Pricing Strategy Consulting Business - Essay Example

? Pricing Strategy Consulting Business Table of Contents The Scenario 3 Pricing Policy 4 Analyzing the best price setting process used to establish sustainable and profitable prices 5 Key pricing considerations and strategies 6 Challenges of effectively implementing a new or updated pricing strategy 8 Differentiating between incremental and avoidable costs 8 The Scenario Pricing has always been an important part when deciding upon the product or in launching of a new product. It has been said that while establishing pricing, three things can happen: firstly, to overprice the product and lose a sale that might have resulted profitable; secondly, underprice and make an unprofitable sale; and thirdly, price accordingly and make both sale and profit at the same time. Out of the three options, the most profitable and widely accepted one is number three. Most organizations falsely believe that they are competent at pricing, whereas the case is totally different (Daly, 2002, p. 1). Thus, it is necessary to price the product at a right price in order to attract the target market and gain profits. This paper aims to discuss the pricing strategy adopted in the launch of a new product. The scenario describes a company launching a new product. The organization has sought the help of a consultant in deciding upon the price. The client deals with luxury goods and has decided to launch perfume targeting the high-end segment of the society. The perfume introduced will be segmented both for men and women. Therefore, it is necessary to decide upon the price so as to attract the consumers and make the product profitable and well accepted by the target market. The client has asked the help of the consultancy in deciding upon the pricing of the product. The business deals in luxury goods; as a result, they cannot charge a comparatively low price as compared to its other luxury goods. Therefore, pricing strategy should be decided based on the product and the business strategy which it has adopted for over the years. Pricing Policy Pricing has been termed as one of the important aspects in branding and marketing strategy as pricing is considered one of the first and foremost indicators of a brand positioning with respect to its consumers. Pricing is also the most flexible factor out of the 6 Ps of marketing mix as it can be modified at an ease (Okonkwo, 2007, p. 140). Pricing policy determines the way or the technique used by the company to set its prices for its product. One of the simplest ways to set price is through uniform pricing policy. The most profitable pricing policy is the price discrimination because in this case each of the unit is priced based on the benefit that the unit provides to its respective buyers. The next profitable pricing policy is direct segment discrimination. Here the seller should be able to directly identify the various potential segments. Next to direct segment discrimination is the indirect segment discrimination. The least profitable pricing is the uniform pricing. Therefore based on the above discussion, it would be advisable to the client to adopt the pricing policy of complete price discrimination as in this pricing policy the marginal benefit equals the marginal cost which would benefit the client. Each of the buyers would be charged a maximum price that the customers are willing to pay and it is applicable as the product is targeted to the high-end segment of the customers. This pricing policy would extract a much higher price for its units that would be sold (Png & Cheng, 2001, p. 1-3). There are six steps in setting the pricing policy which includes selecting the pricing objectives, determination of demand, estimating the cost, analyzing the cost of its competitors, selecting the pricing method and finally selecting the final price (Kotler, 2007, p.241). Figure 1: Pricing Policy (Source: Kotler, 2007, p.241) Analyzing the best price setting process used to establish sustainable and profitable prices In order to establish a sustainable and profitable pricing, the client should firstly select pricing objectives. The goal or the pricing objective for a company dealing in luxury goods would be “maximum market skimming.” Each of the price sets leads to different level of demand and thus has different impact on the marketing objectives of the client business. The demand curve shows the exact relationship between the current demand and the alternative price. In normal cases demand and price are inversely related, i.e., if the price is higher, demand gets reduced. But there are exceptions such as in the luxury goods segment: if the price is high, demand is even higher. The demand curve tends to slope upwards but if the price is too high, demand might fall. Thus keeping it in mind, the price for the new product must be set accordingly. It becomes increasingly important to analyze the competitors pricing strategy through which the client would decide upon the pricing strategy. The most important consideration in setting price is the three Cs: the customers, cost and the competitors (Kotler, 2007, p. 251). Apart from the basic dimension, marketing decisions such as the positioning strategies, product line strategies, new product launch strategies and others have an impact on the price levels. Since the client is launching a new product, it is advisable to concentrate on the new product launch strategy. While launching a new product, price is a factor that needs to be considered with utmost care and along with promotional strategy. Thus, it is advisable to the client that it should take into consideration all the necessary factors as stated above and adopt the pricing goal or objectives of market skim pricing. Key pricing considerations and strategies The product, which is a perfume, has targeted the high-end segment and has segmented itself towards both the males and the females sections. Therefore the top three sellers for the client would be those people who have an inclination towards perfumes, people obsessed with premium products and finally those who are loyal towards the brand. These three segments would result for the top sellers of the new product launched by the client. The perfume would fall in the introduction stage of the product life cycle as it is a new product. The business would follow the pricing strategy of market skimming, particularly “rapid skimming strategy” as the client would follow a high promotion with high pricing strategy. High price tends to provide high return on investment and with heavy promotion would create brand awareness. Figure 2: New product launch strategy It would be advised to the client to adopt a pricing strategy that will not only be cost effective but also able to create emotions with respect to the brand. The luxury goods are often driven by marketing and a huge number of customers fall for the emotions associated with the products. The luxury brand has a strong emotion driven USP which adds to its advantage as they are not compared with the competitors product and pricing. Emotional desires usually determine the premium price and hence need to be quantified. It can be said that price is one of the primary profit drivers in the luxury goods sector. The product is a premium brand and thus it is advised to set market skimming price for the perfume, where the price would be set high for the new product in order to skim maximum amount of revenue generated from the particular segment that is willing to pay the high price set by the marketer. In this pricing strategy, the quality of the product and the image should support the high price and there are a substantial number of customers to purchase the product. The client needs to set a value based pricing for its new product. The company would set the price based on the perception of the product value. Thus, the price is decided along with the other marketing mix. Figure 3: Value based pricing Value based pricing is the reverse of cost based pricing; the client would set the target price based on the perception of the customers. The targeted price and value then drive the decisions about the design, and the cost that is to be incurred (Kotler, 2007, p. 268). The premium sector usually craves for perception about the target market and similarly, the new product launched would also consider the factor and adopt the value based pricing. Challenges of effectively implementing a new or updated pricing strategy The luxury goods market is highly prospective, even though the emerging sector tends to face certain challenges. The pricing strategy adopted by the client is that of market skimming where the new product is charged a high price right from the introductory stage. If the consumers believe the product not to be up to the mark of paying a high price, this can result in negative profit and breakeven would be achieved quite later than expected. Thus, the greatest challenges lie with the promotional team. It becomes increasingly necessary to generate awareness about the new product and create a brand image in the minds of the customers. This would eventually lead to customer’s acceptance of the product and creating a grand image. On the other hand, being a premium product, due to an economic downturn or any cut off in the cost of the target customers, the product would eventually face a decline in its ratio resulting in loss with respect to the new product. Differentiating between incremental and avoidable costs The difference between the incremental cost and avoidable cost is that the incremental cost is forward looking and avoidable cost looks backwards; it looks into the change in the existing plans. Incremental cost refers to the additional cost that the business incurs in the process of producing a new product. Avoidable costs are those that can be saved if production of an existing product is discontinued (Dunne & Morris, 2008, p. 31). Since the client is launching a new product, it would definitely incur incremental cost. Hence, it becomes necessary that the revenue generated should cover the incremental cost which is associated with the decision for the long run. The new product would require breaking even before it starts to incur profits and generate revenues. In the light of breakeven analysis, contribution margin is referred to as a margin in between the variable cost and the sales price. The contribution margin for the new product would be as follows: The new product would cost approximately $150 as it is a premium product; thus, if 500 bottles of perfume are sold off, the contribution margin would amount to $75,000. Therefore, it can be concluded by advising the client to follow the pricing strategy of market skimming as the product belongs to the category of premium brands and in order to maintain its brand image, a high price should be set for its customers. The client would incur an incremental cost with the launch of its new product and, as estimated, the contribution margin for the new product would amount to $75,000. References Daly, J. L. (2002). Pricing for profitability: Activity-based pricing for competitive advantage. US: John Wiley & Sons. Dunne, P., & Morris, G. D. (2008). Non-executive director's handbook. UK: Elsevier. Kotler, P. (2007). Framework for marketing management. South Asia: Pearson Education India. Okonkwo, U. (2007). Luxury fashion branding: Trends, tactics, techniques. New York: Palgrave Macmillan. Png, I. P. L., & Cheng, C. W. J. (2001). Pricing policy. Retrieved from http://www.comp.nus.edu.sg/~ipng/mecon/sg/09prc_sg.pdf Read More