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Pricing plays an important role in today’s competitive business environment, since the customers nowadays are more complicated and have a higher expectation on the products and services they purchase. “In the narrowest sense, price is the amount of money charged for a product or service. More broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service”. (Kotler & Armstrong, 2006).
In today’s world, companies face a competitive and fast-changing pricing environment, where the price now has turn out to be the major issues in affecting the buyer’s preference. However, this perception has now changed, where consumers now give importance more on value rather than price. Basically, there are five types of pricing strategies; they are product line pricing, optional product pricing, captive product pricing, by-product pricing and product bundle pricing.
Drawbacks on Selling at Lower Price
“Price is what you pay. Value is what you get”. (Buffet n.d). Selling at lower price may be ineffective to a company because there are chances the company may loss profits and consumers may have a negative view of a products or services, which the company delivers. For instance, what if Lamborghini Reventon one of the most expensive cars which cost almost $1,600,000 were to lower its selling price? The first thing that will be captured in the consumer’s mind is Lamborghini Reventon is about to be replaced by newer models or either the car have some mistake or errors and are not been selling well. Besides that, the consumers may also have a negative impression and thoughts about Lamborghini Reventon and might believe that the car is throwing away the car business and may not stay in the business for a long period. Therefore, it may have an effect on the brand’s image and the quality of a product or services where the price of the car may decreases down even further, and eventually the company may loss profits.
Moreover, selling at lower price may also be ineffective to a company and can lead to damaging price wars. Competition among the retailers, especially hypermarkets, is intense with large international retailers such as Tesco frequently engaging in price wars to establish their presence as major players in the market. An example is seen through from the times online article, which took place on the 5th January 2010, where Asda, a British supermarket, takes on Tesco in Grocery Price War. (Leroux, 2010). The article states that Asda has cut its price of 3,600 items by an average of 13 percent and this has give an impact to Tesco whom also surveys its prices on daily basis in all 50 product lines to ensure their prices are always lower than competitors.
In my opinion, the competitors might just have assumptions thinking that the company is trying to get attentions to a larger market shares, or that the company is not doing well and trying to boost its sales. Tesco is following “Cost Leadership” strategy with the objective is to become the lowest-cost producer in the industry, wherelse Asda is emphasizing its “Everyday low prices” strategy where it states in the article that Asda’s chief merchandising officer, Darren Blackhurst said: “People are sick and tired of being tricked and deceived by dodgy claims and bogus bogofs [buy one get one free offers].
Occasionally, a low-cost leader will also discount its product to make the most of sales, for the most part if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share. In some way, when these two powerful competitors Asda and Tesco tries to take over each other’s market share by progressively reducing prices, this will lastly lead to one of them to draw back temporarily and this may lead to damaging price wars in a company.
CUSTOMER’S VIEW ON VALUE, NOT PRICE
Companies should always be able to sell on value, not price. If your price is too far above the ground, your sales will be hurt. But this can also be true if you price your product or services too low. The customer who pays a higher price whenever they were to purchase a product or service, also have an higher expectations on the value of a products or services which they are going to purchase. “Being good enough, is not enough – give customers a reason to be faithful”. (Phelps, G.R, n.d).
Total Customer Value
Customer Delivered Value
Total Customer Cost
Kotler and Keller, 2009
A company should be able to increase the total customer value by looking forward into the product value, services value, personal value and the image value as well. Product value do meets the requirement of the customer’s expectations where there quality of a product should have a high value, where companies should be able to deliver the customer value, not the product features such as the design, sizes, varieties and many more. At McDonald’s, they believe great taste comes from great quality. “High quality is one of our top priorities. From our meats to our cheeses, from our fresh produced to our eggs, we’re committed to serving you the very best”. (Anonyms n.d). Not only that, McDonald follows the strictest food safety and preparation standards at every McDonald’s restaurants around the World.
Service value is how the company satisfies the customer’s expectations by providing better services. McDonald’s has been always excellent in offering their products and managed giving their services at a very minimum time. McDonald’s has trained its employees to be speed enough to execute operations where they need to give the best service which include speed up the process when requested by customers. Speed actually benefits their restaurants. McDonald applies speed inside the operation, where speed reduces inventories- by makes sure their staffs are multi-skilled and fit for the fastest performance and speed reduce risks, where all the operation will be plan first before applying it. By this, they can prevent from any kind of danger, for example, using the professional high pressure cooker.
Personal value is the total involvement which a product or service will involve the customers to hold on to their community value system. For instance, the top three major manufacturer that produce Hybrid vehicles are Toyota, Honda and Hyundai. The most common form of hybrid vehicle is combining the power of the tradional internal combustion engine with a battery fuel cell. Those cars tend to save the environment by their ‘environmental friendly’ hybrid cars. Hybrid car can save the environment by reducing the pollution because it consumes less gasoline.
Image value is the development of the customer’s personality of customer’s self good opinion with the products or services. For instance, a Rolex watch which is one of the most luxurious watches being produced today has a good quality image among everyone. Consumers who purchase Rolex watch shows that they are rich and affordable to purchase the luxuries goods and mainly are to impress the others.
The total customer cost can be decreased by looking into the monetary cost, time cost, energy cost and psychic cost as well. The monetary cost can be reduced in a company by increasing the standard sale per customer, by receiving better or bigger return for the company’s advertising and sales promotion and last but not least is, by improving the company’s internal methods and procedures as well.
Lastly, the time cost is opportunity cost which can be reduced within a company by not spending much time on looking or searching information about a product or a service. For instance, the online purchasing helps companies to save their time, energy and psychic cost by just browsing and clicking within the website itself. When the monetary, time , energy and psychic cost can be decreased, a company should be able to increase the total customer value and decrease the total customer cost, therefore the company will be able to meet its customer’s requirement not only on price, but value.
Pricing has always been playing the main and important role for each company in order to achieve their goals. In order to compete with their competitors and lead the market, each company should be able not to sell on price, but value and has to change the requirement according to the customer needs as well.
Being very dependent on constant price war and cost cutting assessment between retail stores are not viable enough to retain their competitiveness as it will not contribute to the survival of retail industry in the long run. Reduction of price strategy need to be changed since it will have an effect on retailers’ profit margin. As a suggestion, Malaysian retail industry needs to have new forethought, measures and assessment of competition level in order to achieve professional standard that filled up with refinement. Thus it will able to meet shopping needs, wants and preferences in the most valuable and competent manner.
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