Product Pricing Strategy: Value-Based or Costing Based - Essay Example

Product Pricing Strategy: Value Based or Costing Based? Introduction: In this short essay, the author presents the strategic perspective of product pricing with an argument whether it should be value based or actual costing based. The author also presents the ethical considerations & other concerns in product pricing. In the end, the author has presented few discussion points. Product Pricing Strategy Every organization should have own strategic goals for pricing the products – like prices will never be quoted in such a way that the revenues from the product will be less than 10% above the break even pertaining to the business of that product OR under any circumstances no product shall be allowed to incur losses to the extent that the overall revenues of all products put together will be less than 20% above the break even, etc. Hence, it is very important that the organization should know all their costs in developing the products and in their marketing & inventory holding. Once the internal thresholds are known there are multiple additional factors that drive pricing decisions from market perspective. Monroe and Bitta (1978. pp414) presented a consolidated view of multiple models of product pricing decision classified as – new product models, product line models, price change models and price structure models. The indicated their choice for market comparisons based pricing – like related products, volumes in demands, number of discounted units, price differential with competition, etc. These factors have been empirically accepted by product strategists in pricing their products. However, the author agrees with a new theory presented more recently in 2000 by Thakur and Nair et al. (2000. pp90-92) on product pricing stating that products should be priced based on consumer preferences and not by the actual prices or consumer budgets. They reiterated that the products should be offered with the characteristics preferred by customers kept above thresholds and priced based on maximum welfare model such that consumers having wide variations of income can afford the product. This is particularly prevalent in automobile and consumer durables markets. Armstrong (1996. pp51-52) argued that prices should be kept variable as per customer preferences such that premium customers buying larger quantities are offered lesser prices and standard customers buying lesser quantities are offered more prices. However, it is observed that when customer preferences are combined with inventory levels, companies tend to increase prices irrespective of whether the customers are premium or standard. There are some concerns in such models that the author presents in the next section. Ethical considerations and other concerns in product pricing Ethical considerations are specifically required to be considered in monopolistic product pricing when dynamic pricing is carried out with fluctuating demands combined with inventory levels. Elmaghraby and Keskinocak (2003. pp1288-1289) discussed that, empirically, dynamic pricing has been one of the best practices in products and services due to change in customer demands (like urgent deliveries needed) or change in inventory levels (less inventory of products in more demand). This strategy is largely prevalent in service industries – like Airlines, Hotels, Transportation, etc. From the ethical perspective, the author hereby argues that dynamic pricing should not be carried out for essential commodities like food, clothes, medicines, healthcare, hospital beds, etc. Some companies increase prices substantially as soon as they witness customer orders with urgency. There are theories in operations research to maximize profits by taking urgent supply orders from customers at premium prices (example, Levin & Ma. 2004. pp217). While it may be a good practice to service customers with urgent deliverables at premium prices, the level of price escalation should be kept under reasonable levels and the customers should be convinced about the same – otherwise the organizations can suffer reputational losses and face problems when it would be their turn to reduce prices to clear surplus inventories. Such relationships should be managed in congenial give-and-take modes that make both the supplier and customers happy about the deals. Discussion Points Shankar and Bolton (2004. pp28-31) presented a complex mechanism of pricing products for retail markets comprising of stores and chains. They presented pricing strategies as per the factors of stores & chains along with customer preferences. This results in different stores offering different prices for the same products. The author wants to discuss how do the customers perceive about these differences? Do they rate quality of stores based on prices or else end up disbelieving the originality of the lower price variants of the same product? Does this strategy results in negative impacts on branding? This is the first set of questions that the author wishes to take up. Monroe and Bitta (1978. pp415) presented systematic approaches to new product pricing based on empirically available information from the markets. They presented three approaches to systematic product pricing – Dean, Oxenfeldt and Welsh methods. In modern context, such approaches must be taking help from Information Technology to arrive at most appropriate product pricing. Among these three methods, Welsh proposed the product life cycle expectancy to be taken into account when pricing new products. This definitely is a good parameter to be considered in order to calculate the price to company during the life cycle such that the returns can be optimized. The author wishes to discuss about the parameters that can be considered in arriving at accurate life cycle estimation. How did the marketing experts do it when the IT tools were not available? This is the second discussion point proposed by the author. Elmaghraby and Keskinocak (2003. pp1288-1289) presented the dynamic pricing model to get the best out of customer demands & inventory positions – that means highest prices during highest demands but lowest inventories. The dynamic pricing however must be requiring timely available & highly accurate decision support databases which at times might be the main bottleneck that prevents the companies to maximize their benefits due to lack of accurate information on consumer demand profiles mapped with supply chain management. The author wishes to discuss how the sales team & supply chain team should support the marketing team to vary the product prices? Conclusion: The author presented the strategic thought process in product pricing supporting the customer preference above all other factors. The author also concluded that ethical aspects should be kept in consideration during dynamic pricings. Lastly the author presented some discussion points to be discussed in the class. Table of Contents: Reference List: Armstrong, Mark (1996). Multi-Product non-linear pricing. Econometrica. Vol. 64. No. 1. pp51-52. The Econometric Society. Retrieved on 9 April 2009. Available at http://www.jstor.org/stable/2171924 (Liverpool Library). Elmaghraby, Wedad and Keskinocak, Pinar (2003). Dynamic Pricing in the presence of inventory considerations: Research Overview, Current Practices and Future Directions. Management Science. Vol. 49. No. 10. pp1288-1289. Special Issue on E-Business and Management Science. INFORMS. Retrieved on 9 April 2009. Available at http://www.jstor.org/stable/4134007 (Liverpool Library). Levin, E.J. & Ma, Y (2004). Profit Maximization in a Multi-Product Firm with Impatient Customers. The Journal of the Operational Research Society, Vol. 55, No. 3. pp217. Palgrave Macmillan Journals on behalf of the Operational Research Society. Retrieved on 9 April 2009. Available at http://www.jstor.org/stable/4102000 (Liverpool Library). Monroe, Kent B. and Bitta, Albert J. Della. (1978). Models for Pricing Decisions. Journal of Marketing Research, Vol. 15, No. 3. pp414-415. American Marketing Association. Retrieved on 9 April 2009. Available at http://www.jstor.org/stable/3150590 (Liverpool Library). Shankar, Venkatesh and Bolton, Ruth N. (2004). An Empirical Analysis of Determinants of Retailer Pricing Strategy. Marketing Science, Vol. 23, No. 1. pp28-31. INFORMS. Retrieved on 9 April 2009. Available at http://www.jstor.org/stable/30036655 (Liverpool Library). Thakur, L.S. and Nair, S.K. et al. (2000). A New Model and Solution Method for Product Line Design with Pricing. The Journal of the Operational Research Society, Vol. 51, No. 1, pp90-92. Part Special Issue: Operations Research and Strategy. Palgrave Macmillan Journals on behalf of the Operational Research Society. Retrieved on 9 April 2009. Available at http://www.jstor.org/stable/253951 (Liverpool Library). Read More