WEEK 5 Discussion: Pricing Strategies and Methods

QUESTION

WEEK 5 Discussion: Pricing Strategies and Methods

Discuss the different types of pricing strategies and methodologies confronted by Purchasing and Supply Management professionals in the acquisition of goods and services – in particular cost- and market-based pricing, value-based pricing, penetration and predatory pricing, life cycle pricing, and segmented pricing. Differentiate between customer-driven and competition-driven pricing and their affect on the buying organization’s willingness and ability to purchase a particular good or service. What is the role of Purchasing and Supply Management professionals as “gatekeepers” who control the flow of information and external contacts with suppliers? Are these professionals considered decision makers with respect to product and supplier selection as well as price acceptance?

ANSWER

Pricing Strategies and Methods

Introduction

In any form of business, the setting up of price is a very important task for management. Firms must carefully perform product pricing to ensure that the product is affordable enough, for maximum sales, and achieve a profit (Monroe, 1979).

Pricing Strategies

The management decision on price is controlled and regulated by factors which include demand, cost of production, and the competitor product’s price. Different pricing strategies include:

• Cost-based and market-based pricing: as the name suggests, a cost-based form of pricing is based primarily on the production cost of a commodity. Costs involved with the production of a good, the fixed and variable cost, is calculated first, then a profit margin agreed upon is added. This makes the final price of the product. Market-based pricing is pricing controlled by the prevailing or current market prices of similar commodities.
• Value-based pricing: in this pricing strategy, the pricing of a commodity is normally looked at as the perceived value it possesses. The producer studies the customer’s need, tastes, and preferences before placing a price on the good (Hinterhuber, 2008).
• Penetration or predatory pricing: this refers to the strategy applied by a producer who is most likely new in a market. It involves setting the price of a commodity lower than the prices set by competitors, so as to attract more buyers in the new market. This lower price intrigues consumers to try out the new product.
• Life cycle or premium pricing: this strategy is applied where the product has some uniqueness from competitors’ products. Price is set higher than those of competitors. Companies do this to maximize profits on the early stages of a new commodity’s life cycle (Tellis, 1986).
• Segmented pricing: this strategy places different prices on the same product, in different geographical regions or markets. This depends on the different forces in each of the markets.

Customer-driven and competition-driven pricing: customer-driven pricing is based on what the customer is able to justify paying for. The price reflects the value perceived by the consumer. This form of pricing seeks to assure buyers that they are paying a certain price for the value obtained by consuming the product. Competition-driven pricing is done with regard to the prices of the competitors’ products (Eliashberg, Jeuland, 1986). It is done to achieve a market share that is profitable, not focusing on maximizing profits. The set price may be slightly lower than that of competitors but still, make a profit.

Role of Purchasing and Supply Management Professionals

The purchases and supply team of any organization is responsible for information passage from suppliers to the organization, and vice versa. They determine which type of information is appropriate for outside parties, and protect the company’s private information regarding sales, production costs, and pricing strategy. They are tasked with decisions on the best suppliers and liaise with management on the pricing of different commodities, after considering costs (Monczka, Handfield, Giunipero, Patterson, 2015).

References

Monroe, K. B. (1979). Pricing: Making profitable decisions (pp. 37-46). New York: McGraw-Hill.

Tellis, G. J. (1986). Beyond the many faces of price: an integration of pricing strategies. The Journal of Marketing, 146-160.

Eliashberg, J., & Jeuland, A. P. (1986). The impact of competitive entry in a developing market upon dynamic pricing strategies. Marketing Science, 5(1), 20-36.

Hinterhuber, A. (2008). Customer value-based pricing strategies: why companies resist. Journal of business strategy, 29(4), 41-50.

Monczka, R. M., Handfield, R. B., Giunipero, L. C., & Patterson, J. L. (2015). Purchasing and supply chain management. Cengage Learning.