Terms of references
Our doesn’t end in ensuring that our company produces some high-quality products/services, but also includes the burden of apportioning the right prices to them. This report looks at the different pricing strategies that can provide appropriate prices to company products. Traditionally, product prices vary from one market structure to the other; be it an oligopolistic or a monopolistic market structure, depending on the primary purposes of the organizations: whether to make a lot of profits or to serve the society justifiably. In our case, two major market structures would be considered include oligopolistic and monopolistic markets.
This report only tries to provide an outline of the pricing strategies the company may take while introducing a new product into the markets. It has to be remembered that the company is yet to enter the targeted markets. In this report, we will only depend on secondary sources of data, as a primary survey if conducted in those two different markets, may increase the cost of the report to a great extent. For this, the first important step is to find out the list of companies that are operating in those markets. When the list is obtained, from the company annual report of the sales revenue figure of the companies can be obtained. With those figures, a pie chart can be plotted. This pie chart will give visual implications of which company is performing with great dominance. These data will distinctively show the percentage of usage of different products. With the findings, the company can match their product range and can identify whether their product range is competitive enough for the markets. But this will give partial information, as according to the third objective the price of these products also has to be determined. Price along with the product will give a clear indication of the market taste and preferences. The price at which different companies market their product can be obtained from the company website itself. All the above-mentioned information once extracted will narrow down the problem. After matching with the company’s current product portfolio the exact products to start with, at what price ranges can be estimated for the two different markets. The next objective goes even further and tries to merge the two different strategies into one. This would be a qualitative study, where the common areas of the different strategies have to be identified.
Pricing Strategies in a Monopolistic Market
A monopolistic market is one whereby a single producer totally controls a particular market. Even though the products/services of the producer or company enjoy the highest sales whatsoever, the company cannot charge more than the maximum demand price that buyers are willing to pay. Monopoly, an evil business practice, has no far-reaching benefits to society: it erodes competition and destroys buyers’ ability to choose whatever they need from a range of products/services. According to Frank and Bernanke (2001), some of the common techniques or strategies for pricing mechanisms in a monopolistic market include:
Price Discrimination: What a monopolist does is simply engage in the process of price discrimination with the intention of controlling the majority of the market. There are three degrees of price discrimination: First, this involves charging the customers the maximum amount they could afford for each incremental unit. Take for example, when a company sells a product that requires the periodic supply of its accessories to a customer, the company will make sure that such a customer could afford the subsequent expenses; second, this entails giving the complete information about the corresponding decline in prices of commodities, for instance, electric utilities. This kind of information isn’t made available to customers in the first degree. Third, this is the practice of charging different categories of people different charges for the same product. These discrepancies may be due to the fact that a society is divided into categories of people, each with distinct status. Under this strategy, there are student discounts, senior citizen’s discounts, regional and international pricing.
Block Pricing: This strategy entails the process of packaging multiple units of a similar product together and selling them as one package.
Two-Part Pricing: Sometimes it is impossible to charge different prices for different units sold at the same time, even though the demand information is known, so, two-part pricing would allow the firms to extract all surplus from consumers. Two-part pricing is composed of a fixed fee and a per-unit charge.
Commodity Bundling: This is the technique of bundling two or more products together and charging one price for the bundle. The benefit of this practice is that the customer could have access to several products he/she has wanted to buy but could not afford it singly. On the other hand, products sold together in a bundle are likely to be poor-quality ones.
Peak-Load Pricing: In a situation where there are more demands during peak periods than the capacity of the company, the company may engage in peak-load pricing: that is, the company would charge a price higher than its previous one in order to curtail the high amount of demands. This logic is very simple: too few goods with too many buyers may not go round; hence, the decision to charge higher to dissuade some poor buyers from competing for the available goods has been in practice for a long time.
Cross Subsidies: This is another age-long practice whereby the price charged for one product is subsidized by the sale of another product.
Transfer Pricing: The process of setting an internal price at which an upstream division sells inputs to a downstream division so as to maximize the overall firm profits is referred to as transfer pricing. And this practice is safe and efficient because the two parties/divisions have a good knowledge of each other, and could quickly transact businesses together.
Pricing Strategies in the Oligopolistic Market
In order to fully understand the nature of an oligopolistic market pricing system, it is important to highlight the three main models of oligopoly: According to McConnell et al. (2004), the known three models are:
Kinked-demand curve Model
If the oligopolistic demand curve of each of the companies is drawn, the shape and location of the curve would reveal a kink (McConnell et al., 2004). For example, when one company changes its price, there are two possible assumptions about the reactions of other companies. According to McConnell et al (2004), There are various pricing strategies include:
Changes in Match price: The other companies would automatically change their prices to match with the price of our products.
Ignoring the price changes: Or the two companies can both ignore the price change instigated by our companies while concentrating on increasing the quality of their services/products to keep their customers’ loyalty.
Rigid Pricing System: Under the condition of non-collusive oligopoly, companies often give rigid or inflexible prices to their products/services. What this signifies is that each oligopolistic company feels that a change in price may be well unacceptable by its customers, and it may lead to the boycott of the company’s products; an issue every company takes quite seriously (McConnell et al., 2004).
Collusive Pricing Model
Companies could also form a collusive entity or a cartel by implicitly and explicitly agreeing to manipulate the price of commodities in a single market. Their actions would amount to killing other competitive prices from little-known companies (Tisdell & Hartley, 2008).
Price Leadership Model
It is common among oligopolistic companies to try to take over the entire market by offering prices that would be attractive to prospective buyers (McConnell et al., 2004). They do this by using a number of techniques described as follows:
Price Competition: The oligopolistic companies offer prices that seem to keep the others at a disadvantage: this is possible because different companies enjoy different costs of production. And those with cheap products can offer prices difficult for the others to give to their customers, hence causing a shift in customers’ patronage towards the company with the cheapest but good-quality products (Vives, 2001).
Randomized Pricing: When a company enjoys a competitive price advantage over the others, such a company can carry out a randomized pricing strategy (Vives, 2001). Randomized pricing is quite common for skincare products whose usefulness depends on the weather conditions. In case of low sales, a company sometimes may reduce the price of its product to prevent the other rivals from undercutting their prices. The demerit of this practice is that it discourages customers from shopping around to find other alternatives for the products being sold. This alone constitutes an unfair business practice.
Non-price competition: Another way to spur crazy patronage for a product is by making sure that the product meets all standards in the area of quality, packaging, branding, coupon warranties, customer services, advertising, and so on. While this practice has no direct links with the pricing system, but it, in a way, increases the chance for a company or producer to control a larger share of the entire market.
Pricing strategies determine the discount functions that will be made available, the list price, and even the financing options. This is the most critical part of any marketing plan since it will be responsible for revenue generation for the company. The company’s product is distinct and differentiated from other competitor products also implying that the customers do not have many varieties to choose from. Therefore, the company has reduced competition and a bit of control over customer purchasing power thus the company has the flexibility to set the price and reason to claim charges are based on the uniqueness and superior quality of the product. For this reason, also there will be no need to administer pricing implying that a fixed price of £ 102 plus a 25% markup should be retained. The fixed pricing policy use will be sustained and depend on data made available reflecting customer expectations, their purchasing power, and capability. Customer perceptions and definition of value will thus be imperative factors in determining our standard prices.
According to Beamish and Ashford (2007), brand integrity and value will furthermore be an important aspect that will influence the pricing based on fixed pricing policy. This implies that under no circumstances will the pricing be way too far from what the loyal customers are used to. This is because extraordinary reductions would put a question mark on the quality of the presented product making it almost unacceptable especially also since our company has been identified as a sole producer of this brand plus it would do little to augment profits
Additionally, seasonal discounts will be most preferable primarily to encourage customers to buy more than they previously did thus increasing company proceeds. Cash discounts which will encourage customers to offset their bills quickly, special sales prices which are temporary discounts from the listed prices, and trade discounts for channel members will also be considered as part of the pricing strategies. Trade or functional discounts refer to the list price reduction that is given for motivation purposes to channel members so that they can do a good job.
List pricing will as well depend on the various geographic pricing policies. For instance, zone pricing which will guarantee that buyers within specified geographic areas have an average freight charge will be administered. Freight absorption pricing which implies absorbing the cost of freight so that the firm delivered price meets that of the nearest competitor will also be applied. The pricing strategies will also indicate that the company comprehends the legal elements of pricing policies, regulations, and their implications on the strategies.
For instance, the strategies must not violate fair trade practices, enhance dumping, offer phony list prices since this may attract penalties from authorities and thus ruin the brand’s reputation. The company will thus simply conform and obey all requirements of the law meaning nothing illegal will be perpetrated by the pricing strategies.
In the beginning company should behave as a monopolist and charge prices that are reasonable.
If the company is denied the patents by the licensee then should expect the entry of new competitors and thus should behave then as an Oligopolistic competitor.
The price set price for the Blueberry at the moment will depend solely on the performance in the market.
5.4 The price should be above the cost of production to make a profit.
List of References
Beamish, K. & Ashford, R., 2007, Marketing planning. Elsevier, Netherlands.
Cohen, W 1995, The marketing plan. John Willey & Sons, New York.
Frank, R, & Bernanke, B 200, Principle of Microeconomics. McGraw-Hill/Irwin, New York.
McConnell, C, Brue, S, & Campbell, L 2004, Microeconomics: Principles, Problems, and Policies. McGraw-Hill Professional, New York.
Tisdell, C, &Hartley, K 2008, Microeconomic Policy: A New Perspective, Surrey. Edward Elgar Publishing, London.
Vives, X 2001, Oligopoly pricing: old ideas and new tools, MIT Press: Cambridge, Massachusetts.