The best pricing method for Canned Vegetables and Media Distribution
Introduction
Pricing is a way of determining what a firm receives in exchange of its products. The
major factors of pricing are the cost of manufacturing, competition, market place and condition
and the quality of the product. Pricing is also a key component in microeconomic theories of
price allocation.
Pricing is also utilized in financial modeling and its one of the fundamental aspects of
marketing mix four Ps, the others are the product, promotion and the place. Among the four Ps,
price is the only income generating element, the rest of the Ps are generally cost centers. Pricing
is either the manual or the automatic process of subjecting prices to purchases or sales orders
based on such factors as the promotion or the sales campaign, prevailing entry price, shipment or
invoice date and many others. Automated pricing systems need more setup and regular
maintenance but are very reliable and they help prevent pricing errors. The needs and basic
requirement of consumers can be met and be converted into demand if the consumer is willing
and has the capacity and willingness to buy the product.
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Pricing is a critical element in marketing. Pricing is the central lever in determination of
profits. It’s normally approached in three major ways i.e. the industry level, market or transaction
level. At the primary level, pricing focuses on the economics of the firm which includes changes
to supplier prices and customer demands. Pricing at the normal market level concentrates on the
competitive position of the regular price in comparison to the real value of the differential
product of comparative products. At the transaction level, pricing concentrates on the
management and implementation of discounts besides the reference or the quotation which are
included on the invoice or the receipt or at times omitted totally.
The main objective of pricing is to maximize the short run and long run profits, increase the
sales and market share of the company’s products, stabilize the market and its market price,
encourage growth, maintain price leadership and discourage the entry of new firms in the market.
Demand based pricing is a method that utilizes consumer demand which is based on
perceived value as the main element. Examples of demand based pricing systems are price
skimming, penetration pricing, value based pricing, psychological pricing and price
discrimination.
Price skimming is one of the pricing strategies in the marketer sets a very high price for
its products or services initially then gradually reduces it over time. It’s a relative version of
price discrimination which is very common in technological products and services like in the
media distribution business and application of latest media distribution in information
technology. It allows the companies to recoup the sunk costs in the initial stages of the product
development before competition steps in and reduces the market price. For instance, companies
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like Netflix. The initial profits are huge but later competitors flood the market and the profits
drop eroding the profitability entire market.
The major objective of the price skimming strategy is to exploit and capture the entire
consumer surplus. Price skimming strategy therefore is a process in which a company charges
the highest initial price the customers are willing to pay. Once the demand of the first client is
satisfied, the company reduces the price to attract another, more responsive and price sensitive
section.
Price skimming is only effective in markets where the companies are facing an inelastic
demand. If the demand is elastic, then the equilibrium in the market will be achieved by the
changes in quantity not the prices and the suitable strategy in that case will be penetration
strategy. Price discrimination is illegal in most countries. The difference between price skimming
and price discrimination is at times difficult to differentiate.
Skimmed products attract very low inventory turnover and these could affect the distribution
chain of the manufacturer. It also encourages and attracts the entry of new competitors as the
initial profit margins are very high. The sudden reduction in product prices might send wrong
signals about the quality of the firm’s product. These might create a negative image about the
firm and its future products.
Value based pricing is a pricing strategy that sets all its prices primarily and not
exclusively on the perceived or estimated value the customer is willing to pay and not on the
products cost or its related historical prices. Goods that are highly traded like canned foods, for
instance canned vegetables or other commodities that are essential like oil or products that are
very sophisticated and which are sold to customers in large markets.( Nagle and Hogan, 2005).
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Value based pricing approach is applied where other external factors such as recession,
inflation or increased competition compel companies to promote their products by adding value
to their products and services to retain their regular sales. For example, the value meals at such
restaurants as McDonald’s, fast-food restaurants, and other fast-moving products. Value price
means getting value for your money i.e. paying a price that makes one feel that he’s getting
much more than the real value of the product. Its similar or the same as economy pricing.
Value based pricing is very common and highly successful when products are sold and
promoted on the basis of emotions or fashions or during shortages or for the indispensable
products like canned fruits or vegetables or add-ons like printer cartridges or the headset for cell
phones. www.knowthis.com/principles-of-marketing-tutorials/
The prices based on the value based pricing strategy are normally higher than or equal to the
calculated prices obtained from cost-based pricing strategy. If the prices are lower than the real
value that’s perceived by the customers is lower than the costs of its production i.e. the cost of
the product plus its profit margin which means ultimately in future the firms will no longer be
interested in its production given its low selling price.
The Value based pricing is normally predicted or estimated upon an understanding of the client
value. In most settings, gaining this knowledge may need primary research on the evaluation of
the customer operations and related interviews with the client’s personnel. These research or
survey methods are used to value or determine the customer’s perception of the product or
service. The research results depict the customers readiness to pay.
Value based pricing is applicable to canned vegetable’s as they have a higher turnover and are
fast moving. These are like the Delmonte canned vegetables or fruits. Price skimming refers to
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products that attract higher prices because of their competitive advantage. However this
advantage is normally short lived as the new prices also attract other competitors into the market
eventually the price falls due to the increased supply. Netflix Inc original charged higher values
for its products during its initial years but later reduced its prices to compete with the other
competitors.
References
Nagle, T., Hogan, J (2005). The Strategy and Tactics of Pricing, 4th Edition. Prentice Hall.
