Priceflexibility Strategy

A price-flexibility strategy usually consists of two alternatives: a one-price policy and a flexible-pricing policy. Influenced by a variety of changes in the environment, such as saturation of markets, slow growth, global competition, and the consumer movement, more and more companies have been adhering in recent years to flexibility in pricing of different forms. Pricing flexibility may consist of setting different prices in different markets based on geographic location, varying prices depending on the time of delivery, or customizing prices based on the complexity of the product desired.

One-Price Strategy

Flexible-Pricing Strategy

A one-price strategy means that the same price is set for all customers who purchase goods under essentially the same conditions and in the same quantities. The one-price strategy is fairly typical in situations where mass distribution and mass selling are employed. There are several advantages and disadvantages that may be attributed to a one-price strategy. One advantage of this pricing strategy is administrative convenience. It also makes the pricing process easier and contributes to the maintenance of goodwill among customers because no single customer receives special pricing favors over another.

A general disadvantage of a one-price strategy is that the firm usually ends up broadcasting its prices to competitors who may be capable of undercutting the price. Total inflexibility in pricing may undermine the product in the marketplace. Total inflexibility in pricing may also have highly adverse effects on corporate growth and profits in certain situations. It is very important that a company remain responsive to general trends in economic, social, technological, political/legal, and competitive environments. Realistically, then, a pricing strategy should be periodically reviewed to incorporate environmental changes as they become pronounced. Any review of this type would need to include a close look at a company's position relative to the actions of other firms operating within its industry. As an example, it is generally believed that one reason for the success of discount houses is that conventional retailers have rigidly held to traditional prices and margins.

A flexible-pricing strategy refers to situations where the same products or quantities are offered to different customers at different prices. A flexible-pricing strategy is more common in industrial markets than in consumer markets. An advantage of a flexible-pricing strategy is the freedom allowed to sales representatives to make adjustments for competitive conditions rather than refuse an order. Also, a firm is able to charge a higher price to customers who are willing to pay it and a lower price to those who are unwilling, although legal difficulties may be encountered if price discrimination becomes an issue. Besides, other customers may become upset upon learning that they have been charged more than their competitors. In addition, bargaining tends to increase the cost of selling, and some sales representatives may let price cutting become a habit.

Recently, many large U.S. companies have added new dimensions of flexibility to their pricing strategies. Although companies have always shown some willingness to adjust prices or profit margins on specific products when market conditions have varied, this kind of flexibility is now being carried to the state of high art. As a matter of fact, electronic commerce is further likely to accelerate the flexible-pricing trend. The Internet, corporate networks, and wireless setups are linking people, machines, and companies around the globe and connecting sellers and buyers as never before. This is enabling buyers to quickly and easily compare products and prices, putting them in a better bargaining position. At the same time, the technology allows sellers to know customers' buying habits, preferences, and spending limits, enabling them to tailor products and prices.19 The concept of price flexibility can be implemented in four different ways: by market, by product, by timing, and by technology.

Price flexibility with reference to the market can be achieved either from one geographic area to another or from one segment to another. Both Ford and General Motors charge less for their compact cars marketed on the West Coast than for those marketed anywhere else in the country. Different segments make different uses of a product: many companies, therefore, consider customer usage in setting price. For example, a plastic sold to industry might command only 30 cents a pound; sold to a dentist, it might bring $25 a pound. Here again, the flexible-pricing strategy calls for different prices in the two segments.

Price flexibility with reference to the product is implemented by considering the value that a product provides to the customer. Careful analysis may show that some products are underpriced and can stand an upgrading in the marketplace. Others, competitively priced to begin with, may not support any additional margin because the matchup between value and cost would be lost.

Costs of all transactions from raw material to delivery may be analyzed, and if some costs are unnecessary in a particular case, adjustments may be made in pricing a product to sell to a particular customer. Such cost optimization is very effective from the customer's point of view because he or she does not pay for those costs for which no value is received.

Price flexibility can also be practiced by adding to the price an escalation clause based on cost fluctuations. Escalation clauses are especially relevant in situations where there is a substantial time gap between confirmation of an order and delivery of the finished product. In the case of products susceptible to technological obsolescence, price is set to recover all sunken costs within a reasonable period.

The flexible-pricing strategy has two main characteristics: an emphasis on profit or margins rather than simply on volume and a willingness to change price with reference to the existing climate. Caution is in order here. In many instances, building market share may be essential to cutting costs and, hence, to increasing profits. Thus, where the experience curve concept makes sense, companies may find it advantageous to reduce prices to hold or increase market share. However, a reduction in price simply as a reactionary measure to win a contract is discounted. Implementation of this strategy requires that the pricing decision be instituted by someone high up in the organization away from salespeople in the field. In some companies, the pricing executive may report directly to the CEO.

In addition, a systematic procedure for reviewing price at quarterly or semiannual intervals must be established. Finally, an adequate information system is required to help the pricing executive examine different pricing factors.

Continue reading here: Distributionscope Strategy

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