Pricing Techniques
There are a number of advanced pricing techniques that allow more efficient product’s pricing. These techniques are price discrimination, multiple products pricing, cost-plus pricing, and uniform pricing. Researches demonstrate that, if correctly applied, these approaches ensure higher profits and more effective planning of prices. Pricing may also substantially increase the overall effectiveness of individual business strategies.
Uniform pricing is focused on charging the same price for every unit of the product. In other words, it is up to the customer to choose the quantity, while the price for each unit remains the same. The shortcoming of this pricing technique from the client’s perspective is that the seller will charge the highest possible price for each unit of the product they intend to sell. According to Xu and Li “uniform usage price surprisingly does not suffer any revenue loss compared to first-order price discrimination, i.e. charging different tenants different prices” (3). Therefore, although unexpected, uniform pricing demonstrates that, while applying this technique, the revenue will at least remain on the same level as when implementing other strategies.
Further follows price discrimination. Wang et al. define it as “the practice of selling the same product to different customers at different prices” (579). Therefore, the price is adjusted according to the seller’s intention to realize their products amongst a certain base of customers. It is considered to be a more successful technique than the uniform pricing due to the flexibility of prices that it provides. However, as mentioned above, recent researches demonstrate that the uniform pricing performs on a par with price discrimination, assuming that the uniform pricing is implemented correctly. There are three types of price discrimination: first-, second-, and third-degree discrimination.
To ensure maximum profits received via price discrimination, a firm must meet three conditions. Firstly, this firm has to possess a certain degree of power in the market. Simply put, the company must be recognizable by its clients. Secondly, the business must implement cost-effective means of preventing resale between consumer arbitrage. Finally, the prices must be flexible enough to be acceptable to individual buyers as well as groups of consumers, while differing between them.
If price discrimination is not applicable, an entrepreneur will most likely resort to multiple products pricing. It is often referred to as the bundle pricing. It is defined by Letham et al. as a pricing under which “a collection of items are sold together at a discount” (217). Therefore, if price discrimination technique is no longer implementable, bundle pricing allows realizing goods that do not bring any revenue. This strategy will be important to receive as much profit as possible from older products before proceeding to next technique or returning to price discrimination. To use this method effectively, an entrepreneur must ensure that the prices in the bundle are different for each product. Furthermore, demand prices must be negatively correlated across consumer types.
Finally, the cost-plus pricing is described by Aho as follows: “when the price of a company’s service or product is defined on a cost-plus basis, the value that an individual or a unit creates is defined regarding cost savings rather than value added” (13). In other words, it is an alternative method to value-based pricing. The price of a product is, therefore, based on the unit’s cost plus a specific markup. While implementing cost-plus pricing, the seller and customer often pre-agree the markup added to the product’s initial price. The customer, in turn, may perceive this strategy as a reasonable one. Furthermore, if product prices are similar in a particular area of product realization, cost-plus pricing may allow stabilizing the competition, assuming that every entrepreneur will adopt this strategy.
Techniques’ Importance
The importance of pricing strategies and techniques in the competitive market is indeed hard to overestimate. Correctly chosen and effectively implemented pricing approach may lead to a significant increase in revenue as well as in rapid realization of products which will give rise to a steady increase in the output potential of any business. Moreover, pricing strategies are applied to a multitude of various markets. From education to water pricing, the techniques affect every aspect of business relations.
Due to the increasingly critical nature of pricing strategies, a lot of researchers pay their attention to the most efficient ways of implementing an individual plan, as well as deciding which strategy will be the most accurate in a certain undertaking. For example, Tabatabaei et al. provide an in-depth analysis of pricing approach regarding deteriorating items (1-57). Furthermore, Gulicheva and Osipova analyze a certain method of pricing for international educational services (21-27).
Therefore, it is important to identify which approach to pricing is the most profitable and effective. However, there is no simple resolution of this problem. The choice of technique will most likely depend on the type of business, its target market, its recognition in the market, and the firm’s productiveness. Each firm will have to adapt and choose a strategy according to their needs and focuses. For example, if a company requires selling products that have not been realized well for any given reason, the leaders will probably have to shift the firm’s approach to multiple products pricing. Thus, the firm will be able to realize different products which vary in price in a single bundle and receive revenue with a slight decrease in overall profit for these products.
Works Cited
Aho, Ilari. “Value-added Business Models: Linking Professionalism and Delivery of Sustainability.” Building Research & Information, vol. 41, no. 1, 2013, pp. 110-114.
Gulicheva, Elena, and Marina Osipova. “Program-target Method of Pricing for International Educational Services.” Czech Journal of Social Sciences, Business, and Economics, vol. 6, no. 1, 2017, pp. 21-27.
Letham, Benjamin et al. “Latent Variable Copula Inference for Bundle Pricing from Retail Transaction Data.” Proceedings of the 31st International Conference on Machine Learning, vol. 32, no.1, 2014, pp. 217-225.
Tabatabaei, Seyed Reza Moosavi et al. “Optimal Pricing and Marketing Planning for Deteriorating Items.” PLOS ONE, vol. 12, no. 3., pp. 1-57.
Wang, Guoli et al. “An Uncertain Price Discrimination Model in Labor Market.” Soft Computing, vol. 17, no. 4, 2013, pp. 579-585.
Xu, Hong, and Baochun Li. “A Study of Pricing for Cloud Resources.” ACM SIGMETRICS Performance Evaluation Review, vol. 40, no. 4, 2014, pp. 3-12.