Literature Review on Pricing Strategies and Theories

Abstract:

This purpose of this research is to study how the organization decides the price for the products. As price is considered has a very high sensitive factor of an organisation. In this study we are going to see the role of Pricing, different methods of pricing and effects of pricing on organisation and consumer behaviour. The pricing is explained with literature review followed by critical evaluation and ends with solution with valid recommendation.

Introduction:

Customers and determination of price is necessary for every organization. As this both customers and price have a high relation to the demand for products. Even there is a small increase in price levels it will highly affect the demand for the product and the organization profit. The price determines what products/services could be produced and in what quantities. Secondly it determines how to produce and finally whom to produce.

There organization should be cautious while altering the price for the goods and services by changing the quantity, quality and by providing premiums or discounts, acceptable form. When there is raise in demand for service will led to increase in prices, which in terms led to concern of public or governmental activity.

There are different ways in which the price of the products is determined. These are the foremost strategies that business use like Competition based pricing, Cost-plus pricing, Creaming or skimming, limit pricing, Loss leader, Market-oriented pricing, Penetration pricing, Price discrimination, Premium pricing, Predatory pricing, Contribution margin-based pricing, Psychological pricing, Dynamic pricing, Price leadership, Target pricing, Absorption pricing and Marginal-cost pricing. As their name it explains the method of pricing.

Methods:

Pricing was considered has a process towards achievement and to face the competitors of business. So that organisation thinks effects of pricing should be the targeted on returns.
What method of pricing to be adopted.
Whether adopted pricing would attract the customer and maximize the profit of business.
Determination of price requires the organisation fully focused on the markets.

These strategies should be considered while determining the price for the product.

Aims & Objectives:

The aim of this research is to investigate; whether CRM supports the Marketing Strategies of an Organization.

• To conduct the literature review on Pricing Strategies
• To evaluate the methods of pricing theories
• To analyse the effects of pricing on returns.

Literature Review:

Customers are important for every organization. Numerous researches had been conducted for determining the method of pricing, which is explained in Literature review, has normally segregated in two divisions. First division will explain about a pervasive context about the, pricing and methods of pricing. The second part of this assessment deals with the previous related studies.
Price is a highly sensitive factor of an organization. The standard economic analysis of pricing is based on the customers desire for the product its usually depends up on the income of the customer and other factors like ethnic origin. There are some consumers may pay high prices, while others willing to pay only lower prices. Instead of charging same price to all, the organization decided to charge different price for different customers as it will increase the business profit. This method of pricing is known as price differentiation. In earlier days sellers of perishable goods would sell the old products at low price instead of dumping or taking back home.
If the price of competitor product was reduced it is necessary to reduce the price of the product, as it could create loss of customer and market. The pricing based on the competitors is competitive based pricing.
The simplest method of pricing is cost-plus pricing. It just calculates cost of producing the product and adds on a percentage of profit to that price.
Sacrificing high sales for gaining higher profit. Low volumes at high price. This is suitable for products that have short life cycles. It skims the profit from the market. It is known as market skimming.
A monopolist set limit price to discourage others entry in to the market. Limit pricing is illegal in many countries.
Loss Leader pricing strategy was illegal under EU and US. They sell the product below the cost, so the loss appears as public interest. It is similar to predatory pricing.
Some business set their prices based on the analysis and compiled from the targeted market. This is known as Market-Oriented pricing.
The organization set different price for the same product In the different segments to the market. This method is called Price discrimination
Psychological pricing strategy the price is designed on the positive psychological impact on customers. For example, price of the product at £3.95 or £3.99, rather than £4.
Price leadership is an observation that usually one company would be the dominant competitor among several other companies. They will follow that soon.
Target pricing strategy is calculated to produce a particular rate of return on investment for a specific volume of production. It is often used by public utilities and companies with high capital investment.
These methods of pricing all the cost incurred are recovered. This is a form of cost-plus pricing.
The practice of setting the price of a product to equal the extra cost of producing and an extra unit of output is marginal-cost pricing.
The impact of price elasticity should be considered while deciding the price. The degree of price elasticity focuses on the proportionate changes. The percent of change in price would be something less than the fall in sales is inelastic price. In case of price elastic the percent of change in quantity demanded greater than change in price. Slow inflation rates from other countries economies have led to the need for new approaches of pricing strategies.
Five factors to be considered on determining the price are Demand, cost, competitive factors, corporate profit and market objectives and regulatory constraints.

Previous Related Study:-

Combivir and Trizivir case study

“Some of the more dominant groups with observe to pricing in the HIV market are patient advocacy groups. Distinct patients on other condition, save probably cancer, HIV/AIDS patients are predominantly mobilized and oral when it arrives to treatment. This had guided to the growth of a widespread expanded admittance programs for products in development, and then patient assistance programs for new, costly products. Companies are well aware of the benefits of maintaining a positive relationship with the patient base.

Combivir was launched essentially the same price as the some of the components. This not only replicates GSK’s desire to make new treatments accessible to patients at a reasonable price, but also that mixture therapy was flattering more widespread – and that physicians did not need a discounted price to justify recommendation. However, clearly single-agent therapy is still commonly used, as lamivudine unit sales (not including combinations) continue to be greater than Combivir unit sales. Only around the end of 2002 do lamivudine unit sales begin to decrease.
Trizivir was also priced similarly at the some of its component’s prices, indicating the company’s aspiration to keep it available to treatment for immature patients. GSK held Combivir’s price the same in most markets when Trizivir was launched. The intension was not to have Trizivir cannibalize Combivir patients. Combivir still had a low price relative to Trizivir which would continue to make it attractive to many physicians.

Sales of Trizivir quickly slowed as a result of clinical results showing that the three drugs used in the fixed-dose combination were not as effective as other three product combinations. Combivir has not had similar clinical setbacks and has continued to enjoy strong, but flat, sales.”( Combivir and Trizivir case studies)

In this case study Combivirz has adopted the market oriented pricing method and penetration pricing hence it can be able to survive in the market after the tough competition with Trirzivir. Determination of price is considered as important to survive in the market and to gain consumer interest.

Borden Company vs. Federal Trade Commission

In 1958 the FTC issued a complaint against Borden Company for selling the same products to different customers at a different price and ceased price discrimination on goods.

Tom Nagle, Reed Holden, Kent Monroe, Eric Mitchell had trail the price leadership and companies following these ideas but when it is tested with the scientific methods invented like hypothesis does not fetch the expected results.

Michael V.Marn, Eric V. Roegner and Craig C.Zawada has analyzed about price wars in the book The Price Advantage explains how to react for the change in price of competitors. They said that make the customers focused on the benefits, do not over spend on advertising, gaining the market share rapidly from one or two competitors. Rapid changes in the market almost set the price war. Do not react until you understand the reason for price cut of competitor. If you don’t understand the well delay your response until you understands the facts. Do not react with lower price as it affects the organization. They suggest when there is need in change of price it is necessary to analyze the consequences as it could affect the market and over all organization.

“Thomas Nagle and Reed Holden outline 9 laws or factors that affect buyer’s price compassion with respect to a given purchase in the book “The Strategy and Tactics of Pricing”.

o Reference Price Effect

Buyer’s price sensitivity for a given product rises the elevated product’s price relative to apparent alternatives. Perceived alternatives can vary by buyer segment, by occasion, and other factors.

o Difficult Comparison Effect

Customers are less sensitive to the price of a known / more reliable product so they would have complexity of comparing it to possible alternatives.

o Switching Costs Effect

The higher product-specific on investment a buyer must make to switch suppliers, the less price responsive that buyer is when decide between substitutes.

o Price-Quality Effect

customers are less sensitive to price they think higher prices seems higher quality. Products for which this result is particularly relevant.

o Expenditure Effect

Buyers are more prices sensitive as soon as the expense accounts for a large percentage of buyers’ obtainable income or budget.

o End-Benefit Effect

The effect refers to the relationship a given purchase has to a larger overall benefit, and is separated into two parts:
Derived demand: The more responsive buyers are to the price of the end benefit, the more responsive they could be to the prices of those products that contribute to that benefit.
Price proportion cost: The price amount of cost refers to the percent of the total cost of the end benefit accounted for by a given element that helps to produce the end benefit (e.g., think CPU and PCs). The lesser the given components portion of the total cost of the end benefit, the less sensitive buyers will be to the component’s price.

o Shared-cost Effect

The smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be.

o Fairness Effect

Buyers are more sensitive to the price of a product when the price is outside the range they perceive as “fair” or “reasonable” given the purchase context.

o The Framing Effect

Buyers are more price sensitive when they perceive the price as a loss rather than a forgone gain, and they have greater price sensitivity when the price is paid separately rather than as part of a bundle.

Critical Evaluation:

The research conducted on the supermarkets the Cost effects all the other coefficients are important and reliable with well-mannered approximate reproduction, representative to contributing extra services produce extra costs bear by the supermarket chains. The approximate limitation for the long-run charge components designate that 0.15% and 0.21% (respectively) of the extra long-run cost for effective food and non-food services is owed to milk sales, while the amount of the additional cost of operating a store that is 1,000 square feet /larger owed to milk sales is 0.13%. Also, although the additional long-run cost module does not collision the short-run marginal cost, at the model averages, for each gallon of milk sold the long-run marginal cost of services is approximate equal to $0.0216 for the in-store services model and $0.0158 for the store-size model. Overall, the results confirm Ellickson’s (2006) finding that retailers provide Quality with an augment in fixed costs, following Shaked and Sutton’s (1987) endogenous cost model.( Journal of Revenue and Pricing Management)

The estimated marginal collision of retail services on milk prices (at the sample averages). Affects milk prices positively, in constancy with preceding answer (Cotterill 1999; Bonanno and Lopez 2004). spotlight on the in-store services model results first, food services show a marginal price-increasing effect roughly one-third that of non-food services. While the consequence of non-food services on milk prices is mainly due to marginal cost changes, the effect of food services is mainly due to market power. It should be noted that there are considerable economies of scope produce by increases in food services.( Journal of Revenue and Pricing Management)

A limitation of the analysis offered in this article includes dependence on strong supposition based on the nature of supermarket competition. Prospect research might expand the analysis by comforting the short-run monopoly postulation to unscramble the communications between strategic pricing and service provision.

Another noticeable limitation is the use of burly functional forms used for the demand and cost functions. The use of more elastic functional forms, although hard to apply with the available data. ( Journal of Revenue and Pricing Management)

First, the study was limited to one service setting and one customer segment. Additionally study transversely other services that apply revenue management and other customer segments is needed to institute the simplify aptitude of our conclusion. Secondly, the data used in the revise were obtained from an existing survey database. Research using review instruments specially intended for a field study should also be carry out to determine the robustness of the results. Finally, the study did not, nor was it planned to; detain all of the qualifications of revisit meaning. In particular, there may be extra factors power the relationship between price and customers’ return intentions. An attractive research area to believe is role of customer discernment of value in the price-return intentions relationship. The effect of affective commitment on the price-return intentions relationship also merits examination. (Journal of Revenue and Pricing Management Vol. 7, 4 357-369)

the steps needed to appropriately implement the strategies: breaking down pricing decisions by region or by customer segment; constructing result on rigid data filter during complex software; basing optimal prices on inventory positions, offering manufacture capacity, demand predictions and aggressive market conditions; and creating “sense and respond” mechanisms that allow them to test often and react fast.

Conclusion:

The pricing strategy is considered as the success factors for the organization. Now we know the consequences of pricing decision are likely to have on customers’ purchasing behaviours—and on financial performance, regionally or globally, short term and long term. They could plan more assertively for the potential on more calculated risks and creation of fewer guesses.

Finally, effective pricing is the most excellent way to make the major difference in earnings while conserving unit sales and market share. It is, in effect, the last major step on the path to high performance.

References:

• The price is right . . . isn’t it?
Greg Cudahy and George L. Coleman

• Competition effects of supermarket services
Alessandro Bonnanno and Rigoberto A.Lopez

• The effect of price on return intentions:Do satisfaction and reward programme membership matter?
Breffni M. Noonen and Daniel J. Mount
2008 Palgrave Macmillan, 1476-6930 Vol. 7, 4 357-369 Journal of Revenue and Pricing Management
• The price advantage
By Michael V. Marn, Eric V. Roegner, Craig C. Zawada
• Pricing on purpose: creating and capturing value
By Ronald J. Baker