply and demand at will. It also assumes that people will buy some quantities of goods no matter at what price they are offered. These assumptions unfortunately do not work in rural markets; neither do consumers have full information nor do producers have flexible supply chains.
Pricing strategies come from economics. Students of economics learn about the demand curve—more goods can be sold if prices are low—and managers devise pricing policies based on costs, value, demand and competition. Pricing strategy can help a company use pricing to achieve its goals, such as achieving penetration, market share or profits. However, much of the pricing theory fails in rural marketing.
This is because companies have to work around low purchasing power, availability of local brands that are priced cheaply and price points that are convenient for customers. That is why, prices for rural markets must fit market conditions and satisfy the need for affordability. In addition, the pricing must cover costs, which are quite high in rural markets.
Some of these methods are:
1. Cost-Based pricing.
2. Value-Based pricing.
3. Demand-Based pricing.
4. Competition-Based pricing.
1. Cost-Based Pricing:
Cost-based pricing policy rests on the principle of recovering all costs in manufacturing and selling a product. It is a pricing method in which a fixed sum or a percentage is added to the total cost of producing and selling a product to arrive at its selling price. The company thus recovers the costs incurred and achieves a profit as well. This method is simple and is based on internal information from financial and accounting records to give a figure of fixed costs (FC) and variable costs (VC).
Cost-based pricing can be represented as a simple equation:
Selling price = (FC + VC) + Mark-up
In rural markets, apart from FC and VC, the cost of selling and distribution must be added. These are often hidden and difficult to calculate. They are also very high, because economic modes of transport do not exist. As a result, cost-based pricing method does not work in modern market conditions. It may lead to high prices in weak, scattered markets, making the effort of selling difficult. Moreover, in rural markets the challenge for companies and brands is to establish themselves.
A purely cost-based pricing may lead to high prices that turn away rural consumers. By bearing in mind the prices they can charge and the costs they can pay, companies have to determine whether their costs will enable them to compete in low-cost markets where customers are concerned primarily with price, or find richer customers in the premium-price market in which they are primarily concerned with quality and features.
2. Value-Based Pricing:
Value-based pricing is a method in which price is set on the basis of the value perceived by the customer in buying and using a product. The perceived value of a product is the sum of attributes and psychological value. Consumers derive value from a product or service from their needs, preferences, expectations and desires. The job of a manager is to find out from customers and research the market to determine how value is placed on a product or service.
Value-based pricing is a psychological pricing strategy. Value in the minds of the consumer is achieved by creating desire by product attributes, advertising or adding status to products. Value has to be communicated and this is not so easy in rural markets. Much of communication and consumer engagement has to be done directly by companies in the absence of mass media. Except for high-end brands, rural consumers are more likely to be swayed by functional benefits than by features that merely enhance aesthetics.
3. Demand-Based Pricing:
Demand-based pricing follows the classic demand curve taught in basic economics classes; it simply means that if prices are low, demand will be high and vice versa. Demand-based pricing focuses on the level of demand for a product or service, not on the cost of materials or of making it. According to this policy, companies try to assess demand at different prices, or the amount of products or services they can sell at different prices.
Some companies, selling luxury or aspiration goods, limit supplies in order to sell their products at high prices. Others, dealing with mass production goods, use pricing policy to sell goods at low prices and hope to achieve volumes because of that. Production and sales are based on these calculations.
However, it is quite difficult to estimate demand of any product based on different price levels, more so in villages. Estimating demand in rural areas is even more difficult than in urban areas, because a host of factors are at play, many of which are simply not apparent.
4. Competition-Based Pricing:
Competition-based pricing is relatively simple, because the company sets its prices by looking at prices of similar products offered by competitors. Prices of competing products are used as a benchmark for setting prices.
Once prices of competitors are known, the company may decide any of the following three strategies:
i. Pricing at Par with the Competition:
The company chooses to price its products exactly at the same price as competitors. For instance, if a cold drink is being sold at Rs. 25 per bottle in a market, a competing manufacture will also price its product at Rs. 25 per bottle.
ii. Pricing above the Competition:
The company sets a price higher than its competitor by highlighting the superiority of its products over those of others, hoping that customers would like to buy their superior or longer lasting product.
iii. Pricing below the Competition:
The company prices its products lower than those offered by competitors hoping that customers might like a cheaper product than other, more expensive but similar products.
In competition-based pricing, the company does not consider its costs of manufacturing and selling or the demand of the product, but only prices of similar products.
Each of the mentioned strategies has advantages and disadvantages. For instance, while pricing at par, the company must have a similar cost structure as that or the competitor. If the costs are higher, competition-based pricing will lead it to ruin. This method is fraught with another danger—if a company prices its products at par with local brands, it will impact consumer perception – consumers will perceive its products being of the same inferior quality as the local brands.
While pricing above the competition, the company runs the risk that customers may turn away from expensive products. Pricing below the competition carries the risk of a price war—if the competitor also reduces prices, the company is forced to reduce prices even further, which could lead to losses. In rural markets, competitors are usually low-cost local brands. Pricing at par or below the competition is almost impossible for big brands, which have higher costs. Such brands have to compete on communicating value rather than price. Innovative strategies have to be thought of rather than competing on price.
However, competition-based pricing policy is easy since competitor prices are easy to find, allowing companies to set prices quickly and with little effort.
Pricing Strategies in Rural Markets:
The pricing strategies are summed up below:
Comparison of Pricing Strategies:
1. Definition – A pricing method in which a fixed sum or a percentage is added to the total cost of producing and selling a product to arrive at its selling price.
2. Method – Cost-plus pricing, mark-up pricing.
3. Advantage – Easy availability of data.
4. Disadvantage – Does not vary with demand or volume.
1. Definition – A pricing method in which price is set on the basis of the value perceived by the customer in buying and using a product.
2. Method – Advertising and psychological value assigned to product attributes by customers.
3. Advantage – Can contribute to high profit.
4. Disadvantage – Very difficult to assess psychological value.
1. Definition – A pricing method based on demand of a product at different levels of price.
2. Method – Price sensitivity, price demand analysis.
3. Advantage – Caters to variable prices.
4. Disadvantage – Demand cannot be easily assessed.
1. Definition – A pricing method in which the seller uses prices of similar and competing products as a benchmark of setting prices.
2. Method – Competitor prices of similar products.
3. Advantage – Very easy to implement.
4. Disadvantage – May lead to price wars.
New and Established Products:
Product pricing strategies frequently depend on the stage a product or service is in its lifecycle; that is, new products often require different pricing strategies than established products or mature products. For rural pricing, most products will have to be treated as new products.
If the price is too high, volumes will not be achieved, whereas if the price is too low, it becomes difficult to recover costs of selling and distribution in remote areas. This means that rural pricing should enable companies to recover their costs while, at the same time, keep their margins low through creative pricing policies.
While product cycles in urban markets are shortening and companies have to recover their investments quickly, in rural markets product cycles are relatively longer and afford companies a chance to develop the markets. Companies such as Jain Irrigation, ITC, Fabindia and many others have invested for the long run and gained traction over the years.
When a company launches a new product, it follows one of two policies. One is market skimming, meaning that prices are kept deliberately high as there are no competitors, thus making the customers pay high price. In this case, the company tries to make maximum profit in the initial phase. Many technology-related products, for instance, follow the market skimming policy, initially pricing their products highly but decreasing them later.
The opposite is market penetration, in which prices are initially kept low to attract customers to get them hooked on to the product. Prices are increased once the desired mass of customers has been achieved. A case in point is that of SMS in India. When introduced, it was a free service, but the prices were increased once people got used to it.
Factors Impacting Pricing in Rural Markets:
Companies devise their own price policies depending on their objectives. Dealers are usually unwilling to stock low-price goods as they earn lower commissions from them. In any case, most goods are sold at prices higher than MRP printed prices to cover the cost of reaching remote areas. Hence, customers have to really see value in the brands to pay those high prices.
Rural pricing has to keep the following factors in focus:
i. Low Purchasing Power:
A major problem in rural areas is the lack of purchasing power. The SECC 2011 data for rural India shows that more than half of rural households depend on manual labour for livelihood and 75 percent of the rural population, or 133.5 million families, earn less than Rs. 5,000 per month. This means that for majority of the population, low prices are important.
ii. High Selling and Distribution Cost:
Activities such as salesmen travelling over long distances, sending small quantities of goods and collecting small payments add to high sales and distribution costs. Companies have to figure out how these costs can be recovered.
iii. Gaining Consumer Acceptance:
Prices have to be set keeping in view consumer acceptance. Usually the problem is in trying to sell high priced brands when similar unbranded products are available at cheaper prices.
iv. Difficulty of Communicating Value:
High prices imply that the company is able to communicate value to the customers. This is often a difficult task in villages and it depends on direct selling.
v. Local Brands are Cheaper:
While in urban areas brands can use competition-based pricing, competition in villages comes from unbranded or local brands, which offer reasonably good quality. These products also have substantial loyalty. Companies have to figure out ways to fight these products that are priced much cheaper than bigger brands.
Innovative strategies have to be devised to keep prices at low level despite the high costs of serving rural markets. Such strategies as that of Tata Tea, which partnered with local people instead of going through dealers, or that of Grameen Bank in Bangladesh, which was able to reduce call rates for rural customers by buying air time in bulk from Grameen phone.
Because of the aforementioned reasons, marketing in rural areas can only succeed if prices are made affordable. Many pricing methods like market skimming will fail and innovative techniques will have to be devised to reach such customers.
A Complicated Market:
Prices for different market segments are devised on the assumption that all customers do not have the same needs, expectations and financial resources. Segmentation is successful when a company knows the factors that motivate particular segments to buy products. For rural markets, a company has to find out customers who are mainly motivated by price or by functionality and utility.
Another important task is to find segments that are motivated by aspirations. Many rural customers aspire to be like urban dwellers and are willing to spend for achieving that. Though people in rural areas are willing to spend on aspiration-motivated goods, the lack of formal banking channels and tougher availability of loans means that spending power remains limited.
Rural pricing decisions are not easy because markets are imperfect. Many of the pricing strategies do not work because of the unique nature of rural markets. Innovative approaches are more likely to succeed than time-tested methods used in urban markets.