“Pricing Techniques”

Studied in- Mobile Industry

Company- Nokia

Background of the study:
Pricing Techniques: are the methods adopted by a firm to set its selling price. It usually depends on the firm's average costs, and on the customer's perceived value of the product in comparison to his or her perceived value of the competing products. Different pricing methods place varying degree of emphasis on selection, estimation, and evaluation of costs, comparative analysis, and market situation. It takes into view factors such as a firm's overall marketing objectives, consumer demand, product attributes, competitors' pricing, and market and economic trends. The term pricing technique is also called cost plus because it attempts to secure the firm against a loss by imbedding marginal and fixed costs into the price consumers pay. The term plus refers to markup, which may ensure some strictly positive profit. If, the firm sets markup = 0, the firm breaks even because the price equals the average total cost.

Objective of the study:
The objective of the study is to see the different pricing strategies used by Nokia for its different products.
Nokia started by making paper – the original communications technology
Nokia was founded in 1865 by Fredrik Idestam in Finland as a paper manufacturing company. In 1920, Finnish Rubber Works became a part of the company, and later on in 1922, Finnish Cable Works joined them. All the three companies were merged in 1967 to form the Nokia Group.

In the late 1970s, Nokia started taking an active interest in the power and electronics businesses and by 1987, consumer electronics became Nokia's major business. Nokia created the NMT mobile phone standard in 1981 and launched the first NMT phone, Mobira Cityman, in 1987. The company delivered the first GSM network to Radkilinia, a Finnish company in 1991, and in 1992, Nokia 1011 - a precursor for all Nokia's current GSM phones - was introduced.
In the 1990s, Nokia provided GSM services to 90 operators across the world. Another significant move of the company during this period was the divestment of its non-core operations like IT. The company focused on two core businesses - mobile phones and telecommunications networks. Between 1992 and 1996, the company exited from the rubber and cable businesses as well.
Nokia in India
Nokia entered the Indian market in 1994. The first ever GSM call in India was made on a Nokia 2110 mobile phone on its own network in 1995. When Nokia entered India, the telecom policies were not conducive to the growth of the mobile phone industry.

The tariffs levied on importing mobile phones were as high as 27%, usage charges were at Rs.16 per minute and, at these high rates, consumers did not take to mobile phones. Nokia also had to face tough competition from other powerful global players like Motorola, Sony, Siemens and Ericsson.

Scope of the study:
Nokia has emerged as one of the most recognized brands in India, surpassing some of the Indian business conglomerates in terms of revenues. Nokia considers India as one of the most important markets for its future growth; the company has been facing stiff competition in the recent years from Korean players like Samsung and LG.
After cutting prices to restore lost market share, Nokia has reverted to its old pricing strategy of maximizing profit and cash generation. Nokia has made the pricing transition amid expectations that the Finnish group has stopped the slide in its market share. Nokia Corporation slowed down its effort to slash prices. In Europe, Nokia maintains its leadership on "ease of use" and reliability, but in the U.S. market, all brands are now considered equal. "The key risk for Nokia in continuing to play on prices is that it could be further pushed toward the low end of the market". Nokia can sustain a price war for longer than any of its competitors. Earlier this week, Nokia said it expects to invest $100 million to $150 million in construction of a manufacturing facility for mobile devices at Chennai, India.

Methodology:
First degree Price Discrimination: In first degree price discrimination, price varies by customer's willingness or ability to pay. This arises from the fact that the value of goods is subjective. A customer with low price elasticity is less deterred by a higher price than a customer with high price elasticity of demand. As long as the price elasticity (in absolute value) for a customer is less than one, it is very advantageous to increase the price: the seller gets more money for fewer goods. With an increase of the price elasticity tends to rise above one. One can show that in the optimum the price, as it varies by customer, is inversely proportional to one minus the reciprocal of the price elasticity of that customer at that price. This assumes that the consumer passively reacts to the price set by the seller, and that the seller knows the demand curve of the customer. In practice however there is a bargaining situation, which is more complex: the customer may try to influence the price, such as by pretending to like the product less than he or she really does or by threatening not to buy it.
An alternative way to understand First Degree Price Discrimination is as follows: This type of price discrimination is primarily theoretical because it requires the seller of a good or service to know the absolute maximum price that every consumer is willing to pay. As above, it is true that consumers have different price elasticities, but the seller is not concerned with such. The seller is concerned with the maximum willingness to pay (or reservation price) of each customer. By knowing the reservation price, the seller is able to absorb the entire market surplus, thus taking all consumer surplus from the consumer and transforming it into revenues. From a social welfare perspective, first degree price discrimination is not undesirable. That is, the market is still entirely efficient and there is no deadweight loss to society. However, it is the complete opposite of a perfectly competitive market. In a perfectly competitive market, the consumers receive the bulk of surplus. In a market with first degree price discrimination, the seller(s) capture all surplus. Efficiency is unchanged but the wealth is transferred. This type of market does not much exist in reality, hence it is primarily theoretical.
Nokia introduces its phone at the highest price to extract the entire consumer surplus it can.

First Degree Price Discrimination by Nokia: | Releasing Price | Nokia 8800 Sapphire Arte | Rs. 62,829 | Nokia E90 Communicator | Rs 40,499 | Nokia N95 8 GB | Rs 34,999 | Nokia N95 | Rs 31,900 | Nokia N93i | Rs. 37,500 | Nokia N91 8GB Music Edition | Rs.19,999 | Nokia N81 | Rs 26,970 | Nokia N70 Music Edition | Rs. 19,789 | Nokia N72 | Rs. 17,500 | Nokia N73 Music Edition | Rs 22,l000 | Nokia E71 | Rs 22,949 | Nokia E66 | Rs 23,689 | Nokia 5800 | Rs 19,835 | Nokia 7500 Prism | Rs 11,200 | Nokia 6300 | Rs14,495 |

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. The supplier is once again capable of capturing more market surplus than would be possible without price discrimination.

Third Degree Price Discrimination by Nokia: | India | USA | UK | Australia | Nokia 8800 Sapphire Arte | Rs.53,000 | $1,387.14 | £849.00 | $1,107.21 | Nokia E90 Communicator | Rs.32,500 | $695.86 | £392.00 | $664.32 | Nokia N95 8 GB | Rs.21,000 | $449.82 | £309.00 | $427.00 | Nokia N95 | Rs. 20,474 | $425 | £ 245.44 | $298.36 | Nokia N93i | Out from market | Out from market | Out from market | Out from market | Nokia N91 8GB Music Edition | Out from market | Out from market | Out from market | Out from market | Nokia N81 | Rs.15,500 | $349.66 | £299.00 | $321.07 | Nokia N70 Music Edition | Rs.9,000 | $199 | £155.21 | $159.99 | Nokia N72 | Rs.7,000 | $201.86 | £165.87 | $188.21 | Nokia N73 Music Edition | Rs.10,500 | $296.55 | £216.26 | $279.00 | Nokia E71 | Rs.18,900 | $395.00 | £255.00 | $379.00 | Nokia E66 | Rs.18,500 | $239.00 | £255.00 | $349.00 | Nokia 5800 | Rs. 16490 | $269.00 | £239.00 | $330.00 | Nokia 7500 Prism | Rs. 7,692 | $198.11 | £162.00 | $188.21 | Nokia 6300 | Rs 6,200 | $156 | £99.00 | $139.00 |

Skimming:
Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.
Price skimming is sometimes referred to as riding down the demand curve. The objective of a price skimming strategy is to capture the consumer surplus. If this is done successfully, then theoretically no customer will pay less for the product than the maximum they are willing to pay. In practice, it is almost impossible for a firm to capture this entire surplus.
Price Skimming by Nokia:

| Releasing Price | Current Price | Nokia 8800 Sapphire Arte | Rs. 62,829 | Rs.53,000 | Nokia E90 Communicator | Rs 40,499 | Rs.32,500 | Nokia N95 8 GB | Rs 34,999 | Rs.21,000 | Nokia N95 | Rs 31,900 | Rs. 20,474 | Nokia N93i | Rs. 37,500 | Out from market | Nokia N91 8GB Music Edition | Rs.19,999 | Out from market | Nokia N81 | Rs 26,970 | Rs.15,500 | Nokia N70 Music Edition | Rs. 19,789 | Rs.9,000 | Nokia N72 | Rs. 17,500 | Rs.7,000 | Nokia N73 Music Edition | Rs 22,l000 | Rs.10,500 | Nokia E71 | Rs 22,949 | Rs.18,900 | Nokia E66 | Rs 23,689 | Rs.18,500 | Nokia 5800 | Rs 19,835 | Rs. 16490 | Nokia 7500 Prism | Rs 11,200 | Rs. 7,692 | Nokia 6300 | Rs14,495 | Rs 6,200 |

Bundling:
The practice of joining related products together for the purpose of selling them as a single unit. This is generally carried out when the seller thinks that the characteristics of two or more products and services are such that these products might appeal to many consumers more as a package than as individual offerings e.g. local and long distance services. Bundling arrangements usually feature a special pricing arrangements which make it cheaper to buy the products and services as a bundle than separately. Bundling is also often a way for creating a larger market for relatively low value products by selling them cheap (or giving them away free) with a higher value product. Various products sold to a customer together are offered at a price less than the sum of the prices of the products sold individually.
With Airtel:
Customers who purchase Nokia handsets receive a value rich Airtel Handset Bundle Offer. The bundle offer combines free outgoing calls and free SMS's to Airtel and all other networks, in addition to free Data Usage offers. Free Airtel Welcome Tunes for the first 30 days will also be among the list.
With Vodafone:
Nokia and Vodafone have joined their hands to offer speedy internet service in India; starting of with the new N97 and later it would be available on other Nokia make cell phones. Mobile internet, Vodafone Music Client and personal and business email access along with mobile navigation capabilities are all included.

Prestige Pricing:
The pricing of a product at above the going market price on the basis that many buyers regard price as an indicator of quality and so will impute enhanced quality to products with higher than usual prices. Sellers are able to ask prestige prices for products which have distinctive BRAND NAMES. A product for which prestige pricing may apply, the high price is itself an important motivation for consumers. As incomes rise and consumers become less price sensitive, the concepts of ‘quality’ and ‘prestige’ can often assume greater importance as purchasing motivators. Thus advertisements and promotional strategies focus attention on these aspects of a product, and, not only can a ‘prestige’ price be sustained, it also becomes self-sustaining.
People will buy a premium priced product because: 1. They believe the high price is an indication of good quality; 2. They believe it to be a sign of self worth - "They are worth it" - It authenticates their success and status - It is a signal to others that they are a member of an exclusive group; 3. They require flawless performance in this application
Vertu:
Nokia established Vertu in 2002, which can be said as the Rolls-Royce in the industry. Labeling itself as a manufacturer of prestige communications product, Vertu released its over US$19000-priced debut "Vertu Signature Collection" handsets which are made of platinum, gold and other high-cost materials. In 2004, Vertu released its second product series, Ascent. Adopting totally new material Liquid Metal, this new series are priced at US$3840 for each. Vertu is Nokia's up-market brand, its focus is not on the comprehensive functions, but the craftsmanship and materials of the handsets. There are not many Vertu's own stores all over the world. Paris and Singapore are the locations among the few. Even in Hong Kong, there is only Vertu's private office, to which customers need to make advanced appointments. Or you can go to some famous jewellery stores to search for it. We can still see the prestige retail way of Vertu, though the price of Ascent has dropped.
Nokia 8800:
Nokia 8800 is the other luxury phone which is in market for elite customers who don’t go for Vertu. The Sirocco is crafted from premium materials, with a stainless steel casing and scratch-resistant sapphire-coated glass to protect the display.

Conclusion:
Nokia has mobile phones for every category. It varies its prices using different pricing techniques to compete with competitors. 1. First Degree Price Discrimination: Nokia uses this to earn the maximum consumer surplus and maximize its profits. By this method it knows whether there will be a demand for its products in future or not. 2. Third Degree Price Discrimination: Nokia prices its products in different markets at different prices to make sure there is a subsequent demand for its products. It also keeps in mind the purchasing power of the population in the country, the market structure of the country and the price elasticity. In US the prices are highest whereas, in India the prices are lowest. 3. Skimming: Nokia introduces its products at highest possible prices and keeps the same price till the time when the product is in high demand to earn maximum profits at that time and reduces the prices later to make sure the demand for the product is always there. In case, the demand falls down even after reducing prices to the lowest it can, it removes the product from the market. 4. Bundling: Nokia has bundle tie ups with Airtel and Vodafone, where-in, it provides Airtel or Vodafone connections with its phone. It also has tie up with Vodafone to provide internet access. 5. Prestige Pricing: Company has two brands for the elite class Nokia 8800 Sirocco and Vertu. 8800 is a phone for the mangers, whereas Vertu is a phone for CEO’s.

References: a. http://www.nokia.com/ b. http://www.vertu.com/ c. http://www.mobilewhack.com/reviews/nokia_vertu_-the_ultimate_luxury_phone.html d. http://www.mobileindia.info/airtel/504/airtel-nokia-1208-handset-bundle-offer.html e. http://telecomtalk.info/vodafone-offer-nokia-n97-in-india-with-free-internet/5479/ f. http://www.fonearena.com/nokia-phones-prices.html