Pricing Strategy - Term Paper Example

Pricing Strategy Introduction Pricing involves the determination of what the organization will receive in exchange for its products and services. The main determining factors of pricing are market place, quality of the products or services, market condition, competition and manufacturing cost. Pricing is key among the most primary components of the marketing mix because it is one of the four Ps i.e. price, product, promotion and place. In addition, price is the only revenue generating component among the other four Ps while the rest are cost centers (marketingteacher.com). Product positioning, product features, promotion and channel decisions, all are relate to pricing. This explains the importance of pricing, and that’s where pricing strategies come into play. Pricing is very important for organization and aims at maximizing current profit, maximizing current revenue, maximizing quantity, recovery of partial costs, quality leadership; it helps in business survival and to maintain the status quo in business (entrepreneurs.about.com). Apple Inc, one of the companies that use technology to win the price war has successfully experience rapid growth in the market. The company produces and sells different kind of consumer electronics products ranging from personal computers, commercial servers, digital distributor of media content and computer software. The company’s core products are smart phone, iPhone, iPod portable media players, iPod table computers and Macintosh computers. Apple Inc, headquartered in Cupertino, California, has a long history dating back from its formation in April 1, 1976 (apple-history.com). The American multinational corporation has gone through tuff market conditions resulting from financial challenges to stiff competition in the market. By revenue rating, Apple Inc is the world’s second largest information technology firm after Samsung Electronics. The company is also the world’s third largest mobile phone producer after Samsung Electronics and Nokia. Apple Inc has 394 retail stores in fourteen countries and also has online Apple Store and iTune Store. By market capitalization, Apple Inc is the second-largest public commercial firm in the world, with a predictable value of US $ 414 billion. The company currently has 72,800 permanent full-time employees and 3,300 temporary full-time employees worldwide (apple.com). Pricing Strategies Pricing strategy can focus on three different approaches namely; cost-based pricing which is determined by adding profit part on top of the cost of producing of a product. The buying prices are set by adding a percentage to the rate of manufacturing or purchasing a product. The pricing approach has received critics as an out-dated method of pricing and as a discredited pricing strategy. However, it is still widely practiced by most of the manufacturing firms worldwide. The second approach is the competitor based pricing in which competitor price influences the price set. Customers are always faced with the challenge of choice of who to buy from in a stiff competitive market (entrepreneurs.about.com). The customer may choice to buy for the lowest bidder in the market or from the highest bidder, or perhaps even choice to fall in between and choice the average bidder. However, customers are always careful of their choice bearing in mind that expensive may not mean quality and cheap may not necessarily mean low quality. This approach deletes much power from the organization with regards to price setting. The main slogan of a competitive market is “going rate” pricing, referring to price setting that is in line with the price charges by direct competitors. The delicate part of this pricing approach is that the company will require other ways to attract customers. This includes using non-price methods to effectively compete like offering distinct customer services (sixrevisions.com). However, it is advantageous in that, selling price should be in line with competitors, thus price is not a competitive disadvantage. Last but not least is the customer based pricing in which prices are determined by what the customer will comfortably pay for. The customer based pricing is divided into three key strategies namely; price skimming, penetrating price and loss leaders. The penetrating price is where a business sets a price with the main aim of increasing the market share, by encouraging customers to switch to their products. This can be achieved by setting a relatively low initial entry price in the market and is commonly associated with marketing objective (apple.com). Price skimming is where a business sets a high cost before other rivals come into the market. This mainly targets the early product adopters who are always ready to spend extra coins for the new products in the market. Then there is the loss leader approach which is a method for sales promotion. It is a method of setting product price below the cost price so as to attract customers. The main aim of this method is to encourage customers to make more purchases of profitable products while in the shop. The above pricing approaches displays how price is a very key competitive tool and is a very flexible component of the marketing mix (sixrevisions.com). Apple Inc price strategies Apples Inc pricing tactics can be dated back to the 1976 from the era of their Pre-Macintosh computer family by the introduction of the Apple I (the first Apple Inc production) which was costing $ 666.66. This was the initial cost and was the first low cost microcomputer system with terminal and 8k bytes of RAM on single PC Card. The low cost was to capture the attention in the market and show off as a company with quality products with low cost. Apple Inc price strategies revolve around competitor based pricing and customer based pricing. The multinational corporation has successfully achieve evolution of its products and services from the year 1976 beginning from Pre-Macintosh, Classic Macs, iBook, iMac/eMac, iOS, Ipod, MacBook, MacBook Air, MacBook Pro, Macintosh Centris, Macintosh II, Macintosh LC, Macintosh Quadra, Mac mini, Mac Pro, Newton, Performa, PowerBook, PowerBook G3/G5, PowerMac, PowerMac G3/G4/G5, to Servers among other electronics. Steve Jobs, one of the founders of the Apple Inc introduced the customer based pricing system and it has so far worked on the corporation’s favor (apple.com). Steve Jobs had a focus of being the market leader and to achieve that, he adopted a pattern of always being the first investor in the market through modification of the apples Inc already existing products and news discoveries. Apple Inc main price tactic is price skimming, where the firm introduce a new product in the market and set a high cost before other rivals come into the market. This was displayed during the introduction of Apple iPad. The iPad is costing as much as $499, in both the retail shops and the online shopping. The iPad faces little competition in the market; thus the corporation has managed to monopolize the market to a great extent. Despite the high cost, the iPad was fully endorsed in the market and the corporation made high sales ever from the product (apple-history.com). The introduction 5 GB iPod of was also based on the price skimming tactics. Apple Inc believed the product had the perfect compromise between storage capacity, size, and impressive industrial design and was generally a unique product with distinct features ever seen in the market. This made Apple believe that it had a highly potential product in the market, thus concluded that a set price of $399 would not be a problem to consumers. However, the high price did not go down well with the media, claiming that the product price was too high. Despite the press critics, Apple Inc made successful sales of the gadget in the market and made high profits than ever. Apple then added 10 GB model to the line of iPod selling at $ 499 and made better sales in the market again. Apple Inc has practice price skimming tactics in all its products and MacBook Pro (Retina) was also not excluded in this customer-based pricing strategy (apple-history.com). The MacBook Pro (Retina) was selling at $2199 for 2.3 GHz quad-core Intel i7, 256 GB SSD and $2199 for 2.6 GHz quad-core Intel i7,512 GB SSD. From the above notable example, it is very evident that Apple Inc, the American multinational corporation has recognized customer-based pricing strategy for its pricing patterns. The company has for decades use technology, to fight the war price in the very competitive market which includes other multinational corporations like Samsung Electronics and Nokia (marketingteacher.com). Price skimming is a strategy that cannot stay for long as competitors would also find ways to keep with the pace in the market by introducing other competitive products that offer the same solutions to customers and satisfy the same need. The other challenge for this kind of pricing tactic is that, Apple Inc Corporation may slow down on its volume growth of the demand of the product. This will give main competitors like Samsung Electronics a considerable margin and time to develop effective alternative products ready when the market demand is stronger. With Samsung Electronics topping the list as the world’s leading information technology firm, it is very evident that Apple price skimming tactics may face challenges in the future if the corporation fail to do a thorough market research (apple-history.com). Apple also practices competitor-based pricing and this is very evident that after the price skimming, the product cost drops to the normal price in the market. This is seen on the drastic drop in price of 5 and 10 GB iPod from $399 and $499 to $ 299 and $ 399 respectively. This is due to the strong competition in the market majorly from Samsung Electronic and Nokia (marketingteacher.com). Works Cited "Pricing - Pricing Strategies." tutor2u | Economics | Business Studies | Politics | Sociology | History | Law | Marketing | Accounting | Business Strategy. N.p., n.d. Web. 23 Feb. 2013. . "Pricing Strategies." Pricing Strategies. N.p., n.d. Web. 23 Feb. 2013. Read More