Pricing Strategies of Organisations - Essay Example

?Running Head: Pricing Strategies of Organisations Pricing Strategies of Organisations [Institute’s Pricing Strategies of Organisations Introduction As the literature regarding marketing suggests, marketing mix consists of four Ps, which remain crucial to marketing of any product, service, brand, or company. These are product, place promotion, and price. Out of these four, product, place, and promotion are the ones that add to the costs and expenses of the company. Only price represents what matters to the bottom line of any company and that is revenue. In other words, the bread and butter of the company and its employees depend directly to the pricing strategies of any company (Baker, pp. 78-82, 2010). Nevertheless, over the past few decades, price is much more than just the representation of revenue earned by the company but it can have many objectives and many different tasks could be accomplished with pricing strategies. This paper is an attempt to explore the pricing strategies that companies use and how these different pricing strategies help the company to target different markets. The same would be done with the help of examples, case studies, and theory. Discussion To understand the role and importance of pricing in the marketing mix and in targeting specific markets, consider the following example of Whirlpool Duet. At least until the 20th century, Washers and dryers had the image of products, which could never justify a high price. However, in the year 2001, Whirlpool decided to introduce its Whirlpool Dent, a new washing machine that had the capacity to wash almost 16 jeans at the time and a washer dryer combo, more efficient in terms of time and energy consumption and priced it at 2300 US dollars. This price was almost four times high than the average price of a washing machine in the market. Critics expected that the machine, although is one of a kind but would end up giving only losses to the company. Bigger loads, lesser time, lesser electricity, and lesser water required the machine was appealing enough to the market to make an impact. Important here to note is that with this new pricing strategy, Whirlpool wanted to put an end to the series of confusing discounts that it used to give its customers and which resulted in losses to the company. With this shift in pricing strategy, Whirlpool was able to redefine the washing machine industry and identify new markets and segments within it (Gregson, pp. 85-87, 2009; Ferrell & Hartline, pp. 47-49, 2008). Market Skimming Consider the example of Sony’s first High Definition Television (HDTV) in the Japanese market introduced in the year 1990. Sony initially priced it with 43000 US dollars but by the end of the year 1993, the same HDTV with similar features was being sold for almost 6000 US dollars. By the year 2004, a 42-inch HDTV had a price tag of only 1200 US dollars in the Japanese market. What Sony was trying to do here in Japanese market is known as “price skimming” or “Market skimming price” in the language of marketing. When companies introduce new, technologically advanced and better products, they deliberately charge very high prices for those products (Gregson, pp. 85-87, 2009). Usually, extensive promotion and hype is created in the market about the product, which create a very high demand. Furthermore, the unit costs of producing small volumes are not so high. This allows the organisation, not only to keep the competitors out of the market but at the same time, the high price communicates the message of luxury, uniqueness, and superiority of the product. By starting with the highest possible price and gradually decreasing it over a period, the company is able to “skim” all the revenue layers of the market (Zhang, pp. 36-39, 2005; Kurtz, MacKenzie & Snow, pp. 325-326, 2009). Important here to note is that with this method, the company is able to target all the segments and markets. With high initial prices, the company targets the market of less price sensitive customers who are willing to pay higher for premium. However, when the price decreases, the upper middle class and the middle class people also join the target market of the company. Therefore, with the help of market skimming pricing, a company is able to target different markets, starting from the least price sensitive customers to the most price sensitive customers (Dolan & Simon, pp. 167-168, 1996). Market Penetration Pricing The flip side of market skimming pricing is market penetration pricing, which refers to the process of charging the lowest possible price to reach to the masses in the market. The low price represents the intent of the company to penetrate into all segments of all markets and appeal to all customers whether or not that they are price sensitive (Marn, Roegner, & Zawada, pp. 63-68, 2004). Moreover, production in high volumes allows the organisation to reap significant cost benefits as well. The success of Southwest Airlines is an example of how effective penetration pricing could be in certain cases. Southwest Airlines only flies Boeing 737 which helps the organisation to save dollars when it comes to maintenance, training pilots and stocking parts (Zhang, pp. 36-39, 2005). Furthermore, the company also saves money by not serving meals and not having to use the costly software such as SABRE and Apollo. Therefore, the company stands out of the crowd as a low cost provider and has the lowest cost of operations per seat per mile in the airline industry. Moreover, as of the year 2008, the stock of Southwest Airlines is of higher value than that of the stock of all other airlines combined (Kurtz, MacKenzic & Snow, pp. 325-326, 2009). Consider the example of Procter and Gamble in this regard. When P&G was all set and ready to launch its electric toothbrush “Crest Spin-Brush” in the market, it found out that the average price of an electric toothbrush in the market was around 50 US dollars. P&G decided to use market penetration pricing and sold its toothbrush just for 5 US dollars. P&G earned millions of dollars from the selling of this brand and Crest brand become P&G’s twelfth billion dollar brand. Important here to note is that this move of P&G did not only allow Crest to sell its electric toothbrush in great quantities but it promoted the image of Crest as the low cost producer of the market. The value proposition of Crest emerged as that of “more for less” and the customer associated the same with all products of the product line of Crest. Towards the end of the day, P&G with Crest was able to target many different markets (Nagle & Holden, pp. 102-104, 2002; Smith & Smith, pp. 85, 2011). However, on the other side of the picture, there are reasons to believe that market penetration pricing may end up hampering the ability of a company to target different markets. This is true because to certain customers, a lower price sends the message of lower quality product. Furthermore, the higher income customer group is always willing to pay a premium to create a line between the products and services used by them and by the public. With penetration pricing, the company is most likely to lose hold of those customers. Moreover, it will create a gap or a niche market, which would allow another competitor to capture this niche market by creating a higher quality product with premium pricing (Nagle & Holden, pp. 102-104, 2002). The experience of Omega, which was one a more prestigious watch brand than Rolex, is a great example of how penetration marketing may backfire in targeting different markets. In order to appeal to a higher base of customer and increase its market share, Omega committed the sin of decreasing the prices of its watches. The move flooded the market with mote lower price competitors thus confusing the customers and increasing the competition. Omega was never able to justify its move to decrease its prices since the gains of decreasing the price were not sufficient to justify the move for destroying the previous brand image of Omega as a premium priced and high quality brand (Dolan & Simon, pp. 167-168, 1996; Ferrell & Hartline, pp. 47-49, 2008). Odd-Even Pricing Odd even pricing refers to the “price tactic which uses odd numbered prices to denote bargains and even numbered prices to denote and imply quality. Odd-even pricing is a type of psychological pricing. It is a common sight to find retailers pricing their products ending with digits for example, $99.95, or $49 because it appears as less expensive and less imposing than $100 or $50 respectively” (Nagle & Holden, pp. 102-104, 2002). This makes the consumers feel that the price is at the lowest possible level and that they are paying a much lower price. On the other hand, even pricing is used to denote quality and superiority of the product. Sellers prefer to price a mink coat as $3000 and not as $2995 since the former sends the message of “more for more” and the later sends the message that the seller is just trying to get rid of the product. Superior watches would be priced as $1000 and not as $999 for the same reasons (Baker, pp. 216-218, 2006). A careful analysis would reveal that with even and odd pricing, companies are able to get hold of different target markets. With odd pricing, companies are able to attract customers, which are looking to spend less and get the maximum value. These customers are trying to save as much as possible and want to get the best deals (Ferrell & Hartline, pp. 47-49, 2008). Big, high end and fancy stores keep these customers outside of the shops, staring at the products and taking deep breaths because they know that they cannot afford these products. However, with even prices, sellers that even have mediocre products can send the message of quality and better products thus allowing them to attract people who are willing to spend more for quality (Baker, pp. 78-82, 2010). Predatory pricing Despite the fact that it is considered illegal in almost all states, predatory pricing takes places all the time within industries because it is always difficult to prove in the court of law that whether or not a specific instance by a company was of predatory pricing or not. Predatory pricing refers to the practice of deliberately decreasing the prices to less than the level of average variable costs of the company in order to force the smaller competitors in the market to leave the industry or incur the same loses (Kurtz, MacKenzic & Snow, pp. 325-326, 2009). The predator would quickly shift the prices to the previous level once the competition has been forced out of the industry. There are not a lot of examples of such practice in the recent past but there are many examples of such price wars in the past. A careful analysis would reveal that this is another way to expand the market share and target new markets. When a company decreases its prices to the minimum possible level, either it is actually allowing other consumers, which were previously not interested in the product or were the customers of other competitors, to consider the product and try it (Baker, pp. 216-218, 2006). Leader Pricing Leader pricing or loss leader pricing refers to the practice of marketers to sell one product at breakeven price or even at loss to attract shoppers to the shop in the hope that once they visit, they would also buy other products offsetting the loss created by that one product. Furthermore, they also intend to change the loyalties of customers of other competitors through providing them with even better deals (Kurtz, MacKenzic & Snow, pp. 325-326, 2009). Quite clearly, with leader pricing, the company tries to increase its market share and share of consumer purchases. At the same time, it allows the company to target different markets that were previously either unknown to the company or were being served by the customers (Nagle & Hogan, pp. 63, 2006). Case of Ryanair Consider the case of Ryanair in this regard. Many airlines in the airline industry use dynamic pricing strategy, which is another form of price discrimination. Under the umbrella of dynamic pricing, airlines charge different fares to the different customers during peak and off peak seasons, for advanced bookings, for last minute bookings and thus fares vary for different times of the day, different days of the month and different seasons (Kurtz, MacKenzic & Snow, pp. 325-326, 2009). In fact, there are all chances that two people who are travelling through the same flight may have paid different fares for the same flight with the same benefits. Important here to note is that this kind of pricing not only allows the company to earn some extra revenues during the peak hours, days and seasons but it also ends up in increasing tourism in those areas. However, important here to note is that these are the low cost carriers who use aggressive forms of dynamic pricing. Furthermore, recently in Europe, low cost carriers handled more than 20 percent of the total air travel, which indicates the success of these low cost airlines (Malighetti, Paleari & Redondi, pp. 43, 2009). The study indicates that during the years of 2006 and 2008, Ryanair has decreased its intensity of dynamic pricing. It has appeared that the gains that it made through its previous pricing strategies, it has used that capital to expand its network by adding new destinations and locations. Ryanair is now saving its aggressive pricing strategies for the regions with strong economic growth since they are more likely to respond to fluctuations in the fares (Malighetti, Paleari & Redondi, pp. 43, 2009). More importantly, Ryanair’s recent steps to reduce its dynamic pricing strategy and adding new destinations is expected to stimulate additional tourist demand which also means that advance booking with Ryanair would be expensive. However, even more important to understand is that this study reinforces the idea, which is being discussed here that pricing strategies have a significant link with targeting specific market. As evident from the above example, a change in Ryanair’s pricing strategy is expected to help it to target new tourists (Malighetti, Paleari & Redondi, pp. 43, 2009). Conclusion Therefore, towards the end, it is understandable enough to conclude that pricing strategies play a crucial and imperative role in targeting different markets. Companies and managers, which are aware of the potential of pricing strategies to target different markets, are able to generate more business and revenue for the company (Marn, Roegner & Zawada, pp. 63-68, 2004). However, as mentioned earlier in the paper as well that much consideration and thought must be put into the pricing strategies to target different markets because an incorrect pricing strategies may not even end up tarnishing the image of the company but it may also end up putting the company into losses (Kurtz, MacKenzic & Snow, pp. 325-326, 2009). References Baker, Ronald J. 2006. Pricing on purpose: creating and capturing value. John Wiley and Sons. Baker, Ronald J. 2010. Implementing Value Pricing: A Radical Business Model for Professional Firms. John Wiley and Sons. Dolan, Robert J., & Simon, Hermann. 1996. Power pricing: how managing price transforms the bottom line. Free Press. Ferrell, O. C., & Hartline, Michael D. 2008. Marketing Strategy. Cengage Learning. Gregson, Andrew. 2009. Pricing Strategies. Jaico Publishing House. Kurtz, David L., MacKenzie, H. F., & Snow, Kim. 2009. Contemporary Marketing. Cengage Learning. Malighetti, Paolo., Paleari, Stefano., & Redondi, Renato. 2009. “Has Ryanair’s pricing strategy changed over time? An empirical analysis of its 2006–2007 flights.” Tourism Management. Volume 31, pp. 36–44. Marn, Michael V., Roegner, Eric V., & Zawada, Craig C. 2004. The price advantage. John Wiley and Sons. Nagle, Thomas T., & Hogan, John E. (Ph. D.). 2006. The strategy and tactics of pricing: a guide to growing more profitably. Pearson/Prentice Hall. Nagle, Thomas T., & Holden, Reed K. 2002. The strategy and tactics of pricing: a guide to profitable decision making. Prentice Hall. Smith, Tim J., & Smith, Tim. 2011. Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures. Cengage Learning. Zhang, Z. John. 2005. Pricing strategies. McGraw-Hill Custom Publishing. Read More