Product Customization and Pricing Strategies

Identification of the problem

Marketers today are matching the prices of the products and services they offer to their customers based on the desires of an individual customer instead of the entire marketplace. However, even though most companies recognize the fact that different customers place different values on goods and services, they do not exercise any price customization.

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The marketing issue in this case study is the loss of profits when a company uses unitary pricing instead of customized pricing for its products or services1. Unitary pricing involves giving customers the same price for goods or services regardless of whether the customer is willing to pay more for value. Price customization involves having customers pay a price based on the value they place on goods and services2.

Justification for choosing the problem

Companies that are in the business of selling goods or services recognise the fact that customers place different values on their products and they are willing to pay more for these products or services. The problem lies where the companies do not charge their customers individual prices for their goods which leads them to lose out on huge profit potential.

Companies focus their price fixtures on factors such as the cost of the good or service to the customer; whether it will be affordable to the majority in the market place, and the fairness of the price; if it is fair to charge a high or low price for a good that is of high or low quality. Such factors make it difficult for most companies to exercise price customization making it difficult for the high and low-value customers to purchase products based on what value they place on the company’s products3.

An example given by Simon and Dolan is the purchase of movie tickets. Adults might be willing to purchase a ticket for $7.50 while kid’s tickets might go for $5. If a unitary pricing system was to be used in this case, adults might be forced to buy a ticket for $5, the same price as for kids, or kids might have to purchase a ticket for $7.50 which might prove to be too expensive for a low-value customer.

In order to avoid a situation where high-value customers take advantage of a low product price, a company needs to “fence off” or “build a fence” with its prices. In the case of the movie tickets, the $5 price is fenced off by making it available to customers who are below the age of 12. In a situation where large volume buyers place a small value on products when compared to the small volume buyers, the low price is fenced off by making it available to the large scale customer only after they purchase the goods at a higher price4.

Unitary pricing limits a company’s ability to achieve high-profit margins while price customization allows companies to maximize their profit potentials. Companies can achieve price customization by offering different prices by product variation where for example packages that are large are put on discount or commercial products are given a price that is higher than the consumer products5.

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Another method through which a company can achieve profit potential is by the customer or market segmentation. An example is business class passengers travelling with an airline usually pay more for their air tickets than the economy class passengers who pay according to the affordability of the ticket. The time of purchase also influences whether a company will have profit. Peak season prices are usually seen to be much higher than off-peak seasons for all goods and services. Booking a hotel during the Christmas vacation is much more expensive than booking during the off-peak season of January to March. Basically, the basic principle that underlies the concept of price customization is to maximize profitability by matching the price of commodities with the value that customers derive from that commodity or service6.

Recommendation

Companies should incorporate price customization strategies instead of unitary pricing strategies that will see them achieve higher profit potentials. The main strategies that can be used to implement price customization as highlighted by Simon and Butscher are multi-person pricing where the price of a good is designed for two or more people, multi-dimensional pricing which entails using two or more pricing parameters instead of one parameter, multi-product strategies which involves the use of less expensive alternatives in dealing with low priced products by coming up with another product line or a private label. Price bundling involves selling two or more products at a price that is less than their combined prices when putting together. Auctions provide the customer with the opportunity to bid for an item that is on sale by increasing their bid as other bidders increase their original bids. The highest bidder gets to buy the item7.

In implementing the price customization strategies, a company has to consider the following aspects in its implementation plan: what value the customers place on the good, the cost structure of the product, the aspect of price elasticity and the impact the new pricing schemes will have on the whole organization8. The implementation plan will, therefore, entail conducting an investigation to find out what customer value is by conducting customer surveys and cost structure studies.

Decision support models can be used to simulate the effects of customized pricing on the profits and revenues of a company. These simulations can also be used to derive price elasticity and customer value. After gaining the customer valuation information, the next will stage will involve coming up with the appropriate pricing models to be used on the company’s products or services. An example of such a model as stipulated by Terui and Dahana is the heterogeneous price threshold model which uses market response and the reference price to find out about customer value. This model will enable the company to come up with an efficient price customization system by providing the strategic marketer with a customer’s price insensitive region9.

The heterogeneous price threshold model will contribute to the minimization of a loss to the retailer in the event a discount price does not exceed a lower threshold leading to a loss or in the event of a price hike that would result in the price staying below the customer’s upper threshold, it would lead to the maximization of profits or revenue that are obtained from the hiked prices if they remain below the customer’s upper price thresholds10. The application of the appropriate price customization model will enable a company to be able to achieve better profit potential from the sale of its goods and services.

The performance of customized pricing models, when compared to unitary pricing, is that the unitary pricing experiences a constant or flat price while the customized pricing experiences fluctuations with respect to the sale of the goods. According to Terui and Dahana, known customized pricing otherwise referred to as unitary pricing does not generate any large sales increments because of the insensitivity to price changes.

Article Review

The article that is under review is individualised pricing: Boosting profitability with the higher art of power pricing. The authors of this article are Hermann Simon who is the Chairman of Simon, Kucher and Partners, a Strategy and Marketing Consultancy firm that is based in Bonn, Germany. Simon has written and co-authored various books such as Power Pricing and Hidden Champions. Stephan Butscher who is the Director of Simon, Kucher and Partners has authored several books also such as Customer Clubs and Loyalty Programmes

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Key Concepts of the article

The main idea behind the article is price customization and price customization strategies that can be used by organizations to achieve higher profit margins.

This concept has emerged because of the increasing use of the internet to purchase and sell items as well as arising new business opportunities that are taking place in a globalized economy. The authors of the article note that the concept of price customization has also become more common because of the increasing demand by customers to have individual and exclusive commodities that meet their personal preferences instead market preferences.

Because of these new trends in customer preferences, marketers in organizations world wide are now faced with the task of matching their products and services to the desires and wants of individual customers. Their focus has now shifted from targeting a market’s value, preferences and tastes to focusing on an individual customer.

The authors give the example of how customers can now be able to order custom- tailored designer jeans form Levi and how sneakers can be designed to capture a customers tastes by the design team in Nike. The authors also note that telecom companies are the most prominent users of price customization strategies because of the different call plans they have for their customers. These pricing strategies have enabled telecom companies to have higher returns on their profit margins. The important aspect to note is that price customization has increased the perceptions of customer value to the products and services of a company.

Simon and Butscher note that most companies have still not embraced the concept of price customization despite the fact that they recognise their customers place a different value on their goods and services. They observe that most companies have overlooked the aspect pricing when they undertake the marketing mix activities. According to the authors, most companies recognise that their different customers place a different value on commodities but they rarely venture out to charge these customers individual prices. This means that they loose out on a lot of profit potential11.

The article highlights the fact that customized prices will offer better profits for companies who practice the price customization strategies. The authors outline the basic idea of price customization as charging customers an individual price for a commodity according to the value they place on these commodities.

Managers are therefore charged with the duty of finding out what values a customer places on products and determining what to charge them for these products in terms price. Once product or service value is determined, customer segmentation is undertaken after which price customization strategies are chosen to implement the prices. To ensure that high value customers do not take advantage of the lower prices, a concept known as fencing off is incorporated to ensure that individuals with a high value perception pay the commensurate amount for their goods.

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The authors come up with the concept of fencing off which is segmenting customers according to the value they place on products and how much they are willing to pay. Fencing off is done to avoid having customers who are ready to pay more for high value goods from exploiting the low prices of low value goods. It creates a pricing system that is fair to both high and low value customers. The authors outline the various techniques that can be used to implement customized prices which are multi dimensional pricing, price bundling, auctions, multi person pricing, and multi product strategies. Simon and Butscher note that these strategies while different have a common denominator that allows for the adjustment of prices to meet the customers willingness to pay more for value. The prices also allow for the company to yield profit improvements over the unitary pricing methods12.

The first strategy they talk about is the multidimensional pricing strategy where two or more price parameters are used instead of one. They give the example of a firm marketing industrial gases which when it uses one dimensional pricing will sell its gas on a weight basis. Price changes for individual customers will have to be made on the one dimension of the weight of the gas cylinder.

The other price customization strategy they explored was the multi person pricing strategy which is designed for groups of two or more people. This strategy suggests that the first customer will pay the full price for the product or service with the second customer receiving a discount for the same product. The idea behind the discount is that the second customer is less willing to pay the full price for the commodity when compared to the first customer. Multi person pricing strategy is used in the travel industry and also in hotel reservations.

Price bundling involves selling two or more products together at a price that is less than the sum of their individual prices. This strategy works for product commodities only and cannot be applied in pricing for services. There are pure and mixed bundles where pure bundles involve selling one bundle only while mixed bundles involves selling the individual product commodities separately. This strategy is more common in auto mobile industries, fast food joints and in the telecommunications industry. The authors note that price bundling operates differently when compared to other pricing strategies because it reduces the differences between customer values, perceptions which enhances profitability.

Multi product strategies entails incorporating less expensive alternatives to deal with the increasing number of low priced brands that compete with premium brands. The alternatives can be in the form of second product lines, second brands, brands with no name or label or private labels. The authors give Marriot as an example of a company that has incorporated the use of multi product strategies in marketing itself. Marriott has a total number of eleven brands under its name. Simon and Butscher highlight the fact that the strategy’s most important aspect is to design and price the alternatives to foster market share gain and limit the overshadowing of premium brands by the low brand products.

The other price customization strategy that is demonstrated in the article is auctions and Dutch auctions. Auctions allow customers to pay the exact maximum price of what they are willing to spend. Customers are allowed to bid on an item that has been put on sale. The price of the commodity keeps increasing with each bid. The item is sold to the individual with the highest bid. Auctions require that bidders be present at the auctioning forum but nowadays they can be conducted through the internet and also by telephone.

Auctions have been viewed as the best pricing strategy that takes advantage of a customer’s willingness to pay more. The idea behind Dutch auctions as noted by Simon and Butscher is that the starting price is put slightly above the highest price the seller can achieve. The price decreases as the first customer signals his willingness to buy the product at its current price. The main idea with Dutch auctions is that customers wait for the price to drop below their own personal limit.

Simon and Butscher also talk about the concept of unitary pricing in their article with reference to profit potentials. According to the authors, unitary pricing does not improve a company’s profit margins because the prices are similar for all customers regardless of what value they place on the product or what amount they are willing to pay for quality goods. They note that the element that is often overlooked by companies when they are involved in the marketing mix is the price of products13.

The authors note the implementation of the price customization strategies will yield significant profits for companies that use those strategies when pricing their products. They also note that for effective implementation of these strategies to take place in a companies pricing strategy, marketers should focus on aspects such as what value the customers place on the product, the concepts of price elasticity’s, the impact the new prices will have on the organization, cost structure of the product and how it will be affected by volume changes and the logistics and impact of implementing the price structure. The authors note that the conjoint measurement technique can be used for valuing products as well as customer value and their perceptions about customer value.

Explaining the idea of Price Customization and Strategies using Toyota

Toyota is a global car manufacturer that is known for its various car models as well as the affordability of the vehicles to its consumers. The different car models made by Toyota go for different prices based on the customer preference, value, price and affordability. By using the price customization strategies, Toyota can be able to gain increased revenues from the sale of its motor vehicles. For example, the Toyota strategic marketer can use the price bundling strategy when coming up with the prices for its sports, SUV, Lexus and comfort car models.

Price bundling will reduce the cost of production and purchase of the materials that will be used to assemble the cars14. The multi- product strategy can also be used in the event Toyota’s competitors in the automotive industry such as Chrysler or BMW decide to produce car models that are similar to Toyota’s Lexus brand. The factors that Toyota can use when segmenting its customers and building fences offs are the price of the product, quality, service, distribution and brand. Simon and Butscher note that for the price factor, prices for different products should have a difference of 20 to 40 percent, quality entails having the second product or car model to be of a lower quality than the top product without going below the acceptable levels of customer value.

Service involves having a top product with better quality that the second product. Brands entails multi brands, multi-products or by alternatives. The authors note that using the same brand for all products creates a uniform strategy which gives the second product an opportunity to regain market share. When marketers use separate brands for their products, market actions and the reactions of the competitors become more transparent. Using multi brands also ensures that a broader marker range is covered which might be difficult if a single brand is used. Distribution involves selling the second product using the same distribution channels that are incorporated for the top brand products.

Other than multi product strategies, Toyota can use multi person pricing where according to Simon and Butscher, prices are designed for groups of customers or for two or more people. Toyota’s car marketers could use this strategy where the first car buyer in pays the full price of the car while the next customer receives a discount. The discount will be as a result of the second customer’s willingness to pay which when compared to the first customer is low. Toyota has to ensure that the multi person pricing strategy is well prepared by ensuring that there is detailed information on the customer’s willingness to pay for the products.

The article covers the aspects of price customization in a clear and precise way. It discusses price customization and price customization strategies in depth giving suitable examples to show how price customization pricing works for different industries and business organizations. It also highlights the fact that companies that practice customization are more likely to have improved revenues and profits than those that still exercise uniform pricing of their products.

Bibliography

Burden, Kit and Annabel, Ashby. Flexible Pricing: What, Why and How. DLA Piper. Web.

Butscher, Rob & Simon, Hermann. Using pricing to increase customer loyalty. The Journal of Professional Pricing, Vol. 8. No.1, pp. 29–32. 1999.

Dewan, Rajiv, Bing Jing and Abraham Seidman. Adoption of Internet-Based Product Customization and Pricing Strategies. Web.

Dolan, Robert and Simon, Hermann. Power Pricing: How Managing Price Transforms the Bottom Line. New York: Free Press ,1996.

Hermann, Simon and Stephan A. Butscher. Individualized Pricing: Boosting Profitability with the Higher Art of Power Pricing. European Management Journal Vol. 19, No.2, pp 109- 114, 2001.

Hermann, Simon and Robert J. Dolan. Price Customization. The Journal of Professional Pricing, American Marketing Association, Vol. 7, No.3, 1996.

Homahelpsite. Price Customization. Web.

Johnson, William and Art, Weinstein. Superior Customer Value in the New Economy: Concepts and Cases. 2nd Edition. New York: CRC Press. 2004.

Terui, Nobuhiko and Wirawan Dony Dahana. Price Customization Using Price.

Thresholds Estimated From Scanner Panel Data. Journal of Interactive Marketing, Vol.20, No. 3-4, pp 59-70. 2006.

Wuebker, Georg, Jens Baumgarten, Martin Koderisch, and Dirk Schmidt-Gallas Price Management in Financial Services: Smart Strategies for Growth.Great Britain: Gower Publishing Limited. 2008

Footnotes

  1. Simon Hermann and Rob Butscher, Individualised Pricing (European Management Journal, 2001). P.109.
  2. Simon Hermann and Robert Dolan, Price Customization, (Journal of Professional Pricing, 1990) 15.
  3. William Johnson and Art Weinstein, Superior customer value in the new economy: Concepts and Cases (CRC Press, 2004) 34.
  4. Rob Butscher, Using pricing to increase customer loyalty. (Journal of Professional Pricing, 1999) 29.
  5. Homahelp website, Price customization, Web.
  6. Robert Dolan and Hermann Simon, Power pricing: how managing price transforms the bottom line (Free press, 1996) 248-275.
  7. Georg Wuebker, Baumgarten Jens, Koderisch Martin, and Schmidt-Gallas Dirk (Price management in financial services,2008)84-90.
  8. Kit Burden and Ashby Annabel, Flexible pricing: what, why and how (DLA Piper, Web.
  9. Nobuhiko Terui and Wirawan Dahana, Price customization using Price Thresholds (Journal of interactive marketing,2006) 59.
  10. Rajiv Dewan, Jing Bing and Seidman Abraham, Adoption of internet-based (product customization strategies,200) 20.
  11. Simon Hermann and Rob Butscher, Individualised Pricing (European Management Journal, 2001). 109.
  12. Simon Hermann and Rob Butscher, Individualised Pricing (European Management Journal, 2001). 110.
  13. Simon Hermann and Rob Butscher, Individualised Pricing (European Management Journal,2001) 109.
  14. Simon Hermann and Rob Butscher, Individualised Pricing (European Management Journal,2001) 112.
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