Product Mix Pricing Strategies:
Changing prices is necessary at the strategy when the product belong to a product mix. The strategy for setting a product’s price often has to be changed when the product is part. Pricing becomes a hard job because products are related among them in terms or demand and costs but without the same degree of demand.
Below, 5 mix pricing situations will briefly be described:
- Product line pricing: it takes into account the cost differences between the products of a line, the feature evaluation by customers, and the prices of the competitors.
- Optional Product Pricing: it considers optional products or accessories together with the main product.
- Captive Product Pricing: it consists on establishing the price for goods to be used together with a main product, such as air fresheners and their refills.
- By-Product Pricing: it refers to products with little or no value that are generated as a result of the main product. The looks for a market for these by-products to offset the costs of disposing of them and make the price of the main product more competitive.
- Product Bundle Pricing: the practice is based on mixing different products and then offer them at a reduced price, similar to the ‘combos’ at restaurants. (pp. 315-319)
Price Adjustment Strategies:
It is not only setting the initial price for the products, concerns come later that oblige the firms adjust prices according to customers or situations.
The next table
Briefly, seven price adjustment strategies will be shown in the next table.
Table: Price adjustment
Source: (Kotler & Lane, 2012, p. 319)
It is important to highlight that the use of the promotional pricing strategy may become risky since competitors can offer real bargains to attract customers, hence a price war may result (pp. 319–325)
Price Change strategies:
Sometimes, once having established the structures and pricing strategy, some companies must start price changing or respond their competitor by changing prices. Then, according to particular circumstances, manager must decide between cutting price or increasing price. Price cut occurs when there is an excess capacity or a decreased demand due to strong price competition or weakened economy while price increase occurs when there is a overdemand or cost inflation.
Customers do not always react as expected with the strategies, for instance, when a price increase strategy is implemented, it is expected a negative perception, nevertheless, they consider that the firm is ambitious, or that the product is exclusive; on the other hand, when the price cut strategy is chosen by the firms, costumers’ perceptions are related to low quality or out-of-season products.
Organizations need to be always quick to respond their competitors’ price change (pp 325–328).
The following figure illustrates the questions they should self-make, and the possible actions to follow:
Source: (Kotler & Lane, 2012, p. 327)
Real price strategies in practice, a real challenge.
Although literature provides managers with solid background to make decisions, sometimes, practice can show them that it is not enough. One example is observed on the article ‘Airlines’ New Basic Economy Fares Show the Power of No-Frills Pricing’ where “no-frill” is used a strategy by American Airlines, United Airlines and Delta in which passengers can save some dollars by sacrificing some of their convenience or comfort, giving the airlines the rights to select seats, boarding last, or surrendering the opportunity to make flight changes.
The strategy is just an opposite practice of Product Bundle Pricing strategy, which may be called ‘Product Unbundle Pricing’[1] strategy. The strategy of basic economy is not new, but the implementation on air companies is, and it has shown to be effective to combat discount rivals either as an offensive strategy to steal customers from other airlines and to capture new ones, or a defensive strategy by cutting price for being competitive. Nevertheless, it may become double-edged sword when the discounts go to customers who do not them (Rafi, 2017, pp. 1-2).
Similarly, sometimes, to avoid losses, airlines use overbooking to support the price strategy, which they turn it as a plan to make it attractive for customers by giving customers the opportunity to resell their tickets at a higher price. However, professors Sandeep Baliga and Jeff Ely agree on the idea that setting a right price in this strategy is tough. They have found that there is still a lot of inconvenience with it because it is impossible to establish an accurate price in advance for the tickets to be sold. One solution for this may be auctions, but most of the times this is not good-looking for the customers, since participants usually buy at the lowest price (Baliga & Ely, 2013, pp. 1-4).
In the same way, fallacies can vitiate the price strategy; Utpal Dholakia describes three cases in which misconceptions lead the value-based pricing strategy to failures. The first one is the incorrect idea of assessing the value costumers give to every single feature of the product, which make the exercise dull and difficult to apply. The second misconceptions lie on the risky idea that when competitors do not make a correct pricing strategy, the use of the value-based pricing strategy will take them to succeed. Sometimes, failures of the competitors can create false expectations on price strategists. Finally, the last misconception deals with wrong formulas to calculate the value-based pricing strategy when the brand value is part of the equation, since most of the times marketers put a very high weight to the brand value (Dholakia, 2016, pp. 1-3)
Conclusion
It is a challenging task to set prices to products, especially if they are new in the market. Nevertheless, pricing strategies come in handy when managers need to set the right prices to their products. There are many of them which can be useful and efficient according to specific situation or environment, also a huge amount of literature can be considered according to the pricing strategy organizations need to implement. Nevertheless, the real life is more than literature, many mistakes are made when managers focus the efforts on creating pricing strategies relying too much on literature, it is also convenient to read different scenarios and environment to avoid losses when they are put in practice.
REFERENCES
Baliga, S. & Ely, J., 2013. Pricing Strategies People Love. Harvard Business Review, pp. 1-4.
Dholakia, U. M., 2016. A Quick Guide to Value-Based Pricing. Harvard Business Review, 09 08.
Kotler, P. & Armstrong, G., 2016. Principles of Marketing. 16 ed. Essex: Pearson Education Limited.
Kotler, P. & Lane, K., 2012. Marketing Management. 14 ed. Upper Saddle River: Pearson Education, Inc.
Marn, M. V. & Rosiello, R. L., 1992. Managing Price, Gaining Profit. Harvard Business Review, September-October.
Rafi, M., 2017. Airlines’ New Basic Economy Fares Show the Power of No-Frills Pricing. Harvard Business Review, 03 03.p. 4.
[1] There is no such a strategy, it is just mentioned to give a tangible example of the described scenario.
Comments