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Файл:Basics of entrepreneurship in the motor transport industry. Study guide
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11. Pricing strategy and the company's reputation. If a company has
created a reputation for itself as a manufacturer of expensive, high-quality
products, then when developing a new series of products, it will concentrate its
efforts on the high quality of the products, set high prices for them, and try to
avoid emphasizing the price of the product when advertising.
If a company does not strive to create a reputation on the market as
a leading brand among products of this type, it uses price as one of the main
components of its marketing policy. Companies of this type indicate the price in
their advertisements, because they are confident that for this price they offer
customers a better product than their competitors.
12. Strategy of prices depending on the purpose of the product. There
are products that can have several purposes, and this factor is taken into account
in pricing. Thus, a new product, if it is purchased as a gift, will be better sold at
a high price.
13. Traditional price scales for products of different classes and
their consideration in the production of products. Many types of products
traditionally have price scales to which manufacturers and traders must
adapt.
14. Strategy of «odd» prices is setting prices below round numbers.
Unrounded prices help consumers stay within their price limits and still buy the
best product.
15. Flexible pricing strategy which means a company changes prices for
a product depending on the customers’ ability to bargain, or, in other words, on
their purchasing power. Flexible prices are most often found in markets where
individual transactions are concluded. These are mainly industrial goods and
services.
16. Pricing strategies that take into account the geographic factor
There are five main approaches to setting prices based on geographic
principles:
1) setting prices at the place of origin of the product;
2) setting a single price with delivery costs included;
3) setting zonal prices;
4) setting prices applicable to a base point;
5) setting prices with the assumption (in full or in part) of delivery costs.
17. Price discount strategy to strengthen market position in certain
market situations.
18. Price lines reflect a price range, where each price corresponds to
a certain quality level of the product of the same name.
Within a given product group (for example, a group of inexpensive
radios), upper and lower price limits are first determined, and then
specific prices are set within this range. The price range may be low,
medium, or high.
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19. Discriminatory pricing strategies in which prices are set without
taking into account differences in production costs, but rather differences in
customers, products, place, time, etc.
20. Mixed marketing strategies when pricing strategies are used in
combination with other marketing strategies.
Signs of poorly functioning pricing strategies
– product prices change too often;
– pricing policy is difficult to explain to customers;
– distribution channel participants complain about low profit margins;
– pricing decisions are made without sufficient information about the
market;
– a price is not appropriate for the target market;
– a large proportion of products are discounted or prices are reduced at the
end of the selling season to liquidate excess inventory;
– a very large proportion of customers are price sensitive, and the
competitor attracts them with discounts on its products;
– a company faces serious problems related to pricing legislation.
5.2.3. Pricing methods
Prices can be determined based on production costs. The manufacturer of
the product determines the production costs and adds to them the desired amount
of profit, which they consider as a reward for the invested capital.
Wholesale and retail sellers, when determining their prices, proceed from
the costs associated with the acquisition of goods and markups (wholesale,
retail), which are set by sellers at their discretion (unless, of course, markups are
regulated by the state) and must ensure coverage of costs associated with their
activities and obtaining the desired profit.
The size of the markups depends on many factors: the nature of the
products, the volume of their sales, the position of sellers in the market, the
markup values established in the market, the desires of sellers, and government
intervention in pricing.
Prices based on production costs are determined on the basis of full and
variable costs. When calculating prices based on full production costs, both
variable and fixed costs are taken into account.
But when calculating prices based on variable costs, fixed costs are not
taken into account. Profit in this case is added to variable costs. «Cost-plus
pricing» is shown in Fig. 5.5.
The method of price substantiation based on production costs has the
following disadvantages:
1. The price may be higher or lower than the price that customers are
ready to pay for a given product, since the price substantiation does not take into
account the demand factors for the product.
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Unit Cost = Variable Costs +
Fixed Costs/Sales Volume
Additional Price = Unit Cost / (1 – Planned Profit Margin)
Fig. 5.5. «Cost-plus pricing» method
2. Manufacturers ignore the fact that the price may not be directly
dependent on production costs, which can be changed in order to satisfy the
market.
3. Manufacturers often base prices not on variable costs, but on full
production costs, not on expected costs, but on current costs.
4. Manufacturers ignore the issue of market segmentation and the
customer’s attitude to price.
5. Manufacturers are not interested in developing new products, citing the
need to refund the costs of research and development and the launch of the
product on the market at the initial stage.
6. Manufacturers do not use price as an effective commercial tool and
thereby restrict their freedom of action.
7. The method is more suitable for determining the lower price limit
(which should answer the question whether it is possible to enter the market
with a new product or not, and to stop or continue production of an old product)
than for determining the selling price.
Cost-based pricing is considered by many economists to be an outdated
and ineffective pricing strategy, although it is often used.
Cost-based pricing is used by monopolies, large oligopolies, and small
sellers.
The popularity of the cost-based pricing method is explained by a number
of reasons:
– this method is simple. Information on production costs is more
accessible than on demand;
– many consider the «average production costs plus profit» pricing
method to be fairer to both buyers and sellers.
When demand is high, sellers do not profit at the expense of customers,
and at the same time, there is an opportunity to receive a fair rate of return on
invested capital.
Prices are also determined based on the value of the product. This
method is based on the value of the product perceived by the consumer and the
customer’s desire to pay a certain amount for this value.
The method of determining prices for new products based on a survey is
the «arrow throwing» method. Several executives of the company get together
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and each expresses their opinion about the product under consideration and its
price. The price proposal of the one who can convince all the other participants
that their price is closest to the optimal one, i.e. to the «center of the target»,
compared with other proposals, is accepted.
Another version of this game is a survey of friends and potential
customers.
The method of determining the price on the basis of the value
significance of the product perceived by the consumer can be successfully
used in the presence of interchangeable goods on the market, which allows
the customer to compare goods and choose those that meet their desires to
a greater extent.
Pricing with a focus on competition expects the company to proceed
exclusively from the level of current prices of competing goods and pay the least
attention to its own production costs and demand.
It is used by:
– companies whose products are in a purely competitive market (many
agricultural products can be included here, with some allowance) or in an
oligopolistic market (steel, aluminum, paper, cars, computers, etc.);
– companies that find it difficult to accurately determine the production
costs per product unit (for example, for crushed stone with different fraction
sizes) and consider the average prices formed in the industry to be a good basis
for determining the prices of their products.
With this approach to pricing, the company, as a rule, does not change its
prices due to changes in its production costs or demand. When competitors
change prices, the company also changes its prices, although its own production
costs and the level of demand remain unchanged.
The «sealed envelope», or tender pricing method, belongs to pricing
based on competition. This most often happens when companies participate in
government tenders.
A tender is a written statement of price by a company, in determining
which it is based primarily on the prices that, in its opinion, competitors will set,
and not on the amount of its production costs or the level of demand for the
product.
The goal of the company is to receive an order, so its price should be
lower than the prices offered by competitors. If the company has difficulty
determining competitors' prices, then it bases its price on information about their
production costs.
Sometimes a company offers a price lower than its costs in order to
increase the likelihood of winning an order.
The prices offered by companies are in sealed envelopes that are opened
at the auction. The order is received by the company whose price is lower than
all the others.
The method of determining prices based on finding a balance between
production costs and the state of the market consists of several stages:
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Stage 1. Setting the goal (task) of pricing.
The company must formulate for itself the goal that it wants to achieve
with the help of a given product and its price in the short and long term. The
clearer the goal, the easier it is to determine the price. The price is calculated
based on the set goal.
Stage 2. Determining the initial sales volume of the product.
The sales volume of the product is determined based on the production
capacity of the company and the market capacity (which is determined by
studying the market).
Stage 3. Calculating the initial price based on the production costs and
sales of the volume of production adopted at the previous stage.
Total costs can be variable and fixed. Then the costs and the price per unit
of production are calculated.
Stage 4. Working out various (possible on the real market) sales volumes
of the product in order to select the optimal one and obtain marginal profit
(profit plus fixed costs or the difference between total revenue and variable
costs). Taking into account the elasticity of demand for price, from all possible
options for sales volumes of the product and its prices, the combination of
«price – sales volume» is selected that provides the company with the greatest
marginal profit.
Stage 5. Assessing the position of the product on the market. Based on
a comparison of technical and economic parameters, the company identifies the
advantages and disadvantages of its product compared to competitors' products.
Here it is determined how much the price level calculated on the basis of costs
(see Stage 3) fits into the system of current market prices for similar
competitors' products.
Stage 6. Having worked out various «price – sales volume» options,
taking into account the competitive factors identified at Stage 5, the company
selects the option that ensures it receives the maximum possible marginal
profit. Quantitative analysis is necessarily supplemented by qualitative
analysis.
Stage 7. Taking into account additional factors when setting the final
price:
– Customers consider price as an indicator of quality, and each customer
is within their own «price limit»;
– Reaction of sellers (wholesale, retail) and competitors to the expected
price level;
– Requirements of state legislation in the field of pricing;
– Take inflation into account, if it is significant;
– See what the advertising will be;
– Whether the company will operate in one or several market segments.
There are also parametric pricing methods. Quantitative dependencies
are identified between costs or prices and the main consumer properties of the
products included in the parametric series.
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A parametric series is a group of products that are homogeneous in design
and manufacturing technology, have the same or similar functional purpose and
differ in the quantitative level of consumer properties [59].
The quantitative dependencies between costs (prices) and product
parameters identified on the basis of an analysis of statistical material are used
to determine costs and project prices at the early stages of designing and
constructing new products (technical specifications, technical proposals,
technical projects), when information on costs for a new product is almost
absent or insufficient, and only the main parameters of the future product are
known.
There are the following types of parametric methods: the method of
specific indicators, the method of correlation and regression analysis, the
method based on the technical level coefficient, expert methods, the method of
structural analogy, and the aggregate method.
5.2.4. Pricing methods for the provision of transport services
A transport tariff is the price for moving a material object in space.
Transport tariffs include freight tariffs and passenger tariffs. Freight transport,
delivering products from producers to consumers, increases their cost. Passenger
transport provides a service. In this regard, the formation of passenger tariffs
relates to the provision of services.
Freight tariffs are based on socially necessary labor costs for the delivery
of freight, which determines the cost of transportation, the monetary expression
of which is the transport tariff. The cost of freight transportation consists of the
costs of initial and final operations and the costs of its transportation.
Travel costs depend on the distance of transportation. Per 1 ton of cargo,
they increase in direct proportion to the distance of transportation. Thus,
transportation costs consist of the costs of initial and final operations and travel
costs.
The cost of transport products can be represented by formula (1):
P = C + MD, (1)
where P is the prime cost of transporting 1 ton of cargo;
C is the cost of initial and final operations per 1 ton of cargo;
M is the cost of moving 1 ton of cargo per 1 km;
D is the distance, km [45].
From here, the cost of a ton-kilometer of freight turnover of transport will
be calculated using formula (2):
P = C / D + M. (2)
With increasing transportation distance, the cost price per ton-kilometer
decreases. This depends on the reduction in the share of expenses on initial and
final operations per ton-kilometer. Freight transport tariffs are defined as the
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sum of the cost price per ton-kilometer of freight turnover and the profit
required for normal transport operation under conditions of expanded
reproduction. The tariff does not directly include value-added tax, which is
charged on the freight charge.
Allocation of expenses for initial-final and movement operations allows
for the establishment of two-part tariffs. Such tariffs more accurately reflect the
real process of forming socially necessary labor costs, ensure approximately
equal profitability over all transportation distances, and allow for the
simplification of price lists for freight transportation. Tariffs are formed in
a special way for certain types of transport. Rates for initial-final operations are
the highest on water transport, and the minimum rate for initial-final operations
is on motor transport. The cost of a movement operation is the lowest in water
transport and the highest in motor transport, since the energy costs of movement
on water are significantly lower than those of movement on a road.
The level of transportation costs varies by region of the country. The
differentiation of transportation costs is most pronounced in river and motor
transport, since the cost of transportation by these types of transport is
significantly affected by natural and climatic conditions.
Tariff rates are calculated for the average transportation distance within
certain limits; the average transportation distance is called a tariff zone. The set
of tariff rates by zones forms a tariff scheme.
The prime cost of a ton-kilometer of freight turnover depends on the
characteristics of each type of cargo. Thus, the prime cost of transporting cargo
with a small specific weight is significantly higher than that of heavy cargo.
High tariff rates are set for the transportation of perishable goods, live fish, and
similar cargo. Taking into account these and some other factors, all specific
types of cargo are combined into sections, groups, and positions.
5.2.5. Marketing strategies for motor transport enterprises
The main elements of the marketing system are market research,
development, and implementation based on a market (competitive) strategy.
Marketing strategy is an integral part of the entire strategic management of the
motor transport enterprise; it is a plan for its business activity. The main
objective of strategic marketing is to achieve and maintain competitive
advantages of the organization in developing new markets, increasing the
volume of transport services provided and, ultimately, increasing the
competitiveness and efficiency of the motor transport enterprise.
The formation of competitive strategies requires a good knowledge of
competitors, the factors that determine the competitive advantages of the motor
transport enterprise, as well as current and long-term plans for their
development.
In the process of marketing research, calculations to assess the
competitiveness of transport services are aimed at identifying the competitive
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advantages and vulnerable positions of the motor transport enterprises. The task
is to maintain and develop competitive advantages. For this, a business
(competitive) strategy should be formed for each strategic business unit. To find
and implement strategic positioning, this model provides for a combination of
the following three criteria:
– primarily by costs;
– product differentiation;
– market concentration.
Let's consider the features of these strategies:
– transportation cost leadership strategy involves reducing the full costs of
transport services production, which attracts a large number of consumers;
– wide differentiation strategy is aimed at giving specific characteristics to
motor transport enterprise services that distinguish them from the services of
competing organizations, which attracts a large number of consumers (clients);
– optimal transport cost strategy is aimed at providing consumers with
greater value for the same money by combining low costs and wide
differentiation of transport services, which is a complex task and therefore is an
unstable and transitional strategy;
– focused low transport cost strategy is based on low costs and is focused
on a narrow market segment, where the motor transport enterprise is ahead of its
competitors due to lower production costs;
– focused differentiation strategy is based on differentiation of transport
services that most fully meets the requirements of a narrow market segment.
These strategies of the motor transport enterprise create their competitive
advantages, and each strategy requires the availability of the necessary
economic resources, certain skills and correct management actions of the
leaders.
In accordance with the starting positions of the motor transport enterprise,
one of the following competitive strategies can be used: reducing the cost of
transport services, differentiating transport services, segmenting the transport
services market and choosing a market niche, introducing innovations, or
focusing on the needs of the transport services market. When developing
a competitive strategy, it is necessary to take into account that all types of
competitive advantages are divided into two groups: low-order advantages and
high-order advantages. Low-order advantages are associated with the possibility
of using cheap labor and material resources. The low order of these competitive
advantages is due to the fact that they are very unstable and can easily be lost
either due to rising prices and wages, or due to the fact that these cheap
production resources can be used by competitors in the same way. In other
words, low-order advantages are advantages with low stability, unable to
provide an advantage over competitors for a long time.
The advantages of a high order are: unique transport services, unique
technology for cargo transportation, optimal marketing structure, organization of
production of transport services, and good reputation of the motor transport
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enterprise. If a competitive advantage is achieved by providing unique transport
services using new rolling stock or additional equipment based on its own
design developments, then in order to destroy such an advantage, competitors
will have to either develop similar equipment, acquire new rolling stock, or
come up with something better. All these options are not cheap and require a lot
of time to implement.
The most valuable competitive advantage is a good reputation of a motor
transport organization, which is achieved with great difficulty, slowly and
requires large expenses to maintain it.
The type of strategy chosen depends on the position that the motor
transport enterprise occupies in the market and the nature of its actions. Along
with the strategy for ensuring competitiveness, it is necessary to develop tactics
and methods of conducting a competitive struggle that will be used by the motor
transport enterprise, as well as to outline measures aimed at improving its
competitive positions. The development of a competitive strategy requires the
appropriate formation of the entire marketing complex, since there is a certain,
although not necessarily strict, connection between the competitive strategy
model and the instrumental strategies of the marketing mix. An essential point
influencing the choice of strategy is the definition of performance indicators and
their justification. The parameters of the strategic plan are important criteria for
assessing the efficiency of the chosen strategy. As a rule, the choice of
a strategic efficiency criterion is not limited to any one indicator, since it
depends on the characteristics of the current situation, the prevailing (dominant)
goals of the motor transport enterprise, as well as the availability of reliable and
trustworthy information about the state of the external and internal environment.
The implementation of the developed competitive strategy and the
corresponding measures that make up the marketing mix will improve the
following basic elements of the competitiveness of transport services: the list of
offered transport services, the quality of the transport services produced, and the
availability of the services provided.
An efficient quality strategy creates a stable competitive advantage and
increases the intensity of the activities of the motor transport organization.
Ultimately, this factor is decisive in a dynamic and unpredictable environment.
5.2.6. Analysis of advertising activities of a transport company
Let's consider the concept of advertising and its main types. Advertising
is a non-personal form of communication carried out through paid means of
disseminating information, with a clearly indicated source of funding. It
performs one of the most important marketing functions, which is carried out by
the absolute majority of participants in market activities.
Depending on the goals, the following types of advertising are
distinguished: initial (informative), comparative (competitive), and supporting
(reminding).
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Initial advertising aims to familiarize potential consumers or clients with
a new product or type of service for a given market. At the same time, detailed
information is provided about the quality, method of consumption, place of sale
of the product or provision of the service, and price.
Competitive advertising is aimed at distinguishing a product (service)
from the mass of similar products (services) produced by competitors, and
convincing the consumer to buy this product or use the services of an
advertising company.
Supporting advertising is aimed at maintaining and supporting demand
for an existing product. It has a reminder nature.
The International advertising association has proposed the following
classification of advertising media: advertising in the press; printed advertising;
screen advertising, radio and television advertising; exhibitions and fairs;
advertising souvenirs; direct mail advertising; outdoor advertising; public
relations events; computerized advertising.
Advertising in the press includes various materials published in
periodicals. They can be divided into two main groups: advertisements and
publications of a review and advertising nature.
An advertisement is a paid placement of an advertising message in
a periodical. In Russia, there are periodicals entirely devoted to commercial
advertising.
For example, the taxi company «Mig» («Миг») uses this type of
advertising, placing them in local newspapers; the advertisement often comes
with a cut-off coupon, the presentation of which gives the right to receive a five
percent discount.
Printed advertising is a specially produced publication using
a typographic method, distributed among potential consumers free of charge.
Such publications can be divided into two main groups: catalog advertising and
gift advertising.
Catalog advertising publications include:
1. Catalog is a stitched or bound publication containing a systematized list
of a large number of offered goods or services, usually with prices for them.
2. Prospectus is a stitched or bound publication (smaller in volume than
a catalog), providing detailed information about a specific product (service).
3. Booklet is a multiple-folded («accordion»-folded) publication
containing general information about the company and the main advantages of
the advertised goods or services.
4. Leaflet is a small-format publication in one sheet, containing one or
two illustrations, detailed characteristics of the goods or services, address, and
telephone number. This type is also used by this company; leaflets are
distributed near large supermarkets in the city.
5. Poster is a large-format publication, in most cases with one-sided
printing. Usually contains a large drawing or photo illustration, an advertising
headline – a slogan. Double-sided posters are also published, on the reverse side
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