(Source: Manager et al., 2016)
It is ancient day Mesopotamia, a man is arguing with a trader from Babylonia about the price of the rice he is being sold. The trader wants more barley, the system of currency back then, than the man can offer. The trader wins the argument and the man goes back home empty-handed.
What made the trader come to the decision that he wants more barley? This is at the heart of pricing consideration and these practices were known to exist since those early days. (British Museum, n.d)
(Source: ORC International, 2014)
Companies today spend a lot of resources on finding what a product should actually cost and what consumers would actually pay for it. A little while back, organisations would just set a price for a product without any research, not budge on their decision and hope for the best. That didn’t work really back then and will definitely not work in today’s climate where the consumer is king.
Pricing consideration must be based on strategy and needs to be a part of the process of product development. It would be wrong to completely ignore pricing while developing of a product and then finally decide on a price at the very end. Instead, the development process must incorporate pricing strategies to ensure that raw materials of required quality are bought at the best price and production practices are efficient.
(Source: Yohn, 2010)
There are various approaches to pricing. One is the “cost-plus” pricing strategy which basically involves figuring out the overall cost, finding the unit cost and finally adding the required profit margin and then setting the price. A more research based and analytical approach includes finding out what a customer would actually pay for a product through surveys and historical study and setting the price based on that. One other approach is competition-based pricing where a company studies its competitors and their pricing models and then decide to set a price somewhere close to that to gain advantage. No single approach is sufficient to guarantee success. A combination of different approaches must be considered to attract customers, gain competitive advantage and have a Plan B ready when facing failure. (Knowledge at Wharton, 2003)
(Source: Thompson VSE, 2013)
It is important to consider competition, substitutes available, company budget, production cost, operations cost, market positioning and availability before pricing a product (Randazzo, 2013). To understand this concept better, we can look at the example of Ford Motors back in the 90’s to understand pricing consideration gone wrong and how to fix it. (Automotive News, 1995)
Ford, as mentioned above, set low prices for their entry-level cars and higher prices for their premium cars and stuck with it. Their idea was to attract young people to buy the entry level cars, foster loyalty and then wait and hope that these same customers would come back to Ford to buy their premium cars when older and financially stable. (Mullin, 2016)
This didn’t work really well as premium cars were too expensive and weren’t bought my consumers and the low end entry cars had non-existent profit margins which affected the ability of the company to earn profits that they should be earning.
To increase profitability, they decided to reduce the prices of the premium vehicles to increase demand for the cars but also ensured that it doesn’t reduce their profit margins significantly. This made a huge impact on the company. Ford ended up earning about $7.2 billion in 1999, which is said to be the highest amount of annual profit ever earned by a company in the automotive industry back then.
A firm’s pricing strategy should always be solid and based on comprehensive research of the company’s micro and macro environment. The company, by analysing customer perception, setting different profit margins across different product lines, efficiently segmenting the market and positioning themselves in it and spending the right resources on pricing a product (Sjofors, 2010), can hold on to their profits even in times of economic distress without having to reduce their prices too much.
- Automotive News (1995) Ford faces challenge in pricing new Taurus for 1996. Available at: http://articles.orlandosentinel.com/1995-04-06/topic/9504040430_1_taurus-mercury-sable (Accessed: 2 May 2016).
- Knowledge at Wharton (2003) Choosing the wrong pricing strategy can be a costly mistake – Knowledge@Wharton. Available at: http://knowledge.wharton.upenn.edu/article/choosing-the-wrong-pricing-strategy-can-be-a-costly-mistake (Accessed: 2 May 2016).
- The British Museum (no date) Trade in Mesopotamia. Available at: http://www.mesopotamia.co.uk/trade/home_set.html (Accessed: 2 May 2016).
- Mullin, S. (2016) ‘Pricing & non-pricing strategies by different companies’, Small Business Chron, .
- Randazzo, G. and profile, V. my complete (2048) The manager’s view. Available at: http://gwrresearch.blogspot.com.au/2013/07/10-considerations-for-pricing-product.html (Accessed: 2 May 2016).
- Sjofors, P. (2010) Pricing Strategies – The Top 10 Mistakes Most Companies Make. Available at: http://ezinearticles.com/?Pricing-Strategies—The-Top-10-Mistakes-Most-Companies-Make&id=5505245 (Accessed: 2 May 2016).
Images & Videos
- Manager, L.Y., Development, S., Ventures, D. and Co-Founder (2016) Introduction to pricing strategy. Available at: https://generalassemb.ly/education/introduction-to-pricing-strategy (Accessed: 2 May 2016).
- Yohn, D.L. (2010) Pricing strategies gone wrong. Available at: http://deniseleeyohn.com/bites/pricing-strategies-gone-wrong/ (Accessed: 2 May 2016).
- ORC International (2014) Create winning pricing strategies & avoid common pricing pitfalls. Available at: https://www.youtube.com/watch?v=v_AXrgFfpvI (Accessed: 2 May 2016).
- Thompson VSE (2013) Pricing strategies. Available at: https://www.youtube.com/watch?v=XBmWEduod5k (Accessed: 2 May 2016).
Student Name: Archana Ramakrishnan
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