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Pricing Strategies

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Abstract

In relation to pricing strategies, managers usually take into consideration a variety of factors, including those that are internal to the enterprises and those that are external to its operations. Nevertheless, little attention has been directed towards the decision that managers make in the process of considering these factors combined and how these decisions influence the final choice of pricing stratagem. These are the basic points of this study particularly as they relate to international pricing decision. Concerning both internal and external factors that mangers employ in coming up with their final strategy results indicate that product technology, degree of internationalization, shares in the market, and other related external factors influence the nature of the market (Ray & Boyaci, 2003). Even further, decision making factors combined together usually affect the decision making process that given strategies pricing mangers are likely to employ indetermination of prices both internationally and in the local market.

Introduction

Due to the fact that pricing decisions have a direct effect on revenue; they have always been areas of concern in regard to strategic planning. Regardless of the product or an enterprise, a well-established price allows an enterprise to capture the value embodied in a given type of product and thus creates an environment for competitively beneficial position in the market. Pricing decisions, nevertheless, can be a complicated task and in most in cases speculative due to uncertainty that are related to the current dynamic changes (Ray & Boyaci, 2003). Rapid changes in the information sectors, proliferation of product lines, and advancement in the technology just to mention but a few are some of the elements marketers are faced with in establishment of pricing strategies.

The level of intricacy is compounded further when mangers try and make pricing strategies in the international arena. In the past decade, we have been faced with fundamental sudden increase of information concerning customers and their preferences, many enterprises and companies have the capability of judging the willingness of its customers (Swann et al., 2003). Due to this, managers are able to determine with some level of accuracy the effect of changes in price on the amount of sales. Concurrently, companies have taken major strides in creating understanding and managing dynamics of supply chain. Externally, they have aggressively persuaded supply chain initiatives including, e-procurement, forecasting, replenishment, and vendor-managed inventory as well as collaborative planning.

Nonetheless, despite this process having great potential benefits, there is still persistent dilemma. Pricing decisions in most cases have direct and occasionally dramatic effects on the operations and vise versa. In this context, many have been forced to think of eliminating promotions in favor of “everyday low prices” which in turn evokes the disdain of other related marketing counterparts. Therefore this article reviews the linkage between pricing and operations as they affect the general pricing strategy, it thus highlights varied motivators for dynamic pricing strategies, which includes the following:

1)      Revenue Management

Yield management – by far it is the most mature and preferable area in dynamic pricing. This process is related to pricing a perishable resource with demand from various clients segments in order to ensure that profit is minimized. In this particular process, prices are adjusted dynamically as a function of inventory level and the due period left when the products are still being sold. Typical applications are in the airline and hospitality industries, where there is a fixed capacity that can not be invented further. In most instances where this yield management is applied, the cost side of yield equation is in most cases not relevant due to the fact that the incremental cost of adding another passenger or filling another room is definitely nominal. According to Chan & Simchi-Levi (2002) management of revenue has been the motivating factor in making of various attempts to integrate pricing as well as operations.

Research in relation to revenue management has been imperatively improved and encouraging. For example, management, practice, and software solutions have likewise indicated that there is sudden and notable increase. Basically, the airlines’ successful application of revenue management is broadly understood. Not long ago, similar concepts have been used in the management of rebates in car sales thus leading to high profitability in both international firms and local entrepreneurs.

2)      Retail Markdowns

To retailers who are selling seasonal goods such as X-mass toys, school suppliers, clothing; regularly are faced with the complicated issue of when and how much to reduce the prices of their goods towards the end of a specific season. Similarly, the underlying trade-offs are just like the problems of revenue management. Particularly, the cost of products during these specific periods is likely to be as inappropriate as the primary focus is maximizing revenue from left-over products. One emergent feature however lies in the co-ordination of the initial purchase decision in connection to the schedule of the markdown (Chen, 2002).

In relation to this a seminal references in relation this point according to a research carried out by Keskinocak & Elmaghraby (2003), findings have it that static pricing strategy or policy are usually easy in the process of implementation as compared to dynamic prices. It is therefore evident according to the findings that the lost revenue due to static pricing is nominal. The revenue is lost due to the irrelevant pricing decision made by either the managers or the people involved in the exchange of their products.

Another model which confronted retailers indicated that sets prices optimally in connection with series of policies and on the other hand takes into consideration the brunt of the reduced collection, seasonal variations on rates of sales, and costs as well. Implementation at the level of retailer can at time prove to be difficult due to soft input data, existing management practices, and related complexities and the end results can be mixed. In one instance, a revenue increase of only 1% can be realized, even though this represents a 15 million dollars increase in gross margin. In the recent analyses, markdown analyses have been extended to varied stages of supply chain.

Software innovations in relation to markdowns are much more prevalent as compared to revenue management. Examples include 4R System (www.4Rsytem.com) which involves forecasting, inventory ordering as well as markdowns; Markdown Management Inc. (www.markdown-mangemnet.com) with solution that aims at optimization of markdowns and initial inventory judgments; Profit logic (www.ProfitLogic.com) which is also inclusive of markdown models.

3)      Promotions and Dynamic Pricing

Promotions are usually preferred when introducing a new product in the market, but they are also used with staple consumer products including tuna, soda and paper towels. The literature shows that price discrimination is a motivating factor of promotion offering. For instance, incase clients vary in their brand loyalty, their information in relation to existing prices, or rather willingness to stockpile, then the idea of periodic promotion allows a firm to profitably price discriminately between these varied types. Yet price discrimination is not the only motivating factor in promotion of price of most products. Regrettably, the exact dynamic remains tentative.

4)      Operation: Pricing, Lead Time and Capacity

Research integrating pricing issues with management of lead time and the capacity of production can be divided into two: a) pricing concerns into the capacity procurement decision that reflects a long time horizons. This is aimed at smoothing out demand imbalances, because of structural seasonal patterns or short term random fluctuation (Federgruen & Heching, 1999), b) pricing concerns lead time strategies that depend on the structure of the market and the choices made by customers.    

Conclusions

Academic research or literature in relation to joint pricing/pricing strategy or operations decision has led to greater levels of improvements. In areas such as markdowns and revenue management have been realistically encouraging. In some areas such as pricing inventory, pricing capacity, the academic progress relating to this has been theoretical as practical application has remained intangible. There is so much to be done in creating the understanding concerning dynamic pricing, along with complicated operations on demand as well as supply chains. For that reason operation managerial staffs and the faculty in general must appreciate that a unit cost is not a given number, not is it lead time given value. Eventually, their decision to adjust prices can have greater effects on the supply chain and largely on prosperity. Operation faculty has to appreciate the varied reasons for and benefits of dynamic pricing and be willing to explore the interaction between inventory and dynamic pricing, production planning, and capacity management decisions. It is beneficial to see the improvement of and pursuing of complicated models and software developers creating best insights in the existing offerings.

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