Pricing Strategies and Their Effect on Company’s Performance

free essayThe long term end goal of an effective marketing and pricing strategy should aim primarily not at raising prices and cutting costs but at customer satisfaction, competitive advantage and increase in sales and profit.

Low Price vs High Price: Benefits, Drawbacks and Examples

Often, manufacturers and retailers are pressured by fierce competition to take actions that lead to raising prices, slashing of promotions and cutting quality. For example, supermarkets might resort to raising prices because it is a seemingly easy way to higher revenue and avoiding losses. Also, retailers might underestimate or not understand the effect that raising prices have on sales. Consequences can be decrease in number of customers, loss of target groups and consumers. Avon is an example of how change in pricing policy of their beauty products has led to a gradual decline in sales in domestic US market.

Avon is an example of how raising prices for its beauty products in United States was a mistaken move on top management’s part. Initially, Avon’s business model offered strong competitive advantage. Method of direct sales kept the number of employees small and saved costs of rent and advertising. Lower costs enabled Avon to sell cosmetics at lower prices. Avon’s large scale centralized production and direct sales resulted in good value for customers’ money and good profit margin. Then, former CEO Andrea Jung promoted retail based sales instead of focusing on direct sales. In US market, it led to increase in prices and loosing focus on traditional target group. Thus, previous target group was lost since former and potential middle class clients were not ready to pay more for the value and image Avon offered. Also, direct sales are based on the importance of motivating people to sell your product rather than looking for people to buy the product. Thus, change in prices may lead to change in philosophy and approach which makes or breaks company’s performance and success. Manufacturers and retailers opt for raising prices because they think that it will not affect their customers, sales and overall performance. However, research and practice suggest that shoppers pay close attention to price changes and react swiftly. Another example of successful “low-cost” operation is Wal-Mart’s pricing strategy. Wal-Mart’s low-cost business strategy allows taking advantage of economies of scale in its retail practice. Large scale of operation enables purchasing and selling large quantities of products at prices that are lower than those of their competitors. Such policies enhance competitive advantage and aim at high volumes of sales through low-cost strategy. Low-cost strategy is enhanced by Wal-Mart’s salaries and human resources policies that help to maintain internal operational costs lower. Its strategic management process is a motto of “Low prices every day”. Zara International is one more example of how pricing strategy that aims at low prices can be effective. Swedish apparel retailer H&M is the closest Zara’s competitor. Although H&M’s quality of apparel is lower and prices are higher, Zara confidently leads the market with high volume of sales. It is because Zara adds a lot of value to its apparel by positioning her products as latest fashion. Evidently, there are a lot of examples of successful employment of low price approach to marketing. The reasons that manufacturers and retailers make mistakes with pricing strategies and increase prices to the point of driving customers away may lay in low competence and weak knowledge of marketing mechanisms. Additionally, enterprise may pursue consumer unfriendly pricing tactics due to monopoly or weak competition. Also, pricing mistakes may be caused by the economic inability of the enterprise to adopt low price strategy. Examples of Avon and Zara prove that recommendations for maintaining low prices, raising prices in a smart way and adding value to the products are applicable not only to supermarkets and products sold there by to other enterprises that sell cosmetics and apparel.

Consumer Behavior Theories

Some consumer behavior theories and concepts explain why and how consumers react to pricing strategies the way they do. For example, theory of perception explains that customers are willing to pay a higher price for the product if this product has high value in their eyes. If a product appeals to customer’s unique perception, the customer is willing to pay more. Theory of social status explains that the consumer is ready to pay a high price for a certain product if possession of this product helps the shopper to feel like someone with the sense of superiority, or gives the feeling of belonging to elite. Also, theory of Cardinal Utility argues that the buyer will be ready to pay more when purchase of a product brings him/her psychological satisfaction. This theory states that each product has a certain power to satisfy buyers’ needs and wants (value). Consumers are ready to pay a higher price for products that they value. Theory of collective consciousness claims that if a certain group perceives particular item as expensive, the shopper may choose to adapt similar thinking and perception.

Conclusion

The general rule is that raising prices does not benefit the company and drives consumers away. The long term end goal of an effective marketing and pricing strategy aims primarily not at raising prices but rather at customer satisfaction, competitive advantage, raising the value of a product and increase in sales and profit.

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