Companiesuse different pricing strategies when selling their products. Thetype of pricing strategy selected depends on objectives that thecompany wishes to accomplish. Some companies use the pricing strategywith the objective of expanding their market share, enhancingcompetitiveness, and increasing profitability (Moghddam &Foroughi, 2012). A company may also apply different pricingstrategies on different products, especially when the market ishighly competitive. In addition, companies keep on reviewing theirpricing strategies depending on the reaction of other players in theindustry. This paper will analyze the rising strategy for ahypothetical retail firm.
TheABC Retail Company has found itself in a situation that threatens itssurvival as a result of cutthroat competition. The management of ABCattributes the stiff competition to the entry of many retail storesin the city, where nearly all of them sell similar products from thesame manufacturers and distributors. In internal committee led by thehead of marketing department comes up with three suggestions toaddress the issue of a rapid increase in the level of competition.These strategies include differentiation, low-cost provider, andproduct pricing strategy. The committee rules out the first twostrategies for different reasons. Product differentiation seemsdifficult to implement because all retailers sell products from thesame manufacturers and suppliers. The low cost provider, thoughpractical, may take a lot of time to plan and implement. Therefore,the company is left with an option of using competitive pricing toretain its loyal customers and attract new customers. However, ABCwill require the services of a price consultant to design aneffective pricing policy.
Therole of a pricing policy is to guide the company on how to price itsservices and products in a way that helps the firm retain itscompetitiveness (Caruba, 2010). The ABC pricing policy has threecomponents as considered below
ABC’spricing policy will be based on three key objectives. First, thepricing policy seeks to increase ABC’s market share. The pricingpolicy should seek to help the company attract more customers fromdifferent segments. Secondly, the policy seeks to enhance ABC’sprofitability. This pricing objective is consistent with theorganization’s overall objective, which is to make profit out ofits sales. Third, the pricing policy seeks to enhance ABC’scompetitive position. To be a competitive retailer, ABC has to offercompetitive prices compared to other players in the retail industry.
Developmentof the pricing structure:
ABCwill apply a systematic approach to set prices for differentcommodities on its shelves. To achieve this, ABC will compute theretail mark-up for each commodity to ensure that the price will atleast be above the cost of purchase. The company will assess the costof acquiring its stock and the expenses involved in offering thoseproducts to customers in order to determine the desired profit. Someof the cost items to be considered include the labor and overheadcosts.
Selectionof the suitable pricing strategy:
ABCwill use the findings of research on industrial patterns as the keyguide in selecting the suitable pricing strategy for differentcommodities. The selected strategy should be able to help the ABCbreak even and reach the profitability objectives.
Theprocess of setting prices
Theprocess of setting prices for different commodities sold in ABCstores will follow six major steps as considered below
Step1: Determination of price objectives
Theprice objectives should be designed in a way that will increase thecompany’s capacity to face the fierce competition. Therefore, theprimary price objective should be to increase the capacity of thecompany to survive amidst the stiff competition (Ki, Natter &Spann, 2009). However, survival is a short-term objective that shouldbe followed by long-term objectives, such as an increase in thecompany’s profitability.
Step2: Estimation of demand for each product
Someof the factors that influence the demand for demand for differentproducts include environmental factors, price, consumer’sexpectations, and income (Ki, Natter & Spann, 2009). ABC willstudy three key factors when estimating the demand for its products.First, the company will determine the price sensitivity of itsproducts so that products that are less sensitive can be assignedhigher prices than those that are more sensitive. Secondly, ABCshould study the demand curve for each product. The demand curve is astatistical tool that indicates the relationship existing betweenprice and demand, which helps in determining the most optimum price.Third, ABC should then study the price elasticity of demand for itsproducts. This will help the company in determining products withinelastic and those with elastic demand.
Step3: Analysis of competitors’ price:
ABCshould focus on benchmarking its prices with those offered by otherretailers in order to ensure that its prices are competitive. This isbecause the pricing strategy used by the competitor can affect themarket share of the company (Caruba, 2010). ABC can decide to keepthe status quo, setting its prices equal to, or less thancompetitors’ prices depending on the perceived outcome of each ofthese decisions. ABC has to rely on the public statements and thepublicly available data to determine the possible strategies that thecompetitor will make since accessing data from a competitor isdifficult.
Step4: Selection of the pricing method:
Thisinvolves the determination of the strategy that will be used toassign a price for each product. ABC may decide to use differentstrategies to assign a price for different products depending on theperceived impact of each strategy in relation to individual line ofproducts.
Step5: Selection of the pricing policy
Thisinvolves the alignment of the entire process of product pricing withthe pricing objectives (Caruba, 2010). For example, each of thepricing strategy should be geared towards enhancing the profitabilityof ABC.
Step6:Setting the final price
Theentire process culminates in the determination the actual price thatis placed on the tag of each product on the shelves. The price setfor each product will determine whether the company will beprofitable and competitive (Hinterhuber& Liozu, 2013).
Thethree top sellers for ABC Company include outwear, bread, and travelsprays. The stage at which each of the products has reached in itslife cycle is among the key factors that influence the pricingprocess. The fact that the three products are considered as the bestselling items means that they are at the maturity stage of the lifecycle. On maturity stage, products face the risks associated withstiff competition from new entrants (Valentina, Paolo & Franco,2010). The degree of scarcity is one of the factors that need to beconsidered. The three products (including milk, bread, and outerwear)are readily available in many retail shops, which mean that higherthan normal prices can force consumers shift ABC competitors. Inaddition, the company should consider the level of consumers’utility of the product. The utility of the three products is quitehigh, which implies that ABC may charge slightly above the marketaverage or the market average price since consumers will still buy aslong as the utility remains high.
Giventhe high level of competition and the fact that the three productsare in their mature stage of the lifecycle, the pricing strategyshould seek to prevent a decline in sales due to pressure from stiffcompetition. For example, ABC may decide to use the cost pricestrategy, which means that a certain margin should be added to thecost of acquiring stock (Valentina, Paolo & Franco, 2010). Themargin can them be varied depending on the market conditions andtrends.
Challengesof implementing the new pricing strategy
ABCmight face two major challenges during the implementation of the newpricing strategy. The first and the major challenge is thereiteration by the key competitors. Other retailers fighting for thesame market share are likely take counter-strategies that willprevent ABC from achieving the objectives of changing prices for itskey products. For example, other retailers might lower their marginsmore than ABC or use other marketing tactics (such as promotionalpricing), which involves a temporary reduction of prices with theobjective of attracting customers (Ridyard, 2014). Secondly, ABCmight be faced with the challenge of informing potential buyers aboutthe change of prices. The company can only benefit from a reductionin the marking if more consumers get the information and act on thatinformation by buying more, which is the only way to recover the lostmargin. Unfortunately, many customers may not even be aware of anychanges in prices.
Differentiatingbetween incremental costs and avoidable costs
Incrementalcosts refer to additional costs that result from changes in thenature or the level of activities (Ridyard, 2014). In the case of ABCLimited, the incremental costs may include the cost incurred bychanging the type and quality of stock of different commodities.Avoidable costs, on the other hand, refer to costs that the companycan avoid by not engaging in certain activities. For example, ABC mayavoid certain costs by eliminating unprofitable product lines. Thecompany can determine the contribution margin by subtracting thevariable costs from revenue obtained from different commodities. Thecompany should continue selling all product lines that have apositive Conclusion
Pricingstrategies are critical in the retail sector because they determinethe capacity of the company to make a profit. The decision on themost appropriate pricing strategy should be guided by an establishedpricing policy. The suitability of a pricing strategy should bejudged on the basis of its capacity to enhance the profitability,competitiveness, and the market share of the company. However, thecompany should consider multiple factors when selecting the suitablepricing strategy. These factors may include the scarcity of thecommodity, the price offered by competitors, and consumers’utility. The company should also be prepared to face challenges (suchas the reaction of competitors) when implementing a new pricingstrategy. Contribution margin and eliminate those with a negativemargin.
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