Competition Based Pricing

5 Key excerpts on "Competition Based Pricing"

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  eBook - ePub

  Essentials of Marketing Management

  • Geoffrey Lancaster, Lester Massingham(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  If a company has a downward sloping experience curve – that is, costs fall as a function of production experience – then the company might then adopt an aggressive pricing strategy based on increasing volume through low prices. This strategy carries risks such as aggressive competitor reaction and the creation of a down-market image.

  Although costs are just one of the inputs to pricing decisions, in many organizations they are given more emphasis than any other factors in setting prices. Cost-based pricing is criticized, but it is still a widely used approach. Before looking at cost-based and other approaches to pricing along with their respective merits, we need to look at the final key input to pricing decisions: competitors.

  Competitor considerations

  It is increasingly recognized that, in today’s competitive environment, effective strategic marketing plans are as much about being competitor-oriented as customer-oriented, as evidenced in the following quote from Porter:5

  Competition is at the core of the success or failure of firms. Competition determines the appropriateness of a firm’s activities that can contribute to its performance, such as innovations, a cohesive culture, or good implementation. Competitive advantage is the benefit derived through competitive strategy aimed at establishing a profitable and sustainable position against the forces that determine industry competition.

  Business can be compared to running a competitive race, with all the awards going to the winner. It behoves the marketing manager to make a careful analysis of the company’s competitors before devoting resources to marketing strategies. This involves an examination of competitors so that the planner can develop and sustain superior competitive performance. This deceptively simple statement belies the fact that to do this we must establish where competition stems from now and in the future. We also have to consider and appraise competitors’ present and likely future objectives and strategies, as well as their probable reactions to the competitive moves we might make.

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  eBook - ePub

  Innovation in Pricing

  Contemporary Theories and Best Practices

  • Andreas Hinterhuber, Stephan M. Liozu(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Most pricing practitioners agree that pricing orientation and the lack of scientific and systematic return on investment (ROI) calculations for pricing strategies constrain visibility of pricing in the C-suite and restrain firm adoption of modern pricing approaches. In addition, marketing and pricing literature is silent about both the consequences of pricing orientations on overall company performance (Ingenbleek, 2007; Hinterhuber, 2008b) and, more specifically, on how value-based pricing might lead to superior firm performance. Perceived value-based pricing is a pricing practice whereby managers make decisions based on customer perceptions of product benefits and how these benefits are weighted by the customers relative to the price they pay (Ingenbleek et al., 2010). Ingenbleek et al. (2003) demonstrated that value-based pricing is a key pricing practice for obtaining larger returns and for creating a comparative advantage for the company’s products. This was demonstrated in a study conducted by Füreder et al. (2014) on medium-sized companies in Austria that showed higher contribution margins when accompanied by the perceived value-based pricing strategy.

  Competition-based pricing uses competitors’ price levels and behavior expectations as key sources of information to determine pricing (Liozu & Hinterhuber, 2012). The main advantage of this approach is considering the actual pricing situation of the competitors. Its main disadvantage is that demand related aspects are not considered. Furthermore, a strong competitive focus among competitors can increase the risk of starting a price war in the market (Heil & Helsen, 2001).

  Cost-based pricing is the simplest and most popular method for setting prices because it carries a sense of financial judgment, which involves adding a profit margin on costs, such as adding a standard percentage contribution margin to the products and services. First, sales revenue is determined; then the unit and total costs are calculated; followed by a check of the company’s profit objectives; and, finally, establishing the prices. Thus, from a pricing professional perspective, it is necessary for customers to perceive enough value in products and commercialized services to justify the prices charged by the company.

  Pricing strategies may be seen as a process that requires a good understanding of the internal structure of the company, a good knowledge of the market and a good knowledge of the diverse variables that comprise it and their interfaces. The price is considered one of the most impacting elements in companies’ performance. Ingenbleek et al. (2003) tested the relationship between pricing approach and new product success and found value-informed pricing had the overall strongest positive effect on product performance. A subsequent study (Ingenbleek et al., 2010) showed value-informed pricing positively influenced new product market (but not new product financial) performance, noting the latter link may require a more complex model including data on sales, costs and other information (Ingenbleek et al., 2010).

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  Marketing and the Customer Value Chain

  Integrating Marketing and Supply Chain Management

  • Thomas Fotiadis, Dimitris Folinas, Konstantinos Vasileiou, Aggeliki Konstantoglou(Authors)
  • 2022(Publication Date)
  • Routledge

    (Publisher)

  Jobber, 2014 ; Siomkos, 2004; Siomkos et al., 2018). The price is often determined at the same level which the price leader or the main competitors have set, but it could be slightly differentiated either upwards or downwards. The main advantage of this method is avoidance of potential “price wars” which usually turn out to be damaging for all those involved. On the other hand, it does not take into account the many possible differences between competitors’ businesses with reference to cost structure. Thus, in the present time, the management of business relations with the main stakeholders in the supply chain, both upwards and downwards, is probably a necessary condition for the successful implantation of this method for a newly established business in the market.

  Pricing based on the prevailing price on the market

  This may be applied in markets with similar products where a relatively unified price has been set by all the competitors. This set market price is adopted by the business for its own product (Fahy & Jobber, 2014; Siomkos, 2004). In some cases, some of the competitors may somewhat differentiate their price in relation to the market base price, if they wish to target a niche market with special characteristics. This method presents similar advantages and disadvantages with pricing based on the leader company's or main competitors’ prices.

  Pricing of competitive offers

  This method is used mainly for buying supplies in state organizations, and in some industrial markets (Fahy & Jobber, 2014; Paniyirakis, 1999; Siomkos et al., 2018; Perreault et al., 2012). The buyer asks the potential supplier businesses to submit closed (locked) competitive offers with reference to the acquisition of goods based on predetermined specifications. The selection criterion of the supplier company is the best/lowest price among those that fulfill the conditions of the tender. Thus, the businesses taking part in the tender must determine a reasonable trade-off between expected profit from the drawing up of the agreement and the possibility of securing the agreement. The pricing process of a competitive offer also constitutes a great challenge in cases of complex tasks, such as that of construction of buildings. In each case, the submission of a competitive offer demands precious business resources, mainly the very careful work of specialized staff of the business.

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  eBook - ePub

  Business-to-Business Marketing

  • Ross Brennan, Louise Canning, Raymond McDowell(Authors)
  • 2020(Publication Date)
  • SAGE Publications Ltd

    (Publisher)

  Pricing to maximize sales or market share will generally imply lower prices than profit-driven pricing, and may indicate a longer-term orientation (with the strategic aim of building a dominating position in the market) or a belief that higher market share will inevitably bring about higher profits. It is well known that there is a correlation between profitability and market share (Buzzell and Gale, 1987), but there is no obvious reason to suppose that this shows that higher market share causes higher profitability – it is equally likely that firms that pursue effective competitive strategies will achieve both higher profitability and higher market share (Nagle and Holden, 2002). Image-based pricing associates the price with the desired value position of the product in the mind of the business buyer; a premium price will be associated with above-average customer value, which may be delivered through product characteristics such as enhanced quality or additional customer service. Competitor pricing may be aimed at achieving price parity, at aggressively undercutting competitor prices, or at deterring new market entrants by keeping price sufficiently low that the prospects of profitable market entry are minimized. Whatever pricing objective is adopted, fairness will often be an additional consideration. For example, a shortage of a particular type of computer memory chip might encourage suppliers to raise their prices sharply (a practice known as ‘price gouging’) in the knowledge that personal-computer original equipment manufacturers (OEMs) have no ready substitute and must pay the higher prices if they are to maintain production

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  Fundamentals of Marketing

  • Marilyn A Stone(Author)
  • 2007(Publication Date)
  • Routledge

    (Publisher)

  In 1964 Ford introduced the Mustang sports car at a base price of $2,368. More Mustangs were sold in the first year of sales than any other car Ford ever built. Ford’s new product strategy for the Mustang reversed the traditional, product-driven focus related to cost-based pricing. The product-based price assumes that the attributes of the product are given and cannot be readily changed. The price is determined by estimating the product’s costs and calculating the price that would cover cost plus a given yield (or profit). Only then does the marketer consider whether customers can and will pay the price. In the case of the Mustang, Ford began to consider the favoured price by asking customers what they wanted and what they were willing to pay for it. Their response determined the car’s selling price. Only then did Ford attempt to develop a product that could satisfy potential customers at a price they could afford, that still permitted a substantial profit. This reflects a customer-orientated marketing approach to pricing.

  one. Unlike cost reductions from capacity utilization, cost reductions resulting from experience are a result of concerted effort by management. For example, the relative prices of fax machines and mobile phones are falling, partly because of the experience curve effect.

  Demand-based pricing

  Demand-based pricing looks outwards from the production line and focuses on customers and their responsiveness to different price levels. Even this approach may be insufficient on its own, but when it is linked with competition-based pricing (see below), it provides a powerful market-oriented perspective that cost-based methods ignore.

  Demand-based pricing allows the price to go up when demand is strong and, vice versa, for the price to go down when demand is weak. Examples of demand-based pricing can be found within the package holiday industry where prices are highest during the school summer holidays and in the travel industry where prices vary according to the level of demand, e.g. highest during the morning rush hour and cheapest during off-peak times.

  This method requires decision makers to make volume forecasts for different price levels and calculations of production and marketing costs at different levels to cover overheads. In setting a price information has to be obtained about demand factors, e.g. the price elasticity of demand. This is calculated by estimating the percentage change in quantity demanded over the percentage change in price. By gaining knowledge of demand factors the marketer helps avoid the potentially disastrous mistake of focusing too much on costs. Typically, this involves estimating likely demand at different prices; estimating what happens to cost as demand rises; estimating the likely effects of raising or lowering price. How is this done?

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