Price Customization, Multi-Dimensional Pricing - Coursework Example

Price customization (Name) (Institution) (Course) (Instructor’s Name) Date of submission The fact that consumers have different perceptions of value and utility on different products and services on offer implies that the amount they are willing to pay for the same product or service varies. Marketers are faced with the challenge of identifying the value perception held by different consumers in order to ensure that they pay for a price that is individually fair to each and everyone. While this has proved to be difficult, marketers have developed techniques that bring them closer to realising a situation whereby each customer pays what he feels is worth that product. Simon et al (2001) list these techniques as: multi-dimensional pricing, multi-person pricing, price bundling, multi-product strategies and normal or Dutch auctions. The choice of technique to be used depends on the nature of the consumers, consumer information availability and the products/service being marketed. The two main ideas behind individualised pricing strive to ensure higher profits and higher customer satisfaction on the pricing front. They note that use of unitary pricing which groups all consumers in one large segment results in lost profits as some consumers may be willing to pay higher than the set price. They indicate that the regular optimal pricing strategy where consumers are placed in one segment leaves out untapped profits. Individualised pricing comes in to play to reach out to consumers left out by the optimal pricing strategy. Essentially, it targets consumers who might be willing to pay more above the optimal price for a product/service according to the value perception and also those who might be willing to pay above the breakeven price for the firm but below the optimal price. However, to achieve effective individualized pricing, the marketer must gather necessary information about the market such as consumer preferences, consumption trends, income, competition etc. The nature of the industry also plays a fundamental role in determining which technique to be applied. Gans and King (2004) identify that despite there being other determinants in customer satisfaction, price plays the highest role. They write that “perceived price fairness might be the dominant determinant of satisfaction” (p. 49). On the other hand, the principle of dual entitlement states that the marketer cannot sacrifice profits for a fair price for the customer and hence a fair price should also optimize the benefits (profits) for the marketer (Herrmann et al 2007). Simon et al (2001) discuss the various techniques individually and give examples. This paper summarises the discussion of these techniques by Simon et al in the paper “Individualised pricing: Boosting profitability with the higher art of power pricing” and supports them further with relevant literature and gives out other examples. Multi dimensional pricing This is one of the favoured methods of individualised pricing where the marketer uses more than one price parameter to set the price. During the recent global economic recession, some economists did suggest that air travel companies would be well suited to introduce charges based on the weight of the passengers besides the regular travel charges based on distance and class (Elliot 2010). Although this has not been adapted, it would make economic sense to charge extra fees to heavier passengers as it basically implies higher energy costs for the flight company. Although this would earn the airlines higher profits, it would hurt their public image and sales on social and ethical grounds. This concept seems to have been borrowed from freight and delivery companies where charges are based on w eight, volume and distance. Rao (2009) says that multidimensional pricing is a favourite strategy among marketers who have established loyalty programs for their clients. A good example is Costco which is a membership warehouse club that has different membership cards and fees for their members. Costco has three membership levels namely; Business, Gold star and Give the gift of membership. For business membership, there is an annual subscription fee of $55.00 and gold start and gift of membership are charged $60.00 annually. This multidimensional pricing is Costco’s main business strategy. The firm ensures higher sales and profits by encouraging members to shop at their outlets in order for them to realize the utility of being a member and gain the worth of their sunk costs in terms of membership fees. The firm on the other hand stocks its product at a relatively lower price than other stores and also sells in bulk to drive sales even higher (Costco Australia 2010). Multi-person pricing This technique according to Simon et al (2001) is most common in the travel and hospitality industry or where large groups of people are involved. Essentially, multi-person pricing involves setting different prices for different people based on their willingness to pay. It implies selling to several people or groups at a lower price than the sum total the individuals would have to pay. In the hospitality industry, firms have a tendency to offer lower prices for additional family members. In fact, major hotels offer family suites at a lower price than it would cost if each family member was to be accommodated individually. A case in point is the offers available at the Sebel Cairns in the Tropical North Queensland. The hotel allows free accommodation for two children below 12 years if they occupy the same room with parents. The allowance for two children below 12 years is also substitutable for an adult. Children above 12 but below 16 also get free accommodation if they share existing beddings in acquired rooms. Meals are also discounted for children below 11 years at only 50% of adult meals while children below two years eat free. Although there is no data available to verify the benefits of such a strategy, it can be assumed from an economic point of view that the establishment attracts a higher number of visitors than in an alternative situation where children and adults would be charged uniformly (Sebel Cairns 2010). Price bundling Price bundling sometimes referred to as product bundling works across different persons where consumption of more than one brand is encouraged at a lower price than if the brands were purchased individually. Bundling is either performed purely or in a mixed scenario where goods are sold only as bundles while in the mixed scenario they are also offered individually. Product bundling is best practised in complementary goods or related goods both from the same manufacturer of different ones. For instance, Hewlett Packard has an arrangement with Microsoft Inc to sell some of their products preinstalled with the Windows operating system in specified markets at a discounted price. Such a bundle targets consumers of both brands by offering them a bundle of two products at a lower price than if the two were offered individually. This strategy is important in that it expands Microsoft’s market by tapping to that of HP without affecting sales. On the other hand, HP taps into the market of Microsoft (HP 2010). Currently, windows 2007 suite goes for around US$120. Buying an array of HP units allows buyers to save up to US$ 20 than if the products were bought separately (Shopping HP 2010). Multi-product strategies This strategy is similar to targeting the lower income and the upper income markets with almost similar products. According to Simon et al (2001), this strategy is employed by marketers in order to protect their premium product from low priced competitors by introducing less expensive alternatives that complete with the low priced competitors. Ideally, competition here is based on pricing rather than quality. However, in order to achieve low priced products, marketers have to forego some qualities and features present in the premium product but match those of the low priced competitors without necessarily affecting the demand of the premium product. Gans and King (2004) note that this strategy is most relevant to marketers who prefer segmenting their markets based on technological know-how and income levels. They say that price sensitive buyers will forego quality for price while technology sensitive buyers will forego price for quality. In order to target both markets, such marketers are forced to develop less expensive alternatives to protect their premium market while at the same time exploiting the low income market. According to Simon et al, the LEA and the premium brand may also share a similar product and/or name to show connection but have to vary in pricing, quality and service. However, in some instances, different brands are used. For instance, Nokia has launched a number of mobile phones and classified them into series where each series contains several sub brands. A good example is the popular E series with the most popular one being E71. This smart phone was intended for the high income earners given that it had some hi-tech features. However, price aggressors such as Huawei and Zec developed cheaper alternatives inspired by the E71 brand. In response, Nokia developed a cheaper alternative named E63. This phone has minimal variations from the premium E71 in terms of feature as below. A search in a number of websites revels that the differences between the two phones are as shown below (Phonegg 2010). E71 E63 Compatible networks HSDPA 2100 UMTS 2100 Talk time 10.5 h 11h Stand-by time 410h 432h Input navigation QWERTY Keyboard Navigation Joystick / Button QWERTY Keyboard Touch Sensitive Keys / Bar Camera resolution 3.15 Megapixels 2 Megapixels Video telephony Available None Positioning Integrated GPS None Dimensions 114x57x10mm 113x59x13mm Cover Metallic Plastic Price 264-324 170-209 The automobile industry offers a great range of example of firms that have opted for this multi-product strategy. Toyota Motor Corporation, one of the leading global automaker has launched different brands and products under its parent Toyota brand in different markets in order to compete effectively across different market segments. The Lexus brand is an affiliate brand of Toyota that targets the luxury market but does not bear the name Toyota. On the other hand, the firm employs a multi-product approach seen in Toyota Prado, Toyota corolla and Toyota Premio, among others. This strategy has worked well for Toyota as it complements the lean management style where single manufacturing line is capable of producing different products (Sabri & Shaikh 2010). Normal or Dutch auctions The normal auction is a situation whereby buyers quote the highest price they are willing to pay for a product. This hence requires the physical presence of all the buyers or it can be done over the internet. Buyers bid for the product and in the process allow the seller to maximize the willingness to pay for more from the buyers. The Dutch auction is somehow reversed as the buyer starts by quoting the highest price he would expect to gain from the product. Buyers on the other hand will accept any lower price that they feel is acceptable. In order for auctions to be effective, then the right market must be harnessed and gathered either in person or through the internet. Targeting a low income earning market will limit profits while targeting a high income earning market with a perceived higher value of the product will fetch higher profits for the seller. A good example of auction is provided by the Luxury Link through their website at http://www.luxurylink.com/. This company targets leisure travellers whereby consumers through the website are allowed to bid for cruise ships, tours and hotel and lodging facilities around the world. The website also offers Dutch auction options that allow buyers to state their highest but lower that quoted price. The website targets the higher income earning marketing going by the fact that it works in collaboration with five star hotels and facilities. This implies that the company is profit maximiser rather than a sales maximiser. To gather and maintain market, participants in these bidding offers have to register at the company website free of charge. Members can constantly check for available bidding offers (Luxury Link 2010). Conclusion It is apparent that many companies employ a combination of these techniques in an attempt to explore different markets and maximise their profits. Although there is little or no data directly link the contribution of such strategies to profits, it is evident that companies such as Toyota Motors and Nokia Inc have used multi-product strategy to reach out to different market segments and dominate the market. Consequently, they have achieved economies of scale, serviced larger markets and have increased their profits tremendously to position them as leaders in their respective industries worldwide. References Costco Australia. Retrieved online on 10/08/2010 from http://www.costco.com.au/Common/Membership.shtml Elliott, C. (2010). What's next for airlines, paying by the pound? Retrieved online on 10/08/2010 from http://edition.cnn.com/2010/TRAVEL/04/29/airlines.paying.by.pound/index.html Gans, J. and King, S. (2004). The Australian national university working papers in regulatory economics paying for loyalty: product bundling in oligopoly. University of Melbourne working paper no. 2. 30 march 2004. Retrieved online on 10/08/2010 from http://dspace.anu.edu.au/bitstream/1885/41985/1/04-02.pdf Herrmann, A. et al (2007). “The influence of price fairness on customer satisfaction: an empirical test in the context of automobile purchases” Journal of Product & Brand Management. 16(1) 49–58 HP and Windows 7 Professional. Retrieved online on 10/08/2010 from http://www.hp.com/sbso/solutions/pc_expertise/windows7.html Luxury Link (2010). About us. Retrieved online on 10/08/2010 from http://www.luxurylink.com/. Nokia E71 vs E63. Retrieved online on 10/08/2010 from http://www.phonegg.com/compare/24/Nokia-E71-vs-Nokia-E63.html Phonegg (2010). Nokia E71 vs. Nokia E63. http://www.phonegg.com/compare/24/Nokia-E71-vs-Nokia-E63.html Rao, V. (2009). Handbook of pricing research in marketing. Melbourne: Edward Elgar Publishing Sabri, E. & Shaikh, S. (2010). Lean and Agile Value Chain Management: A Guide to the Next Level of Improvement. London: J. Ross Publishing Sebel Cairns. Retrieved online on 10/08/2010 from http://www.check-in.com.au/QLD/Cairns_International_Hotel.htm HP Pavilion Laptop, Tablet, & Netbook PCs. Retrieved online on 10/08/2010 from http://www.shopping.hp.com/webapp/shopping/series_can.do?storeName=computer_store&v1=HP+Pavilion&a1=Brand&landing=notebooks Price Bundling: needs to better explain the example. The Multi product strategies section: needs proper refrencing ( who is Joshua KING?). For Normal or dutch auction: use luxurylink.com ( Read More