The Considerations of Pricing Strategies in Multiple Industries - Essay Example

The considerations of pricing strategies in multiple industries BY YOU YOUR ACADEMIC ORGANISATION HERE HERE HERE The considerations of pricing strategies in multiple industries Introduction Pricing is most definitely not just an accounting issue, there are many different factors which drive how a company determines their pricing philosophy which stem from the external marketplace. Consumer behaviour and their willingness to pay for a particular product or brand name at a certain price impacts the pricing activities of a business, as well as the regulatory and legal environment, and can also be influenced by competitor pricing as part of strategic business rivalry in similar product markets. This essay describes the many different pricing philosophies of several real-time companies along with an explanation of how this impacts managing a business environment in terms of pricing and profitability. Beyond accounting Burrows (2009) describes the dilemmas at Microsoft company when deciding pricing policy on its many different technology and consumer-oriented products. Microsoft maintains tremendous buying power in its technology market, but is facing pricing issues in the midst of a global economic slowdown and rising competition in this market. Microsoft is now wondering, in order to keep sales volumes up and profit at expected levels, whether the business should consider lowering the prices on a wide variety of Microsoft branded products. Says CEO Steve Ballmer of Microsoft, “we’re focusing on gaining share in (new markets) that are most critical” (Burrows, p.51). Apparently, Microsoft has considerable problems in some markets, such as in Asia, with large volumes of pirating occurring in its computer-related technology marketplaces. Piracy, when customers are able to get their hands on Microsoft products without a proper license, erodes sales success at the company. Therefore, Microsoft considers that in these markets where piracy runs high, they can lower the price of the technology software to make the product less appealing from illegal markets and will bring buyers into the store instead to make a purchase. Even though there is not research evidence which shows that Microsoft has determined a price policy that fits with the company’s leadership expectations, clearly a consideration of pricing is the ability to avoid piracy and also to make products seem more attractive to buyers with fewer resources in order to boost higher sales volumes. Cooper (2009) describes how the regulatory environment impacts pricing, by describing data from the Digital Britain Report. In Europe, the government acts as a regulator for certain taxation obligations on behalf of media companies, such as those which provide satellite television to UK viewers. There are concerns about intellectual property (such as brand logos and images), payments associated with regulatory obligations, and any other subscriber-related aspect which makes pricing have to be driven higher in order to make a higher profit. For example, if a satellite television service offered a package to buyers for £35.00, but was forced to pay, as an operating expense, £12.00 for regulatory purposes and taxation, this would create the need to pass some of these costs back to the subscriber (the consumer) in order to meet profit goals. In this situation, these charges would likely show up on the buyer’s payment invoice as regulatory fees. In order not to make the price appear to high to the buyer so that they search for competitive prices with other companies providing satellite service, this becomes a major consideration for companies with their pricing philosophies which is far beyond merely an accounting issue. Krannich and Krannic (2000) offer that in some markets, such as the Asian market, which would be important for global accounting purposes in a multi-national business environment, pricing is often negotiable as part of a cultural norm. Today, many businesses are looking for new export market opportunities in order to build a stronger business or branded product presence in foreign marketplaces and also boost sales in the process. When a fixed price is attached to a product in a domestic market environment, such as with a company who has established a positive consumer perception of quality, pricing is not a major concern. However, if these products are now extended into foreign markets where negotiation is a commonplace business transaction, fixed pricing for this product may no longer be acceptable. In this type of situation, a business would have to consider whether there is risk attached with buyers trying to drive down the price of marketed products or whether they can actually use fixed pricing in this environment. This would point toward companies having to have a very good understanding of what drives buyer behaviours in these types of difficult markets, therefore maybe even sacrificing some of their profit expectations just to ensure that buyers cannot drive down prices because of cultural values related to negotiation and bargaining. If prices are able to be manipulated or bargained, there is going to be a financial loss to the company as well as the seller. This might also suggest that for some companies who take products across the world, there would be a need to create mutual relationships with the retailer or organisation responsible for selling the product in overseas market environments. For example, a company like Microsoft which wants to sell software in negotiation-common environments might create contractual agreements with retailers that if a buyer negotiation begins, the retailer can only negotiate down to a certain price point and no lower. This would be another pricing consideration, this being contractual relationships with retailers and other product vendors, to ensure that buyers do not get the perception that all products distributed by this company are negotiable. Barton (2009) offers how pricing becomes more than an accounting issue by describing the impact of competition on pricing and the efforts of these competitors to seize market share from their business rivals. In the United States, the restaurant chain Quizno’s, a sandwich restaurant chain, had traditionally had higher prices because of the company’s unique marketing tactics such as offering toasted sandwiches or other upscale meat categories on their sandwiches. However, rival companies such as Subway, found commonly in the United Kingdom, began offering large-sized sandwiches for only five American dollars. This competitive action made many customers buy their sandwiches, in order to find a financial value, making Quizno’s have to reconsider their pricing policies in order to remain competitive and ensure higher sales volumes. Without changing their sandwich menu items to appear in-line with competitive pricing, it is likely that the sandwich chain would have experienced measurable drops in sales revenue. Competition seems to be a very strong factor in how a company decides to set pricing policies which comes from the external environment and is much more than merely accounting. Croft (2009) also offers that pricing, in some industries, can be largely affected by the current economic conditions of a specific region. This is most evident in the home building industry which, in today’s market, is suffering due to housing price drops and homeowners having problems making their mortgage payments. The author offers that high losses, due to the inability to sell homes, creates the situation where house prices must be dropped simply because there is no buyer demand. In this situation, even though the houses are being sold to some buyers who are willing to make purchases, the profit potential is lost when house prices have to fall in order to guarantee it becomes sold. In this type of environment, pricing becomes much more than accounting issues, it becomes the focus of whether or not the business can stay profitable and successful in difficult economies. Outside of accounting, for the housing industry, there would have to be considerable management activity and strategic analysis of the housing market in order to price homes competitively. A SWOT analysis of the external environment, such as measuring regulatory fees, taxation, location value, etc. would need to be considered and then measured against accounting obligations to decide whether or not to price a certain house unit at a budget price or a more profitable one. Miraldo (2009) offers that pricing is often a major consideration simply due to changes in buyer (consumer) behaviour. Specifically, product differentiation is described as a means of making one marketing effort from a competitive company appear more valuable than that of others in the same market. For example, two rival companies which create a similar consumer household product must use clever marketing and innovative communications in order to make customers feel that one product, over the other, provides more value. This is sometimes done by creating unique logos, or using communications to make one product brand appear to be more lifestyle-focused than competition, and then attempting to take market share away from one another in the process. In this type of situation, pricing become much more than accounting because it involves a team-work focused organisation, with multiple creative departments and slogan ideas for marketing, in order to set an appropriate pricing policy. Through product differentiation and marketing, this seems to alter the buyer’s behaviour about whether one brand is more favourable to their personal needs than another. This could, theoretically, drive down pricing for one competitor while making a more attractive price for another more creative and marketing-focused company. Won and Lee (2008) also illustrate why pricing becomes more than accounting by offering an interesting fact from the sporting and recreation industries. Sports marketing for events involves understanding the costs associated with using various stadiums or sporting arenas, costs of paying those on the payroll (the athletes), and other operating costs associated. Additionally, there is going to be yet another aspect of buyer behaviour in which a customer will reach a point where pricing is simply too high and no clever marketing could change this viewpoint. Therefore, a company must seriously consider whether to price simply to meet profit expectations or whether the pricing is considered satisfactory for the sports enthusiast. Understanding the price elasticity for many different buyers in this market, the price willing to pay before demand for a product or service goes down, makes this much more than accounting problems when deciding on what price to attach to sporting tickets and events. Koenigsberg, Muller and Vilcassim (2008) describe the pricing philosophy of easyJet, an up-and-coming, low-fare airline company, which uses promotional efforts to affect pricing policy. This company, as part of their regular business model, promotes the value offered to customers by being more no-frills in terms of passenger amenities and relaxation while on board, compared to other competing airlines which are more luxury in design. In this type of environment, low fares would lead to lower profit than other competing airlines, therefore pricing a major consideration because the fares can likely not be lowered more without risking profit goals from being met. At the same time, the airline company would have to determine whether they are achieving full planes (for maximum profit) or whether they are operating with many planes without a large amount of customers. This would impact pricing, from a level much beyond merely accounting, because operations and passenger statistics would also be linked with a low-fare business model to decide what is a price which will not create loss of revenues. This seems to require more strategic and senior-level business analysis and is not the role of an accounting professional. Intensity of competition is also cited by Iyer and Seetharaman (2008) who describe the pricing issues associated with the retail gasoline industry across the world. In some areas of the world, which are more developed, there are many different competitors in terms of providing gasoline, oftentimes this is based on population demographics and the degree to which populations in a region are grouped together. However, when many different competitors exist, it would be problematic for the business to create a pricing schedule which was considerably higher than other local gasoline stations. If these stations are in a highly-populated area and on the same street, it is likely that a small fraction of pricing differences could make one traveller choose the less-expensive station that that of the more profit-oriented station charging a higher gasoline price. This would seem to be a difficult industry when deciding on pricing, because even if the profit goals exist in management, a price can only be increased in very small amounts to avoid giving gasoline buyers a negative perception about the gasoline station or its ownership. Because these businesses also sometimes operate solely for local markets, it would be highly important for a business to have a quality reputation to avoid buyers choosing another station based on perceived attitude of ownership. The example offered from the gasoline industry shows why pricing has moved far beyond accounting, largely because there are so many different external factors which impact pricing policies that it becomes much more of a management issue. There are individuals in many different industries which are chosen for their leadership abilities because they are talented in analysing financial data, sales data, or marketing efforts in order to determine whether the company should take a new approach to operations. This senior-level analysis could set a new pricing policy which simply gives the business higher profit or reduce prices on a temporary basis just to make a service or product appear as a superior value to the buying public. Accounting and pricing are linked in terms of recording and acknowledging these pricing transactions, however the actual act of setting price begins at the strategic level. This makes pricing an executive issue and an executive function. Conclusion As described in this essay, many different industries experience situations where pricing moves beyond an accounting issue and becomes a much broader concern which requires the intervention and actions of many different staff and management members. External customer values, based on price flexibility, also creates an issue as it was identified that some buying markets will simply reject a product because it is perceived as being priced to high. Therefore, understanding why consumers choose one product over another, based on price, would be another management issue of concern to non-accounting personnel. Higher volumes of competition were also identified in this project as being an issue outside of accounting when it comes to pricing. Marketing philosophy, much more than accounting, becomes the focus of price setting based on the ability to give one competing product better visibility than other. Through creative and innovative promotions, pricing is again established at the executive or management leader level. There are clearly many reasons why pricing is much more than merely an accounting issue, and pricing seems to be the focus of business success at multiple levels. There are a wide amount of different considerations in the external market, including the regulatory environment, which should be addressed by companies from much more than an accounting-minded lens. Bibliography Barton, Veronica. 2009. Quiznos promotes new pricing strategy. Nation’s Restaurant News. 43(5), p.20. Burrows, Peter. 2009. Microsoft’s Aggressive New Pricing Strategy. Business Week, New York. Iss. 4140, p.51. Cooper, Will. 2009. Digital Britain: What does it mean for you? New Media Age, London. 18 Jun 2009, p.1. Croft, Jane. 2009. Moody’s warns about building society losses. Financial Times, London. 13 Jan 200, p.18. Iyer, G. and Seetharaman, P.B. 2008. Too close to be similar: Product and price competition in retail gasoline markets. Quantitative Marketing and Economics, Dordrecht. 6(3), p.30. Koenigsberg, O., Muller, E. and Vilcassim, N. 2008. easyJet pricing strategy: Should low-fare airlines offer last-minute deals? Quantitative Marketing and Economics, Dordrecht. 6(3), p.279-290. Krannich, R. and Krannich, C.R. 2000. The Treasures and Pleasures of Thailand: Best of the Best. Impact Publications, 58-61. Miraldo, Marisa. 2009. Reference pricing and firms’ pricing strategies. Journal of Health Economics, Amsterdam. 28(1), p.176. Won, D. and Lee, Y. 2008. Optimal dynamic pricing for sports games with habitual attendance. Managerial and Decision Economics, Chichester. 29(8), p.639. Read More