Pricing Strategy: Key to Business Success & Competition - Essay Sample

Introduction

The pricing strategy that a business chooses determines a lot the way the business progresses. A business that adopts a suitable pricing strategy stands a high chance of succeeding. On the other hand, the wrong choice of pricing strategy might result in little profits or even losses. The pricing strategy can as well be instrumental in competing with other firms that enter the market. The method that the company uses also helps in ensuring that the company meets its cost of operating while producing a given product.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

A change in the method of setting the price or the amount of price set for a given product might have a significant effect on the profitability of a business. Wiki limited, a consultancy, has been charging a high amount of fees to its clients. An interview with some clients has revealed that clients shy off from seeking the services offered by the wiki consultancy because their prices are too high for the customers to afford. They, therefore, revealed to us that they prefer another consultancy which is the biggest in the town. As an economist, I had to help the business on how to maneuver.

There are some pricing strategies that a marketer can try.

Pricing Strategy of the Firm

Wiki consultancy has been using skimming as their method of pricing. This they did by setting a very high price. The price set by wiki consultants was more than double that of their competitors. As I interviewed some of the residents of the town, they responded that the firm is so expensive that they were even afraid of stepping on the door of the business. Potential clients could not seek services in the business as they found it very expensive. They argued that the business meant to serve exclusively very high-class clients.

Strategies of pricing could be either market-oriented or cost-oriented. Cost oriented marketing strategies aim at coming up with a price that will cover all the cost that has been incurred while producing the good or offering the service.

An excellent example of a cost-oriented marketing strategy is cost-plus pricing. In this pricing strategy, the total cost of production is determined, and then a certain percentage is added to the cost to get the price that the seller would sell the goods or services to get a profit. For example, wiki traders, after seeing that the cost of offering the service is $100 they could decide to make a 40% profit and so they will provide the consultancy service at an amount of $140 per unit. This will see them covering all the costs of production. Other cost-oriented pricing methods are the markup pricing, break-even pricing, and target return strategy.

On the other side, market-oriented pricing is those that the seller chooses to set a price that would allow him to sell best in the market and get the highest number of customers to compete with the other sellers of the same commodity. This mostly appears when one is dealing with goods that are substitutes for each other.

Our respondents in the town argued that they do not feel satisfied with the way wiki consultants work. The majority held that the business was overrated by having set such high prices. Only a small percentage of the respondents felt that the company offered low-quality services. Other customers were satisfied with the costs of the wiki firm, and they gave a reason that it provides them the high quality that they could not get in the other firms. Others who were okay with the prices of the firm gave a reason for the prestigious services they used to get them. Those who were not willing to buy from the firm even if the price reduced cited the history of being alienated by the firm as it took the initiative of high rates. While interviewing the chief marketing officer, I learned that the reason for setting the price so high was to ensure that few clients will be able to finance the operation of the business. The strategy of pricing they were using, although it is advisable for a startup business that needs to recoup the high expenses. These prices were incurred during the setting up of the firm, which is more disadvantageous as it makes the products expensive, and this makes the business lose some customers to completion since the customers would prefer any available cheap options and forgo all other costly alternatives. (Kent, 2004) this is something that had impacted the consultancy significantly as it had already lost many customers.

The marketing manager sought my advice on what to do as the number of customers in his business was declining at a terrible rate. I was ready to help him, and I recommended an immediate change in the strategy of pricing for the consultancy. This was based on the fact that their service was one of the most price responsive products. Also, there was a lot of competition in the market for consultancy. This meant that consumers could switch the sellers from the higher-priced one to cheaper options. This is why I advised the manager of the need to consider different factors before deciding on the right strategy of pricing. Factors like market structure that is the number of firms in the market, the actions of competitors who deal with the same product, desired profit margins, and the cost of producing the product was to be put into considerations.

After making all the necessary considerations, we agreed that there was a need to change the strategy of pricing. This was to lower the prices in an attempt to win more customers. Having debated about various methods, both cost-oriented and market-oriented, we settled on the marginal method of pricing. In this method, prices are set according to costs incurred to offer the service. Businesses set a price that is just above the total cost of producing a unit product, and that is what we agreed to do. While we were holding our discussion, we found that this method could help in attracting more customers as it will lower the fee that the consultancy used to charge. This would mean the firm would be able to compete with other consultancy businesses favorably.

In the discussion, we went through all other things that could be done to improve the productivity of the business, and we agreed on the need to do a lot of product promotion to create awareness and also correct the negative image of the firm as it was being perceived by the outsiders. We also came up with a remedy of trying to cut costs of operation and review the offers to lure more clients into our business.

Discussion

In wiki consultancy, the main activity that was yielding high was on consultation by clients. This is the reason why dealing with pricing alone was enough to result in an improvement in the productivity of the whole firm. We had no option other than to attempt an overhaul of the price system as we had identified it as the leading cause of the decline in the performance of the whole firm, and that is why we did it.

We asked ourselves if there were other ways of improving the performance of the business. Maybe undertakings like changing the nature of the services that the firm was offering. This proved to be more challenging than changing the pricing mechanism. We also made consideration of reducing the consultation time, but this was found less useful as, without a change in price, clients would still be hesitant to visit the consultancy. After making considerations, measures were put in place that would ensure that the future of the firm would be bright. This included the establishment of customer care services to increase customer satisfaction.

With the change in the price, it was expected that the number of customers was to increase significantly over the following period. Significantly, the profitability of the business was expected to increase due to the high rate of clients who were expected. The expectations were that people were to change the perception of the consultancy that they already had formed. Our new product pricing strategy was expected to work for the betterment of our organization.

However, while we were to set the price, we discussed the need to be careful as lowering the price could result in some negative impact like a reduction in the amount of loss as the number of customers might not increase as much as the price decreases. Although decreasing the price might have an effect of making the firm lose the standing as an entity of high quality, we agreed that it was inevitable at that moment as it was the only available solution to the woes of the consultancy. However, the reduction was made with consideration, so we set a reasonable price that could bring a balance between both sides.

Conclusion

Although someone might think that a certain pricing method is the best, some businesses prefer combining a number of pricing strategies before coming up with one final decision of the price that they will have to offer their products for. The price that the firm chooses determines the outcome in the market significantly. This depends on the nature of the products and the cost factors of production. Before deciding on the pricing strategy, government policies and laws should not be ignored as they matter a lot. Both very high prices and very low ones are not desirable as both result in losses of profits.

References

Kent B. (2004) The pricing strategy audit, Cambridge strategy publications https//blog.hubsport.com Sales and pricing strategy.

Nagle, Thomas, and Holden, Reed. The strategy and tactics of pricing. Prentice hall, 2002

Research Methodology

According to an analysis of statistics from the business, before making the decisions to change the pricing technique of the firm, the business was making a small number of sales. Customers had been less willing to visit the firm based on the fact that the business was offering them high prices such that they could not afford them. This is the reason why the firm needed to take action. The table below shows the number of sales made by the business before the decision to overhaul the price.

Selling price $1200

Costs $100

Number of items sold 50

profit $55000

After making discussing with the marketing officer and lowering the price, there was a positive change in sales. Customers got more willing to acquire services of the business and this translated to an increase in profits as shown in the table below

Selling price $700

Costs $100

Number of items sold 170

profit $117,300

From the above tables, we can now conclude that a change in the pricing strategy was inevitable. The time when the business was charging high prices, only 50 customers were willing and able to seek the services of the business. When the business lowered the prices from $1200 down to $700, more customers seek the services of the business, and this made the number of items sold to be $170 this translated to an increase in the amount of profit for the business from $55000 to now $117,300. This means that a business that charges extra high prices might not necessarily make additional high profits.

However, the prices can be reduced so much that it could lead to a less significant increase in the amount of profit or almost a loss.

We made consideration of a price of $100, and the result was as summarized in the table below.

Selling price $100

Costs $100

Number of items sold 500

profit $0

At this price, we found that the business could have made no profit at all. The price of the services here was equal to providing the service. Below the price, the business could have made a loss. The concept of marginal price comes here whereby; a business cannot set a price lower than the total cost of offering the commodity as this will result in loss-making.

Feedback from the Customers

To come up with a final decision, I interviewed 100 prospective client...