Advantages of Everyday Low Pricing - Essay Example

Pricing Strategy

Pricing strategy is having the best price for a product or services after all the cost of the product are covered, and still margins remain for profits. It is an essential element of the marketing mix. Setting the price is a complex decision; the organization must ensure that the buyers don’t perceive the price as too high to allow competitors to substitute them but also make sure the organization is not running at a loss (Peter et al, 1999). Again if the price is too low sales will increase but profits will be low. A firm needs to think strategically before pricing a new product or adjusting the price of current products. A number of factors affect pricing which includes consumer factors, government factors, strategy variables and manufacturers wholesalers and suppliers. Pricing strategies can be demand-oriented, cost-oriented and competition-oriented. Demand-oriented pricing estimates how much customers will buy at certain levels and set prices to achieve goals. Also with demand, you set acceptable prices for the target market and lastly psychological pricing; price-quality relationship and odd pricing (Peter et al, 1999). Cost- oriented takes into account the cost of merchandise, retail operating expenses, and desired profits. Competition oriented where prices are set to for the organization to remain competitive in the market. However, there are two common pricing strategies used which are everyday low pricing (EDLP) and High/Low pricing. Everyday low pricing is where retailers claim to have the lowest price every day while High-low pricing is also known as a promotional approach to pricing the strategy employs two mechanisms by issuing product discounts or temporary offers (Peter et al, 1999). There is, however, advantages and disadvantages of using either price strategy in pricing.

Advantages of Everyday Low Pricing (EDLP)

• Marketing – Everyday low pricing has clear marketing information that every item in the store will always be available at a low price (Ailawadi et al, 2001). The messages provide clarity but do not offer anything new to advertise. This method is commonly used by retail supermarkets where they offer shoppers some promotional sales to encourage them to buy.
• Cost and revenue – Everyday low pricing have lower fixed costs, and thus, they are able to develop their infrastructure and supply chain efficiencies (Ailawadi et al, 2001). Also, since they spend less on advertising on everyday low pricing because the retailer has used one product to attract shoppers who end up buying other stuff in the store.
• Simplicity – It is easy for consumers to understand. Everyday pricing helps in branding of the stores as the cheap alternative (Ailawadi et al, 2001). The message is appealing to customers and is imprinted psychologically on clients who purchase on the basis of price. Everyday pricing is easy to implement in the marketing environment due to the short information the messages usually have.
• Perception – Everyday low pricing always attracts bargain-conscious customers.
• Reduce stock outs and improves inventory management – It reduces the variations in demand caused by frequent sales (Ailawadi et al, 2001). The retailers can manage their inventories well with a more predictable customer base thus reducing inventory needed for special promotions.

Disadvantages of Everyday Low Pricing (EDLP)

• Credibility – With the advancement of technology and the rapid growth of the internet consumers are wary of their rights and always checking for the best prices on the web (Krishnan et al, 1999). If the company has lied on the best price, it stands to lose its credibility, if the prices are not comparable to the prices available on the internet for the same product.
• Discounts – Due to offering discounts to attract customers by issuing the lowest prices every day. The company profits will be low due to the promotional discounts (Krishnan et al, 1999). Pricing discounts are used to drive sales and reduce inventory, conditioning consumers to expect a low price every day can cause customers to question the source and quality of the products.
• Perception of quality – pricing based on competition does not take into account the production costs and organization administration expenditures thus reducing profits especially if the product demand rose at a certain time or period than anticipated.
• Customer service – Everyday low pricing forces the firm to operate on low budgets (Krishnan et al, 1999). This is due of hiring a large sales team to promote the special low prices that the company is offering. Furthermore, the low pricing may not be able to sustain the business in the long run due to giving too much to satisfy the customer.
• Discounting products is not a long term solution to profitability. The excitement and surprise fade with time, and you can’t be lowering your prices every time sales have dropped (Krishnan et al, 1999).
• Competitors can lower their prices too – this brings the risk of the source of products that you are selling. Is the manufacture giving you at the best price? They can lower their prices until you are no longer in business.
• The retail will always harass the vendors to get the best prices. For the low price strategy to work every day, the cost of the items should be cheaper than competitors.

Advantages of High/Low Pricing

• Profit increase – It can yield high profits if carefully implemented that is if the customers are willing to purchase multiple products in the store (Krishnan et al, 1999). The stores charge high prices for clients who are not prepared to wait and are able to pay and again charge low prices for clients want low prices for the same product.
• Marketing – The business maintains the high/low marketing method because it must be constantly advertising specific items that are at low prices (Krishnan et al, 1999). It allows the business to sell merchandise that is not moving or had a lot of inventory of a specific product.
• Creates excitement – the sales draw a lot of customers due to phrases such as “get them while stocks last” who are always excited about sale offers (Krishnan et al, 1999). As such events draw celebrity appearances and free products as part of the promotions.
• Ease of use – managers don’t require a lot of tools to get the pricing using this method thus it is easy to plan and implement for managers. Managers only require cost information to come up with a suitable price for promotional basis.
• Accuracy under stable expenses – if costs are stable over a period of time and the low and high activity level of the company are represented in the company’s cost behaviors then the high-low method is extremely accurate.

Disadvantages of High/Low Pricing

• The risk of loss – If an organization does not price its promotional products properly if faces the risk losing money on its promotional products (Shankar & Bolton, 2004).
• Customer loyalty – There is a danger of losing customer base if they find out that you have been selling to them products at higher prices than competitors.
• Marketing cost – It is expensive to run the promotional events especially when they involve celebrities who charge exorbitant prices for their services (Shankar & Bolton, 2004). There is also the cost of hiring sales team with vehicles to promote the product. The cost might be too high than the intended cost of the promotion.
• Inaccuracy with variations – if the costs are relatively unstable, the high-low method produces inaccurate results (Shankar & Bolton, 2004). This is because it uses two methods of calculating cost estimates, but monthly variations are not put in the estimates.
• Least squares regression – The biggest problem with the high-low method is with the prevalence of spreadsheet software (Shankar & Bolton, 2004). The least square regression can obtain all data and quickly get the estimates that are more accurate than the high-low estimates.
• Insufficient profit margin for discounting – The pricing from manufacturers might be so small the retailers cannot offer promotional offers

Pricing as the key decision in organizations has also faced a lot of environmental changes before deciding on their price. They have had influences from the internet, competition, and government regulation. The internet is the biggest influence on pricing decisions today (Shankar & Bolton, 2004). Prior to the internet, it was difficult for consumers to compare prices and they would have to travel from store to store to compare prices. At times, consumers would call to ask for the availability and prices. However in today’s era, it is different consumers go to the internet and compare prices among the stores that stock the specific item. Sites that are most common by consumers are google.com, kayak.com, expedia.com and Edmunds.com among others. But the most internet breakthrough is use search engines like google.com, ask.com, and yahoo.com among others have made it easy even for those who are not so conversant with technology to use the search engines (Shankar & Bolton, 2004). The Internet has also helped organizations to know the average price of a product before pricing theirs. Competition tremendously affects the pricing of commodities. The firms have to consider how competitive their products will be in the market, and they need to have the following factors in mind; number of competitors; growth, market share and profitability of competitors; strengths and weakness of competitors; likely entry of new firms into the industry; the level of vertical integration of competitors; number of products sold by competitors; cost structure of competitors and historical reaction of competitors to price changes (Shankar & Bolton, 2004).

Government through consumer protection federations has put tighter controls and regulations to avoid exploitation of consumers by the retailers. Prices of certain goods are regulated by state and federal governments. The legal constraints that affect pricing are price fixing, deceptive pricing, price discrimination and predatory pricing. Price fixing is illegal in almost all countries. Competitors are not allowed to make an arrangement to set the prices of goods. There are consumer laws established by the legislature to prohibit such behavior. Deceptive pricing is completely outlawed in section 5 of the federal trade commission act (Shankar & Bolton, 2004). This is where the retailer would mark the cost of the good very high then offer promotions on the said product at a lower price which is still far beyond from promotional. Price discrimination is where it is wrong to charge different buyers different price while the good is of the same grade and quality (Shankar & Bolton, 2004). Predatory pricing is the extent of charging very low prices with the main aim of getting your competitors out of business.

Everyday strategy and high-low strategy all want to attain one goal of increasing sales and profits. However, the strategies have different results when implemented.