The Concept And The Factors

Published Date: 02 Nov 2017

Research paper

Strategic behavior: The pricing

Columbia Southern University

Student name: Nhat Nhu Hoang

Student ID: 208541

MBA

The introduction

Free trade between countries is the ideal trade policies that are directed to countries. Free trade would allow states to increase welfare and reduce the loss of social production and consumption. Although economists often argue that deviations from free trade reduces welfare, in fact, almost no other country approaches full free trade. The developed nations are developing or using measures that tariff protection despite reduced social benefits across the world. Obviously, there are affordable dominant theoretical background to the policy choices of national commerce.

The aim of this research paper is studying the analysis of the behavior of economic actors. It is to explore the objective of pricing behavior that firms follow along well with the methods of pricing which is assuming in order to adjust their price. This strategic behavior, in recent years, is particularly interested in the interaction of economic actors, such as producers, consumers, and government decision-making. In interactive situations, entities competing against each other and do not know for sure what the opponent will do, but they all know that the outcome of the interaction depends on the decisions made ​​by each party. Therefore, pricing methods of companies can form due to the interaction between the strategic behavior of economic actors in the world economy.

The pricing

Based on Keat, P., & Young, P. (2009), companies perform their pricing based on the four basic types of market such as: perfect competition, monopoly, monopolistic competition, and oligopoly; thus, depending what kind of market they are in, they will perform their pricing strategy in order to achieve more market for their products. Specially, the two extreme market environments are perfect competitive and monopoly that firms compete in terms of market power. In this market, a firm has the power to establish its product’s price, it called price maker; in contrast, a firm that has no power to establish its price called price taker. Before making the pricing, managers have to answer the basic of question such as, how much of product should the firm produce? The firm will get back how much profit based on the amount of product which would be produced? In case of loss rather than profit, will the firm continue produce the product in long term or exit from the market? These are depending on the firm’s strategic behavior, the current market, and the objectives of pricing of the firm, then the firms will apply the pricing methods to their business. According to Oxenfeldt (1983), the actor defined methods for pricing such as: (i) Cost-based methods including Cost-plus method, Target return pricing, Break-even analysis, Contribution analysis, and Marginal pricing. (ii) Competition-based methods including Pricing similar to competitors or according to the market’s average prices, Pricing above competitors and below competitors, Pricing according to the dominant price in the market. (iii) Demand-based pricing including Perceived-value pricing, Value pricing, Pricing according to the customers’ needs. In addition, Keat, P., & Young, P. (2009), in their book, provided the multiproduct pricing method which is being applied by companies, it can be brief describe as a firm or a plant manufacture two or more products that the norm rather than the exception. These various products could be independent or one another.

The concept and the factors to consider when pricing

After having the decision on the goods / services, the firm will be faced of determining the price. Price is one of four important variables of marketing mix. Consumers always consider price as a factor in the decision to choose goods. For business, the decision of price is competitive in the market. The pricing of products is important for enterprises because it directly affects sales and profits. How is the price? Consumers always want lower prices, sellers want a higher price. So what is the reasonable price for both parties? Consider the concept of price: (i) Price is what to be paid for something is worth, and (ii) Price is what people want to pay to get something valuable. The pricing strategy of firms is affected by the internal and external factors of the business. Before evaluating, firms have to decide whether the product is necessary to achieve what the market has determined. If enterprises choose target market and identify correctly the position that firms want to perform in the market so that they will perform their strategy of marketing mix and pricing quite easily. Enterprises must also identify other targets such as some objectives as follows:

The existence: in the fierce competition, business faces much of the difficulty, the main goal of firms is to survive. Then they should lower the price, the revenue just enough to cover the variable costs and some other expenses to be able to survive. In year 2008, the witness of the decline of the prices of goods, so that firms can be survived in the crisis.

Maximizing Profit: Companies estimate that the demands and costs will be associated with the different prices, and then they will choose the accurate price in order to maximize the rate of profit on their investment.

Leading market share: people believed that in business, who has the largest market share will be the lowest cost and the long-term profitability is highest, so they will seek market share by low valuation and coordinated program marketing activities to achieve this objective. Wal-Mart is always famous for its attractive retail price and the price used to attract customers.

Leading product quality: A firm can take the lead on target quality of products on the market, this requires pressing the high price and high R & D costs. Mercedes-Benz always pride of the quality of vehicles and always has higher rates of other vehicles.

The other goals: for example, to prevent competitors participate in the market. Prices can take to maintain the loyalty and the support of the resale or to avoid government intervention. Prices may be temporarily reduced to enable the tremendous response of hungry customers with a product or to entice more customers to the retail outlets. Thus, the valuation may play an important role in accomplishing the goals of the business in many different levels.

Coordination of marketing strategy:

Price is one of the tools of coordination of marketing that firms use to achieve their marketing goals. The pricing decisions must be coordinated with the decisions of designation, distribution and promotion of the product to form a consistent and effectively marketing program. The decision of the other phases of the marketing coordination are affecting the pricing decisions. For example, selected-sales strategy with limited manufacturing product will be associated with higher price (Louis Vuiton fashion).

Enterprises often pricing products first, and then they make other decisions of the marketing coordination on the basis of the price that they want. Thus, price is the main factor for positioning the products, defining the product market, competitors and model. Price decides characteristics and product costs. If the product is positioned based on the non-price factors, the quality of decisions about advertising and distribution will influence the price, if the price is the main factor, it will strongly affect the other decisions under the coordination of marketing.

The cost strategy

The costs create a platform for product pricing. Enterprises must set a price to cover all costs of production, distribution and sale of products with a reasonable profit rate. Enterprises should consider the cost if the cost is higher than competitors’ cost of produce and sell an equivalent product. There are two types of costs: (i) The fixed costs are the costs which are not changing the volume of production or sales. For example, ground rent, administrative costs, depreciation of fixed assets ... As the volume of production or sales volume increases, the fixed cost of a unit of production decreased. (ii) Variable costs are costs that directly alter according to the volume of production, when the total volume of production increases will lead variable costs to increase, but the variable costs per unit of product is not changed. For example, costs of materials, labor ...

Based on Keat, P., & Young, P. (2009), the external factors affecting pricing decisions:

(i) Perfect competition: comprises a lot of sellers and buyers of a particular product. For example, the rice, food market. In this market, sellers cannot pricing higher than the price of market, because buyers can choose to buy whatever they need at the market.

(ii) Monopolistic competition: large sellers and buyers make more purchases in the price of a very wide range (for example, the market of fashion clothing, cosmetics ...). The pricing in this market is an extremely challenge for sellers.

(iii) Oligopoly market: some sellers are very sensitive with the formation of pricing and policy in their marketing strategy. Products of this market may be the same (steel construction, mobile network ..) or dissimilar (cars, laptops).

(iv) Monopoly market: there is only one seller (as may be the state company, or companies which are the copyright holder). In this market, the price can be very low or very high depending on the state or regulated by the "invisible hand" in the market.

(v) The consumer perception: When firms make a valuation, they must consider the consumer's sense of perceived value and how it affects the buying decision (Keat & Young, 2009).

The evaluating of goods and adjusting pricing strategy.

Enterprises often deploy a range of items or product lines. For example, Sony offers 5 types of color TV 21 inch flat screen of thickness and different colors, so Sony can set five different prices. Enterprises often have to adjust prices due to the conditions , circumstances or changes in the environment due to factors related to goods overbearing . The price adjustment strategies include: discount valuation, distinction valuation, psychology valuation, the price to advertise, and geography valuation.

When evaluating the initial of costs, firms need to consider many factors, and the valuation is a six phases process: (i) Determine the target sale or marketing objectives, (ii) identify the elasticity of demands and price of product, (iii) calculate the total cost (the fixed costs and variable costs), (iv) the study of price competition, (v) the method of choice to build cost, and (vi) the decision in the interest that associated with the acceptance of buyers and psychological buyers , intermediaries and government agencies.

For new products, enterprises need to to take the initiative in their pricing decisions about geographic criteria, the list of goods to the distribution agreement, the consumer incentives. Enterprises can actively increase or lower the price depending on the goals and business relationships, but always study the reaction of the market, partners and competitors. Based on Wheelen, T. L., & Hunger, D. J. (2010), when pricing a new product, firms should trace one of two strategies such as, (i) skim pricing strategy enable firms to "skim the cream" from the peak of the demand curve with a best price meanwhile the product is new and their rivals are few, and (ii) penetration pricing strategy trying to rush market develops faster and offering the leader the chance to utilize the experience curve to obtain the shares of market with a low price and then control the industry. Either of these choices, depending on firm’s objectives and strategies, could be desirable to a special firm or unit. Nevertheless, penetration pricing is more probable than skim pricing in order to raising operating profit of company in the long term.

Nowadays, pricing is becoming the economic war expanding in a global scale, especially, in developing countries. In Vietnam, this is an extreme war between firms; for example, mobile phone retailer companies such as Vien Thong A, Thegioididong, SFONE, and Beeline telecome have an extremely pricing war. They are scrambling to reduce their services fee and their product’s price. According to Brands Viet Nam (2012), the Thegioididong company (Mobile world Co.), it is a top 500 retailers in Asia – Pacific from year 2010 to year 2012, a Top 5 fastest growing vendor in Asia - Pacific 2010, in year 2010 it has voted as a top 500 Fast Vietnam (Thegioididong.com in the top 4), and it is the most trusted retailers 4 consecutive years 2007, 2008, 2009, 2010 (Vietnam Mobile Awards). The company is trying to increase its revenue to twenty percent in year 2013 by its own pricing and marketing campaign, it chose to rearrange the store to attract customer fastest and most efficient. Its chain retailer has partnered with Samsung in the Vietnamese currency billions project, building the experience of practicing smartphones right in its stores. In addition, the Mobile World also expect new partners, its shares were transferred to an investor with experience developing retail chain in the world known as CDH Electric Bee Limited. Meanwhile, its competitor, Vien Thong A company, it also partly sold its shares to TD Mobile, the leading mobile retailer in Japan.

According to VienthongA (2002-2013), after the involvement of partners, Vien Thong A company building more smartphone centrals and its sales continuous growth. Now, VienThong A smartphone company has 36 centers with the cooperation of most of the major phone manufacturers to service customer. When the price of the product on the market is equilibrium, the Companies made ​​several sale-off campaigns such as offering gifts, reducing service fee, and increasing the time of warranty to customers. These two above companies are typical example for a success of the pricing.

The problem

The market, where supply and demand are the core of the matter, while price is the appearance and competition is the living soul of the market; therefore, any violation of fixing minimum resale prices causing damage to customers, and any act of falsifying appearances by any exploitative tactics to customers, or to strengthen and maintain the company's position in the market should be condemned and rejected. Product’s price and quality of product usually go together, so once the low price can make customers believe that this product is a low quality one. For example, China now produces fake products, they are sold at low prices and also means that the quality of these products is low, this not only cause damage to the customers, but also cause damage harmful to companies that violated intellectual copyright.

The solution

In order to against dumping, countries around the world have been trying to put out barriers, including legal and other administrative procedures. At present, Vietnam governments have enacted the competition law, which refers to the anti-dumping between companies, and foreign companies from entering the market in Vietnam. The law mentioned in the agreement fixing prices of goods and services, either directly or indirectly, divide markets, limit or control the number and limit technical development, technology, investment restrictions, prevent, inhibit, not for other firms to enter the market or business development, and etc. (Legal normative documents, 2013).

The conclusion

This research is the study of the pricing method and it would make some suggestion for managers. Through my personal opinion that the service, trade and retail companies are common measures used to attract customers to buy products or services in order to cater to their daily demands and needs. These companies, basically, satisfy the needs of customers, compete against each other by discount strategies in order to survive in the fierce struggle of this competition war.

Based on George J. et al., (2005), to make the discount but still must ensure the quality of the merchandise, companies have implemented cost reduction methods such as psychological research customers, reduce costs, increase more free services, etc. However, the majority of companies is implement cost reduction methods traditionally, they do not pay much attention to the methods of service and customer care because they have difficulties in identifying the demands and customer’s needs.

In addition, the sensitivity of the competitive environment has led the company to focus on market average price strategic to win the market share themselves. In particular, we recognize that customer-related objectives must go hand in hand with competition-related goals, these goals must be combined positively with objective valuation methods depending on the average market price. Meanwhile, the target of quality-related services, maximize profits and sales goal are not satisfactory when doing this method.

A proposal of this research is the need to combine the objective research to the needs and demands of customers, this combination must be a part of the company's pricing behavior as it pertains to the pricing method, which aims to increase the quality pricing decisions of firms. The fact of the matter is that this is a relatively difficult task for managers, because they are only around approach the how to implement cost-plus method, as well as focusing on production costs but a little interest in market factors. Targeting customers is equally important, this goal should be combined with the target of general market is where the competitors are also interested in making their pricing objectives. If managers want to implement different pricing objectives, it is necessary to have closely links in their pricing strategy, if not these different pricing objectives will affect the result of the strategy. At the beginning, the managers must correctly identify pricing methods and pricing approaches so that they are in harmony with the company's overall pricing. These will partially contribute to the success of achieving the corporate goals.