Impact of Price Strategy on Business of an Organization

Introduction

Price strategy is one of the significant objectives of an organization for the long and successful run of business. The significance of the pricing can be estimated by the facts that it can shorten or lengthen the customer relationship with the organization. Customer relations with the organizations are estimated in terms of the customer lifetime. Setting a lower cost/price may result in the satisfaction of the customer and remarkable purchase ultimately resulting in long-term business.

The pricing is such a sensitive issue, that even an organization is providing a branded quality product which meets all the quality standards and consumer satisfaction, but its price does not meet the consumer mind, it may lead to lower the business of the organization. These issues minimize with time as the customer get a better relationship with the organization. In this regards, Churn is one of the options which may predict and give a good idea of customer relationship and pricing. Price strategies need to manage according to the lifetime of the customer.

If this customer is in good relation with the company and has a good life then he/she should be dealing with care and price strategies should be managed on a priority basis. In the pricing mechanism, MSPs have different profit sources and revenues while dealing with different customers. In practical, these MSPs work in such a way that at least one of the sectors get benefits of free services or at subsidized rates, while other the platform, they are making good business (Hagiu, 2014). In this assignment, literature review of the impact of price strategies, their role in resource management and their impact on the business of an organization is highlighted.

Literature Review

Literature shows that there are several factors which are related to the price strategies and basically price strategies are implemented due to the concerns of these factors. One of the factors is the nature of the business and the management of its resources to achieve smart objectives. Impact of the price strategy on the business is briefly discussed in terms of revenue management, commoditization management, the role of low pricing in commoditization management, promotional prices, odd prices and impact of prices on international markets.

Impact of Price Strategy on Business Management

Price Strategy in Revenue Management

The dynamic pricing is important to set time to time prices and it helps to manage the revenue of an organization. It is one of the successful techniques of real-world application. This dynamic pricing technique according to some researchers is said to be beneficial while in some cases some conflicts are seen. According to some of the researchers, dynamic pricing can produce fairness concerns among the customers.

Since the dynamic pricing has become a common practice in business but it also creates questions among the consumers. For example, this technique is based on time to time price strategies. The selling of any particular product is divided into some segments and different prices are introduced for any particular selling period. Therefore, the consumers use a terminology named as reference effect, which gives them the idea that which particular selling period could give them benefits. This reference effect links the previous, present and future selling and terms the prices as high, low or moderate for customers/consumers.

Studies conducted for the revenue management by using the dynamic pricing, dynamic pricing including reference effects and fixed pricing revealed that the dynamic pricing and dynamic pricing including reference effects generated more revenue than the fixed pricing technique. The reference effect significantly increased the initial prices and the seller could have the intention to sell the product at higher cost. Further, this effect supports or recommends adopting the markdown strategy and this strategy becomes more dominant in case reference effect is strong (Yang, Zhang and Zhang, 2017).

Price Strategy in Commoditization Management

As discussed before, the price strategies are indirectly associated with certain resources which are beneficial for the growth of the organization. Technology is one of these resources and its up-gradation and advancement may influence the cooperate sector and optimize the prices. This could make a company rethink the prices. Such kind of strategies builds two things, one being the consumer satisfaction level and loyalty and second being the building of fragile market structures. Several questions arise in the organizations when they are producing with excess capacities whether they would be able to sell significantly or not.

Some organizations continuously face commoditization problems and they found that it could badly affect their business (Cavalcanti, Mohaddes and Raissi, 2014). According to the strategy consultants (Roland Berger, 2014) 60 % of managerial staff believes that they are victims of commodity and the offered services or up standard products are downgraded based on prices. In this regards, pricing strategies are essential to maximize the selling profits by attracting the customers and to compete the competitors in the market (Kim, Natter, & Spann, 2009; Simon, 2013).

Similarly, in another study (Cavalcanti, Mohaddes and Raissi, 2014), the commodity volatility was studied in terms of growth. They expressed that the volatility of a commodity is necessary to consider while developing the strategies for resources, revenues, and other important tasks. In their study, they prepared a country based commodity price index depending on commodity import and exports of countries.

Role of Low Pricing in Commoditization Management

The companies which are offering a low price in the market are growing faster. The low price policy is a good option for those organizations which are not fearful of revenue cannibalization (Krämer and Burgartz, 2016). The customer’s behavior and preferences are based on their perceptions and their attitude changes with price strategies. Several pricing models have been developed by the researchers based on the customer’s perceptions. Following these models, the organization may successfully run their business. The Krämer (2015) proposed an innovative definition of the optimal pricing which stated that pricing strategy should include the customer’s satisfaction to pay and effects of customer’s loyalty to the business.

There are hundreds of activities which can prominent an organization in a competitive environment such as production, selling, delivery, and other services. Some of the researchers explain the pricing policy in such a way that a company can only compete with rivals when it can deliver the greatest values to the customer at a low price. Cost generation is an activity which gives an advantage by performing the above-mentioned activities with passion and innovation as compared with the other business rivals.

There several examples where it has been seen that low pricing give more business. In case of traveling and tourism, people are always attracted towards the low priced packages which save their time and money. There exist a number of groups of customers which are more sensitive towards price and demand the standard quality products with various benefits and low price. It is necessary for the organization in that case to make strategies and how to deal with them.

Impact of Promotional Prices

One of the subcategories of price strategy for the success of the business is the promotional prices. It has been seen that promotional activities always accelerate sale activities (Neslin et al. 1985; Aggarwal and Vaidyanathan 2003). Customers highly desire for the promoted products, therefore it is necessary to have an idea of complexities associated with this strategy. One of the major issues with this strategy is sale fluctuations as it is difficult to estimate how many customers or group of customers will attract to this opportunity.

Therefore, accurate forecasting of customer demands is required. In most of the cases, the products become stock out. This creates a sense of thinking that the forecasting of the promotional product sale was not effective and organization could have more sales of such products. Recently researchers have highlighted the influence of promotional price on the business of an organization as an important strategic factor. According to the EDT theory, the consumer level of satisfaction or dissatisfaction is the result of comparison of product price and performances and their expectations. Usually, this satisfaction exceeded if the price is low and performance of the product is high. While it results in dissatisfaction if the price is comparatively high and do not fulfill their perceptions (Oliver, 1977).

In another study, the effect of promotional prices was studied for the low-fat vending snacks. The results indicated that sale of this product was increased by 80 % in three weeks when its price was reduced to 50 percent. The similar beneficial results were found in selling the vegetables and fruits when their prices were reduced. Survey of a school indicated that the sale was increased from 2 to 4 folds of actual sale when the prices were reduced to 50 percent (French et al, 2001).

Impact of odd Prices on Business

One of the strategies of organizations is choosing the odd pricing technique for consumer products. The origin of this technique is more than 100 years old and till date several organizations even multinational organizations have implemented this strategy for selling their products. The actual meaning of the odd pricing is to set the ending unit of the price just below the round number. For example, the price $ 39.98 and $ 39.99 are considered as odd prices. Studies show the significance of this technique in such a way that it may attract the consumer in several ways which may benefit the seller.

These may result in short or long-range benefits. It is necessary to understand the terminology and importance of odd price in business and when it will be suitable to apply for effective business. Literature shows that till now a managerial staff of several organizations is lacking the research knowledge and has an idea of odd pricing only from their seniors. Little in 1975 recounted about a business situation where a greater sale was seen as compared with the previous business record. On investigation and survey, it was concluded that this significant reduction in the sale was actually due to the absence of odd-ending price strategy. Some researchers mentioned that 80 percent of the store sales are following the price ending with 9.

In a case study, the sale of Margarine indicated that the reduction end price from 89 to 69 increased the price elasticity up to 9.9 as compared with a reduction of the price from 89 to 71. While in other studies it was found that odd or even price ending is not responsible for the better sale. Sometimes odd ending prices gave significant sale and sometimes even ending prices (Schindler, 1989).

Impact of Price Strategies on International business

The business on an international level is a challenging task and based on various suitable strategies. One of these strategies is the price which has a significant influence on international business. The organization has to compete with local organizations in terms of standards, quality, and price. Internationally, the foreign pricing strategy is to be applied by the organization to run the business where the final product reaches the consumer with that country (Mayers, Cavusgil and Diamantopoulos, 2000). In this case, effective pricing such as promotional prices or low prices and odd ending pricing may help in establishing the business in that country.

Conclusions

Form the study, it was concluded that for an effective business, pricing strategies play a vital role. These strategies are associated with resource management and directly influence the growth of the business. Price strategy is essential for the revenue management of the organization. To overcome the commoditization situations sometimes organizations need to develop strategies for competitive prices (low prices or promotional prices). In addition, Odd pricing may also be a good approach to business growth. For organizations willing to participate in international markets, it is essential to develop a strong and suitable pricing strategy. In this way they can survive in a competitive environment.

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