The Pricing Process in Brand Management - Essay Example

Brand Management Introduction The pricing process is a central mechanism of a private enterprise or market system. Price adjustments facilitate the logical allocation of resources; both buyers and sellers use them to clear markets of gluts and to stimulate production when supply is short. A competitive price system features such adjustments to achieve maximum economic efficiency. Still, a pricing decision is closely connected with the issue of brand equity and image of a product. From an industry's perspective, pricing can extend or limit markets; from a company's perspective, it can increase or reduce its share of the market. Price is the ingredient of the marketing mix that has been subjected to the most intensive analysis -- particularly by economists. But as an aspect of the mix, it cannot be divorced from other ingredients. It must incorporate and reflect them. Optimal prices cannot be established, and pricing remains an art with a host of factors to be evaluated for which there are no precise measures and weights. Price Discounting Price discounting is the main strategy used by managers to attract customers and popularize a product. Consumers do not respond to price discount alone; they respond to value. A lower price does not necessarily mean expanded sales. Moreover, marketing activities influence price. For example, governmental agencies have investigated advertising as a cause of higher prices. In microeconomic theory it has received great attention; in marketing, the significance of price varies among industries, competitive situations, and products (Baker, 2006). Pricing is significant where the market impact, profit results, or both, of price variations is great, and where firms have considerable discretion over the prices charged. In many instances pricing decisions are severely constrained and are sometimes relatively unimportant. Large purchasers of industrial goods, for instance, may specify prices at which they will buy, determine product specifications, and send specifications to suppliers for competitive bids (Philips, 2005). For other products price may not be a relevant factor. In some technical areas where products require much research and development and involve much uncertainty, a cost-plus scheme may be used. In other situations, sellers may be almost completely free to set prices, while in still others, they may only be able to decide whether or not to sell at a price. In an economy of scarcity, price is accorded more attention than any other marketing factor. In an economy of abundance, non-price factors assume increasing marketing importance and products are differentiated on other bases than price (Marn et al 2004). Price Discounts and Marketing Objectives The main considerations for pricing discounts decisions involve market objectives and organizational considerations, costs and marketing mix strategies. Also, it is important to take into account market demands and psychographic characteristics of the target audience, competitors' prices and market position of the company. Pricing is a sensitive and complex decision area affecting sales, costs, and profits for both industrial and consumer goods. For consumers, price reductions and increases have symbolic meanings. A customer may associate a price reduction with a reduction in quality, the anticipation of new models, or even lower prices or poor market acceptance (Philips, 2005). Higher prices may indicate better quality, a good image, and good value. Customer perceptions of price are important. Whereas pricing is usually perceived as a short-run action, its implications can be long-run, even to the point of shaping industry structures. Markets that may be viewed as systems of information on cost and demand determine the appropriateness of prices (Marn et al 2004). They contain signals that businessmen must decode. But market information is ambiguous, fragmentary, and imperfect; it contains much uncertainty and is interpreted differently by various executives. To those who can read the signals properly, increased profits are the results (Baker, 2006). Invariably, pricing decisions are wrong and must be altered, as is evidenced by changing list prices. Included in price administration is the determination of discount structures. Thus, price determination refers to the establishment of a "base price" that is adjusted through price administration to reflect varying sales and competitive situations (Baker, 2006). Brand Equity Brand equity can be defined as power and authority of a brand based on unique perceptions and experience of a consumer. In this case, the impact of brand images on consumption has been investigated. Consumers of a brand perceive themselves differently from nonconsumers, and also perceive their brand as different from others. Users may perceive a well-established brand as new and modern, whereas nonusers can perceive it as a product that is outdated and old-fashioned (Monroe, 2001). Users may perceive a well-established brand as new and modern, whereas nonusers can perceive it as a product that is outdated and old-fashioned. shown that prunes carry the image of being dried out, worn out, wrinkled, ugly, old-aged things used only as laxatives, and are a plebeian symbol without prestige. Consumers also hold images of institutions. Images of retail-store characteristics or personalities affect shopping behavior. Sensory impressions result in consumers' attributing distinct personality characteristics to retail units. Some stores reflect the bargain basement, discount atmosphere, whereas others reflect an atmosphere of elegance, luxury, affluence, and sophistication (Marn et al 2004). The store image stems from such diverse factors as advertisements, sales personnel, merchandise, services, pricing strategies, physical plant, and layout. Research findings seem to indicate that consumers choose to shop at stores and purchase brands consistent with their own personalities. A direct link exists between corporate concern with company and brand images and consumer concern with the self (Baker, 2006). In brand quality, the greater the consistency and parallelism are among product image, store image, and desired consumer self-image, the more likely it is that favorable purchase reaction will occur. Maintenance of the self is a basic preoccupation of consumers. The consumer perceives his "true environment" as affording opportunities or restricting his actions and development, either of which affects his self-image. Within his phenomenal field, he attempts to satisfy his needs and achieve his goals, including the important goal of maintaining and extending a favorable self-image. The consumer seems to accept those experiences and opportunities that are deemed favorable to his self-image and to reject, alter, and ignore those that are not (Monroe, 2001). Brand and Price Discounts Although each pricing decision is unique, some constructs and concepts are useful in analyzing pricing situations. The models of market structure (oligopoly, monopoly, and monopolistic competition), concepts of costs (variable, fixed, marginal, and sunk), demand concepts (elasticity and demand schedules), and the company philosophy of followership or leadership, are very helpful. With full knowledge of them, a "right price" can be established. But decision makers are confronted with incomplete or outdated information. The reasoning process they employ considers answers to two kinds of questions. First is "what if" or conditional reasoning. There is a consideration of the relationship of price changes to changes in the other aspects of the marketing program, advertising, distribution channels, product packaging, and personal selling (Monroe, 2001). Prices may also be established through research. Various prices may be tested in limited areas and the "best" price selected. Research of customers' opinions and reactions to products is often sought as a basis for price. Sometimes products are tailored to meet predetermined price points, and product quality is changed so that prices can be maintained and product-line requirements and distributors' price points met (Baker, 2006). In microeconomic theory it has received great attention; in marketing, the significance of price discounts varies among industries, competitive situations, and products. Pricing is significant where the market impact, profit results, or both, of price variations is great, and where firms have considerable discretion over the prices charged. In many instances pricing decisions are severely constrained and are sometimes relatively unimportant. Large purchasers of industrial goods, for instance, may specify prices at which they will buy, determine product specifications, and send specifications to suppliers for competitive bids (Philips, 2005). For other products price may not be a relevant factor. In some technical areas where products require much research and development and involve much uncertainty, a cost-plus scheme may be used. In other situations, sellers may be almost completely free to set prices, while in still others, they may only be able to decide whether or not to sell at a price. In an economy of scarcity, price is accorded more attention than any other marketing factor. In an economy of abundance, non-price factors assume increasing marketing importance and products are differentiated on other bases than price (Monroe, 2001). Style, color, symbols, and brands become more significant, and higher rather than lower prices may actually increase sales. For abundance brings widespread discretionary income, and price becomes a less significant component of the marketing mix than the economic literature might lead one to believe. Nonprice competition and price confusion, rather than price clarity, now seem to be the rule. Buyers are concerned not only with price, in their purchases, but also with service, status, and image. Low price alone does not result in a transaction. Consumers are not mechanical price calculators and price reactors, as so much theory leads one to believe (Philips, 2005). Price discounts do not ha great impact on brand equity still they are a sensitive and complex decision area affecting sales, costs, and profits for both industrial and consumer goods. Pricing discounts are sometimes charged with emotion. Monopoly prices, price determination, and administered pricing are among the terms evoking emotional reaction. Also, the practice of price-cutting is often viewed with disdain or as an unethical practice by others in an industry, even to the point of indicating shoddy merchandise and service. Where products are relatively homogeneous; several large firms constitute a significant part of the market; and buyers are well informed, then estimates of buyer reaction become a significant aspect of the pricing picture. So do competitive reactions that may be ferreted out by the use of marketing intelligence. Studies of what competitors have done in the past, coupled with detailed analyses of the current competitive situation, may furnish guides on what they are likely to do (Philips, 2005). This reasoning process, utilizing subjective probability estimates, can provide decision makers with good guides for contemplated price changes. Legally, price discrimination can be defended on the bases of meeting competition in good faith, of cost savings in dealing with different customers, and of promoting and not injuring competition. It is the effect of price discrimination, and not the act itself, that determines legality. Although these legal constraints are significant in establishing price differentials, the practical guidelines are confusing and the economic consequences are mixed, since price discrimination can actually benefit society (Nagle and Hogan 2005). Pricing Planning Pricing programs of firms, even within the same industry, vary greatly. Pricing strategies should consider both cost and demand conditions, and the dynamics of markets, thereby accounting for both internal and external variables. Although the determination of an optimal price is usually impossible, a satisfactory one can be developed by analysis. The major pricing decisions include determining prices for each product or service, discount structures, price relationships among product lines, and price maintenance levels. Marketing intelligence is a critical component of effective price determination. Various economic models and concepts such as the marginal approach, elasticity of demand, simulations, and other mathematical techniques that have proven useful in establishing prices are noted. Two alternative strategies for pricing new products, penetration and skimming, and the conditions under which each would be used, are examined (Baker, 2006). Conclusion In sum, price discounts do not reduce brand image and do not influence greatly brand equity. Emotional influences play an important role in purchase decisions, because willingness to buy -- a significant component of demand -- is dependent on more than income. While research findings may not establish unequivocally why purchasers react as they do, the insights, tendencies, and perspectives offered by behavioral scientists are helpful. Particularly valuable are the psychological theories and concepts relevant to personalities, wants, needs, motivations, perceptions, attitudes, opinions, expectations, aspirations, security levels, and images. Buyer motivation, a key component of consumption, is the stimulus inducement or purpose in a certain desire. Marketing decisions related to price discounts should take into consideration the significant impact of intervening variables. Concepts of aspiration levels, images, cognition, and vector analysis add to our understanding of human behavior. People seem to aspire to goals that might be attained -- that are just outside their immediate grasp. Once goals are achieved, higher aspiration levels spring up. Purchasers experience brand, product, price, quality, company, and store images. Some purchase behavior, particularly activities, may be explained in terms of reducing dissonance. Bibliography Baker, R. J. 2006. Pricing on Purpose: Creating and Capturing Value. John Wiley & Sonsm Australia. Marn, M et al 2004. The Price Advantage. Wiley; Melbourne 1 edition. Monroe, K. B. 2001. Pricing: Making Profitable Decisions. Melbourne: McGraw-Hill. Nagle, Th. T. Hogan, J. 2005. Strategy and Tactics of Pricing: A Guide to Growing More Profitably. Prentice Hall; Melbourne:.4 edition/ Philips, R. 2005. Pricing and Revenue Optimization. Oxford University Press, Melbourne. Read More