Market-Skimming Pricing - Essay Example

Market-Skimming Pricing 1. Pricing a. Value based pricing is a situation where a company bases its prices in accordance to the product quality or services rendered. The company does this by identifying the total value that customer can generate from the product. This can be in form of satisfaction, efficiency and suitability. Through such buyer perceptions, the company can effectively either choose between good values; giving customers credible high quality services but at a fair price, and value-added pricing; attaching value-added features and services to a product to make it look new and unique while charging a very high price. On the contrary, cost-based pricing involves the use of all production costs to set market prices of the products. The costs determine price floor and price ceiling, which give minimum and maximum prices for the company’s products. Therefore, depending on the situation, the company makes sure the prices fall in between the two set margins. Skimming and penetration pricing is effective under cost-based pricing. Market-skimming pricing is using the highest price when introducing a new product in a market. This makes it possible for the company to recover production costs and other legal fees. Marketing-penetration pricing is when a company uses low prices on a new product with the aim of attracting customers but gradually increases the price with an increase in product demand. b. Strengths and weaknesses Strengths of cost based approach Cost-based pricing approach is very easy to calculate because very little information is required to complete the process. In addition, this type of pricing is efficient in stabilizing competitive markets because it operates between minimum and maximum prices. Weaknesses of cost based approach This approach has been criticized because it ignores opportunity costs in its calculations. This means that the role of consumers and competitors is not factored in when administering it. Strengths of value based approach Value based pricing is effective in the sense that it can capture the exact value that a product creates to customers both economically and emotionally. This makes it easy for the company to nurture high quality products. Weaknesses of value based approach Its implementation is strategic initiative by companies because it requires a lot of time for it to be effective thus making it a limitation. In most cases, unless effectively used, it can lead t severe loses dues to competitive positioning of rival companies. c. Having described value and cost based types of pricing, it is evident enough that Apple Inc. relies on Value-based pricing. The company is concerned with customer satisfaction. To make sure this remains effective, it employs price maintenance strategy, which, through the popularity and uniqueness of its brand makes it easy for customers to value it. To ensure it applicability, Apple effectively employs tactics that can edge out unfair competition among retailers by giving them a very small discount. This makes it difficult for retailers to lower prices in the name of attracting customers. Apple uses this approach by launching most of its products using s reference price. Since people assume quality is expressed through price, it is very easy for the company to use value based pricing approach to make its products affordable to customers by reducing the price margin. Through obscuring of prices, customers believe Apple’s products are very unique and cannot be compared to any other in the whole market. 2. Distribution a. Vertical marketing is the ability of a company to segment customer bases, identify what each segment values and promote the product using the features, with the aim of satisfying their needs. This means the channel structure involves producers, wholesalers and retailers who act like in a unified manner. In such scenarios, one party controls and owns operations and contracts other parties to assist where necessary. On the contrary, horizontal marketing is when a company can identify a target audience in a crowded market thus meaning it can sell off its major products across a series of industries. This channel gives room for two or more business entities that share common ideologies to collaboratively venture and control a market segment. Apple manufactures electronics, and as expected, it has to follow a horizontal marketing system. However, the company effectively relies on the vertical marketing system. This, as explained earlier on, gives Apple a good chance to be the leader in the distribution channel. It has to be understood that Apple produces both the hardware and software of its products and thus easy to control its supply chain. This gives Apple the power to dictate and control its brand because it makes and assembles the final products. Actually, most companies have tried emulating Apple’s vertical marketing model but have so far failed because their products end up being commoditized. b. Distribution channels Apple relies heavily on direct sales. Since it is major aim is to reduce unfair competition among retailers and maintain its prices, the company values using direct sales approach. It means the company has its own retail stores. Even though this distribution channel never worked for other companies, Apple has been successful because it knew how to prioritize and locate itself in the market. It is very cheap because there is very little transaction costs experienced. The products are only sold on request. This means there are no intermediaries and wholesalers who act as brokers. However, this approach cannot be effective in all market segments. Direct sales can slow growth and the company may lose out due to competition created by rivals who offer cheap prices. Through direct sales, it is for the company to offer quality services to customers by providing a dedicated technical team that help customers with issues involving functionality of the products. By reducing the number of retailers, the company can reduce and save on costs. This means the company has the control over technical and other customer services, which makes it easy in understanding customer needs and making alterations that can add value in future. Retailers are known to exploit customers as well as back bite the company. Since Apple offers retailers with little discounts, it is very possible that greedy individuals may opt to reduce the product prices, with the aim of increasing sales volume. Such retailers can compromise with the pricing strategy of the company. By eliminating them, it is for Apple to reach out for the customers through its official stores all over the world. This is a unique way reduces expenses while increasing sales. 3. Promotion a. Promotion mix It has five elements: advertising, sales promotion, persona selling, public relations and direct marketing. Advertising entails product promotion through a sponsor including media platforms, billboards and shops but at a fee. Sales promotion is a short term marketing strategy used to promote sales by encouraging people to buy in large numbers. Personal selling is the capacity of the company in it own efforts to present itself through employees with the aim of maintaining a good relationship with customers. Public relations entail establishing long lasting relations with the public through a good corporate image. Direct marketing is careful identification of potential customers and connecting with them to sustain relationships. A leveraged sales force is entitled with using multichannel selling capabilities to optimize sales. It is capable to realize an increase in sales through a leveraged workforce because it aims at narrowing participation in the market place, created and emphasize of building relationships and integrate channels thus promoting business activities. b. Apple Inc, through its mission, aims at delivering the best through computing technology and innovative hardware and software to promote a nice experience at all levels of life. From the very beginning, Apple’s brand personality aims at making buyers emotional. Through this, it is very easy for customers to be inclined towards the feeling generated with using Apple’s products. It is all about lifestyle, through which, customer imaginations are linked to passions and aspirations. In addition, Apple’s brand personality relies heavily on the principle of being simple and helping people get away from complex life styles. Through this, it is very easy for customers to prefer Apple’s products over others regardless of the price tags. In brand positioning, the company relies on a monolithic brand identity in that customers end up associating everything with the company’s name. It has effectively positioned itself through a variety of products, which include computers, phones, watches and music. c. Without brand drilling, literally, it is difficult to use advertising as a weapon to promote the product. Public Relation is known for its effective use of verbal and linear tactics. This means advertising adds a visual aspect thus stimulating consumer buying behavior. Literally, it is advisable that companies use public relation because it reaches out for to customers personally. This contradicts advertising, which generalizes segments with the aim of reaching out for everybody. Using Berger’s description, it is evident that advertising is meant to be an entertainment; thus the need to be funny. However, business can only survive with serious decisions thus the need for public relations. Due to the cost attached to advertising, companies prefer the use of public relations, which is cheap and is a continuous process in a company’s life thus essential in building a brand. A brand is best known to the public through principles laid down by Berger, that incorporate Social currency, Triggers, Emotions, Public, Practical Value and Stories (STEPP). This means that for a brand image to be known and associate with something in society, the message in it must be understood. This can only happen by companies making sure customers talk about the product even when they do not know. People are influenced by what others talk about in reference to products. Having understood this, companies can use public relation to familiarize themselves to the consumers and later on entertain them through advertising the same product on media platforms. 4. Global marketplace a. Levitt has huge assumptions in regards to globalization of markets. In his argument, it is clear that technology has predominantly influenced how business is in the current world. This is because everyone wants to be associated with what is new even when it is not worth having. Technology has seen the rise in global and multinational organizations that are after competing and establishing empires across international territories with the aim of making the best money out of the venture. This means that technology has highly contributed into influencing people to adopt “proletarianized” communication, transport and travel. Cultural differences have, to a great extent turned into being homogenous thus influencing how companies align themselves in response to the homogeneity. Multinational companies for example Fox have information about a variety of products. Such companies have operations in many countries since they can use the information to camouflage. However, from Levitt’s argument, such companies are already obsolete. This is because multinational companies scramble after controlling everything in a diversified international market thus making it difficult for consumers to understand their motive. This always lead to great losses especially in situations where multinational companies try to standardize products. They always get the message wrong and fail to incorporate customers’ satisfaction in the product modification. Global companies operate with a motive that the world is one huge market that requires keen analysis. Therefore, having known that it cannot control everything, a global company seeks to understand a single item and replicate the idea to see how effective it can work on a global scale. Through this, it is very easy for such a company to gain a competitive advantage since it commercializes on a single product. Hedgehog and Gillette are good examples in such scenarios. Gillette manufactures razorblades, mainly for shaving purposes. Having identified its market, it segmented it into men and women. Through such creativity, it is easy for a global company to apply the concept of product standardization (96). This gives it a reason for it to be absolute. b. Globalization opportunity for Apple There is no electronic company in the world that produces unique products as Apple. Due to its unique, a very important globalization opportunity has come its way; culture. It has become a luxury to own an Apple product thus making the culture phenomenon-fetishism. This means they are the number one products that people sort and dream to own in their entire life. Due to brand maturity, people do not really worry about prices because they associate it with quality. This is a nice globalization opportunity for the company because it means it has managed to define its products in a perspective that satisfy customers regardless of where they are. When IPhone4S was launched into the market, the company came up with restriction to limit buyers from accessing the products. However, due to globalization culture, the demand increased to an extent that the company could not resist. The company can improve on this globalization opportunity by reducing channeling most of its products through China before they reach out to other markets in the East and Africa. They have to make sure people get what they demand for and in time. Taking them through tedious processes in China can be a number one cause to the increase in the number of fake phones. In addition, China has her own demand and thus may use up all the stock meant for other countries. Work cited Berger Jonah. Contagious: Why Things catch On. New York: McGraw Hill. 2013. Print Levitt Theodore. The Globalization of Markets. Harvard Business review. (May-June 1983): p. 92-102. Read More