Customer Orientation in the Pricing Strategy - Assignment Example

Orientation in the Pricing Strategy 2007 Introduction The purpose of this essay is to see how better understanding value and needs contributes to the creation of the effective pricing strategy. In this research I will overview the main pricing theories and show how they can be applied to the general strategy of the company to promote it on the market. I will also consider the benefit, which marketing managers achieve from the application of the Customer Derived Value to the sphere of pricing strategy. My present research lies within the framework of marketing management, which is defined as “the art and science of choosing target markets and getting, keeping and growing customers through creating, delivering, and communicating superior customer value” (Kotler & Keller, 2006) Quite often marketing management can be defined with the consideration of the following definitions of the marketing: “...an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders” (Armstrong & Chandler, 1998). Strategic Marketing Our present research is also linked with the other subdiscipline of marketing management, known as strategic marketing that encompasses the sphere of the marketing analysis. It is important for my research due to the fact that in order to create an appropriate marketing pricing strategy the company has to make a thorough analysis of the main spheres of the company external and internal factors. Originally marketing analysis incorporated three main spheres and was known as “3Cs”: Customer analysis, Company analysis, and Competitor analysis. However, the latest researches added this list and now we can propose the model of “5Cs” marketing analysis: Customer analysis, Company analysis, Collaborator analysis, Competitor analysis, and analysis of the industry Context (Brown, 1993). However, in order to establish a correct pricing strategy it is not enough to analyse the environment. After the company defines its strategic objectives, chooses its target segment of customers and finally creates the appropriate positioning, it proceeds to the second stage. This is the implementation of the chosen strategy. Many scholars define “4Ps”, which constitute the implementation planning of the company. They are Product management, Pricing, Place and Promotion (Jensen, 1998). Definitions and Types of Pricing In this research I’m primarily interested in one of these “Ps” of the marketing mix namely Pricing. The definitions of pricing are as numerous as the definitions of the marketing itself. Pricing is generally defined as the manual or automatic process, in the process of which definite prices are applied to purchase and sales orders. This process is based on such factors as: a fixed amount, quantity break, promotion, particular vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, etc (Kyle, 2007). Much research is done on the functions of the price. Generally all researchers agree that a well-considered price should perform six main functions: 1. Be the main means of achievement of financial goals of the company 2. Be able to meet the main requirements of the real life marketplace 3. Be the ground of the positioning of the product as well as correspond to the other variables in the marketing mix 4. Correspond to the type of distribution channel applied by the company, to the type of promotions and to the quality of the product manufactured by the company 5. Correspond to the objective factors like the cost of the manufacturing, exclusivity of distribution, extensiveness of advertising and promotional campaigns, which are intended to promote the product 6. Be alternative to the quality of the product, effectiveness of promotion campaign, or an energetic selling effort (Johnson, 2007). Economic essence of the price, which shifts most of the customer surplus to the manufacturer, is opposed to its marketing essence, which considers that the best price is the one, which is the closest to the maximum, which the customers are ready to pay for the goods (Kyle, 2007). Effective Pricing Framework Before discussing the marketing strategies of the effective pricing it is important to discuss some main definitions within the framework of the effective pricing. The first definition is that of the effective price, which is considered as the price received by the company after the processes of accounting for discounts, promotions, and other incentives. The other type of pricing, which should be mentioned, is price lining briefly defined as the application of the same or near the same prices to all products offered by the company. On the one hand this is beneficial for administering, but on the other hand poses the problems associated with the lack of flexibility (Johnson, 2007). One more term, which lies within the framework of pricing strategy, is “loss leader”. This is the product, for which the seller sets the price below the operating margin. This causes some loss to the company, but the expenses are covered by the attraction of customers to the other products as well (Boone & Kurtz, 1992). This category overlaps with the category of promotional pricing, which views pricing is the main element of the marketing mix (Boone & Kurtz, 1992). Marketing managers are also well-aware of the existence of the price/quality relationship, which implies that the majority of consumers are persuaded that there is a direct dependence between the price of the product and its quality, meaning that high price indicates good quality and vice versa. One of the most prominent evidences of this is the case of the snack cake Twinkies, which was considered to be of low quality solely on the basis of its lowered price (Semenik & Damossy, 1995). Prestige or Premium pricing is applied by the marketing managers in cases when they apply the price, which is at the top of the possible price range. In spite of the seeming groundlessness of this step it still proves beneficial for the company, due to the case that the customers expect the high price to be the sign of good quality. The other explanation is the persuasion of some customers that high price is the indicator of the high status of its buyers. Finally premium product can be a success due to its flawless performance in this application, which is also important for the potential customers. Just have a look at the LVHM products, which all are premium products but still are very popular within their target audience, who have the high status or want to acquire it buying expensive goods. Closely associated with the term of the premium pricing is the term Goldilocks pricing, which is applied to the marketing strategy of giving a “gold-plated” version of a product by high premium price. This is done against the background of the purposely lowered quality of cheaper products to persuade the customers in the appropriateness of the choice for the more expensive product. One of the most conspicuous examples is the Victorian England company, which built third-class railway carriages without windows. This was done for the sake of the motivation of the second-class buyers (Mayer& Mayer, 1999). Finally, I’d like to mention one more type of the strategic pricing - demand-based pricing, which is based on the consumer demand, which in its turn focuses on perceived value of the customers (Johnson, 2007). Customer Delivered Value So, as you can see the number of the possible pricing strategies is really broad. The further problem arises in the appropriate choice of the pricing strategy. This is a critical issue for the marketing manager as the choice of the suitable pricing strategy will have a direct influence on the profitability of the product and the general performance of the company. This choice is not an easy task. In this the marketing manager should rely on the overall customers values and expectations and the positioning of the product and the company. One of the most important aspects of the pricing strategy is the good knowledge of the managers of values of the product to the potential customers. In order to make a conscious choice the manager has to posses a good knowledge of customer delivered value. Marketing managers should be well-aware of the fact that the customers buy a product on the basis of its value proposition, not on its low price. Philip Kotler gives the following explanation of this fact: “Total Customer Value is the bundle of benefits customers expect from a given product or service. Total Customer Cost is the bundle of costs customers expect to incur in evaluating, obtaining, and using the product or service. Customer Delivered Value is the difference between Total Customer Value and Total Customer Cost” (Kotler, 1977). So, for the implementation of the “correct” price the marketer should take into consideration and maximize Customer Delivered Value. This can be done not only on the basis of the cost side of the product. Maximization of the Customer Delivered Value can be done either by offering greater Total Customer Value or by making products available at a lower Total Customer Cost (Ahola, Oinas-Kukkonen, Koivumaki, 2000). This leads to the great range and considerable variations of the prices, quality and performance of the products offered by the company. Each of these possible variations are proposed by the companies in order to limit the threat of the variation is an attempt to avoid competition through offering a product, which is unique in some of its qualities from other manufacturers or retailers (Churchill & Peter, 1998). For example, one can buy a bag or a briefcase at Wal-Mart at the price less than $50, but if a person wants to buy a genuine Samsonite or Louis Vuitton, he/she will go to the specialized stores and pay a much higher price. So, the first feature, which attracts the possible customers, is uniqueness of the product. The other feature, which contributes to the Customer Demand Value, is uniqueness of the product. Thus, in some cases customers are ready to pay more for a product, which is at hand when they need it. The example is very simple: retailers of the camera films know that the customers will pay more for the same film in the places, where they need it most - Tower of London, Niagara Falls or the Eiffel Tower (Johnson, 2007). The other essential aspect of the maximization of the Customer Demand Value is through promotion of the product. Applying Promotion Mix, companies can lead the customers to the realization of the necessity of the product, which can be either conscious or subconscious process. By means of promotion, companies aim to assure the customer of superiority of their product n the basis of its higher quality or greater value to the consumer. For example, the shirt by Ralph Lauren costs much more than the shirt of the unknown author. For real experts this doesn’t matter but for the public at large there is no doubt in the superiority of the Ralph Lauren shirt, greatly due to the wise promotion campaign (Johnson, 2007). There are but the main considerations of the Customer Demand Value. However, marketing managers may have other suggestions as well. Thus, prices may vary on the basis of the geographic position of the market, time characteristics, and customers’ target group. So, all these Customer Demand Values contribute greatly to the realization of the customers’ expectations and needs and thus, is of extreme value for marketing managers. All of the questions concerning Customer Demand Value should be thoroughly studied and taken into consideration, while adopting certain pricing strategy. Customer value consists of a number of different components price occupying only a small place in them. One of the most powerful drivers is the brand value of the company. It is argued that customers always subconsciously compare a price for a definite product with the “reference price”, which is deeply entrenched in their mind concerning the definite product category. This “reference price” is the price, which the customers expect for a definite type of product (Brand Value: Cracking the Pricing Code, 2006). Conclusion So, in this research I proved that for the sake of establishment of the appropriate pricing strategy and overall general strategy marketing managers should be well-aware of the expectations of the customers, their needs and values. I outlived the main pricing strategies, which can be of the following types: effective price, price lining, “loss leader”, promotional pricing, price/quality relationship, prestige pricing, Goldilocks pricing and strategic pricing. I showed that Customer Demand Value is of great importance for the establishment of the pricing strategy. Thus, the customers may prefer a definite product on the basis of its high quality, low price, availability, effectiveness of the promotion campaign, brand image. I consider that Customer Demand Value is extremely important for the development of the reasoned and well-balanced pricing strategy and qualified marketers should be able to chose the tactics for the maximization of the Customer Demand Value based on the peculiarities of the product. References AHOLA, H.; OINAS-KUKKONEN, H.; KOIVUMAKI, T. (2000). Customer delivered value in a Web-based supermarket. System Sciences, Proceedings of the 33rd Annual Hawaii International Conference Volume 1, Issue , 4-7. ARMSTRONG, BROWN and ADAM CHANDLER. (1998). Marketing 4th edition, Pearson Education, Australia. BOONE, L. E., AND KURTZ, D. L. (1992). Contemporary Marketing. New York: Dryden/Harcourt Brace. BRAND VALUE: CRACKING THE PRICING CODE ( 2006) . [online]. Available from: 7 May 2007 BROWN, STEPHEN (1993). Postmodern Marketing?, European Journal of Marketing Vol. 27 No. 4 CHURCHILL, G. A., AND PETER, J. P. (1998). Marketing: Creating Value for Customers, 2d ed. Boston: Irwin/Mcgraw-Hill. JENSEN, M. C. (1998). Foundations of Organizational Strategy. Cambridge, Massachusetts, Harvard University Press. JOHNSON, Robin. Pricing Strategy Article: Making Sure the Price is Right. [online]. Available from: 7 May 2007 KOTLER, PHILIP (Nov. 1977). From Sales Obsession to Marketing Effectiveness. Harvard Business Review. KOTLER, PH. AND KEVIN LANE KELLER (2006). Marketing Management, 12th ed.. Pearson Prentice Hall. KYLE, Bobette. Pricing Strategies in Marketing [online]. Available from: 7 May 2007. MAYER, GLORIA G. AND THOMAS R. MAYER (1999). Goldilocks on Management: 27 Revisionist Fairy Tales for Serious Managers. AMACOM/American Management Association. SEMENIK, R. J., AND BAMOSSY, G. J. (1995). Principles of Marketing: A Global Perspective, 2nd ed. Cincinnati, OH: South-Western Read More