An Analysis of Pricing Scenario

GROUP : CANNONBOLT ,DATE-10th MAY,2013

A REPORT ON

“Pricing strategy and scenario of “RFL PLASTICS (JUG)”

Course no: 412

Submitted to:

Moutushi Tanha Assistant Professor Department of Marketing University of Dhaka

Submitted by:

Group: CANNONBOLT

B.B.A. (16th Batch) Section: B Department of Marketing University of Dhaka

Date of submission: May 10th, 2013

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Name of Members Roll no.

Md .Afshanul Hossain 44

Irfanul Haq 80

Shaikh Md. Rasel 82

Md. Asaduzzaman 162

Md. Murshedul Alam 172

Md. Saddam Hossain 258

Acknowledgments:

"We would like to thank our course teacher, Moutushi Tanha, for the valuable advice and support she has given us in the writing of this report. We would also like to thank our librarian for his attempt to help us. Thanks also to our all group mates for collaboration. Our deepest thanks go to our internet service providers for good services as well as the Maj. Gen. Amjad Khan Chowdhury of the RFL who referred with precious information which was inevitable to accomplish this practical research.”

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Letter of TransmittalDate: May 10, 2013ToMoutushi Tanha Assistant ProfessorDepartment of MarketingUniversity of Dhaka

Dear Madam,

It is honor and great pleasure for us to present our Project Report on “Pricing strategy of RFL plastic (jug).” This report was assigned to us as a partial requirement of the “Pricing policies and procedures” (course-412) in the 4th year 1th semester.

The project program was an experience of rediscovering our potentials and full excitements. This report has given us an opportunity to apply our theoretical expertise, sharper our views, ideas, and communication skills, and bridge them with the real world of practical experience, which will be a good head start for our future professional career.

During the preparation of the report we faced some problems that have been erased out with your profound lecture and assistance. Without your cooperation and guideline this report would have been an incomplete one.

Finally, thank you for your supportive thought and kind consideration for formulating an idea.

Lastly we would be thankful once again if you please give your judicious advice on our effort.

Sincerely yours,The members of Group- CannonboltDepartment of MarketingUniversity of Dhaka

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Executive Summary

In our entire report we have tried to focus on the pricing strategies practices of RFL plastic (jug) in Bangladesh. We have divided the topics of the report into different segments. First we have discussed about the origin of the report, objective and scope of the study, the method of preparing the report, limitations of the study. Then we have given the theoretical idea about the topics we are going to discuss so that the reader can understand the topics clearly. Thereafter we have discussed about plastic industry in Bangladesh in brief. Then we have entered into the core part of the report that encompasses various perspectives how RFL arrives at their prices and strategies. Finally, we drew a conclusion on the basis of whole report.

Table of contents:

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Serial no Topics Page

1 Introduction 06

2 Company background 07

3 Introduction of product 07

4 The nature of pricing process 085 Critical factor in pricing 09-106 Factors affecting pricing decision 10-127 Price structure 12-138 Price-quality relationship 15-179 Allocation of cost 17-19

10 Cost volume relationship 19-2211 Break-even analysis 23-2612 Pricing decisions 26-2913 Retail pricing 29-3114 Pricing and legal issues 31-3315 Pricing in international market 33-36

16 Appendices 37

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Introduction

Origin of the Report:

As a partial requirement of BBA Program we are required to study the “pricing policies and procedures”. In the classroom we get the opportunity to know the theoretical part of the subject. But without practical orientation it is somewhat difficult to grasp the core concept, we are required to prepare a report on practical situation, So, in order to enhance the understanding of the core concept, we are required to prepare a report on practical situation to understand how to implement and practice the theoretical part in real life situation and for the social welfare.

Objectives of the study:

General Objective:

The general objective of this report is to find out the pricing strategies, policies and procedures of RFLSpecific Objectives:

To measure the usage of core management. To identify the importance of cost in pricing decisions To identify the level of practices and strategies of the RFL To Identify how it affect their work To measure the performance

Scope of the Study:

The topic of our report is “Pricing strategies and scenario of RFL”. So the report will only be applicable for pricing other than the report will not work at all for others. Because we just work only based on the RFL and internet information. We didn’t use imaginary or irrelevant ideas. All of our ideas and information based on facts.

Methodology:

The report in this study is basically on inductive one. The report is based on both primary and secondary information.

Primary Information:

The primary data have been added from our class lecture and from the books.

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Secondary Information:

The secondary information has been extracted from various brochures and prospects of RFL and company visit information . Other notable information that was used for this report was the information gathered from internet.

Company Background

RFL Plastics is a sister concern of PRAN-RFL group. The group has a turnover in the vicinity of USD $0.5 billion. Primarily Rangpur Foundry Ltd (RFL) was founded by Maj. Gen. Amjad Khan Chowdhury (Retd) in 1981 with a vision to leveraging the farmer in irrigation through cast iron products like centrifugal pump as well as ensuring drinking water through Tube well. After that it commenced its operation in plastics business in 2003. The factory sites are in company owned industrial parks of 300,000 sq meters, which is fully equipped with state of the art injection molding machines with a conversation capacity of over 10,000 tons per month.

RFL Plastics currently utilizes 1200 molds through 250 machines having own tooling facilities.

RFL is a very strong organization of 10,000 employees dedicated to supplying customized and quality plastic products globally.

Product introduction:

In this report we will only focus on a particular product of RFL plastic –“jug”. RFL has various types of jug namely-

1. Conical jug 2. Trans blue juice jug3. Two color jug4. Beauty jug5. Blue designed jug

6. Trans blue decorator7. Blue design8. Prism jug

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9. Dolphin design jug10. Trans blue orcid11. Cristal jug 12. Designed jug

The nature of the pricing process of RFL:

Of all the decisions made by the management of RFL, pricing is undoubtedly the most visible because it’s direct impact on its performance in the market place and overall level of profitability. Price of Jug is quite visible in nature as consumers know well what they are paying for the required product. RFL considers many factors in determining a pricing strategy. One useful approach categorizes these as intrinsic and extrinsic factors. Intrinsic factors are the baseline needs, such as costs, product characteristics, and soon, and the regulatory system which places limitations on how those needs can be met. Extrinsic factors are related to the economic and operating environment of procurement, including product differentiation, demand, and the number of firms involved. Besides, there are some factors that contributed to making the marketplace much more difficult place for RFL to do business:

Globalization Accelerated changes socially and demographically in customers. Shifts in public policy Technological changes

By considering the customer satisfaction and cost consideration RFL can come about through the premise that increases in quality resulting in increased customer satisfaction can lead to reduced costs through improving market place performance .As a result successful pricing bridges the gap between internal costs and external market demand to achieve a positional advantage. The strategic options for RFL are defined by:

Cost structure of the firm: RFL sells provide reasonable product with reasonable price. Competitive status of the firm: RFL is the market leader in the plastic industries. Marketing strategies based on competition: RFL usually formulates marketing strategies

based on the competitors in the relevant field such TALUKDAR plastic, TANIN plastics etc.

Organizational capabilities: Being the market leader, RFL possess enough resources that is their competitive advantage.

Critical factors in the pricing decision of RFL:

Effective cost information: Management of RFL needs to look carefully at the costs involved in the allocation of resources to create and define the product. This means not only manufacturing and distribution cost but special marketing and technological costs.

Customer valuation: Rather than compete on price alone, marketers of RFL think in terms of total value as perceived by the customer combination of features and

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experiences that create a total customer perception of value. What a customer will pay for a product or products does not relate solely to physical features or performance as well as symbolic features. Customers of RFL not only pay for the exact product(Jug) price but also for symbolic features like: durability, stylish design, status and prestige .

price price

featuresfeatures

Figure : Conceptualization of providing total value to customers(4)

Market targets: The total market for RFL plastics(Jug) can be segmented because of the differences between groups and needs of customers. RFL offers various types of plastic Jugs including difference in color, shape, design and sizes. These difference may allow for product and pricing differentials whereby no segment is buying the same product or paying the same price as another.

Competitive dynamics: It is important for RFL to know who are their competitors. The major competitors of RFL are Tanin plastics, Talukdar plastics, Bangal plastics,Thai plastic. It is important for RFL to observe the reaction pattern of the price cut and price increase among their competitors. Besides they also observe the previous record of the industry pattern, capacity and price structure.

Pricing strategies:

Scale: RFL observe the size of their the plastics (Jug)purchases pricing separately for individual customers.

Consumer knowledge: RFL observes whether their actual and potential customers are aware of their products.

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Marketerscompetitors

Cost and differentiation

Demand: RFL observe how the law of demand is working in case of their customers. Besides they observe whether price can influence the purchasing decision of the consumers.

Information: In this case the marketers are to know about the micro and macro environment factors of pricing their plastics (Jug).

Competitive substitute: The major competitors of RFL are Tanin plastics, Talukdar plastics, Bangal plastics,Thai plastic. RFL constantly compare its price with these companies.

Patronage: RFL observe whether customers will favor their competitors for non-price reasons. In that case RFL consider their product, promotion and place to fight with.

Factors Affecting Pricing Decision

Pricing the product is one of the important elements in marketing mix. Bresnahan (1989)

argued that until recently it has been one of the most neglected areas. Even today, pricing in

some firms is simply based on the concepts of cost, market position, competition and necessary

profits.

Figure 1: Critical factors that affect the pricing decision

Objectives of the Business: There may be various objectives of the firm such as getting a

reasonable rate of return, to capture the market, maintenance of control over sales and profits

etc. A pricing policy thus, should be established only after proper consideration of the

objectives of the firm.

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Factors Affecting

Pricing Decision

Objectives of the BusinessCost of the ProductMarket PositionCompetitors PricesDistribution Channels PolicyPrice Elasticity and Demand ElasticityProduct’s Stage in the Life Cycle of the ProductProduct DifferentiationBuying Patterns of the ConsumersEconomic EnvironmentGovernment Policy

Cost of the Product: Kullback (1959) analyzed cost and price of a product are closely related.

Normally, the price cannot or shall not fix below its cost (including the product, administrative

and selling costs). Price also determines the cost.

Market Position: The prices of the products of different producers are different either because

of difference in quality because of the goodwill of the firm. A reputed concern may fix may fix

higher prices for its products on the other hand, a new producer may fix lower prices for its

products. Competition may also affect the pricing decisions.

Competitors Prices: Competitive conditions affect the pricing decisions. The company considers

the prices fixed and quality maintained by the competitors for their products.

Distribution Channels Policy: Miller (1994) discussed that the nature of distribution channels

used and trade discounts which have to be allowed to distributors and the distribution

expenses also affect the pricing decisions.

Price Elasticity and Demand Elasticity: Price elasticity affects the decisions of price fixation.

Price elasticity means the consequential change of demand for the change for the change in the

prices of the commodity. If demand is elastic, the firm should not fix high prices rather it should

fix lower prices than that of the competitors.

Product’s Stage in the Life Cycle of the Product: Mittelhammer and Cardell (1997) claimed that

Pricing decision is affected by the stage of product in its life-cycle. In the introductory stage of

the product, it is the price strategy which determines the price of the product.

Product Differentiation: The price of the product also depends upon the characteristics of the

product. In order to attract the customers different characteristics are added to the product

such as quantity, size, color, alternative uses, etc.

Buying Patterns of the Consumers: If the purchase frequency of the product is higher, lower

prices should be fixed to have a low profit margin. It will facilitate increasing the sale volume

and the total profits of the firm (Bresnahan and Peter, 1991).

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Economic Environment: In recession period, the prices are reduced to a sizable extent to

maintain the level of turnover. On the other hand, the price and increased in boom period to

cover the increasing cost of production and distribution.

Government Policy: Price discretion is also affected by the price control by the government

through enactment of legislation when it is thought proper to arrest the inflationary trend in

prices of certain commodities.

Price structure:

Price structure is defined as a series of the price levels that represent how a product will be priced. Generally price of a product/product varies with market-segmentation. The more sub-segments the more marketers can serve their customers properly. In this case RFL can serve its customers properly as they have some sub-segments of their customers on the basis of products features. Here they get some benefits:

Greater flexibility in pricing Rapid adjustment to competitive trends in the market place Enhancement of market segmentation strategies

Constraints on pricing practice:

Although market valuation and costs of products are major pricing determinants for RFL. Still there some other constraints:

Industry membership: As a market leader RFL has to always apply defensive pricing strategy.

Structure of the marketplace: The more competitive the industry, the easier is the pricing decision. This has resulted in the increase use of different forms of non-price competitions for RFL such as customer satisfaction, product design and status symbol.

General economic conditions: It is difficult for RFL to increase price during the time of recession as the purchasing power of consumer at that time is not good enough to pay increased prices for the its product(Jug).

Legal constraints: RFL has to abide by some legal constraints set by the government such as: increase in raw materials price.

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Market interpretation of price:

Price as a part of marketing mix:

Price as an element of the marketing mix generates revenues to the firm. Effectiveness in pricing is viewed in terms of product positioning and total profitability. Firm with high relative quality with relative price has significant return on investment that RFL follows. Marketing management weigh the behavioral aspects of price and then juggle all the elements of marketing mix, including price as an effort to attain the goals set forth. The elements of the marketing mix are synergistic that is the actions of elements taken together increase each other’s effectiveness. So, price is not an isolated fact rather it’s an accumulated decision.

Effective combinations high of price and quality can produce a favorable strategic position in turn higher profits . Firms classified as having high relative quality with low relative price report the highest return on investment; they are followed closely by firms designated as having high relative quality and high relative price. Interestingly enough, the return on investment for high quality, high price firms tops that of low quality, low price firms by ,more than a two-to-one margin or 34% to 15 % .The poorest performance are medium-quality, medium-price firms, with only 2% return.

Table: Return on investment as a function of quality and price

Relative price Relative qualityLow(%) Medium(%) High(%) Average(%)

Low 15 11 36 21Medium 9 2 16 9High 17 18 34 23Average 14 10 29 17

Price as purchasing information:

Price is set for both functional aspects and non-functional aspects by RFL. So, RFL works on the value seeking customers. They transfers the intangible facts of pricing into tangible facts. Customers are always concerned about the psychographic features. They also use price to sort products into group of categories by doing so they lost convey impressions about their products. Whether or not price provides information to the customer depends upon the inferred relationship between price and the product and also the reliability of that relationship.

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That means the product price of the RFL convey the message that as the price of the products are high enough for the customer, it conveys that the product provided by the RFL can be depended upon. RFL associates higher price with better quality and so their pricing is justified enough.

Usually the greater the variation between brands, the greater the tendency to pay a higher price as a payment for some identifiable product characteristics. Thus the customers of RFL are ready to pay a higher price as a payment for some identifiable characteristics compared to other contemporary brands with RFL. As the social importance of product choice increases, the relationships and their dependability of price as information increases proportionately. A higher price by excluding a large portion of the market defines status and differences in that RFL is able to possess their product.

Figure: Reliability of price/quality relationship (9)

Low High

High substitutability

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Necessities Convenience

Staples

Shopping goods

or products

High

Consumer interpretation of the price of RFL:

Time implications: Customers always consider delays in getting product a time cost. As a result products that are readily available command a premium price as a trade-off with time costs. RFL always strictly maintain their quality with price for their customer’s convenience and satisfaction.

Psychological implications: It means customers do value some non-economic functions of the product they get. As a non-economic function, RFL provide the feeling of prestige to their customers that they really care for. So here RFL make their full justification to high quality with high price.

The Price-Quality Relationship:

Research shows that the consumer's perception of product quality is related closely to the item's price. The higher the price of the product, the better its perceived quality. RFL is taking the advantage of high price here. They provide high quality product with high price and customers are willing to pay for this high price for high quality product. It is possible to measure quality, then quality difference can be compared to price differences. Comparative value can be determined by following formula:

CV = (QH – QL)/QH

(PH−PL)/PH

Where CV is the comparative value or the relative differences in value between a high-priced product (H) and the lower price product (L),QH is the quality dimension of (H), QL is the quality dimension of L, PH is the price of L.

Here is a comparison of RFL with other competitive brands based on quality rating and list price of plastic Jug:

Brand Quality rating List price(jug)BDTRFL 97 150Talukdar 89 140Tannin 76 140Bengal 71 130

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Positional goods or products

Rahamat 63 125Thai 50 100

Figure: Quality rating and list price of brands( 8)

Factors considering for fixing price by RFL:

One of the determining factors for plastic product prices is the production cost. Other reasons are as follows:

a) Cost of raw materials

b) Machineries cost

c) Advertising and promotional cost

d) Competitors reaction

e) Distribution cost

Price adjustment by RFL:

(a) Changes in operating costs and revenue since the last price adjustment;

(b) Forecasts of future costs, revenue and return;

(c) The need to provide the producer with a reasonable rate of return;

(d) Public acceptability and affordability; and

(e) Quantity and quality of service provided.

Role of costs in pricing:

RFL always tries to reduce the price, extend the operation and improve the product. They reduce the price to a point where they believe more will result. The new price forces cost down. Using cost to determine price may be scientific in the narrowest sense, but not in the broader sense.

Impact of cost on pricing:

RFL treats cost management as synonymous with pricing in elaborating the four P’s (product, price, place, promotion) of marketing in strategy formulation. A watchful eye on cost and how they affect pricing and in turn margins is necessitated by two conditions.

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global competition constant streams of new ways to contain cost and become more cost effective market

RFL took their all salespeople off the road and made them online based. The result was a 10% reduction in selling expense with a doubling of sales volume.

Cost structure pricing:

While some cost can be easily detected, calculated and allocated to the price calculations of the RFL plastic (jug), others may either escape the attention of the management or be of such a nature that the prediction of their probable impact on price is almost impossible to make with any degree of accuracy. Examples include

1. service liability cost2. recall cost3. Costs of services rendered unsalable by noncompetitive circumstances.

Allocation of cost:

As market becomes more complex, product lines proliferate and competition becomes increasingly diverse, firms cannot afford allocation scheme that paint vague and inaccurate portrayals of their respective cost structures.

There are two approaches of cost allocation followed by RFL

allocation of cost on the basis of activities allocation of cost key determinants of the competitive advantage

Forecasting cost;

Past cost are less important than current costs and current costs are less important than what costs will be in the future.

Steps followed by RFL —

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Determination of the relative positions of the cost categories currently

Forecast the change in the relative cost position

Forecast the extent of changes within each of the respective categories

Cost concept:

Looking at cost from the standpoint of their use in pricing, normally two types of questions are asked by management body of RFL. They are-

What type of costs is involved? Variable cost Fixed cost

What costs have the greatest impact on customer? Features or benefits Individually or collectively Reflection in pricing

Fixed and variable cost:

Fixed costs are the cost of being in business for a period of time and only vary time to time.

Fixed costs are, as the name suggests, those costs that you will incur regardless of how much business you do. A typical example would be office space or salary costs of permanent members of staff. While all costs are actually variable over time, the essence is to include those costs which it is very difficult to remove and that don’t vary widely according to how much business a company do.

Cost-volume relationship:

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Figure : cost –volume relationship(10)

From the above graph, we can conclude that if RFL produces more number of jugs, the variable cost will be distributed among the produced volume which will ultimately result in cost reduction in every product (jug).

Structural factors influencing cost:

The more predominant structural factors affecting product cost can be grouped under several headings.

These include:

I. Economies associated with volumeII. Economies of scope

III. Core linkagesIV. Outsourcing and balancing

Economies associated with volume:

There are several reasons why utilization of capacity impact product cost.

The variable cost accompanying increasing volume are relatively small or inconsequential in comparison with fixed cost

The saving from purchasing needed materials, supplies and services in quantity The savings from utilization of unproductive time More efficient utilization of manpower in all areas of the firm

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Limitations of economies of scale:

Growing heterogeneity of most markets Growing diversity Lack of growth in markets Saturated markets

Economies of scope:

Different between volume and variety Emphasis on software rather than hardware Production of multiple products by using same machinery Emphasis on specialized machinery and equipment High volume of production

Figure: a typical experience curve (11)

Core linkages:

Core linkages are relationships between activities where the way one is performed materially impacts cost of performing the other.

In RFL the purchase of a higher quality raw materials and the use of latest technologies in production reduces both manufacturing cost and time . Savings from core linkages results from two factors-

Coordination Optimization

Basic approaches to pricing:

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Actually there are three basic approaches to pricing. They are—

Cost oriented Demand oriented Competition oriented

RFL basically follows the cost-oriented approach to pricing.

Cost-oriented pricing:

Cost-oriented pricing is the most elementary pricing method. It involves the calculation of all the cost that can be attributed to a product whether variable or fixed and then adding to this figure a desirable markup as determined by management.

Features of cost-oriented approach:

Simplicity Cost-justification defense of price discrimination Widely accepted method Delivering the desired result in a relatively short period of time

Why RFL uses cost-oriented approach?

1. Cost-oriented approaches are defensible on ethical grounds2. Cost-oriented approaches use readily available data3. Absence of knowledge more sophisticated technique4. Industry wide accepted practice

In following cost-oriented approaches RFL faces some sort of weaknesses. They are--

Ignoring marketing environment Incorrect or distorted cost information The circular reasoning phenomenon The volume fulfillment assumption Failure to recognize competitive forces Overlooking price as a strategic options Possibility of having to rise price when sales volume falls below expectation

Volume assumptions for purpose of cost calculations:

An important point to bear in mind that changes in volume will affect per unit cost. There are four different approaches to the question of volume.

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An assumption of low volume: this approach is a conservative one. Management is cautious about the future sales performance of the product and assumes a low volume. This approach results in higher overhead of per unit output leading to higher prices.

Assuming the continuation of current volume: this approach can be reasonably sound particularly for industries which experience little or no cyclical fluctuations in their business. This is applicable only to industries with existing operation and not to new products and firms.

Using the best estimate of future volume: it is highly optimistic and risky approach. The weakness of this approach is its dependency on circular reasoning in arriving at the price. In order to able to forecast future sales, it is necessary to have a price. Per unit costs are a functions of volume which at this point is unknown.

Using a standard volume approach: standard volume is a projection of unit volume taking into consideration the varying condition over time in the firm as well as the cyclical fluctuation in the business condition demand and capacity utilization.

RFL:

Actually RFL maintains a standard volume in the case of projection of unit volume. They think this approach is designed to be representation of volume that is expected to prevail under normal or average condition adjusted periodically to reflect to favorable or unfavorable market condition.

Break – even analysis:

A management tool commonly associated pricing is cost-volume analysis or it is commonly known as break-even analysis. The break- even point is the point where there is no profit or loss. It is a portrayal or how many units of the product are to be sold if the firm wants to recover both fixed and variable cost from the sales revenue.

RFL Jug retail priceVariable cost per jugUnit contribution margin

Total fixed cost

BDT 120BDT 60BDT 60

BDT 7500000

Break- even point:

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Break – even point ¿Total¿ cost¿

Unit contributionmargin

¿750000060

= 125000 units

If the firm’s sales volume fall short one lakh twenty five units, in that case losses will be incurred. That can be best understood from the following calculations:

Sales (200000 jugs commercial at BDT 120)Less variable costs (200000 jug at BDT 60)ContributionLess fixed costs

BDT 24000000BDT 12000000BDT 12000000BDT 7500000

Profit BDT 4500000

Break- even chart:

Pricing decision can be made using the break- even poinnt either arithmetical or graphic form. The break – even chart is a graphic representation of the relationships discussed about

i. Costii. Volume

iii. Price

Taka is shown on the vertical scale on chart and unit produced and sold are shown on the horizontal scale. Break- even point is the point at which the total revenue line intersects with the total cost line. Profit and losses can be measured directly on the chart for any volume level. Profits are measured to the right of the break – even point at any volume are equal to the taka differences between the total revenue line and the total cost line. Losses on the other hand are measured to the left of the break- even point at any point are equal the difference in taka between the total cost line and total revenue line.

The break-even chart for RFL

Profit

130

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Break Even point variable cost

120

110 fixed cost

Loss

120 125 130 150

Volume (in lakh)

Profit volume graph:

In addition to the break-even point chart management may find that a profit volume graph is a useful graph showing how profits are affected by the changes in the volume produced and sold.

140

Profit

130

120 120 125 130 140 1

Loss Volume(in lakh)

110

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Profit (in lakh)

Figure : profit volume

Outcome with different pricing alternatives:

By using sensitivity analysis it is possible to have different outcomes by shifting the demand curve totally or in part to obtain pessimistic, optimistic or the most likely demand estimates.

Price alternatives(BDT)

Estimated sales volume

Total revenue(millions)

Expected total cost (millions)

Difference(millions)

200150130120100

100000110000120000125000150000

2016.515.62415

20.1151323.5520

(.1)1.52.6.45(5)

Demand estimation:

To be able to determine the optimum price when a number of price possibilities exist, one must obtain an estimate of the responsiveness of the quantity demanded of the product to price changes. There are a number of methods of estimating demands. The specific condition in the particular case may require using a different technique or may favor one over another. Each of these methods have advantages and limitations.

1) Aggregate sales representative estimates2) Expert estimates3) Analysis of historical data4) Surveys of buyer 5) Worth of product’s functional performance6) Test markets7) Laboratory experiments

Among these estimations methods RFL actually focuses on the analysis of historical data. Here a time series is developed. A time series is a set of observations on a variable such as sales volume in which those observations are arranged in relation to time. RFL actually focuses on the assumption that relationship between quantity sold and price in past periods can be used to predict sales at a given prices at a future period.

Pricing decisions:

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Pricing environment:

Even though the pricing environment varies from industry to industry there are some basic objectives and strategies that may apply equally to various industries. RFL attempts to carve out a niche or small viable market segment that can be addressed with a unique marketing strategy. RFL follows a segmentation strategy. In segmenting the market, RFL considers the following characteristics—

o Lifestyleo Income levelo Geographic locationo Brand personalityo Prestigeo Occupation o Statuso Life standard

Product portfolio:

Each product and segment is looked upon as having different needs and objectives by RFL. Differences can be expressed in terms of the following criteria—

i. Life-cycleii. Market share

iii. Growth potential and much more.

By using the growth share matrix (Boston consulting Group) each product is assigned a strategic role on the basis of its market growth rate and relative market share. There are four types of strategic business units.

Stars: stars are those business units having high growth and high share. In RFL the star product in jug category is Prism jug .

Cash cows: cash cows are those services that have a dominant share of a slowly growing market. In RFL the cash cow product in jug category is Conical jug.

Question marks: question marks are also known as problem children. These services are services with low share of fast growing market. In RFL the question mark product in jug category is Trans Blue Orcid.

Dogs: Dogs are those service units with a low share of a slowly growing market. In RFL Blue color jug is termed as dog .

Pricing objectives:

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Even though the most logical starting point for pricing would be the company’s objectives, it appears that RFL has no formal objectives. But in order to cope with the industry trend RFL maintains some sorts of formal objectives. Objectives of RFL are given below:

i. Achieve a specific target return on investment or on net salesii. Maintain or enhance a market share

iii. Meet or prevent competitioniv. Maximize profitv. Stabilize prices

Pricing strategies:

The price strategies selected by RFL naturally dependent on the objectives the firm has chosen to pursue. Actually there are verities of strategies present—

1. Skimming: A product pricing strategy by which a firm charges the highest initial price customers will pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment.

Therefore, the skimming strategy gets its name from skimming successive layers of "cream," or customer segments, as prices are lowered over time. Two types are--

Rapid skimming strategy Slow skimming strategy

2. Prestige pricing: Marketing strategy where prices are set higher than normal because lower prices will hurt instead of helping sales, such as for high-end perfumes, jewelry, clothing, cars, etc Also. called image pricing.

3. Penetration pricing: A marketing strategy used by firms to attract customers to a new product or service. Penetration pricing is the practice of offering a low price for a new product or service during its initial offering in order to attract customers away from competitors. The reasoning behind this marketing strategy is that customers will buy and become aware of the new product due to its lower price in the marketplace relative to rivals. Two parts-

Rapid penetration strategy Slow penetration strategy

4. Expansionistic pricing: Expansionistic pricing is a more exaggerated form of penetration pricing and involves setting very low prices aimed at establishing mass markets, possibly at the expense of other suppliers. Under this strategy, the product enjoys a high price elasticity of demand so that the adoption of a low price leads to significant increases in sales volumes. Expansionistic pricing strategies may be used by companies attempting to enter new or international markets for their products. Lower-cost version of a product may be offered at a very low price to gain recognition and acceptance by consumers. Once acceptance has been achieved more expensive versions or models of the offering can be made available at higher prices. The extreme case of expansionistic

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pricing, where offerings are made available to the (overseas) market at a price that is actually less than the cost of production is known as dumping. This practice is closely scrutinized by governments since it can force domestic producers out of business and many countries have enacted anti-dumping legislation. Markets that might benefit from expansionistic pricing strategies include those of magazine and newspaper publishers. Where low prices (annual subscription rates) attract a large number of subscribers, publishers can benefit from the higher rates that they are able to charge advertisers for their advertising ‘space’. Book and CD ‘clubs’ also use expansionistic to attract new members.

5. Preemptive pricing: Pre-emptive pricing is a strategy which involves setting low prices in order to discourage or deter potential new entrants to the suppliers market, and is especially suited to markets in which the supplier does not hold a patent, or other market privilege and entry to the market is relatively straightforward.

6. Extension pricing: Extension pricing is a strategy where companies set a basic price across the board for a product or service. Wherever consumers go, the price will be the same. It covers virtually all costs associated with production, including shipping, taxes, and other expenses that may arise. This pricing strategy is one among several options companies can use when they decide on pricing strategies. It has some advantages as well as drawbacks to consider. The practice has a long and established history. Consumers may be familiar with some products which are always priced identically, no matter where they buy them. These companies have an extension pricing policy, and typically require all their business partners to abide by the strategy. If one business attempts to undercut or mark up, it may lose the right to sell the product. This creates an obvious incentive to abide by the policy.

Companies use several metrics when establishing extension pricing. They think about the costs of production, along with expenses associated with packaging, inspecting, and shipping. In considering these factors, they need to think about remote distribution locations, because these can add to the costs of shipping. The goal is to generate a roughly equalized price that will balance these expenses out in the final retail price of the item to allow retailers to make good on their costs and generate a profit. With an understanding of the expenses, the company sets an extension price, the cost it wants customers to pay at the final end of the distribution chain. This allows them to determine wholesale prices, which subtract a standardized retail markup with some leeway for shipping costs. Companies with specific pricing agreements may periodically inspect price lists and audit stores to confirm that they are complying with the agreement. The consequences for violations can depend on the contract language. For consumers, this has a clear advantage, because they can buy a product anywhere and be assured of the same price. Businesses do not always fare as well under extension pricing. They may not be able to use these products in promotions and sales, for example, and may be stuck with stock they cannot sell. Demand for the product usually requires retailers to carry it, and they may use various sales products to increase

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revenues, using it as an anchor to draw customers in. If a store carries mattresses with extension pricing, for example, it could sell sheets and accessories to boost income.

Retail Pricing

There are many outside influences that affect profitability and a retailer's bottom line. Setting the right price is a crucial step toward achieving that profit. Retailers are in business to make a profit, but figuring out what and how to price products may not come easily.

Before we can determine which retail pricing strategy to use in setting the right price, we must know the costs associated with the products. Two key elements in factoring product cost is the cost of goods and the amount of operating expense.

The cost of goods includes the amount paid for the product, plus any shipping or handling expenses. The cost of operating the business, or operating expense, includes overhead, payroll, marketing and office supplies.

Regardless of the pricing strategy used, the retail price of the products should more than cover the cost of obtaining the goods plus the expenses related to operating the business. A retailer simply cannot succeed in business if they continue to sell their products below cost.

One Price versus Variable Price:

The term one price is a phrase used to mean the price of a good or a service is not subject to bargaining. The term commonly indicates that an external agent, such as a merchant or the government, has set a price level, which may not be changed for individual sales. In the case of governments, this may be due to price controls.

Bargaining is very common in many parts of the world, outside of retail stores in Europe or North America or Japan, this makes this an exception from the general norm of pricing in these areas.

One the Other hand, Variable pricing is a form of pricing of products or services as distinct from a fixed price. Traditional examples include auctions, bargaining, discounts, price skimming, penetration pricing and 'price shading' (where the seller may vary the price by a certain amount or percentage as required). Stock markets and foreign exchange markets are based in variable pricing, with pricing models generally becoming more sophisticated driven in part by reduced transaction costs using modern information technology; notably examples include yield management and congestion pricing.

Price Lining:

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Price lining, also referred to as product line pricing, is a marketing process wherein products or services within a specific group are set at different price points. The higher the price of a product, the higher the perceived quality to the consumer. However, while price lining can be profitable, it relies on a number of factors to make it work and is not always the best pricing option for every product or service.

Price Points

Using the price line model, each product or service within a group is set at distinct price points. Price pointing allows marketers to sell the same product but charge for additional features and options. For example, a car may come in three different styles: a value model, a standard model and a limited model. While each model has a different price point, the costlier model is seen as higher-end when compared to the base model, while both retain the same brand name.

Effect on Consumers

Price lining offers consumers the flexibility of choice. Those seeking additional features or higher quality are willing to purchase the product at a higher price point, while budget conscious shoppers or those that just want the basics may go for the lower-priced option. However, while consumers generally like to have choices, there is a danger that if the higher price point is not justified, they may disregard the product or service altogether. Therefore, it's important to set prices according to what consumers are willing to pay.

Advantages

Apart from offering purchasing value to consumers, price lining has several other advantages. Pricing products or services using this method offers companies higher profit without a high investment. Rather than focusing on offering several different products, marketers can focus on a single brand, which lowers advertising costs, labor and overhead. Price lining products also results in reduced inventory, which in turn reduces the cost of storage and upkeep.

Disadvantages

One of the disadvantages of price lining is its narrow focus on cost alone. As a business model, price lining does not take inflation or consumer purchasing trends into account. A weak economy, a change in purchasing patterns, or additional fluctuations in the market, may cause consumers to lean toward the lower-priced products, thus leaving companies stuck with higher-

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priced inventory. Also, if the differentiation of benefits between the higher and lower end price points is unclear or indistinguishable to end consumers, they may avoid the brand altogether.

Pricing and the Legal Issues

Price Discrimination:

Price discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider in a theoretical market with perfect information, perfect substitutes, and no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopolistic and oligopolistic markets,[3] where market power can be exercised. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, product heterogeneity, market frictions or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers, even in fully competitive retail or industrial markets. The effects of price discrimination on social efficiency are unclear. Output can be expanded when price discrimination is very efficient.

First degree price discrimination

This type of price discrimination requires the monopoly seller of a good or service to know the absolute maximum price (or reservation price) that every consumer is willing to pay. By knowing the reservation price, the seller is able to absorb the entire consumer's surplus from the consumer and transform it into revenues. The seller produces more of his product than he would to achieve monopoly profits with no price discrimination, which means that there is no deadweight loss. Examples of where this might be observed are in markets where consumers bid for tenders, though, in this case, the practice of collusive tendering could reduce the market efficiency.

Second degree price discrimination

In second degree price discrimination, price varies according to quantity demanded. Larger quantities are available at a lower unit price. This is particularly widespread in sales to industrial customers, where bulk buyers enjoy higher discounts.

Additionally to second degree price discrimination, sellers are not able to differentiate between different types of consumers. Thus, the suppliers will provide incentives for the consumers to differentiate themselves according to preference. As above, quantity "discounts", or non-linear pricing, is a means by which suppliers use consumer preference to distinguish classes of

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consumers. This allows the supplier to set different prices to the different groups and capture a larger portion of the total market surplus.

In reality, different pricing may apply to differences in product quality as well as quantity. For example, airlines often offer multiple classes of seats on flights, such as first class and economy class. This is a way to differentiate consumers based on preference, and therefore allows the airline to capture more consumers’ surplus.

Third degree price discrimination

In third degree price discrimination, price varies by attributes such as location or by customer segment, or in the most extreme case, by the individual customer's identity; where the attribute in question is used as a proxy for ability/willingness to pay.

Additionally to third degree price discrimination, the supplier(s) of a market where this type of discrimination is exhibited are capable of differentiating between consumer classes. Examples of this differentiation are student or senior discounts. For example, a student or a senior consumer will have a different willingness to pay than an average consumer, where the reservation price is presumably lower because of budget constraints. Thus, the supplier sets a lower price for that consumer because the student or senior has a more elastic Price elasticity of demand (see the discussion of Price elasticity of demand as it applies to revenues from the first degree price discrimination, above). The supplier is once again capable of capturing more market surplus than would be possible without price discrimination.

Pricing in International Market

Price: A part of the marketing mix: The price is what the customer pays for buying a solution. It includes direct and indirect costs as well as opportunity costs.Direct costs are cash outlays a customer makes in order to obtain something. An example would be admission to an amusement park. Direct costs are, in many cases, a relatively small part of the total cost.Indirect costs are costs associated with obtaining something. An example would be the cost of riding various rides in a amusement park, food and entertainment along the way etc. The total of the indirect costs is often more sometimes much more, than the direct cost. The total cost is obtained by adding the direct and indirect costs.

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Opportunity costs are what we give up when we do something. They can have various types of value sometimes monetary, sometimes not. Opportunity costs include other things you could be doing instead of going to an amusement park. Examples might include mowing the lawn or going to a baseball game (which would be non-monetary) and not working overtime on Saturday in order to go to an amusement park (which would be monetary).The price the park visitor pays to go to an amusement park is the total of all costs, including direct, indirect and opportunity costs. The perceived benefits of going to a national park have to be at least as great as the total of the costs if a potential park visitor is going to make a decision to go to a park.

Determining the price:How do you set monetary prices? There are basically two ways. These are cost-based pricing and value-based pricing. Cost-based pricing is based on the total of all costs associated with delivering a product or service to a customer. An example of cost-based pricing would be when an organization identifies all of the costs associated with producing a product or service, adds them up, adds a margin for profit (in the business sector) and arrives at the "price" the customer is to be charged. This type of pricing is the "floor" for pricing decisions in that it is as low as the price can be and still cover all of the costs associated with delivering the product or service. I'm unaware of applications of this type of pricing in the park service world, unless it might be applied by concessionaires.

Importance of price in marketing mix:

Price is the amount of money charged for a product or a service, or the sum of the values that consumers exchange for the benefits of having or using the product or service

Price is the only element in the marketing mix that produces revenue. Price is also the most flexible element of the marketing mix. The most common mistakes in setting prices are; pricing that is too cost oriented prices that are not revised enough to reflect the market changes pricing that does not take rest of the marketing mix into account prices that are not varied enough for different products, market segments &

purchase occasions

Factors influencing international pricing:

Factors internal to an international firm—

strategic objectives

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cost leader, differentiation, focus gain market share, protect market share, to maintain status quo revenue, profit or market share maximization

marketing mix policies

product, place & promotion costs short term vs. long term cost focus full cost, variable cost, marginal cost pricing organizational considerations transfer pricing cost vs. profit center

Factors external to an international firm

nature of market (buyer or seller) level of market development/sophistication market demand and consumers’ ability to buy competitive situation & consumer surplus product life-cycle-stage type of packaging, environmental issues distribution & marketing costs transportation costs government policies, tariffs, taxes & other restrictions country of origin image after-sales service, warranties & guaranties exchange rate fluctuation environmental factors

Factors contributing the selection of final price:

Psychological effects of price Influence of other marketing mix elements Company pricing policies Costs Impact of price on other parties distributors or dealers company sales force competitors

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Managing price escalation in foreign markets:

Rearrange the distribution channel

length of channel / exorbitant margins

Eliminate costly features (or make them optional)

no-frills versions - sell core products

Downsize the product

offer smaller version or a lesser count

Assemble or manufacture the product in foreign markets

closer proximity to customers - lower costs

Adapt the product to escape tariffs and taxes

by shifting it to different tax classification

Pricing in inflationary environments:

Modify components, ingredients, parts and/or packaging materials Source materials from low-cost suppliers Shorten credit terms Include escalator clauses in long-term contracts - to hedge against inflation Quote prices in a stable currency Pursue rapid inventory turnovers Draw lessons from other countries

Impact of pricing strategy of RFL on the following sectors:

Legal aspects Ecological aspects Political aspects Economic aspects Socio cultural aspects Technological aspects Competitive aspects

Legal aspects: actually RFL needs to consider some legal constraints while calculating their product ( Jug) price. They needs to conduct their manufacturing process in a eco – friendly way.

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Ecological aspects: like all other companies RFL is very much conscious about the ecological balance of the society. That’s why they are trying their best to keep the environment free from pollution. Recently the have started “go green” campaign to aware people about the ecological balance.

Political aspects: one of the major determinant or obstacle of RFL in order to perform their activities efficiently is the political condition of the country.

Economic aspects : Economic impact, the direct and secondary costs and benefits of production and the plastic industry are defined. General methods of approaching plastic industry impact estimation are presented, along with criteria for evaluating alternative approaches.

Social aspect : Social and cultural factors are important to consider while creating and implementing a marketing strategy of a company. These often-linked but somewhat different factors have diverse effects on the decisions of consumers and buyers. Basically, sociocultural factors are customs, lifestyles and values that characterize a society. More specifically, cultural aspects include aesthetics, education, language, law and politics, religion, social organizations, technology and material culture, values and attitudes. Social factors include reference groups, family, role and status in the society. Small-business owners should be aware of and understand these factors' connection with buying habits.

Technological aspect:

Internet has brought opportunities as well as challenges for the plastic industry as a whole. One of the most serious threats from the internet is an opportunity for foreign companies to target consumers directly to sell their products. To counteract the threat of reduced business due to the Internet, RFL need to use internet marketing to its full potential to target customers and business opportunities.

Appendices

References:

1. RFL (1981), (online), Available at http://www.rflbd.com/products.html [Accessed on 7th May, 2013]

2. RFL Plastic Ltd.Company address12, r. k. mission road, 1203, DhakaPhone019 12257049Fax02 9559415

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3. Hanna N., Dodge R. (1997), Pricing policies and procedures, 2/e, Macmillan Press Ltd, Hampshire.

4. Bresnahan, T. F. (1989): "Studies of Industries with Market Power," in Richard Schmalensee and

Robert Willig, eds., Handbook of Industrial Organization, New York: North Holland

5. Bresnahan, T. F., and Peter C. Reiss (1991): "Empirical Models of Discrete Games," Journal of

Econometrics, 48, 57-81.

6. Kullback, J. (1959): Information Theory and Statistics, New York: John Wiley & Sons.

7. Mittelhammer, R. C., and Cardell, N. S. (1997) "On the Consistency and Asymptotic Normal-ity of

the Data-Constrained GME Estimator in the GLM," Working Paper, Washington State University

8. http://www.google.com/listprice/qualityrating/plasticindustry/bd

Bibliography:

9. Pricing policies and procedures by Nessim Hanna , H.Robert Dodge, chapter-1,figure 1.1

10.Pricing policies and procedures by Nessim Hanna , H.Robert Dodge, chapter-2,figure 2.2

11.Pricing policies and procedures by Nessim Hanna , H.Robert Dodge, chapter-4,figure 4.1

12.Pricing policies and procedures by Nessim Hanna , H.Robert Dodge, chapter-4,figure 4.2

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