Price Strategy for Business Market - Essay Example

BSM Test Section A Answer 2: Price Strategy for Business Market Considerations for pricing strategy include strategic versus tactical pricing, strategic use of tools and applications, profit maximizing prices, pricing psychology, costing and financial analysis, managing price competition, and organizational transformation. The decision of strategic versus tactical pricing includes an analysis of how pricing to cover costs, achieving sales and competitive advantage influence profit, what objectives could lead to competitive advantage and profitability, and the role of pricing in overall marketing strategy. Setting prices for profit maximization include determining the role of value, segmented pricing, accounting price sensitivity, setting price to achieve strategic objectives, and management of price over the lifecycle. Pricing psychology is based on price perception and competition influenced by the customer, determination of pricing communication tactics that are effective, and management of risk against maximizing value. Costing and financial analysis includes determination of relevant costs for pricing, break-even changes in sales, and analyzing profitability of price changes. Managing competition in price includes mastering the game of pricing, planning for profitable competition, strategic use of information, management of resources for competitive advantage, and understanding the legal issues in pricing. Thus, pricing policy is based on value creation at the bottom which is enhanced by price structure and communication of value. Managing the pricing policy includes setting prices to maximize profit (Pricing: Strategy and Tactics). Pricing decisions are highly complex, and organizational objectives are primary factors while deciding upon a pricing strategy. Price skimming, penetration pricing, mixed pricing, cost-plus pricing, variable pricing, marginal pricing, promotional pricing, and differential pricing are techniques used by organisations while developing their pricing policies. Price skimming involves offering a product or service for a premium on a low volume. The strategy is typical for new products or services in new markets, where a certain number of customers are willing to pay more for new innovative products or services. The process speeds up the payback period. When the product or service becomes popular and sales volume increase, prices come down. An example of this technique has been deployed in the mobile phone industry. Penetration pricing is a technique used for penetrating the market for gaining substantial market share, by setting the price low for high volume sales. The payback period is long, however the strategy allows for establishment of strong market position. The strategy has been deployed in airline industries and fast food businesses. Mixed pricing involves price skimming in the beginning, and penetration pricing when competitors enter the market. An example of this approach has been used in mobile communications. Cost-plus pricing is based on total cost of the product or service and addition of margin. The disadvantages of the method include, pricing may be too high or too low, and does not consider competitiveness or the market potential. Variable pricing involves pricing based on specifications of individual contracts, and is common in industrial and B2B markets. An example of this approach is tendering, which could include a fixed component such a labour charges or could be variable depending on the complexity of the work. Marginal pricing is based on marginal cost, which is the cost of the last unit of output, and is common in the service industry. An example is standby airfares where last minute seats are a fraction of the normal fare as anything over the marginal cost contributes to the company’s profits. In this technique, strategies to help maximise the take-up of services are extremely valuable. Promotional pricing involves the use of tactical pricing for increasing sales over a short period. These include schemes such as discounts, special offers, vouchers, rebates, loss leaders, etc. Differential pricing involves different prices for the same service at different times or to different customers, and could be seasonal or cyclical. The technique allows for the attraction of businesses during slack periods or attraction of specific customers. Common methods deployed for setting prices include price consumers would pay, price based on competitor prices, price based on production or purchase costs, etc. Effective pricing strategies use a combination of several methods to determine price. However, since consumers ultimately determine price, the value must justify price (Haydu & Hodges, 2008). In the traditional model, profit maximization is based on businesses seeking profit maximizing equilibrium. Changing theories of pricing include dynamic pricing, market segmentation, business objectives, globalization of markets, interdependence between firms, and influence of industry regulators. The internet has brought about a greater use of dynamic pricing. Examples include auctions and reverse auctions, where buyers set prices and sellers bid for businesses, trading exchanges, price matching schemes, and product bundling. Segmentation of markets involves extensive use of price discrimination in specific markets at home and overseas. There are businesses that do not rely on profit maximizing, but have other objectives, such as satisficing behaviour. The globalization of markets does not allow the law of one price. Though pricing behaviour is independent in firms, many markets tend towards oligopoly. There is a high level of interdependence between firms, and there is a potential for price collusion. Creation of strategic partnerships and alliances for long term commitment between suppliers and distributors has been considered an important strategy in B2B markets, and plays a critical role in pricing strategy. There are relatively few markets that are free from the oversight of regulatory authorities and competition authorities, and most businesses have their prices influenced by such authorities. Advances in technology are empowering businesses with the potential for price discrimination and dynamic pricing. On the other hand, greater price transparency is diminishing pricing power. However, since perfect competition does not exist, pricing power depends on variables, such as nature and extent of competition from local and international competition, industry regulation, and the willingness and ability of the consumer to pay (Revision on Business Pricing Strategies). Effective pricing has an important role in sales. Costs, retail channels, consumer psychology and advertising need consideration while developing pricing strategy in traditional businesses. Several pricing strategies have evolved. These include discount strategy, free-sale strategy, bidding strategy, transparency in pricing strategy, and accumulation preference strategy. The discount strategy relies on offering discounts to consumers. The free sale strategy is prevalent in digital products and information services. The internet being the delivery medium, the cost for copies is negligible and profitability could be enhanced by the number of customers. The strategy could be effectively used by enterprises to advertise, gain market share in short time, and increase profits. Enterprises use bidding strategy to reduce costs and time during purchasing. Transparency in pricing strategy relies on providing consumers with price information, such as producer and retailer profits, costs of delivery, etc. Accumulation preference strategy has been based to attract second round consumption, and avoids direct pricing competition. In economies with highly developed markets, when supply surpasses demand, consumers have a direct influence on price, and it is desirable to set a cost that consumers are likely to pay as a pricing strategy (Tao, 2002). Considerations for pricing policy, besides organisational objectives and the degree of profit orientation include, breakeven analysis, levels of demand and elasticity, regulatory factors, marketing mix, and positioning. Components of cost are variable costs, fixed costs and overheads. Variable costs include costs of materials and provisions, staff costs, advertising, etc., and fluctuate in relation to the service output. Fixed costs include costs associated with buildings, depreciation, taxes, etc. and are fixed in line with output volume. Overhead costs include management and administration costs. Breakeven costs include the minimum quantity of service to be sold for breaking even. However, the tool is of limited value because of its simplistic nature about the relationship between costs, price and demand. The tool should be used in conjunction with approaches, such as market structure, potential demand, and competitive position. Competitor pricing is based on information about competitors’ prices, and are common in price sensitive markets and core benefits are more or less similar. The technique is commonly used in banks and airlines. Such organisations attempt to influence customer preference by the use of other elements of marketing mix, such as service quality. Provision of a service of higher quality or additional benefits could be valid reasons for setting the price higher. An analysis of the organisation’s pricing strategy with that of its competitors is important while setting the pricing strategy. Pricing levels are affected by demand and elasticity. Demand could be affected by factors such as economic conditions, consumer spending, seasonal variations, peak periods, marketing and promotional effort, sustainability of service, etc. The sensitiveness of demand in relation to price changes is price elasticity of demand, and helps in the analysis of demand. The elements of a credible and attractive marketing mix are based on influences including product or service offering, promotion, place, people, process, and physical evidence. The product/service price must accurately reflect value, and be of good quality to match customers’ expectations. Promotions should feature value, quality and/or price to customers. Price could be affected by location, costs associated with staffing, training, facilities, physical environment, etc. However, there should be no compromise in value or quality. Positioning involves customers’ perception and evaluation of products or services, and their ranking of features and attributes, such as quality and price against competitors. Organisational objectives and pricing policy decisions are influenced by strategies, such as profit maximisation, revenue maximisation, maintaining price leadership, survival, and/or growth maximisation. Clear and specific objectives are critical in the role of strategies in pricing decisions. Thus, an organisations framework for pricing decisions include analysis of organisational objectives, determination of demand levels and customer characteristics, analysis of costs, examination of competitor pricing and positioning, setting prices based on pricing techniques, and monitoring market response and problems. Price is a key element of the pricing mix, should be used as a marketing tool and organisations should be prepared to adapt to variable market conditions. References Haydu, John, J. & Hodges, Alan, W. (2008). Basic Marketing Strategies for Improving Business Performance in the Turf and Lawncare Industry (1 ed.) [Brochure]. Gainesville, FL: University of Florida IFAS Extension. Professional Pricing Society. (2008). Market Driven Pricing Strategies. Retrieved May 29, 2009, from Professional Pricing Society Web site: http://members.pricingsociety.com/articles/Market-Driven-Pricing-Strategies.pdf Tao, Ding, Bei, Chen. (2002). The Chinese Pricing Strategy in B—TO—C. Retrieved May 29, 2009, from Chinese Academy of Social Sciences Web site: http://old.iwep.org.cn/pdf/the%20chinese%20pricing%20strategy%20in%20b-to-c.pdf The University of Chicago Booth School of Business, (2009). Pricing: Strategy and Tactics. Retrieved May 29, 2009, from The University of Chicago Booth School of Business Web site: http://www.chicagoexec.net/chicago.nsf/97E726F0D614313C85256C2F00491183/$File/PSTa.pdf Tutor2u, (2008). Tutor2u. Retrieved May 29, 2009, from Revision on Business Pricing Strategies Web site: http://tutor2u.net/blog/files/Revision_Pricing_Strategies.pdf Uva, Wen-fei L. (2001). Smart Pricing Strategies. Retrieved May 29, 2009, from Department of Applied Economics and Management, Cornell University Web site: http://hortmgt.aem.cornell.edu/pdf/smart_marketing/Uva%203-01.pdf Section B Answer 1: Appraising relationship management within service environment. Use examples. Can we succeed, why we can succeed? Customer relationship management (CRM) seeks to develop and maintain long term relationships with customers that are strategically significant. A CRM strategy is focussed on acquisition, retention and profitability. Strategies need to be deployed to attract new customers. It has been estimated that the cost of attracting a new customer is five times the cost of maintaining an existing customer. Profitability could be boosted by 20-125 percent by increasing customer retention rate by 5 percent. Thus, a significant amount of focus in required to ensure that existing clients continue purchasing and supporting services. With respect to CRM, profitability is based on lifetime value of the client, accounting for income and expenses. Successful implementation could be achieved by organizations that have a great deal of client information, and understand that the needs of the clients are differentiated. An example is financial services, where institutions have a great deal of customer information and the needs of customers are varied. The financial conditions of each customer being different, it is possible for financial institutions to offer customer specific packages. However, to be successful the associated business processes must be in place to facilitate the success. Relying solely on technology and lack of preparation are risks to successful implementation of CRM. Customer service has a critical role to play in a CRM strategy. Customer service should be designed for operational efficiency and customer satisfaction. The customer evaluates and determines the quality of customer service, which affects the customer’s desirability of a relationship with the organisation. Also, it is important that service encounters are managed by the organization. Four specific actions have been identified for the implementation of CRM strategy. These include identification of customers, differentiation of services, interaction with customers, and differentiation among customers. There is a need for management to continuously review existing processes and methods, and make changes wherever necessary. A key area of focus in the development of long term relationships is staff training in customer service and improvement in service levels. Identification of customer needs, interacting with them and differentiation are essential to provide customized service. Continuous communications with the customer are necessary for relationship building activities, and require being up to date with new developments in technology (Berndt, Herbst & Roux, 2005). Customer-driven organizations have quality, competitiveness and opening new sources of revenue as their primary objectives. Forward-looking organizations realize that it is necessary to strike a balance between spending on customer service, satisfaction and retention, and pursuing growth and increasing market share. The current service environment is more sales and revenue orientated, resulting in increased emphasis on the experience of the customer and revenue growth as significant components on corporate strategy. A renewed focus on the customer, integration of sales and service transactions, and end-to-end capabilities have been based on the realization that the drivers for opening new markets, building sales and ensuring profitability are acquisition of customers, customer loyalty and retention. The arrival of low cost competitors, advances in technology and lack of green-field opportunities have put pressure on margins of service companies. This has resulted in service offerings towards drawing greater income from existing customers. The ability of company to deliver effective sales and support and gain competitive advantage are impacted by the service life cycle, time to market, service quality, and innovation. Companies lacking integration among customer-relation systems and processes suffer from inconsistent promotions and duplications of processes and functions. An outsourcing sales-to-service model has been proposed to support business sales and service function. It is believed that a managed approach could enhance value to the service portfolio, control costs, and allow operational flexibility. Such an approach would allow leveraging of advanced analytics for effectively targeting, reaching and serving customers. EDS, and HP company has successfully deployed the model for several clients (Halikias, 2008). Extended CRM platforms allow services gain competitive advantage in the marketplace, allowing for assessment of customer profitability and demographics across product lines and bring about higher response rates to targeted offerings and campaigns (Jedd, 2003). An important aspect of maintaining relationships is service recovery. However, few firms are capable of handling service failures. Customer knowledge management is an effective method in the implementation of a service recovery strategy (Samiha, 2008). The relation between satisfaction, loyalty and profitability has been studied by Iyer et al. CRM in electronic markets has resulted in millions of dollars in technology spending, however profitability is yet to be obtained. Traditional segmentation has been disassociated with profitability, and more sophisticated methods rely on past behaviour and have proved unreliable in predicting consumer behaviour. Mere understanding of customer preferences is inadequate, and firms would need to provide the highest levels of satisfaction for each driver. Loyalty has been attributed to several factors, including psychological, cost benefit and effort needed in seeking or switching alternatives. Hence, while crafting CRM strategies, firms must be cognizant of the factors that link satisfaction and loyalty. Loyalty and profitability has been explained by the lower costs associated with serving existing customers, and increased revenue from increased business. However, CRM strategies must be based on detailed business specific evaluations. While implementing CRM strategies through the internet, it is important to distinguish between transactional and relational goals of the firm. Transactional goals could be achieved by the use of technology. However, pure technology application could be inadequate in situations such as handling complaints, communicating critical issues, and developing deeper trust and structural ties. Such issues need human intervention, and CRM strategies need to plan for such interventions to be successful (Iyer & Bejou, 2003). References Berndt, Adele , Herbst, Frikkie & Roux, Lindie. (2005).IMPLEMENTING A CUSTOMER RELATIONSHIP MANAGEMENT PROGRAMME IN AN EMERGING MARKET. Journal of Global Business and Technology. 1, 81-89. Halikias. Alex. (2008). Integrating Service and Sales In Customer Relationship Management. Retrieved May 29, 2009, from White Papers Web site: http://www.eds.com/insights/whitepapers/downloads/integrating_crm.pdf Iyer, Gopalkrishnan & Bejou, David. (2003). Customer Relationship Management in Electronic Markets. Retrieved May 29, 2009, from The H. Wayne Huizenga School of Business and Entrepreneurship Web site: http://www.huizenga.nova.edu/5017/ReadingList/Iyer_Bejou%20-%20Customer%20relationship%20management%20in%20electronic%20markets.pdf Jedd, Marcia. (2003). CRM SOLUTIONS FOR FINANCIAL SERVICES. Retrieved May 29, 2009, from Marcia Jedd Web site: http://www.marciajedd.com/pdfs/JeddMsampleCRMFinanServicesDec02.pdf Samiha, Mjahed. (2008).Integrating Service Failure and Recovery into Knowledge Management. Communications of the IBIMA. 6, 15-20. Section B Answer 2: Critically appraise importance of brand experience in service industry. The task of defining and managing brands in services is complex, especially in financial services firms and retirement service providers. This is because the services are not singular, but a collection of diverse services targeted at a variety of constituencies. This makes it difficult to measure the effectiveness of the brand experience against competitors. For example, within the retirement services industry intermediaries, prospects, and clients are B2B customers. In order to manage the brand experience, the lifecycle of a client must be broken into component pieces and the constituents to be reached at various points of the lifecycle must be determined. Retirement services has a typical four stage lifecycle, including managing perceptions of key intermediaries, formalized sales process, service relationship, and client’s departure. Each of the four stages of brand experience possesses unique characteristics that need to be identified, monitored and measured. Thus, managing the brand experience lifecycle involves managing perception, winning new businesses, maintaining and growing clients, and lessons learned. Managing perception includes understanding vendor weaknesses and strengths, gauging interest, and identifying strong and weak relationships. Winning new businesses involves identifying reasons for winning and losing, measuring sales process effectiveness, and benchmarking against key competitors. Maintaining and growing clients includes measuring client loyalty and satisfaction, benchmarking service quality, and identifying problem relationships. Lessons learned include determining sources of dissatisfaction, identifying warning signs, and identifying best practices to prevent future losses (Dietch, 2007). A comprehensive diagnostic tool for the measurement of brand success has been developed by Wunderman. The Wunderman Brand Experience/Scorecard has identified the three most important factors for brand commitment, and has ranked the world’s leading brands. The research offers a model based on customer experience to assess performance, as compared to other models based on brand perception. Interactions with a brand are considered by consumers while deciding what a brand is, what it does and what it means. According to the study, America Online and Marriott are top ten experience brands in the United States. The Wunderman Brand Experience/Scorecard is a compliment to the BrandAsset Valuator, and demonstrates the impact of performance, treatment and community on the three levels of loyalty that brand experience is made of. Performance is simply defined as whether consumer requirements are met, and better than other options. The functional quality of the service is addressed in performance. Treatment includes the number of interactions with the brand, and whether the brand knows the consumer. The quality of interaction between the customer and brand is addressed by treatment. This includes a brand’s response and anticipation of customer needs. Community is about the connection with other users, and whether consumers are interested in more. Community addresses the emotional element of branding experience, and includes the ability to create a sense of belonging among consumers. The brands that are on top of the list have common features, such as being market leaders, genuine, authentic and real. The best experience brands balance performance, treatment and community for the delivery of function, care, and a sense of belonging simultaneously. Past studies of branding have emphasized on the perception of customers, and ranked brands based on category. However fundamental shifts, including the customer being savvier, proliferation of choices and media, and increases in the number of services have brought changes in branding experience. According to the Wunderman Brand Experience/Scorecard, the three experience factors move consumers up along the commitment chain. Satisfaction is driven by performance, and involvement is driven by treatment and community. The three together create a state of satisfied involvement, keeping customers engaged with the brand over time and move up along the commitment chain. There are three levels to the development of commitment chain. The first level is usage, which does not imply commitment. Level two is attachment that indicates preference and further use. Level three is resonance, indicating that the experience continues to be positive, and that the customer is strongly related to the brand. Wunderman has shown that in brands that are falling behind, marketer’s desires are not in sync with customer’s wants. However, it is possible to improve brand experience by focusing on quality and nature of branding experience, and designing holistic integrated marketing campaigns to move customers along the commitment chain (Wunderman, 2003). Social media has forced transformation in the business world by forcing companies to reinvent the process of building brands. Brands have become more participatory and collaborative. These allow for a new approach to the digital world for the determination and adoption of the most successful strategies for creating the ultimate brand experience. Four principles have been identified for building experience. Strong brands have a belief and have built communities where members influence each other. Such insights should be leveraged based on principles of conviction, collaboration and creativity to translate those beliefs into action. By doing remarkable things, they could become truly influential and sustainable. It is essential to be on the lookout for accomplishing objectives in innovative ways. The proliferation of low cost airlines is an example of innovation in the airline industry. Brands need to reach out to not only their consumers, but also their passionate advocates. There is a direct correlation between growth rates and enthusiastic customers referring friends or colleagues. Customers are the most valuable media. Constant dialogue with customers has become more important than ever, and influence is a valuable asset for a brand in a networked world. Brands with influence command attention. Brands should develop openness and transparency, creating a sense of shared ownership, and turn customers into loyal customers and advocates. The collective wisdom of advocates and communities can help in the development of services, and marketing efforts (Ross, 2009). References Dietch, Joshua. (2007). Managing Your Client’s Brand Experience. [Brochure]. Waltham, MA: Chatham Partners LLC. Ross, Paul. (2009). Building Brand Value and Influence in the Airline Industry. [Brochure]. London, UK: DDB Worldwide Communications Group Inc. Wunderman. (2003). Discovering the Missing Link to Brand Loyalty Wunderman Brand Experience/Scorecard. [Brochure]. New York, NY: Wunderman. Read More