Traditional pricing processes focus on a series of iterative steps to set a price. Beginning with the identification of the target market then moving through the choice of positioning strategy and decisions regarding the marketing mix variables. This then leads to the selection of a pricing strategy and actual determination of a price -- all done in the setting of competitive and environmental factors.
With the correct pricing method, the time
and risk-adjusted returns on invested funds will exceed the opportunity cost of
capital or appropriate cost of such funds. Thus we create value which is often
expressed in monetary terms. In one study, "value for money" or
"competitive advantage" was found to be significantly related to
return on investment. And this can be transformed further to favorably
influence pricing.
Sellers often charge at a premium to
increase profit and capitalize on bargaining power. For highly-capitalized,
national industries however, pricing depends on domestic consumers requirement
and price sensitivity, as well as political conditions. Pricing can also be
selected for societal welfare.
But, whatever the strategy of choice,
profit maximization, as a marketing goal is self-defeating. Profit should
follow after satisfying the market requirements. When profit takes the front
seat in decision making, there is a danger of being misled away from the right
marketing direction.
Selection of a Pricing
Method
The following pricing methods were
collected from various peer reviewed articles. It is accepted that there are
similarities between the original methods defined by Kotler and that of the new
ones. Perhaps some are simple naming problems or newer situations and
technologies could have influenced the "slight" modification of the
original concepts for the marketer to adapt to newer requirements.
1. Name
your own price. This method is now being applied to a wide range of
products and services using consumer market options. Another variety of this
strategy is called declining-price or reverse-type auction. This is used for
price discovery, inventory clearance and even to provide exposure and
excitement. This is made possible by the internet and information technology.
2. An
"Art Form" with Declining Price Path. Some items have high
demand and a lot have short season life. The most important questions are (1)
how much to initially price the offering, (2) when to do price changes, and (3)
how much will be the price change. Most U.S. department stores' base judgment
on competitor prices for styles that are easily compared. Mark-ups are made to
fall on "accepted price lines". Price change is usually 6 to 8 weeks
after the start of the season, where the usual discounts are 25%-30% on the 1st
drop, and 50% on the second - when sales fall below forecasts and at season
endings. Price is a quality moderated by factors like image, consumer
experience and pricing history. However, if you get the right price the first
time, there is no need for discounts or other sales promotions. The buyer
should readily recognize value when he/she sees one.
3. Price
Differentiation. This is achieved by exploiting different prices to
different consumers for the same product by exploiting differences in consumer
valuations. There are three levels to differentiation: (1) third degree price
differentiation which depends on consumer information, (2) second degree where
the organization sells different units of output at different prices, but every
consumer who buys the same quantity also gets the same prices, and (3) first
degree where the organization sells different units of output for different
prices and the prices may differ from person to person.This strategy has been
used prominently in the pharmaceutical industry. Prices that represent good
value in different settings are formulated based on their indicative
cost-effective price thresholds. However, it is said that price setting based
on performance could make some types of drugs commercially unattractive, and
development of new drugs for developing nations must come from special initiatives.
4. Reference-Based
Pricing. Similar to price differentiation methods, reference-based
pricing in health care is founded on the assumption that medication classes
with therapeutic equivalence can be identified. Prices are exploited at difference
levels BUT the schedules are dependent on the efficacy of the medication.
5. Option-Based
Pricing. Option-based pricing for products or services that have a
fixed availability and expiration date. The option to cut price can have
positive value for a firm compared to abandoning a capital project. But this
should be done when there is sufficient margin (high priced services) and there
are means of informing the customers about price change. These can be hotel
rooms, rent-a-cars, Airline seats, TV and radio station slots.
6. Flexible
Pricing. When differential and dynamic pricing are combined, the
result is flexible pricing. It also includes non-price variables like delivered
quantity, on-time delivery, reliability which can be traded off each other as
negotiating points. This is common in B2B transactions where the volume of
orders is negotiated on add-ons and other material or monetary considerations.
7. Uniform
Pricing. Firms may choose uniform pricing across markets as a
defensive measure against gray-market imports of unauthorized intermediaries
that are completely out of control. Electronic consumer items where the
official dealers are spread in many countries and regions use such method to
minimize unwanted competition from the other dealers or from unauthorized
importers.
Price Adaptation Strategies
Adding Value
Sellers can incorporate bargaining in
their "product strategies" to allow buyers to have a say in the
configuration. This creates additional value which can be done by the: (1) Use
of modular design of the product core; (2) Incorporation of flexibility in
product design at the augmented level or in items such as service, support,
installation, warranty, delivery, credit; or (3) Introduction newer products
with more comprehensive set of features, options and service dimensions and
allow buyers to bargain.
Price Discounts, Refunds
and Other Guarantees
Assuming that demand is constant over time
and that the retailers incur standard inventory costs, the manufacturer may
offer price discounts to any retailer who places an order which coincides with
the beginning of a manufacturer's cycle. This will lead to an improvement in
the supply chain performance.
When a refund is offered, it will be
perceived to have lower prices than others that do not. It is more effective
when search costs are high.
The Negative Effects of
Discounts and Promotions
There are so many methods and strategies
that can be used to let the company meet its objectives and goals. However,
every marketer must remember that frequently repeating promotions may bring a
negative effect on the effort in the long run.
Periodic price reductions of prices or
offering of bargains can make the pricing policies of sellers suspect in the
eyes of consumers. Gain/loss thresholds are functions of market activity,
income and deal proneness. It is established that deal prone (low threshold)
buyers are less loyal, better educated, not likely to have full jobs, and that
less sensitive shoppers are less influenced by past brand-use and reacts more
to price, feature and display. Thus, price promotions can hurt loyal brand
followers who are reference-price responsive.
On the other side of the equation, a
supplier can also develop a "suspicion of buyer opportunism,"
especially in sealed bid situations. More often than not, effective negotiation
establishes the value of all the "extras" beyond the basic product
that comprises the complete offering.
As low-cost manufacturers are continually
trying to gain market share in entry-level products through aggressive pricing
promotions. Competitors then respond by introducing low-cost brands. However,
when brands within a portfolio start to overlap and lose their differentiation,
it can severely affect the business. Pricing power erodes and discounting
increases, creating a cycle of more promotions to accelerate the decline of
brand equity.
Eventually, the benefits derived by
customers can also be measured by an increase or a drop in sales.