The Role of Pricing and the Marketing Mix in an Organization - Essay Example

?Explain the Role of Pricing within the Marketing Mix In marketing mix, pricing is one of the most significant components because it brings income. Other elements such as packaging, distribution, advertising, selling effort, product development, and promotion entail expenditures. The price that is finally offered for the product interacts heavily with the other marketing mix elements (Breidert 2006, p9). There are two forms of pricing strategies and they include cost-based pricing and value-based pricing. Each form of pricing plays an important role within the organization or a company. In order to use the best pricing strategy for the products, a good estimate of the quantity of money the consumers are willing to spend on the products is required by the company. It is important to note that most companies do not use adequate pricing strategies for the products they generate. Majority of the pricing decisions are cost oriented instead of being value-based as perceived by the consumer (Breidert 2006, p10). Product differentiation entails the modification of the product to make it appear more attractive to a particular group of consumers, thus making it different from the competitor’s products. The main purpose of differentiation is to divide the consumers into segments “and optimizing the products for the specific needs of the segments. Differentiation requires a sophisticated pricing strategy based on the perceived values of the products” (Breidert 2006, p10). In most cases, product pricing is placed within the penetration strategy. Penetration strategy determines the factors affecting pricing as noted by Cohen (1983). For instance, a company may want to look for short-term objectives using a defined strategy for a particular type of product. The common objectives mostly used are current product profit maximization or market share increase. Both objectives depend on the knowledge of how the market will respond to diverse pricing patterns. Price is the crucial element for such short-term objectives. This is because it is the mainly flexible component in marketing mix. Price can be adjusted and changed rapidly and short-term adjustments indicates changes in market shares and profits (Breidert 2006, p10). The price of a particular product for most of the companies is based on the consumer’s perceived value, that is, the company uses value-based pricing. The price of the product is considered with other marketing elements before setting the marketing program (Colin 1989). In order to develop a value-based pricing strategy, the company is required to estimate the present perceived value of its product(s). In such a case, the company attempts to measure the products demand and the demand is dependent on the historical sales data and the competitor’s prices. External factors such as holiday and weekends, and advertising also affect the demand for the products. Lastly, the introduction of a new product into the market by a company requires the adoption of different strategies. The launch of a single product requires a pricing strategy such as penetration or skimming strategy. Adoption of a skimming strategy entails charging the consumer for a short period of time a relatively high price for the launched product. Penetration strategy entails setting a lower price for the product to gain a large market share (Breidert 2006, p11). 2. Visit the Easyjet London (Luton) to Madrid for various periods. Return flights assumed with a duration of one week a. Leaving tomorrow 21-28 Jan 21 January, 2012 - Outbound -€ 73.99 21 January, 2012 - Return - € 46.99 Total = € 120.98 b. Leaving in 1 weeks time 28 January, 2012 - Outbound - € 73.99 4 February, 2012 - Return - € 46.99 Total = € 120.98 c. Leaving in 1 months time 21 February, 2012 -Outbound -€ 25.99 28 February, 2012 Return - € 10.99 Total = 36.98 d. Leaving in 3 months time. April 21, 2012 Outbound - € 35.99 April 28, 2012 Return – € 89.99 Total = 125.98 Easyjet generally offers competitive prices to customers on the same routes and travelling under similar conditions compared to its major competitors. This is mainly because the company enjoys a smaller market share compared to major airlines and seeks to expand its market share. The company’s prices are affected by several factors including demand, associated costs and value to the customer. In other words, the company uses a mixed pricing strategy; price and value based strategies being applied. Customers tend to perceive the services that they receive from Easyjet to be of lesser value compared to its competitors in terms of comfort and prestige. The company targets a segment of the market that is willing to pay a moderate amount for services; the segment in this case is possibly the middle class. The prices of the flights are seasonal in that they change with time based on demand. Holding other factors constant low prices are set for those who make advance bookings, the period between the booking and the actual fight playing a significant role in the pricing. This can be seen in respect that those who make three month advance bookings pay significantly lower amounts than those who have their flight booked one day prior to their flight. This strategy is used considering that there are usually low advance booking for longer periods of time compared to shorter times. Yet again, the company looks at historical data relating to flight attendance. In certain months, bookings tend to be higher than in others. As such the company sets higher prices during peak seasons and lower prices when traffic is bound to be low. In this respect the forces of supply and demand are quite evidently at play. In order to encourage using the company’s services more and therefore maximizing profits, outbound fares are charged low compared to return fares other factors held constant. This strategy is also applied considering that the company seeks to ensure that its return flights are never empty. In any case, the demand for return flights is normally low under normal circumstances. What can be noted from the above facts is that Easy jet relies mainly on cost-based pricing with demand and supply affecting the prices of the flights almost in all respects. Graph Fig1. Easyjet plays along with the forces of demand and supply in establishing its prices. 3. British Airways prices from London (Heathrow) to Madrid for various periods. Return flights assumed with a duration of one week a. Leaving tomorrow 21 January, 2012 - Outbound - € 133 28 January, 2012 – Return -€ 199 Total = € 332 b. Leaving in 1 weeks time 28 January, 2012 Outbound -€ 119 4 February, 2012 Return - € 65 Total = €184 c. Leaving in 1 months time 21 February, 2012 Outbound – € 56 28 February, 2012 - return -€ 56 Total = €112 d. Leaving in 3 months time. 21April, 2012 Outbound -€ 58 28April, 2012 – Return -€ 58 Total = €116 British Airways is a major airline that enjoys a huge market share in the region. The airline claims to be the most popular airline in the world. Owing to its popularity as a reliable a global airline, the company’s prices tend to be higher compared to those of Easyjet and other of its competitors. Customers generally perceive the company’s products to be of higher quality in terms of comfort and prestige. Having knowledge of this, the company uses applies the value-based pricing strategy. Very similar to its competitor, Easyjet, the company’s prices change with time. During periods when there seem to be many bookings, the company’s prices tend to be higher. Air traffic is affected by such factors as seasons, holidays, tourist attractions and availability of alternative means of transport. The company also charges less for advance booking where the date of departure is far away compared to those with near departure dates. Like Easyjet, the company does this considering that there is bound to be low demand for long period advance bookings. Unlike Easyjet, British Airways tends to charge equal or higher fares during the return trip. This it does possibly considering that there tends to be higher demand for flights to London (UK) than to Madrid. Generally, British Airways applies the mainly value-based pricing strategy although other factors also affect its pricing. This can be seen in respect of the fact that its prices are almost twice those of Easyjet in most cases. On the long term, British Airways seeks to establish itself as an airline that offers greater value to its customers. On the other hand, Easyjet wants to set itself apart from its competitor as the cheaper and more convenient alternative. In general, both airlines determine their costs based on a number of factors. The main factors at play in this respect include demand, supply, value as perceived by the customer and costs associated with the flights. Demand as affected by various factors is a major force at play in the pricing of the flights by both companies. While both organizations apply a mixed pricing strategy, it is evident that British Airways is biased toward the value system even as Easyjet is biased toward the cost system. Figure 2: British Airways is affected by demand and supply forces in establishing its prices References Breidert, C. (2006) Estimation of willingness-to-pay: Theory, measurement, application, Wiesbaden, Germany: Deutscher Universitats-Verlag. Colin R., 1989, Money, Interest and Capital: A Study in the Foundations of Monetary Theory, Cambridge University Press. Cohen A., 1983, "'The Laws of Returns Under Competitive Conditions': Progress in Microeconomics Since Sraffa (1926)?", Eastern Economic Journal, V. 9, N. 3 (Jul.-Sep.): 1-15 Read More