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Multipoint Pricing
Multipoint Pricing
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DIY TECHWARE
STRATEGIC PRICING
Strategic pricing typically combines the benefits and innovations set by a product
with the price sensitivities of consumers to develop flexible, executable and
sustainable value-based strategies. By implementing thorough customer
segmentation to identify the needs of individual customers and achieve profit
optimization since perceived value varies across clusters of customers, strategic
pricing exploits variances between micro-segments, to provide customers with
custom-made price/benefit advantages.
Strategic pricing encompasses
PREDATORY PRICING,
MULTIPOINT PRICING AND
EXPERIENCE CURVE PRICING.
WHAT IS PRICING?
Pricing is the method of determining the value a producer will get in the exchange
of goods and services. Simply, pricing method is used to set the price of producer’s
offerings relevant to both the producer and the customer.
EXAMPLE 1:
For example, multipoint pricing is an issue for Kodak and Fuji Photo because
both companies compete against each other in different national markets for
film products around the world.
Multipoint pricing refers to the fact a firm's pricing strategy in one market may
have an impact on its rivals' pricing strategy in another market. Aggressive
pricing in one market may elicit a competitive response from a rival in another
market.
In the case of Kodak and Fuji, Fuji launched an aggressive competitive attack
against Kodak in the American company's home market in January 1997,
cutting prices on multiple-roll packs of 35mm film by as much as 50 percent.18
This price cutting resulted in a 28 percent increase in shipments of Fuji color
film during the first six months of 1997, while Kodak's shipments dropped by
11 percent. This attack created a dilemma for Kodak; the company did not want
to start price discounting in its largest and most profitable market. Kodak's
response was to aggressively cut prices in Fuji's largest market, Japan. This
strategic response recognized the interdependence between Kodak and Fuji and
the fact that they compete against each other in many different nations. Fuji
responded to Kodak's counterattack by pulling back from its aggressive stance
in the United States.
PREDATORY PRICING
Predatory pricing is the practice of using below-cost pricing to undercut
competitors and establish an unfair market advantage.
Predatory pricing is a method in which a seller sets a price so low that other
suppliers cannot compete and are forced to exit the market. A company that does
this will see initial losses, but eventually, it benefits by driving competitors out of
the market and raising its prices again. This predatory pricing practice often results
in the formation of monopolies controlling market power for a lengthy period of
time.
HOW PREDATORY PRICING WORKS
A company that can afford the initial losses caused by predatory pricing has
an unfair market advantage in the long run. Investors see such extremely low
costs as a good way to increase market share and then to raise prices and
create equally extreme profitability further down the line. So long as the
business’ future predicted cash flows are healthy, investors may be willing
to shoulder this burden short-term.
This predatory pricing strategy kicks out new entrants, and makes the barrier
to entry much harder for new businesses. This stops the regular competitive
market from charging reasonable prices for the consumer and retailer.
SHORT-TERM EFFECTS
The company employing predatory pricing will run initially at a loss.
Competitors may also finance a period of loss in order to keep pace with the
predatory company. Companies that are not able to shoulder the loss,
however, will suffer and lose a considerable amount of customers.
Consumers will initially benefit from outrageously lower prices that the
predatory company is selling at. They also might benefit from aggressive
competition in the market, if competitors are able to hold their ground, with
higher-quality products and services as companies are motivated to establish
an advantage over competitors.
LONG-TERM EFFECTS
Competitors not capable of sustaining themselves against the predatory
company will eventually be driven out of the market altogether. Meanwhile,
if the company employing predatory tactics is not regulated in accordance
with the law, they will form a monopoly, having now successfully undercut
the competition.
Under such conditions, prices are likely to rise sharply to compensate for the
initial period of short-term loss. Product quality is likely to drop with no
competition around to incentivize quality. Meanwhile, innovation is usually
stifled due to the monopoly company now controlling the market.
Customers will suffer from abnormally high prices from the monopoly, as
well as a drop in the quality of the product or service
DTC indeed was put out of business, and Busways was then acquired by an
even larger company, Stagecoach. However, Brian Souter, the chairman of
Stagecoach, later admitted that the negative impact of the company’s
predatory strategy had outweighed the financial gains made by
monopolizing the Darlington area.
When the total production capacity (from the first unit to the last) doubles, the
value-added costs decline by a constant percentage. The value-added costs include
the cost of manufacturing, marketing, distribution, and administration.
Example
IKEA, the Swedish furniture manufacturing company, is offering a table, named
''Lack''. Its price developed along with the years, e.g. price in Germany:
2007: €9,99,
2009: €7,99,
2011: €4,99.
The company was able to decrease the selling price of this product on the one hand
because it is one of the most experienced one in the furniture industry and on the
other hand because of economies of scale.
By lowering the prices of the items offered, IKEA managed to drive some of their
competitors off the market in some countries. Young manufacturers may have less
time to experiment with new technologies, so IKEA can rely on their experience
competitive advantage
TIPS FOR STRATEGIC PRICING
Strategic pricing is a marketing decision, which means it should be informed by
dialogue with your customers.
Keeping a close eye on your competitors is important, but remember they are not
the ones purchasing your product, and they may be making mistakes in their own
pricing.
Recognize what your customer’s value and charge them accordingly rather than
going head to head on price with competitors.
CONCLUSION
One reason companies find pricing challenging is because they lack a systematic
process to translate such diverse inputs as customer value, costs, broad strategic
objectives and competitor prices into the right price.
Building a strategic pricing capability requires more than a common understanding
of the elements of an effective strategy. It requires careful development of
organization structure, systems, individual skills, and ultimately culture. These
things represent the foundation upon which the strategic pricing pyramid rests and
must be developed in tandem with the pricing strategy.