Published by MBA Skool Team, Published on February 13, 2011
A lot of big companies manufacture goods which are used daily by people. From soap to toothpaste to hair oil to cooking oil etc are all basic necessities in a person's day to day life. These products are termed and coined as fast moving consumer goods or simply FMCG products. FMCG products have a huge market and super brands like Hindustan Unilever Limited (HUL), Marico, Godrej, Procter & Gamble (P&G) etc are its main players. But the bigger the market, the more intense is the competition. And to stand out in this competitive market one feature that attracts customers are the prices of these FMCG products.
Pricing is one of the most important factors in the success of a business. Setting the correct price depending upon the demand, quality and utility of a product is essential. The most common way of setting prices is by taking a percentage profit of the cost incurred over the previous stage of the manufacturing process and setting it as the price. Taking out profit at every stage of manufacturing, warehousing and distributing is the simplest way of setting price of FMCG products. But the latest trend in the market is reverse pricing where the consumer plays the pivotal role in setting the price of the product.
The target price of products is set by companies depending upon the demand of the customer and the willingness of a consumer to spend on that product. Rather than entering the marketing with a fixed selling price for a particular FMCG product, companies study and evaluate the price which the consumer will be willing to pay. This would probably mean lesser profit but it would increase the penetration manifold. Thus, the overall effect of extracting profit from a line of product would be achieved by increasing the penetration thereby increasing volume of sale.
Reverse pricing model allows the consumer to fulfill his requirements as far as pricing is concerned. The feature of reverse pricing is based on that factor that the needs of the customer are more important than the power of the supplier in determining the price.
A very good example of this can be considered as the telecom industry. Customers are constantly on the lookout for services which provide them facilities which are at a lower cost. Therefore telecom companies have to continuously play with their pricing so as to retain their loyal customers which they might lose due to mobile number portability (MNP). Hence, the customer plays a pivotal role in administering the price of the services and products being offered. Commodity inflation is cyclical and hence it is important for organizations to have a long term view rather than having short term profitability as the prime motive.
The business of business is to do business. Every organization wants to maximize its profit for which a higher profit is extracted. But profits can also be yielded if more penetration is achieved, and this can be happen if FMCG companies apply the concept of reverse pricing.
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