Linked to the concept of Pricing strategies: Cost based, Competition based, Value based, Demand based; Strong linkage between B2B & B2C market
Challenges are galore for the marketers and the pandemic opened up the pandora box of unpredictabilities.
After the last few analyses of news done, linking to value relating concepts, moving further on the same, today I am touching on the concept of Price – the most important component of Value.
I am bringing across a piece of very recent news, which relates to one of the largest & most prominent sectors, that of Automobiles. More specifically the cars segment and the leader brand in India – Maruti Suzuki.
The news relates to the brand’s announcement of a price hike across models on 30th August 2021, which has been brought into effect on few selected ones from 6th September 2021.
This has been the fourth such increase by Maruti in the year 2021. Every increase is ascribed to high input costs by the brand.
You may go through the entire news here or below.
The pricing strategy adopted by a brand can be seen in different ways. Also, there are various factors that play their role in devising the strategy. Broadly we can divide the methods of devising pricing strategy into 4 categories which are:
Cost-based pricing
Competition based pricing
Value-based pricing
Demand-based pricing
Let me relate these methods to the current news on Maruti for understanding in an applied way.
Cost-based
The continuous increase in price by Maruti during this year, the fourth in a row, is mainly attributed by the brand to the significant jump in commodity prices, which has escalated their cost of production. The cost-based pricing approach adopted by Maruti is clearly visible here.
Competition based
Maruti being the leader brand, price hike by it might also be emulated by other brands in the category because of the similar cost-related challenge being faced by all. The news clipping mentions the price raise done by Tata Motors for its commercial vehicles in April and July, and for its passenger vehicles by 1.8 per cent in May. Competition based pricing is seen, where competitors are following parity pricing.
Value-based
Customer perceives value in a product by comparing its cost with the benefits. The concept of customer perceived value (CPV) is explained in detail relating to the ed-tech sector in one of my other articles on news analysis, which you can refer to. On the cost-to-customer dimension, along with different costs incurred by the end customer, one most important cost element is the initial monetary cost, which actually is the price of the product. Increase in this price will definitely result in reducing customer perceived value, unless this is balanced by equal or higher benefit offerings provided by the brand. This explains the scenario in the B2C market.
Connect between B2C & B2B market
On the B2B market front, Maruti is the customer of the various commodities & inputs which it buys from different suppliers, in order to manufacture cars. As covered in the news, steel prices had increased from Rs 38,000 to Rs 65,000 per tonne while the price of copper in the international market had gone up from $5,200 in FY20 to $10,200 per tonne. Prices of precious metals such as rhodium have gone up from Rs 18,000 per gram to about Rs 64,000. All this led to increase in cost of manufacturing of cars, & Maruti following cost-based pricing, decided to increase price for the end consumers, to offset some part of the impact of high commodity costs “It has become imperative to pass on some impact of the additional cost to customers. The price rise has been planned across models in September 2021,” it said in a regulatory filing.
After understanding the scenarios in B2C & B2B market, we see the strong linkage and strategic implications of market condition in one over the other, with the final impact coming down on to the end consumer. Demand in B2B market is considered as derived from the consumer market. As trends, preferences change in the consumer market, it shows its impact on the demand of different commodities & inputs in the B2B market. Like in a major transformation, as automobile sector is moving towards electrification and automation, with all brands entering into EV segment, has led to increased demand for semiconductors. New age automotive products are all loaded with features like navigation control, infotainment systems, collision detection systems, variety of touchscreens which require semiconductor ICs with different functionalities.
Sales is expected to face a double hit. Along with increase in inputs cost leading to price increase, automobile sector is also facing an acute shortage of semiconductor chips that has been disrupting production, as covered in the news. “The semiconductor shortage will stretch through September. Maruti’s current stock level stands at 20 days, while an ideal inventory level is around 30 days. As of now, it looks like supply will lag behind demand,” said Shashank Srivastava, senior executive director, Maruti Suzuki.
From the above its clear, that while B2B market derives demand from B2C market. At the same time, B2C market derives the cost impact from the B2B market.
Demand based
If we look on the demand side, pandemic had already resulted in demand destruction in the year 2020 and early 2021. Big price hike in April, 2021, at a time when market was recovering would have resulted in dampening the demand, therefore in April, price hike of 1.6% was done across models, by Maruti. Another hike came in July for CNG variants and now in Sept. the increase in car prices is around 2% for select models, across the country. Festive time demand may get affected.
News clipping mentions, the latest round of hike may dampen sales during the third quarter, during which they sell the most number of cars and two-wheelers during the festive season. “Actually, we should have taken a price hike earlier, but since we were coming out of a very bad year in 2019-20 followed by the pandemic-induced lockdowns, we focused on the top line rather than bottom line,” said Shashank Srivastava, senior executive director, Maruti Suzuki.
This statement by the senior director provides 2 strategic indicators. Firstly, time of the year, season, festivals, customer mood & sentiment pertaining to the time plays an important role in demand formation, which has to be taken care in pricing strategy. Secondly, crisis situations pose a trade-off challenge between short-term vs long term objectives to the marketers. Again, as expressed by Srivastava, covered in the news, “There has been a dramatic increase in commodity prices. Normally, we try to accommodate it by increasing efficiency and productivity, so that we don’t have to pass these on to consumers.”
Short term objective directs the focus more on top line growth. Whereas focus on bottom line, results in certain innovations & creative strategies to increase efficiency & productivity, giving long term benefits which can avoid frequent price hikes.
After this detailed analysis on pricing strategy from different perspectives, let me close down by touching upon the topic which is closest to my heart & values. Environment & the urgent attention towards its conservation.
In one of my earlier articles published in Anecdotal Tales section of The Branding Nook, I have shown the tumultuous impact of Environmental force by equating it to Brahmastra. As out of all macro forces, this is one force which can give a sudden destructive blow to businesses & societies, for the wrong practices adopted, neglecting the environment.
Yes, corporates are now responding to the climate call, as covered by me in another news analysis. The government is imposing regulations to enforce corrections. One such step is the shift of the automobile sector to BS-VI norms. In order to comply to that, Rhodium is on higher demand from the automotive industry to meet emission norms. Here again, cost pressure is being posed to the automobile brands as the price of Rhodium has also surged to a record high of $29,200 a troy ounce (₹21.36 lakh per 31.10 gm). Rhodium is a rare metal that is used in automotive catalytic converters, designed to clean vehicle emissions, to meet strict emission norms.
Winning strategy for the automobile brands is definitely by moving on the Green path.
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