Is It Time to Rethink You Pricing Strategy?
Abstract
The article under revision is taken from an academic journal MIT Sloan Management Review dated as of 2012 written by well known economists and businessmen Andreas Hinterhuber and Stephan Liozu who are also the authors of “Innovation in pricing” book. It is headed as “Is It Time to Rethink You Pricing Strategy?” and dwells on the issues of pricing and its role in the company's profitability. Economists know that pricing plays a substantial role and a strong impact on company's profitability indicators. Many companies nowadays use old pricing methods based on cost and competition. Businessmen mainly pay due attention to innovative incentives but however the importance of innovation in pricing skip their attention altogether. However global analytic of company Millward Brown, Nigel Hollis (2014) has some critics of the questions on product price in his article “Why brand differentiation still matters?”.
This work would not have been possible without help and guidance of several teachers. I am deeply grateful for all those who made it possible for me to finish up this work. For technical contribution I am thankful to my course tutor Title Name. My acknowledgment includes my teacher of Economics Title Name.
Thank you to Name Title, the teacher of Financial economics who had kind concern for my paper.
Is It Time to Rethink You Pricing Strategy?
Article examines how adequate pricing policy can influence company's profits. Significance and relevance of this article is undeniable since pricing strategy is of high importance for all companies on the market. There are not only financial aspects of pricing politics but also psychological which is shown in the way the companies influence customers expectations of value and price. Renowned investor Warren Buffett (2011) has said, «the single most important decision in evaluating a business is pricing power». According to information of Professional Pricing society (2011) only 5% of companies do research on pricing problematic. Well known McKinsey & Company (2004) estimated that only 15% of companies devote time to pricing research. according to the Association to Advance Collegiate Schools of Business (2007) among business schools only 9% teach subjects about pricing. The authors are worried about negligence of this subject because small deviations in price increase or decrease profitability of business from 20% up to 50%. By interviewing a large number of CEO's in different companies the authors draw the conclusion that price variation is not a providence or destiny but a skilled and balanced behavior. The most profitable and effective companies were those who's chief executive managers did a thorough research on «prices orientation» and «price realization». In order to build an effective assessment model the authors of the article created a tool called «pricing capability grid» as a result they figured out five categories corresponding to price abilities. According to the authors of the article there are various price zones and categories as well as price settings in different companies across US however all pricing based approaches fall into three different buckets: “cost-based pricing, competition-based pricing or customer value-based pricing». All these pricing categories are distinguished by the way the price is influenced by different factors. Moreover authors examine five types of companies with different approaches to pricing strategy. According to this gradation companies fall into five pricing zones. It depends on how much time and effort a company devotes to price basing policy. During their research authors assess price getting capabilities with a number of questions used as a diagnostic tool. It was found out companies having strong pricing capabilities are driven by leader executive or CEO who establish tough pricing discipline. Companies neglecting pricing policy, just move within a pricing trend or control only pricing deviations are loosing quite a substantial amount of profit and lag behind other more effective companies which are serious about pricing in all key profitability and financial indicators. In order for the companies to increase their profits they need to adopt an approach of strong pricing capabilities and take pains to implement value-based strategies in price paying attention to product differentiation. It will demand a change not only in personnel and decision making, it will force the company to change the whole company's culture and mentality.
However the article “Why brand differentiation still matters” of Nigel Hollis (2014) there is an argument to some points outlined in the above article. Hinterhuber and Liozu (2012) state that it is possible to differentiate price of any product or service if the customers and consumers needs are thoroughly analyzed. Hollis underlines that the word “needs” in this situation can be too commonly understood as a simple product differentiation. Meanwhile differentiation can be achieved by other means like positioning, design and communication. One product brand should be distinguished from that of the competitor and same should happen with price. However this differentiation can lie in the sphere of feelings rather than facts. For consumer goods where no good deal of thought is demanded, suitable communication of a salesman in the store can provide the necessary differentiation of one brand from that of competitors with no respect to price. Furthermore, price will not decide in cases when product differentiation has to take place for a price premium brands, between two close alternatives and personal choice and satisfaction.
References
Hintehuber A. Liozu S. (2012) «Is it time to rethink your pricing strategy?», in MIT Sloan Management Review Journal, Vol. 53, no. 4.
Hollis N. (2014) «Why brand differentiation still matters?», MillwardBrown Review. Retrieved from Social Science Citation Index
Hinterhuber A. (2004) «Towards value based pricing: an integrative framework for decision making», Industrial Marketing Management 33, no. 8(2004): 765-778
Hinterhuber A. Bertini M. (2011) «Profiting when customers choose value over price», Business Strategy Review 22, no. 1: 46-49
