Pricing Process and Methodology and Its Impact on Profitability - Essay Example

Pricing process and methodology and its impact on profitability Number, Programme of Study of Is pricing strategy and methodology usefful tools to increase profitability In this paper, we will briefly introduce the pricing process, methodologies and their impact on profitability. We will have a review on some of previous researchs and then we will propose some methos to be implemented in pricing process and will discuss how they impact on profitability. Introduction Given current economic conditions, companies are under increasing pressure to sustain profitable operations. Traditional approaches to improving profitability managing costs are necessary, but are increasingly limited. An alternative approach is to address revenue growth as an additional lever to improving profitability. As economic cycles decline, however, management teams cannot drive volume improvements. Pricing improvements, however, are an important route to increasing profitability. The key to improving profitability through pricing lies in moving from a tactical to a strategic approach to pricing. Pricing strategy involves much more than merely setting price points. In order to achieve profitable pricing, managers must consider both their price structure and their pricing process. Pricing structure is built around target customer segments and culminates in constructing the Product-Service-Price menu. The menu then becomes the basis for constructing and positioning offerings for the customer targets. Pricing processes focus on communicating value delivery to the target customers while minimizing negotiation driven price discounting in the selling process.1 Proposed method,reflections and relation to previous researches "We begin with the most fundamental of economic constructs, price, because much of the analytic power of economic theory stems from the abstract image of markets that generate prices.On the surface, price adjustment might seem like an odd place to understand a process of social construction. Few economic precepts are more taken for granted than the notion that markets determine prices. Moreover, few economic concepts offer so little social content as price. Neoclassical price theory is a highly stylized theory of market behavior. It presumes that social content is unimportant to market outcomes. It offers no theory of how prices work in a firm; simply a notion that they do work. In neoclassical economic theory, firms readily react to changes in market conditions by adjusting prices. A wide variety of changes may take place: changes in costs, supply, or demand, competitive entry or actions, change in technology, and so on. Firms incorporate those changes and adjust prices upward or downward. Classical economics assumes that because organizations are endowed with this ability to adjust prices, industries, markets and economies can function efficiently. Much of the existing literature in economics takes this ability for granted, assuming this as a kind of innate organizational capability. To a student of organizations, this seems like an unrealistic belief, and indeed, some economists acknowledge this. In economics the literature on the costs of price adjustment argues that price adjustment can be a complex and costly organizational problem. For example, Caplin and Leahy (1991) argue that price adjustment is a "very difficult, costly and time-consuming process," Levy, et al. (1997) suggest that changing prices "is a complex process, requiring dozens of steps and a non-trivial amount of resources," and Ball and Mankiw (1994, p.142) "suspect that the most important costs of price adjustment are the time and attention required of managers to gather the relevant information and to make and implement decisions." According to Blinder, et al. (1998, p. 21) these costs have become "one of the main strands of New Keynesian theorizing." Yet it remains a problem about which, Blinder, et al. (1998: 4) argue, economists know "next to nothing," even though "a small mountain of empirical evidence testifies to the fact that wages and prices adjust slowly to macroeconomic events." We suggest this is an area where sociology and organizational theory can contribute a great deal. Despite the centrality of market language in economics, White argues that "There does not exist a neoclassical theory of the market" (1990: 83, emphasis in original). Rather, economists have produced, very effectively, what White describes as "a pure theory of exchange." Classical economics treated markets as concrete places, either a marketplace or a geographic region, in which people come together to exchange goods. With the marginalist revolution in economics, however, economists began to speak of a "perfect market," with perfect competition and perfect information (Swedberg, 2003). In both economic theory and economic sociology, the central image of markets is the neoclassical market model, whereby prices adjust to arrive at a competitive equilibrium between supply and demand (Milgrom and Roberts, 1992). But dealing with what Krippner (2001: 775) describes as "the elusive market" has been a challenge for economic sociology. One approach has been to accept economic models and either treat the market as an asocial form of behavior that introduces tensions into other social behavior (Mingione, 1991) or treat the idealized image of the market as something that is more or less present (Block, 1990). The difficulty with these approaches is that they don't help us understand the nature of market forces. Hence, another response in sociology has been both to make market exchange more concrete (e.g., Granovetter, 1974) and to situate market behavior better in social relations (e.g., Granovetter, 1985). This literature shows that social relations shape economic outcomes like price. For example, Baker (1984) shows that price volatility in option pricing varies with the density of social networks. Other research shows how price is affected by characteristics of the kind of market (Smith, 1989; Uzzi and Lancaster, 2004) and where one sits in the market (Podolny, 1993). These and various other studies have quite clearly demonstrated that social relations influence economic outcomes, and price in particular. Still, critics (e.g. Krippner, 2001) have argued that network studies have made the structural aspect of social relations paramount, such that other social forces are ignored."2 "We suggest that, rather than contrasting market forces with social forces or showing how sociological variables shape market forces, we treat market forces as social forces. We seek to break down unquestioned assumptions-for example, that market forces, through supply and demand, drive market behavior-to understand how managers construct those conceptions of control. As Cyert and March (1963: 2) argued, the firm "sees the market through an organizational filter." Even if we accept that firms encounter market forces in price competition, the need to change prices presents an interpretive problem that firm members must address. For example, White treats production markets as "tangible cliques of producers watching each other" (1981: 543). What do they watch Answering that question opens up the problem that Fligstein (1996) addresses in his "markets as politics" metaphor. In Fligstein's model, market competition creates both power struggle across firms and power struggle within firms. Market actors use "conceptions of control to erect social understandings" that deal with both the price competition and the internal firm politics. For Fligstein (1996: 658) a conception of control is "a worldview that allows actors to interpret the actions of others and a reflection of how the market is structured." Organizational members use those conceptions of control to propose actions that will aid in the power struggle across firms, but also as a means to position themselves in the power struggle within the firm. If we apply this notion of conceptions of control to the question of how firms adjust price, then we introduce three subsequent questions. One question is what these conceptions of control are. Presumably economic theory should be relevant, but our theories of firm behavior have skirted economic theory. For example, in pursuit of a counterpoint to economic theory, Cyert and March (1963) bracket even the most basic economic principles, treating economic theory as a set of file drawers full of economic variables (folders) and factors affecting the variables (the contents of those folders). Their approach has been richly productive in breaking down the notion of the firm as a unitary actor, but neither Cyert and March nor subsequent scholars have opened those folders to see how firms practice economics. Instead, we introduce very stylized models of economics, without the complexities that economists and marketers try to address. To get at the influence of economics on organizational action, we seek to open those file drawers and consider how the firm members construct and interpret economic variables. To answer this first question, we use the contrast between ostensive and performative routines drawn from Feldman and Pentland (2003). Ostensive routines, they argue, define the aspects of a performance, while performative routines bring to life the routines in the various actors, actions, and situations. We suggest that marketing and economics professions play a big role in defining the ostensive routines. For example, pricing texts propose models and methods such as price elasticity of demand or price sensitivity, price experiments, conjoint analysis, economic value analysis, market segmentation, price perception, bundling, and Bayesian analysis (see Dolan and Simon, 1996; Nagle, 1987). Moreover, marketing theories of price suggest that firms must also attend to competitor actions, and suggest that managers must anticipate and influence competitor behavior, introducing game-theoretic models of price. In these models and theories, marketing and economics define a kind of ostensive routine (Feldman and Pentland, 2003), a normative model for setting price. That ostensive routine may be defined differently by various members of the organization as they draw on those economic images, each in their own way. A second question is how those conceptions of control are situated in action. Performative routines are different than ostensive routines. As Hutchins (1995: 176) argues, the social organization has a substantial effect on both "the cognition that is the task and the cognition that governs the coordination of the elements of the task." This is an important issue in the behavioral theory of the firm (Cyert and March, 1963), which deals with the goal conflict that emerges as different functional groups interpret market behavior. Rather than try to resolve that conflict, Cyert and March argue, organizations instead "most of the time exist and thrive with considerable latent conflict of goals" (p. 117). The structures, processes, and routines of the firm effectively negotiate around latent conflict, thus sustaining the operating coalition. In this aspect, the behavioral theory comes up short in explaining major market responses. As Cyert and March note, the behavioral theory describes organizational processes appropriate to small adaptive changes; it doesn't necessarily address more major changes. While the behavioral theory of the firm effectively shows us the contours of the conflict in an organization, it doesn't help us to get to the substance of the political dynamics behind something like a significant price change. A third question, then, is how conceptions of control (and hence the performative routines) shift as prices need to adjust. Fligstein argues that the task of responding raises questions about firm action as price competition also threatens to undermine the dominant coalition (March, 1962) that controls the internal politics of the firm. To do this, we draw on the literature in the sociology of technology around negotiated order (Barley, 1986; Orlikowski, 2000). We argue that a price change offers what Barley (1986) describes as "an occasion for structuring." We want to understand the rules and resources that actors engage when adjusting price. We also want to understand how they engage economic theory as a conception of control. Because there are no physical properties to constrain the use of pricing technology, we are particularly interested in how individuals use the socioeconomic context to either constrain or shape the use of economic theories. Rather than focus on economics as prescribed, like Orlikowski (2000) we are interested in it as a technology-in-practice, a "behavioral template" (Barley, 1988: 49) that actors repeatedly construct and draw on as they engage in pricing activities. We suggest that by treating economics as a conception of control, we can address both the instrumental and interpretive dimensions of the work of addressing market competition. The instrumental elements define a logic of action in response to market competition. But while those instrumental models may aid in the science of managerial decision making, a variety of forces may drive them from their original intended purpose (Zbaracki, 1998). The challenge is understanding how conceptions of control work in action in order to understand how they affect both instrumental and interpretive action. For example, different groups in an organization may encounter different parts of the institutional environment (Heimer, 1999). A conception of control that reflects the local knowledge of one group may not fit a second group, leading to conflicting ostensive routines in the two groups. Economic models can also be used as symbolic resources (Espeland and Hirsch, 1990, to signal efficiency (c.f. Carruthers and Espeland, 1991) or to provide abstract knowledge to make claims over professional jurisdiction (Abbott, 1988). These latter effects do not deny the instrumental value of the economic models; they simply suggest that that instrumental effect is embedded in a broader social structure. The challenge is to understand how these instrumental and interpretive elements relate. The crux of our argument is that if market forces are social forces, then we need to find out how they work, and that with the theories and methods of sociology, we are best equipped to do that. To get at those social forces, however, we need a setting in which they matter. While we agree that it is important to contrast the market with other social settings, to understand the market, we need to go where the market matters. Hence, rather than look for a setting in which market forces are weak, we seek a situation in which they are strong. The ideal situation, we argue, is one in which, given market forces, a firm must change prices. That is what we pursue next."3 Conclusion As part of a larger project addressing the costs and processes of adjusting prices, we will study the price adjustment processes of a large firm that manufactured parts used in the industry. We will choose the firm for the work that it had already been doing to improve its pricing processes. The firm is already considered a national leader in its major product lines.4 References Pricing structure and structuring price, Mark J. Zbaracki and Mark Bergen September, 2005 Driving Profitability: The Price Connection, available at http://jobfunctions.bnet.com/whitepaper.aspxdocid=70071 for download The Strategy and Tactics of Pricing: A Guide to Growing More Profitably (4th Edition) by Thomas T. Nagle and John Hogan Power Pricing by Robert J. Dolan and Hermann Simon The Price Advantage by Michael V. Marn, Eric V. Roegner, and Craig C. Zawada Read More