Pricing the Product for Effective Marketing - Coursework Example

An understanding of "pricing the product" is essential for effective marketing. Discuss Introduction Today, the world is known as a globalised world because of ease in telecommunication and international trade. The free flow of information from one location to another over remote distances is attributed to advent of internet and development of communication networks. For instance, the construction of faster means of transportation such as air, sea and rail routes has also facilitated globalisation of world followed by contraction of boundaries and barriers among countries. The trade agreements among international community such as WTO, GATT and NAFTA etc. have also enhanced the trade and business volume followed by surge in aggregate consumption, production and output. For instance, this has resulted in subsequent increase in employment opportunities to people and in standard of living worldwide. It is worthwhile to mention that there is cutthroat competition among business enterprises due to regular entrance of new companies in the business sectors. For this purpose, companies place greater emphasis on product innovation, brand development, quality maintenance, differentiation and positioning so that they could a large pool of potential customers towards their market offerings. Nevertheless, it should be highlighted that pricing is an important element of marketing mix, which comprises of four steps namely product, price, place and promotion. Most of the researchers agree with the argument that price is, perhaps, the most important factor in marketing (any product) as it triggers consumer purchase responses. The researcher will discuss in detail about different pricing strategies and models used by business corporations. In addition, the author of this paper will also throw light over how marketers could use ‘pricing factor’ for effectively marketing their products and obtaining desired outcomes for their respective companies. Kim et al (2008) have summarised the thoughts of Tellis (1986) who stated that the main purpose of pricing strategies implemented by marketers is to cover all economic and social costs so that a business firm could end up with monetary gains. Indeed, firms tend to charge prices so that they could maximise their financial profits that later maximise shareholders’ wealth. It should be mentioned that price of a product is determined after analysis and calculation of total costs of production. Hence, if accountants incorrectly calculate total business costs then marketers could also use that incorrect estimation for setting market prices. Nevertheless, the wrong calculation could adversely impact the success of a particular business venture. In short, the first major element of price – setting exercise is near-to-accurate cost estimation as success of entire business-product cycle depends upon the price factor. Pricing Strategies It should be highlighted that marketers use various pricing strategies some of those are as follows: 1) The first strategy is known as cost-plus pricing that refers to charging price after calculation of total product development (fixed and variable) costs and addition of a certain percentage profit. For example, if a product costs £2 to a manufacturer who has inclination to earn a 20% profit margin then marked price of product will become £2.4. The formula is, Market Price = Total Costs + Profit % of (Total Costs) 2) The second strategy is known as value-based pricing that refers to charging prices after analysing value and satisfaction (or utility) a certain product provides to buyers. The profit margin is determined after the valuation of a specific product. For example, multinationals widely use this pricing strategy because they produce premium quality products that are aggressively advertised and marketed. Therefore, the demand of products offered by multinationals is relatively higher in the early stages of product life cycle that lead to higher customer valuations followed by higher market prices. Global mobile phone producers such as Nokia, Apple. Samsung, Sony etc. tend to charge higher prices (in first 2-3 months) on their new products and generate immense margins from early adopters. 3) The third strategy is known as penetration pricing that refers to charging lower prices to increase product sales. Indeed, this strategy is widely used by organisations when their inventory at stores (or stocks) increases because their products have surpassed maturity stage and entered into declining stage. Indeed, the existing products are marketed to existing markets at relatively lower or throw away prices so that firms could tempt and sell to late adopters or laggards and minimise financial losses. It should not be forgotten that firms incur additional costs on storage, warehousing and advertising of products of which product life-cycle is about to end. Hence, it would be better to unload such inventories, cover maximum product costs and focus on new products with better growth prospects. 4) The fourth strategy is known as competitive pricing that refers to analysing market prices of available substitute products offered by competitors and then setting (affordable) prices that could help products in competing and attracting maximum customers in the marketplace. Usually, the competitive pricing strategy is used when firms operate in an extremely competitive industry and sectors in which consumers already have close substitutes of products at their disposal. For instance, marketers also use it when charging higher prices for products with fewer differences could lead to an absolute and immediate debacle or failure of a good or service as consumers have greater variety and freedom of choice. 5) The fifth strategy is known as price skimming that refers to charging higher prices in initial stages of product life cycle to attract early adopters from elite and upper – middle social classes, who appreciate novel ideas and products. Indeed, the main objective of this strategy is to earn higher profits and persuade the customers that follow acquisitions of early adopters. Later, the prices are reduced at the beginning of maturity stage to maintain sales volume and business growth. Also, the higher prices become unaffordable for a large group of consumers from middle – middle social class; hence, firms have no other option but to bring prices in reach of masses. 6) The sixth strategy is known as psychological pricing that refers to charging prices that could match customers’ buying / spending limit. For example, if a customer has willingness to buy products under £20 and he / she would possibly disregard any products priced above the stated £20 limit; then organisations tend to charge prices such as £18.99 or £19.99 so that they could suit the customer’s behavioural aspect and satisfy him / her mentally. Indeed, it has been a proven fact that a customer tends to remember the absolute value instead of fractional increment in the above mentioned examples. For instance, a customer may remember that price is not only under £20 but around £18 or £19. Pricing the Product It should be noted that a customer from middle – middle social class although does not purchase expense brands and designer products; however, he or she may acquire such products if there is any inclination, desire or preference. In simple words, it should be explained that consumers that customer’s beliefs, attitudes, behaviours, tastes and perceptions are extremely important factors as they lead to creation of demand for specific goods and services. Marketers, therefore, should focus heavily on changing consumer perceptions because it is the perception that helps creating the market of products. For instance, international / multinational / supranational organisations emphasise on branding and value addition. It should be recalled that brands are considered as optimal quality products with unique and differentiated features that have certain value proposition and fetch higher prices because of greater reputation, goodwill and recognition in the marketplace. Quite unequivocally, the multinationals focuses on branding followed by brand recognition and greater consumer awareness so that consumers start perceiving acquisition of brands as status symbol. Having successfully created this perception about brands in the minds of customers, the organisations could charge higher prices and generate enormous profits. For example, the branded sports accessories and apparel products offered by Nike fetch twice or thrice the prices that an ordinary retailer charge for same quality products (Kim et al, 2008). It is worthwhile to mention that there are two major types of goods such as perishable and durable. The perishable or fresh products such as food, eatables and beverages etc. (that are expired in a short time period) have usually price inelastic demand (necessities) and their demand is always there no matter what the prices are (keeping all determinants of demand constant). However, it should not be forgotten that food products offered at restaurants and inns may have relatively elastic demand because they are considered as luxuries rather necessities. Hence, if a marketer increases the prices of these food products, the consumer demand will not be affected to a large extent and companies would end up earning higher margins. However, the scenario will be different if there has been strict check & balance followed by implementation of price regulations and laws by government authorities. On the contrary, there are durable products that have both elastic and inelastic demand. For example, clothes, electronic appliances, furniture, automobiles etc. are durables but necessities so they have price inelastic demand. If marketers increase the price of clothes, the negative impact on demand will be lesser than the percent increase in prices (keeping all determinants of demand constant) and marketers could end up with greater monetary gains. Nevertheless, the products such as designer clothes, perfumes etc. are durables, yet these are the luxuries that have price elastic demand as their quantity demanded reduces if prices increase. Therefore, marketers need to be extremely careful when deciding prices for luxurious products as even a small increase may result in greater than proportional decrease in quantity demanded (Ryzin and Liu, 2005). Apart from this, there is also dire need to understand how prices are determined for products for which perfect or close substitutes are available. The economists argue that products for which substitutes are available in the market also have price elastic demand because there is greater variety and choice at consumers’ disposal. For instance, if a manufacturer or seller charges higher prices for Product A, the customers could switch to substitute products B or C and demand for Product A would decrease at every price level. Hence, marketers usually tend to adopt competitive pricing strategies for aforementioned products so that they could retain existing market share. In addition, the marketers should understand the supply side followed by their capability to sense future supply changes. For example, if prices of cotton and other raw materials used in production of textile goods are expected to increase in near future because of decline in area under cultivation or pest attacks, then marketers should adjusting their pricing strategy regarding textiles so that they could avert the possibility of financial losses that would be incurred due to increase in aggregate production costs. Also, marketers have to adjust pricing strategies if there are supply shortages. Usually, marketers increase the prices for famous products, which are scarce in the market. However, creating artificial shortages for short-term gains are unethical and could sabotage a company’s goodwill and market reputation among distribution channel members, business partners and consumers (Aviv & Pazgal, 2005) and (Ryzin and Liu, 2005). Aviv & Pazgal (2005) revealed that seasonal changes must also be taken into account by marketers when setting prices because demand for certain products is directly affected from seasonal changes. For example, demand of electronic heaters, boots, tea and coffee products, leather jackets, sweaters, and other warm clothes is skyrocketed during winters; however, the demand plummets once the season is over. Therefore, prices of aforementioned goods surge at the start of season but reduce sharply just before arrival of summers. Most of the products are put on ‘sale’ during off seasons and are sold at throw away prices so that producers could clear off inventories and prepare for a new season. Marketers should also understand that different pricing strategies should be used to market products at different locations. For example, consumers in sub-urban and rural areas usually have low purchasing power unlike consumers that reside in developed urban areas with greater employment opportunities. Hence, the prices charged are comparatively lower in under-developed areas than the prices for products offered in cities or regions known as industrial or trade hubs. Indeed, income level or target market must be taken into account before setting prices (Elmaghraby and Keskinocak, 2003). Similarly, price discrimination is always there as products are offered at different prices to different consumers residing in different neighbourhoods. Prices are high at showrooms, lavish malls etc. that attract customers from upper classes unlike prices charged at small, though, organised markets where middle income customers prefer to shop around (Shankar & Bolton, 2004). In conclusion, setting right prices for the right consumers at the right time is extremely important in effective marketing of goods and services. Obviously, charging extremely higher prices for a less want-satisfying product (due to costing errors, weak product evaluation, analysis or judgment) would not entice customers and trigger purchase responses. Consequently, the venture would be a big failure, thereby leading to financial losses. Similarly, charging extremely low prices for a greater want-satisfying product due to aforementioned mistakes would negatively affect revenues and profits simultaneously. References: Nakamura, Emi and Jon Steinsson (2006) “Five Facts about Prices: A Reevaluation of Menu Cost Models” Harvard University [Online] Available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.151.5211&rep=rep1&type=pdf Elmaghraby, Wedad and Pınar Keskinocak (2003) “Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions” Management Science, Vol. 49, No. 10, pp. 1287–1309 [Online] Available at http://web.cenet.org.cn/upfile/96567.pdf Bitran, Gabriel and Ren´e Caldentey (2002) “An Overview of Pricing Models for Revenue Management” [Online] Available at http://web.mit.edu/sloan-msa/Papers/2.2.pdf Chen, Xin and David Simchi-Lev (2010) “Pricing and Inventory Management” [Online] Available at https://netfiles.uiuc.edu/xinchen/www/papers/pricing_review_2010_final.pdf Maglaras, Constantinos and Joern Meissner (2006) “Dynamic Pricing Strategies for Multiproduct Revenue Management Problems Manufacturing & Service Operations Management 8(2), pp. 136–14, [Online] Available at http://www.meiss.com/download/RM-Maglaras-Meissner.pdf Shankar, Venkatesh and Ruth Bolton (2004) “An Empirical Analysis of Determinants of Retailer Pricing Strategy” Vol. 23, No. 1, pp. 28–49 [Online] Available at http://www.ruthnbolton.com/Publications/DeterminantsofRetailerPricingActivity.pdf Ryzin, Garrett and Qian Liu (2005) “Strategic Capacity Rationing to Induce Early Purchases” Columbia University [Online] Available at https://www.kellogg.northwestern.edu/meds/deptinfo/MSOM2005/papers/VanRyzin.pdf Aviv, Yossi and Amit Pazgal (2005) “Optimal Pricing of Seasonal Products in the Presence of Forward-Looking Consumers” Washington University [Online] Available at http://apps.olin.wustl.edu/faculty/aviv/papers/AvivPazgal%20MSOM2005R1.pdf Kim, Ju-Young, Martin Natter and Martin Spann (2008) “Pay-What-You-Want – A New Participative Pricing Mechanism” Journal of Marketing [Online] Available at http://www.marketing.uni-frankfurt.de/fileadmin/Publikationen/Natter_Paper2_PWYW.pdf Solomon, Marshall, Stuart, Barnes, Mitchell “MArketing. 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