Pricing as a Mechanism for Differentiation

Table of Contents

Introduction

When we enter a supermarket or a mall to look for items or products we need at home or in school, we see different products and prices attached to them. Price varies on every product, say for example, home appliance like television which has different prices; some are high, some are so low. The prices depend on the brand, type, or quality, etc. The more popular the product is, the higher the price.

Although price does not always pertain to money or finances, this is the most common connotation or definition for the word price.

“Price is the value placed on what is exchanged. Something of value – usually buying power – is exchanged for satisfaction or utility.” (Jobber & Lancaster, 2003, p. 560)

Pricing has also been the subject of marketing research to improve price elasticities. Kalyanam and Shively (1998, cited in Weitz, et. al., p. 274) took “a stochastic spline approach to estimate market response to price”. Other scientists, such Montgomery and Rossi (1999, cited in Weitz, et. al.) used methods to improve estimation of store-based price elasticities.

On the other hand, companies think of pricing as a strategic move. But why do others still fail? Robert (1998) state that ‘companies are so operationally focused that they missed major changes and trends that could have brought them huge new strategic opportunities” (xiii).

Price as mechanism to differentiate

In price competition, a marketer uses price to beat other competitors of a particular product. For example Bic – Jobber & Lancaster (2003, p. 562) say that “Bic engages in price competition by pricing its perfume or pens low and emphasising price in its advertisements. To compete effectively on a price basis, a firm should be the low cost producer of the product.”

This means price is the factor for the product to be purchased. Firms producing the same goods change their price and the lowest price is the most profitable. In this price-oriented selling or marketing, competitors change their prices more often. Additionally, a firm has to know quickly the price of the competitor, so it can also change the price of its own products.

Blythe (2006) says: “Price also has a strategic element, since price is commonly how products become positioned against other products in the market: undercutting competitors on price is a common way of competing” (p. 446)

Also, price makes a particular product distinct and different from other products. In our example above, televisions have varied prices. A Sony TV set has a different price from a GE, and whether one is higher from the other, that makes it different from the other.

Let’s take some other example, in the case of service as a product.

“In many countries, the postal service and United Parcel Service or DHL, engage in direct price competition in their pricing of overnight air express services. In the UK, fast printing services adopt a similar approach.” (Jobber and Lancaster, 2003, p. 563)

In this kind of competition, there is flexibility on the part of the marketer. He/she can easily change the price of the product. Price competition in the UK for certain products allows marketers to change their prices every so often. But this is in the case of a stiff competition, where one company tries to “defeat” the other by lowering the price.

“Prices affect an organisation’s profits, which are its life-blood for long term survival. Price affects the profit equation several ways. It directly influences the equation because it is a major component. It has an indirect impact because it can be a major determinant of the quantities old. Price influences total costs through its impact on quantities sold.” (Jobber & Lancaster 2003, p. 561)

What is meant here is that for companies who go on mass production, they lower their prices, and the over-all costs affect their profits. Sometimes the price lowers the value or the product’s standing in the market – this is so in the case of price competition.

By maintaining a minimum price for a product, a company can lead the market, although not in all circumstances. In so doing, a marketer puts some of his luck in the buyer’s charge, because he/she may withdraw the price cut. Price has different effects on the mind of the buyer. He may or may not take the bait.

There are times that by raising the price of their products, marketers can emphasise the quality of their products as compared to others. Jobber and Lancaster (2003) state:

Because price has a psychological impact on customers, marketers can use it symbolically. By raising a price, they can emphasise the quality of a product and try to increase the status associated with its ownership. By lowering a price, they can emphasise a bargain and attract customers who go out of their way – spending extra time and effort – to save a small amount.” (p. 561-562)

Effectiveness of pricing as differentiator

An example of the great importance of price as a differentiator is the case of Levi jeans. Levi has a long reputation for quality jeans that are sold throughout the world. Levi sells their jeans as a premium brand in different countries, but because of the varying standards of living, the actual price also varies depending on the country the jeans are being sold. Tesco’s supermarket sells cheap Levi jeans imported from Eastern Europe. In July 2002, the UK High Court ruled preventing Tesco’s supermarket for selling cheap Levi jeans. According to Levi they were entitled to retain their premium status in each market, and Tesco’s value of the product was so low. “Tesco’s argue that they are simply doing what every supermarket does – getting the best value for the consumers.” (Jobber & Lancaster, 2003, p. 453)

The ruling can have several interpretations. Levi knows it has the power to differentiate through its own way of pricing. Tesco’s prices of the Levi jeans are way low than Levi’s way of pricing. And the court sided with Levi because it recognises everyone’s power to differentiate its own product, and that is, Levi jeans are distinct from other products, which means “name” and quality. The way Tesco’s sells Levi jeans is like saying that all products are the same: they must be sold at low, low prices to the public so that the public can be benefited. But that is not the way in marketing and in product development and differentiation. Prices of Levi jeans make the product unique from other jeans. It’s what makes Levi competitive and quality-oriented.

Products are developed by different companies passing through different tests and sacrifices, so to speak, so that before a particular product reaches its present price – and status – it went through long and arduous process of product study and testing.

Premium pricing at high end strategy

We know that luxury cars have high average asking price. For example in 1988, BMW launched the Z1 two-seater sports car, at first intended for a limited edition. The official price in 1989 was £36,925, then, it was raised by the German car giant to £46,822, and later to £50,000. (Jobber & Lancaster, 2003, p. 568)

The price became very effective as a differentiator, and no other luxury car could match it. At first this was because it was in demand at that time, but then it could be argued that the price played its role of pushing the product to its stature as a quality, luxury car.

The usual practice of BMW is premium price for its sports car that only those who can afford to pay two three times the usual price will buy. In this particular case, the price skyrocketed even with its initial offering, and in just a short span of time. The brand BMW and the price go together.

References

Blythe, J., 2006. Principles & Practice of Marketing. London: Thomson Learning.

Jobber, D. and Lancaster, G., 2003. Selling and Sales Management, Sixth Edition. England: Pearson Education Limited.

Robert, M., 1998. Strategy Pure and Simple II: How Winning Companies Dominate Their Competitors. New York: McGraw-Hill Professional.

Weitz, B. A. and Wensley, R., 2006. Handbook of Marketing. London: Sage.

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