The Effectiveness Of Cost Based Pricing Stategy Marketing Essay

Published Date: 23 Mar 2015

Pricing is major consideration in purchasing decisions and is correlated to a company/organisations financial performance. Langabeer proposes two major perspectives in pricing, namely, perceived value pricing and cost-based pricing. Although there are many studies on pricing strategies, current academic research on the impact of how these pricing strategies affect company/organisation performance are limited. This dissertation will examine the use of perceived value pricing and cost-based pricing, and their interaction effects will affect company/organisation performance.

A questionnaire was disseminated to 80 respondents working in various industries where they could influence the adoption of various pricing strategies in their respective company/organisation. Various tests were conducted on their responses to establish any significant relationship/association between/among variables, affirming the 10 hypotheses developed.

Results suggest that cost-based pricing has no significant effect on company/organisation performance, whereas perceived value pricing results in positive improvements in company/organisation performance. Significantly, the combined use of cost-based pricing and perceived value pricing lead to better performance than the sole use of either pricing strategy.

This dissertation also examines the factors that drive the adoption of using a combination of both strategies. The findings show that managerial orientations (ie. company, customer and competitor orientations) and behavioral predispositions (ie. risk aversion, perceived environment hostility and long-term outlook) drive the company/organisation pricing strategies. Survey results show that managers, who scored high in company and customer orientations and low in risk-taking levels, competitor orientation, perceived environment hostility and business outlook tend to adopt a combination of the two pricing strategies. (247 Words)

Acknowledgement

I would like to express my deepest heartfelt gratitude and appreciation to my Final Year Project Supervisor, Mr Justin Kung, for his patient guidance, invaluable feedback and comments throughout all 3 sessions. His constant moral support and prompt advice have led to the successful completion of this project.

I would also like to extend my appreciation to the 80 respondents who had filled up the Questionnaire. Their participation made available a unique set of data on which I based my analysis upon.

Table of Contents

CHAPTER 1 - INTRODUCTION

1.1 Reason for choice of topic

While the other marketing mix elements, (ie. product, advertising, and distribution) are primarily associated with cost (Cressman, 1997), pricing is the only element of the marketing mix that generates revenue for a business. Hence, ineffective pricing can cost the ability of a company/organisation to achieve attain reputable financial status even when the other marketing mix elements are well adopted. However, existing research indicates that pricing as an important strategic decision is often poorly managed (Nagle and Holden, 1995).

In business research, it is often examined how strategic decisions affect company/organisation performance (Boulding et al., 1994) and how company/organisations make certain decisions to improve company/organisation performance (Cyert and March, 1963). However, few studies examine how pricing strategies affect company/organisation performance (Ross et al., 2000). Existing research merely suggests that current industry pricing practices often lack methodological and technological sophistication. For example, company/organisation across different industries and countries tend to adopt cost-based pricing as their predominant pricing approach (Noble and Gruca, 1999; Rao and Kartono, 2009).

The lack of understanding on how pricing strategies affect company/organisation performance reflected that there is a large gap in management knowledge as deciding manager may unconsciously adopt a given pricing strategy without knowing/realising its consequences on the company/organisation's profitability or financial status. Furthermore, the adoption of a given pricing strategy may be persistently linked to certain managerial orientations and behavioral predispositions. Without having a clear understanding on what those driving orientations and predispositions are, company/organisation lack the ability to encourage the adoption of desirable pricing strategies.

1.2 Academic Objectives of Dissertation

A good understanding of the effect of pricing strategies on company/organisation performance as well as factors influencing the adoption of particular pricing strategies is paramount important. It is suggested by Langabeer (1998) that prices should be set above the product costs and equivalent to customers' perceived value of the product so that the company/organization could improve their performance and financial status. This implies that both perceived value pricing and cost-based pricing can co-exist. It was also suggested by Raymond et al. (2001) that the studying of the use of market-based and cost-based pricing and its impact on company/organisation performance as the topic on pricing has become increasingly strenuous.

Therefore, first objective of this dissertation is to examine how perceived value and cost-based pricing strategies affect the company/organisation performance and what are the performance implications of adopting either pricing strategy. At the same time, it has to be recognized that both perceived value and cost-based pricing may not necessarily be contradicting each other and simultaneous adoption pricing strategies may even produce better performance for the company/organisation

The second objective of this dissertation is to explore the factors influencing the adoption of the two pricing strategies. With reference to Smith (1995), it was contentious that managerial orientation and behavior do have impact on how managers set or change price. Tian et al. (2005) and Avlonitis and Indounas (2004) establish the relationship between market orientation and pricing processes. However, their definition of market orientation only concerns the external environment and is limited to the attitudes towards customers and competitors.

According to Kotler (1986), various internal company and external environment consideration constantly influence pricing decisions and it is essential for managers to understand how a combination of internal and external orientation will affect their decision on pricing strategy. After careful consideration, it was decided that for the purpose of this dissertation, the Narver and Slater's (1994) method of segmenting market orientation into three components which are customer, competitor and company orientations, shall be adopted. Consequently, the third objective of this dissertation is to examine the impact on the adoption of perceived value-based and cost-based pricing strategies by the customer, competitor and company orientation

In addition, Bourgeois (1985), Allen et al. (1991) and Bukszar (1999) suggest that managerial behaviors such as perceived environment hostility, risk-aversion and long-term outlook affect managers' decision-making process. Therefore, as a secondary segment, the fourth objective of this dissertation is to study how perceived environment hostility, risk-aversion and long-term outlook affect the manager's decision on his/her choice of pricing strategies (perceived value-based and cost-based pricing strategies).

1.3 Outline of Chapters

Chapter 1 begins with the introduction on the rationale for the choice of topic and the relevant objectives of this dissertation.

Chapter 2 will be focused on literature review, the findings on various theories and research of relevant concepts to meet the objectives of this dissertation. This will include theories on the Perceived value pricing, Cost-based pricing, Gaps on pricing strategy on company/organisation's performance, Managerial orientation, Long term outlook, Environmental hostility and Risk aversion.

Chapter 3 lists out the various hypotheses that this dissertation sets to validate. A total of 10 hypotheses will be defined and the analysis of data collected from the 80 respondents will aid to decide if these hypotheses should be rejected.

Chapter 4 identifies the various methodologies used to gather the relevant data and setting the questionnaires to meet the objectives of this dissertation. Primary data will be used through questionnaires to find the market response of the 2 pricing strategies (Perceived value pricing and Cost-based pricing) and how the adoption of these pricing strategies had affected the company/organisation's performance while secondary data such as academic journals and text books will be used as reference for the relevant theory of this dissertation.

Chapter 5 will be zooming into the assessment of the data from the questionnaires through the use of XL Data Analyst function of Microsoft Excel that can identify the relationship of different factors. Appropriate assumptions will be made to draw a possible reasoning/conclusion from the data generated in this chapter.

Chapter 6 will wrap up this dissertation with the conclusion and recommendation for the company/organisation according to the data/information collated and assessed, to improve the overall performance (efficiency and effectiveness) of the company/organisation with the use of right pricing strategies. Suggestions for further research will also be provided in this chapter.

CHAPTER 2 - LITERATURE REVIEW

This Chapter will be focusing on the academic findings through the research on 7 themes to fulfill the objectives in this study. The 7 themes are:

i) Cost-based pricing

ii) Perceived value pricing

iii) Gaps on pricing strategy affecting company/organization performance

iv) Managerial Orientation

v) Long term outlook

vi) Environmental Hostility

vii) Risk Aversion

2.1 Cost-based Pricing

Rao and Kartono (2009) has defined that cost-based pricing refers to the pricing of a product at a predetermined margin over the product's estimated production costs. At the same time, researchers have found that such pricing strategy is one of the most popular pricing methods (Abratt and Pitt, 1985) because it is user-friendly and it provides price stability which also form part of the standard procedure in pricing decision (Shipley, 1986). Whereas, for many companies, average cost is the initial, dominant, or only determinant in price setting (Kaplan et al., 1958).

In addition, from the company/organisation's manager's perspective, the adoption of cost-based pricing will ensure that all costs are covered by the price. (Nagle, 1987; Akintoye and Skitmore, 1992).

However, there are adverse issues arising from cost-based pricing affecting company/organisation performance. It is difficult to obtain accurate information of the product's average or direct costs and it may cause pricing errors (Nagle, 1987; Akintoye and Skitmore, 1992). In accordance to the theory of Morris and Calentone (1990), cost is merely an indicator of the company/organisation's efficiency and effectiveness and it does not necessarily means that the customers are willing to pay at the price equivalence or exceeding the costs. As a result, over-pricing or under pricing in the market may occur if cost is to be used as a basis in pricing.

2.2 Perceived Value Pricing

Perceived value pricing is defined as the practice of pricing the product in accordance with what customers perceive the product to be worth (Ge, 2002). It is a customer- centric approach to pricing that prioritizes the customer's product valuation above competition, cost and other considerations (Rao and Kartono, 2009). To advocate the use of perceived value pricing, Sawhney and Kotler (2001) encourage company/organisations to shift from a transactional to a more relational perspective in pricing. This is because pricing should focus on building and strengthening of long-term relationships between customers and company/organisations in the new economy of ever-changing demand customer service levels (Jallat and Ancarani, 2008).

However, other researchers like Shipley and Jobber (2001) contend two drawbacks regarding perceived value pricing. First, when perceived value pricing is implemented too rigidly, it ignores the competitors' pricing, costs and other environment considerations. Second, to implement perceived value pricing, managers have to form estimates regarding customer price sensitivities and how highly they value the product offering. This information is difficult to obtain and can possibly lead to imperfect demand estimation.

2.3 Gaps on Pricing Strategies Affecting Company/organisation Performance

In many occasions, managers have to adopt more than one pricing method to effectively set prices (Indounas, 2009) as pricing decisions are often complex. The knowledge to assess the drawbacks of each pricing strategy is crucial as pricing has a direct impact on company/organisation performance. From the various literature reviews and explanations above, it can be concluded that cost-based and perceived value pricing have their advantages and disadvantages. However, no comprehensive research has been done on the interaction and complementary effects of these two pricing strategies when they are used together.

Hence, this study also aims to investigate the interaction effects between perceived value and cost-based pricing to determine if the effects on the company/organisation performance are synergistic or antagonistic. If effects of adopting both perceived value and cost-based pricing are synergistic, the disadvantages of each pricing strategy can be mitigated or combated to achieve better company/organisation performance.

2.4 Managerial Orientations

Managerial orientations are attitudinal qualities which can be approached as a way of thinking that is based on the integration and coordination of all marketing activities and other company activities to maximize long-term profitability (Druker, 1954). Kohli and Jaworski (1990) develop a measure of market orientation and test its effect on business performance. Their measure of market orientation consists of three behavioral components, which are company orientation, competitor orientation and customer orientation; each of which affects the way information is generated and disseminated by managers (Narver and Slater, 1994).

Managers with high company orientation pursue efficiency in all parts of their value chain and hope to achieve operational excellence that can translate into higher sales through lower prices or higher margins (Porter, 1985).

Managers with high competitor orientation tend to make decisions by focusing on generating, disseminating, and using information about competitors. They focus on targeted competitors' goals, strategies, offerings, resources and capabilities and disseminate information generated from the assessment of competitors (Day, 1994; Porter, 1980; Kohli and Jaworski 1990). According to Narver and Slater (1994), managers will make decisions in a market-driven perspective when responding to its competitors' actions. Hence, when they are making pricing decisions, they will take reference from competitors' prices and actions (Tse, 2001) and their natural behavior will be to match, if not exceed, competitors' strengths.

Customer orientation is often described as the degree to which the organization obtains and uses information from customers, develops a strategy which will meet the customer needs, and implements that strategy by being responsive to customers' needs and wants (Ruekert, 1992). Managers with high customer orientation aim to gain sufficient understanding of their target customers so as to create superior value for them continuously (Day and Wensley, 1988). There are empirical evidence suggesting a positive relationship between company financial performance and the amount of emphasis placed on user requirements and customer satisfaction (Lusch and Laczniak, 1987; Cooper, 1979; Peters and Waterman, 1982; Rothwell, 1980). Moreover, it has been purported that for a company to achieve continuous above-average performance, it must create a sustainable superior value for its customer (Porter, 1985).

Currently, studies have been focusing on how these three orientations affect company/organisation performance (Kohli and Jaworski, 1990). However, managerial orientations usually affect their decision-making process. As a consequence, the decisions made will impact the company/organisation performance. Hence, this research will focus on how customer, competitor and company orientation affects managers' choice of pricing strategies.

2.5 Long-term Outlook

Strategic decisions are shaped by a variety of contextual influences arising from past events, present circumstances, and perspectives of the future. Strategic decision- makers must examine current issues facing the company/organisation such as organization resources and the competitive environment as well as their subjective evaluation of the future (Bateman and Zeithaml, 1989).

Furthermore, in a dynamic environment where change occurs in unpredictable ways, the challenge for a company/organisation is to have relevant information on which to base its decisions (Duncan, 1972), and to engage in adaptive sense making of the environment (Bogner and Barr, 2000). To make strategic decisions, the strategy formulation process includes a long-term outlook based on an external environment that is anticipated in the future. This additional dimension creates a "tension" between the need to adapt to what is happening in the external environment, and the need to anticipate a future environment (Bukszar, 1999).

However, little research has been done to highlight the issue of predicting the future configuration of the external environment and its relevance to the choice of pricing strategy within a company/organisation. Hence, this dissertation will examine the significance of long-term outlook to the pricing strategies adopted by managers.

2.6 Environmental Hostility

The degree of threat posed by the intensity of competition will affect the perceived level of environmental hostility by the managers (Khandwalla, 1978). A hostile environment is often characterized by the intense price, product, technological and distribution competition (Miller and Friesen, 1983). As it is difficult to predict the likely importance of environmental changes as they occur, therefore, making strategic decisions in a hostile environment can be particularly complex (Sutton et al., 1986). When up-to-date and accurate information is difficult to obtain, it complicates and intensifies challenges to the company/organisation (Bourgeois and Eisenhardt, 1988).

To respond to changes in the external environment, managers will interpret, respond and adapt their strategic decisions to the requirements of its environment (Porter, 1985). For example, managers may set ambitious market share goals and take bold steps to achieve them by cutting price and sacrificing profitability when they feel threatened by the environmental factors (Venkatraman, 1989).

As the external environment becomes more dynamic, threatening and complex, traditional managerial orientations are inadequate factors to motivate managers in making the best decisions. Therefore, further examination of perceived environment hostility and other managerial behavioral dimensions is highly necessary to provide a more holistic model in making pricing decisions.

2.7 Risk Aversion

Risk refers to the uncertainty about outcomes or events, especially with respect to the future (Glickman and Gough, 1990; Miller and Bromiley, 1990). Risk aversion involves the unwillingness of management to commit significant resources to opportunities due to the chance of costly failure (Allen et al., 1991).

Business risk impairs forecasting and planning activities, and such impairment makes it harder for decision makers to create an organizational strategy and plan future actions (Bettis and Thomas, 1990; Sharpe, 1990). Despite it, there is limited understanding on the implications of risk aversion during managerial decision-making process. Therefore this dissertation will examine how risk aversion affects the adoption of pricing strategies within a company/organisation.

CHAPTER 3 - SETTING OF HYPOTHESES

In this chapter, a total of 10 hypotheses will be set up. Research was done to establish the 10 hypotheses where they will subsequently be put into test (in Chapter 5). It is through the testing of these 10 hypotheses that will prove the relationship of these

3.1 Perceived Value Pricing and Company/Organisation Performance

The use of perceived value pricing recognizes the differences in customer value perceptions and spending power, therefore it allows disparity in prices to be set in different segments (Morris and Calentone, 1990). Since perceived value pricing is based on the specific price which customers are able and willing to pay, high demand from the customers is expected.

Also, the use of perceived value pricing allows price skimming by setting high prices initially so as to extract the largest amount of surplus from the high valuation customers. This is an inherent incentive because the high prices contribute to high revenue and profitability and ultimately improve the company/organisation performance (Nair, 2007). Hence, the adoption of perceived value pricing is expected to enhance the overall profitability of the company/organisation.

H1: Company/organisations that use perceived value pricing are likely to achieve better performance.

3.2 Cost-based Pricing and Company/Organisation Performance

Based on Cavusgil's (1980) research, both product and resources costs affect the pricing strategies of the company/organisation. Costs are frequently used as a basis for price setting because they provide a simple guideline of the price "floor" under which prices cannot be set (Simon, 1995).

The use of cost-based pricing accounts only for the company/organisation's supply constraints but it fails to consider the customer perception of the product. This is makes it difficult for the company/organisation to improve the product's image in the customer mindset (Rao & Kartono, 2009). Hence, it leads to low purchase intentions and demand for that product.

As cost-based pricing ignores customer's valuation of the product, using this pricing strategy may harm the profitability by over-pricing the product in weak markets or under-pricing the products when the demand is strong (Nagle, 1987). Moreover, demand and competition are important factors especially in price-sensitive markets because customers are unwilling to purchase products which are not value for money (Myers et al., 2002). Despite having a price which covers costs and guarantees margins, profitability will definitely be affected if there is no demand.

Quoted from Backman (1953, p.148), "the graveyard of business is filled with the skeletons of companies that attempted to base their prices solely on costs." Thus, it was proposed that:

H2: Company/organisations that use cost-based pricing are likely to achieve lower performance

3.3 Effects of adopting both Cost-based and Perceived Value Pricing on Company/Organisation Performance

During price setting, costs are the first to be taken into consideration but the final selling price is usually determined by what the customers will bear (Hankinson, 1995). When making pricing decisions through a series of market analysis and interpretation of market trends, managers are likely to better understand the market requirements and gain greater insights into the psychological impact of price changes on customers (Day, 1994 and Dickson, 1992). After understanding the customers, these information and insights can be used to substantiate or cross-validate final pricing decision made from the pricing computations and analysis derived from cost-based pricing.

The use of both cost-based and perceived value pricing strategies by managers help to enhance intra-organizational coordination. This is because when the pricing logic is cultivated among the managers, the shared understanding of the complementary effects of the pricing strategies may stimulate more intellectual interpretation of data generated from pricing tools which are used to analyse cost-based pricing. This added level of appreciation of pricing computations and analysis should improve the managers' financial judgment and sharpen their ability to extract value through pricing actions (Dutta et al. 2003).

Therefore, when the cost-based pricing is coupled with perceived value pricing, prices are set with a pre-determined profit margin and close to customers' ideal price. This will result in greater improvement in company/organisation performance as profitability and customer satisfaction are achieved at the same time (Nair, 2007).

H3: Adoption of both cost-based and perceived value pricing strategies by the company/organization is likely to achieve better performance

3.4 Perceived Value Pricing and Customer Orientation

Customer-oriented managers focus their pricing decisions on information gathered from their customers and they believe that pricing is used as a tool to reflect product performance or utility or to signal product quality or economic value (Smith, 1995).

These managers rely on in depth analyses of their customers and pay close attention to their needs and benefits in the formulation of their strategy (Day, 1994). Customer-oriented managers are primarily concerned about providing value to their customers and pricing their products closely accordingly to their target market's ideal point. Thus, customer-oriented managers have a high tendency to price according to perceived value pricing strategy.

H4: Managers of company/organisations that use perceived value pricing are likely to be customer oriented

3.5 Perceived Value Pricing and Competitor Orientation

Managers with high competitor orientation tend to make comparisons against large competitors as a basis of their decision making process (Aldrich et al., 1984). They make significant efforts to carefully track conditions in the market by monitoring competitors' prices and market shares and looking for competitor signals. This group of managers views their environments as highly competitive and they formulate strategies to defend or counter competitive actions quickly (Smith, 1995).

Though competitor-oriented managers have an external directed focus (Day, 1994), they are only responsive towards competitors' actions and their pricing strategies (Day, 1994). According to Ge (2002), perceived value pricing is different from other types of external-oriented pricing approaches as it is driven by customers instead of competitors. Thus, managers who pursue perceived value pricing are not competitor oriented.

H5: Managers of company/organisations that use perceived value pricing are not likely to be competitor oriented

3.6 Perceived Value Pricing and Long-term Outlook

According to Harnett (1998), company/organisations will be in a stronger position when they are able to satisfy customer needs and deliver value. This is because managers are able to focus their attention to understand customer's value and achieve this to gain competitive advantage in the market place in the long run (Woodruff, 1997).

Adopting perceived value pricing is one aspect of relationship marketing strategies targeted at safeguarding long-term financial performance (Zeithaml et al., 2006). Therefore, by providing products at the right value to customers, there will be higher level of customer satisfaction and retention which leads to future profitability.

H6: Managers who have long-term outlook are more likely to use perceived value pricing

3.7 Cost-based Pricing and Company Orientation

Company-oriented managers refer to managers who typically utilize an internal driven perspective during decision-making and information usage (Smith, 1995). These managers place strong emphasis on their company/organisation operations (McKechnie et al., 2008) and aim to increase efficiency, improve profit margins or reduce costs through standardization.

They use pricing as a tool for covering costs and these managers often gather data using the company's cost accounting system and subsidiary sub-models in order to calculate unit costs and prices (Smith, 1995). Prices are often set using a predetermined margin with the product costs as its foundation. Thus, highly company-oriented managers are more likely to use cost-based pricing.

H7: Managers who are highly company-oriented are more likely to adopt cost-based pricing.

3.8 Cost-based Pricing and Short-term Outlook

The simple cost-based pricing strategy does not take into account the competitive situation or customers' perception of the product. Long-term objectives of the company/organisation like maintaining competitiveness and building customer loyalty are sacrificed to meet the short-term goals of profitability (Meidan and Chin, 1995). Cost-based pricing strategies are indicative of profit-oriented company/organisations, often with short-run expectations within the market (Cavusgil, 1980). Thus, managers who utilize cost-based pricing tend to have short-term outlook.

H8: Managers who adopt cost-based pricing are more likely to have a short-term outlook

3.9 Cost-based Pricing and Perceived Environment Hostility

High levels of price, product, technological and competition intensity are common characteristics of a hostile environment (Miller and Friesen, 1983). The pressures from external environment make the process of making pricing decision more delicate, complex and important (Monroe, 1990).

Managers who perceive their environment changes as less dynamic and subject to fewer changes are expected to be passive and less market driven in their pricing decisions (Morris and Calantone, 1990). They tend to adopt cost-based pricing because they do not feel threatened by the changes in the market, opportunities and competitors' actions.

H9: Managers who perceive environment hostility to be low are more likely to adopt cost-based pricing.

3.10 Cost-based Pricing and Risk Aversion

French and Kendall (1992) suggest that risk aversion affects the managerial decision-making process. Thus, the attitude towards risk has implications on the pricing strategies chosen. Cost-oriented company/organisations saddle with an inward-looking orientation and have high risk-aversion. They tend to pursue an agenda of streamlining and downsizing to maintain the status quo of the company/organisation performance (Spiker and Lesser, 1995).

Moreover, risk aversion could lead to managers relying on the use of cost-based pricing (Noble and Gruca, 1999). This is because cost-based pricing provides assurance to managers that margins will be earned for selling every unit of product.

H10: Managers who are low risks taker are more likely to use cost-based pricing.

CHAPTER 4 - RESEARCH METHODOLOGY

In this chapter, the various methods of research methodologies will be discussed. The chosen methodologies, its limitation and bias will be the main focus in this chapter.

4.1 Primary Versus Secondary Data Research

The work of Zikmund and Babin (2010) identifies the characteristics of the first dimension of marketing research as Primary and Secondary research. Primary research involves collecting original primary data or starting research from a scratch (Zikmund and Babin, 2010). The advantage of this approach is that the researcher may set the questions specifically according to the critical needs of the research. However, it is time consuming and costly as compared to using the existing, preceding data that might also share the same research objectives. Some examples of Primary data research include questionnaires, interview and customer satisfaction survey (Szwarc, 2005).

On the other hand, Secondary research allows the researcher to utilise existing data and historical information to meet the objective of the research (Zikmund, 2003). A vast range of predecessor works usually covers most of the common findings, making it an easier way to conduct marketing research. Technological advancement also contributes to the ease of access through online research databases (e.g. EBSCO). However, secondary research involves a pre-determined questions or data which may not be very specific to some in-depth research objectives. It also provides historical data which may not be relevant overtime due to the change of trends, business environment and other variables.

4.2 Qualitative Versus Quantitative Data Research

Other than the first dimension of marketing research, Zikmund (2003) also identifies the second dimension available for implementing the research. The first of the second research dimension is Qualitative methods in which the data collected directly from the response/opinion of the relevant parties without the dependency of numerical measurement (Zikmund and Babin, 2010). This method excels in providing a supposedly more direct and clear answer as compared to the quantitative methods which may include some statistical errors. However, Qualitative methods may incorporate biasness and subjective opinion of different respondents as one might hesitate to answer truthfully due to emotional burden or personal views when asked directly. Quantitative on the other hand, takes numerical and statistical evidences into consideration, allowing a more established assumptions based on the number of polls or votes. This may be useful to find the size of a market, current trend and customers' preferences or behaviour towards different variables (Kotler et al., 2009).

4.3 Choice of Research Methodologies

It has been decided that Primary and Quantitative research methods are to be used for this report as primary data allows the questionnaires to be set according to the specific objectives of the report which in turns provide relevant information for research on pricing strategies affecting company/organisation's performance. The research will also be conducted on a sample size of 80 respondents, where statistics deriving from facts and evidences will be collated to support the credibility of the findings. Secondary research methods with reference to academic journal and text books will also be used to compare the relevance of related research done by academic theorists. The questionnaires are distributed in person where results are being obtained instantly. The collated results will then be analysed using XLData Analyst function of the Microsoft Excel Software to generate the conclusive hypothesis and to aid in making relevant and appropriate assumptions on the results.

4.4 Questionnaire Design

The questionnaire is designed in the simplest form to specifically cater to the research's objectives and eliminating any ambiguity. There are two main parts of the questionnaire. The first part covers the Demographical variables such as age, gender, occupation to provide the general idea on the characteristics and segmentation of the tested respondents.

The second part of the questionnaire zoomed straight into the focused issues where respondents will state if they agree or disagree to specific statement drafted to find out if specific pricing strategy complimenting with specific orientation (Eg. Company oriented, Competitor oriented or Customer oriented) will affect the company/organisation's performance in totality.

A sample of questionnaire is attached under Appendix 1 for reference material.

4.5 Pre-test Analysis

The questionnaires are pre-tested to three random respondents before distribution to the targeted respondents. This is done to find the initial response in order to eliminate ambiguity and inability to understand the questions. This will help to improve the quality of the survey. The questionnaire will then be adjusted accordingly before distribution.

4.6 Sample Size

The sample size of this research is 80 respondents. The surveys are targeted at random working adult with diverse backgrounds to gain a broader view and a higher accuracy of the result in the relevant subject. The response rate of the surveys is 100%.

4.7 Bias and Limitation

The sampling size does not sufficiently represent all company/organisations in Singapore. Thus, sampling error may occur. Though it is possible to reduce the sampling error by having a larger sample size, the cost and resources required to facilitate this process will be significant. Biased responses may be incorporated as no absolute control could be exert on how the questions are interpreted or answered by respondents.

CHAPTER 5 - FINDINGS AND ANALYSIS

In this chapter, data analysis from the findings of the surveys will be conducted to generate the hypothesis tests needed for making relevant assumptions with regards to the achievement of the research objectives.

5.1 Demographics Percentage Analysis

The percentage analysis shows the demographical statistics of the respondents of the surveys. A total of 80 respondents are analysed under Demographic bases of Gender (Para 5.1.1), Age Group (Para 5.1.2) and Position held in the company/organisation (Para 5.1.3).

5.1.1 Gender

From above pie chart, it shows that the mixture of male and female respondents are 60% and 40% respectively. From this, it can be said that male respondents are slightly dominant in terms of sample size in this survey.

5.1.2 Age Group

It can be seen from the above chart that the majority of the respondents are under the age group of '30 to 39 years old' and '40 to 49 years old' while the remaining minority are grouped in '20 to 29 years old' and '50 years old and above' age group. The significant number of respondents that falls under the age group of '30 to 39 years old' and '40 to 49 years old' is most likely caused by the possible market standard of employing managers or executives who are experienced or mature in order to make complex decision on pricing strategy for the company/organisation.

5.1.3 Position held in the company/organisation

The respondents of the surveys are ranging from being a Shareholder, CEO/COO/CFO/Director of a company/organisation, Manager, Executive and they could be self-employed too. As can be seen from the above chart, the majority of the respondents are Manager and Executive. These 2 categories (Manager and Executive) covered a significant figure of 78.8% and the remaining respondents are distributed within the other job positions.

5.2 Cross Tabulation Analysis

In this section, Cross Tabulation will be relied to establish if there is any significant relationship between 2 or more categorical variables. There will not be any testing of hypotheses but merely for descriptive and general analysis.

5.2.1 Gender & Adoption of Pricing Strategy

This section aims to establish if 'Gender' of the respondent does affect the choice of adopting a pricing strategy and if there is any significance relationship between both variables.

The results obtained from the cross-tabulation showed that there is no significant association between the 'Gender' and the adoption of specific pricing strategy. This means that regardless the respondent is male or female, it does not necessary means that a certain pricing strategy would be adopted in the company/organisation. This could be due to the fact that the respondents might not have the ability to influence the decision to adopt certain pricing strategy which has already been in use and at the same time, these company/organisations might not have been discriminating against employing staff of particular gender.

5.2.2 Position in the company/organisation & Adoption of Pricing Strategy

This section aims to establish if the respondents' position in the company/organization does affect the choice of adopting a pricing strategy and if there is any significance relationship between both variables.

The results obtained from the cross tabulation showed that there is no significant association between the respondent's position in the company/organisation and the adoption of particular pricing strategy. This means that by holding certain position in the company/organisation, it does not necessary mean he/she has the ability to influence pricing strategy. This could be due to the fact that in the recent decades, company/organisation holds meeting to discuss on the adoption of pricing strategy where staff of certain position could no longer influence such decision solely.

5.2.3 Role in pricing strategy in the company/organisation & Adoption of pricing strategy

This section aims to establish if the respondents' role in pricing strategy in the company/organisation does affect the choice of adopting a pricing strategy and if there is any significance relationship between both variables.

It could be concluded from the results obtained via cross tabulation that there is no significant association between the role in pricing strategy of the company/organisation and the adoption of pricing strategy. This means that even if respondents who have the ability to decide on the adoption of particular pricing strategy, it does not necessarily mean that a certain type of pricing strategy is more favourable.

5.3 Linear Regression Analysis (Testing of Hypotheses)

In this section, Linear Regression will be relied to test the various Hypotheses set out in Chapter 3, in order to determine if there a significant correlation among variables which will allow the prediction about particular variable based on the knowledge of the others.

5.3.1 Pricing Strategy & Company/organisation Performance

In this section, Dependent Variable is defined to be 'My Company/organization achieve good performance' while the Independent Variables are, 'My company/organization uses perceived value pricing strategy', 'My company/organization uses cost-based pricing strategy' and 'My company/organization uses both perceived value pricing strategy and cost-based pricing strategy'.

These variables were used for Hypotheses Testing and prediction then could be made if certain variables could correlate to the other variables where any significant relationship could be established. As a result, Hypotheses can then be supported or rejected.

The 3 Hypotheses which will be testing in this section are:

H1: Company/organisations that use perceived value pricing are likely to achieve better performance.

H2: Company/organisations that use cost-based pricing are likely to achieve lower performance

H3: Adoption of both cost-based and perceived value pricing strategies by the company/organization is likely to achieve better performance

Please refer to the result of the analysis below:

The results obtained from the regression analysis showed a Rsq value of 0.83, indicating that 83% of the variation in company/organisation performance is explained by cost-based pricing, perceived value pricing and their interaction effect.

It was observed from the results above that there is a significant relationship between perceived value pricing and company/organisation performance. This indicated that the adoption of perceived value pricing lead to better company/organisation performance.

Interestingly, this study obtained a significant positive interaction effect between cost-based pricing and perceived value pricing. This result supported the hypothesis that complementarities exist between cost-based pricing and perceived value pricing. Furthermore, the interaction effect of the cost-based pricing and perceived value pricing has greater effects on company/organisation performance than the individual effect of perceived value pricing. Thus, adoption of both pricing strategies would result in better company/organisation performance.

However, a significant relationship between cost-based pricing and company/organisation performance could not be found. Hence, it could not conclude that cost-based pricing would lead to poor company/organisation performance. Supporters of cost-based pricing purports that target profits can be reached over a longer term if prices were corrected frequently through trial and error means (Hankinson, 1995). Thus, H1 and H3 are supported while H2 is rejected.

5.3.2 Factors affecting Perceived Value Pricing

In this section, Dependent Variable is defined to be 'My company/organization uses perceived value pricing strategy' while the Independent Variables are, 'My company/organization is concerned about how my competitors price their products', 'My company/organization believes in providing value to our customers' and 'My company/organization is concerned with the long-term outlook'.

These 3 Independent Variables represent the 'Competitor orientation', 'Customer orientation' and 'Long Term Outlook of the Company/Organisation'.

These variables were used for Hypotheses Testing and prediction then could be made if certain variables could correlate to the other variables where any significant relationship could be established. As a result, Hypotheses can then be supported or rejected.

The 3 Hypotheses which will be testing in this section are:

H4: Managers of company/organisations that use perceived value pricing are likely to be customer oriented

H5: Managers of company/organisations that use perceived value pricing are not likely to be competitor oriented

H6: Managers who have long-term outlook are more likely to use perceived value pricing

The regression analysis results showed a Rsqvalue of 0.88, indicating that 88.8% of the variation in perceived value pricing is explained by customer orientation, competitor orientation and long-term outlook. Customer orientation and competitor orientation are significant predictors of perceived value pricing and this confirms the hypotheses H4 and H5.

However, H6 is rejected as it was predicted the relationship between long-term outlook and perceived value pricing to be negative. The results showed that managers using perceived value pricing actually have short-term outlook rather than long-term outlook which was proposed. Anderson et al. (2010) suggests the reason why perceived value pricing may be short-sighted. The adoption of perceived value pricing alone would not guarantee customers' satisfaction, as it is a short run measure to satisfy customers‟ demand. However, other potential ways of deriving superior value that may result in greater profitability in the long run are ignored.

5.3.3 Factors affecting Cost-based Pricing

In this section, Dependent Variable is defined to be 'My company/organization uses cost-based pricing strategy' while the Independent Variables are, 'My company/organization undertakes high level of risk', 'My company/organization takes note of environment hostility', 'My company/organization is company oriented (focused on maximizing profit, efficiency and cost-saving) and 'My company/organization is concerned with short-term outlook'.

These variables were used for Hypotheses Testing and prediction then could be made if certain variables could correlate to the other variables where any significant relationship could be established. As a result, Hypotheses can then be supported or rejected.

The 4 Hypotheses which will be testing in this section are:

H7: Managers who are highly company-oriented are more likely to adopt cost-based pricing

H8: Managers who adopt cost-based pricing are more likely to have a short-term outlook

H9: Managers who perceive environment hostility to be low are more likely to adopt cost-based pricing

H10: Managers who are low risks taker are more likely to use cost-based pricing

Through regression analysis, results show a Rsqvalue of 0.95, indicating that 95% of the variation in cost-based is explained by company orientation, long-term outlook, perceived environment hostility and risk aversion. Company orientation, long-term outlook, perceived environment hostility and risk aversion are all significant predictors of cost-based pricing and thus supporting the hypotheses H7, H8, H9 and H10.

CONCLUSION AND RECOMMENDATIONS

6.1 Managerial Implications

This research is motivated by the severe gap in management knowledge on the impact of pricing strategies on company/organisation performance and how certain pricing methods are utilized due to different managerial orientations and behavioral tendencies. Recognizing the critical need for managers to acquire this knowledge on pricing, it was set out to empirically examine the performance effects of the pricing strategies and the behavioral factors influencing them.

6.1.1 Pricing Strategies and Company/Organisation Performance

This research results show interesting revelations between company/organisation performance and the two pricing strategies. In accordance to Cannon and Morgan (1990) and Ingenbleek (2007), it was found that company/organisation performance improves with the adoption of perceived value- pricing strategy. Through formal market research, managers can understand the ideal values that their customers attached to their products (Indounas, 2009). It is recommended that managers be mindful of how customers value their products and price their products according to their customers' ideal value so as to obtain favorable growth in their company/organisation.

Rao and Kartono (2009) warn managers against the viability of cost-based pricing method as a profitable pricing strategy. Contrary to critics which suggest that cost-based pricing is a nonsensical approach to pricing (Nagle and Hogan, 2006), this study does not find any significant negative relationship between cost-based pricing and company/organisation performance to support these arguments regarding cost-based pricing strategy. Since the effect of cost-based pricing on company/organisation performance cannot be concluded, managers are cautioned not to utilize cost-based pricing strategy as the only measure for pricing their products.

Notably, this study shows that the simultaneous adoption of both perceived value and cost-based pricing leads to better company/organisation performance. The results are aligned with Indounas's (2009) argument that pricing decision is complex and there is a need for managers to adopt more than one pricing method so as to effectively set prices which enhances company/organisation performance. In addition, Monroe (1990) suggests managers to take a Janus-faced approach when choosing a pricing strategy. They should fix their gaze both inside and outside their company/organisation at the same time during the pricing decision process. A study by Noble and Gruca (1999) also shows that only 35% of the managers used a combination of cost-based pricing and one other pricing strategy. This implies that more managers need to seek both inward and outward orientation when they are making pricing decisions.

As compared to the sole adoption of either pricing methods, the results indicate that company/organisation achieved greater improvement in company/organisation performance when both perceived value pricing and cost-based pricing are implemented simultaneously. Managers are advised to adopt an internal perspective of their company by understanding the cost structure of their company/organisation, and also develop a customer-centric approach by recognizing the customer's ideal value when they are making pricing decisions. This enables the managers to obtain a more holistic view of the inward and outward situation of the company/organisation. In doing so, the complementary effects of both pricing methods will enable managers to reap maximum benefits and thus price their products optimally for favorable company/organisation performance.

6.1.2 Managerial Behaviors and Pricing Strategies

To adopt both perceived value and cost-based pricing simultaneously to achieve the best performance outcomes, there are several managerial orientations and behaviors to control. The ideal traits that a manager should have in implementing both cost-based and perceived value pricing are high customer and company orientation, low competitor orientation and perceived environment hostility, more risk-averse and being short-term focused.

Managers can have high customer and company orientation by constantly engaging customers' feedback and reflecting on their business processes and capabilities during their pricing decision-making process. To have lower competitor orientation and perceived environment hostility, managers should avoid benchmarking competitors excessively and counter their pricing actions aggressively because it may result in a price war.

Furthermore, it is recommended for managers to be more risk-averse by having proper planning and risk assessment prior to deciding the adoption of pricing strategies. Since the business environment has become very volatile in recent years, it is suggested that managers should have a short-term focus instead of having long-term outlook. This will ensure that pricing strategies are constantly reviewed and adjusted according to demand.

In conclusion, managers are advocated to develop these managerial orientations and behaviors of both pricing strategies to take advantage of the complementary effects of the two pricing strategies on company/organisation performance.

6.2 Limitations and Future Research

With reference to this methodology, several areas of this study present opportunities for future research. In particular, this study relies on the data collected from a limited number of respondents, which may not be a perfect reflection of how a particular industry functions in the real world market. Furthermore, some of the respondents of this research were young executives, who do not have extensive pricing experiences. However, it is very likely that these young executive will become junior managers in the future, thus their decision making process are still of relevance to this research. Future research could consider gathering data from solely pricing managers of a wide range of companies to obtain a more accurate reflection of the current market.

Due to the vast number of pricing strategies and methods in use by current managers, this study focuses on two pricing strategies, cost-based pricing and perceived value pricing, to obtain a glimpse on the impacts of pricing strategies on company/organisation financial performance and the factors influencing the adoption of the two pricing strategies. For future research, 19 different types of pricing methods [listed by Rao and Kartono (2009)] can be considered to be examined, to better understand the different financial impacts of each method and the possible interaction effects among them to perhaps discover the best combination of pricing methods for company/organisation success.

This study concludes that the complementary effects of cost-based and perceived value pricing strategies have a positive impact on company/organisation performance. However, further comprehensive research is required to develop a new pricing model to achieve better company/organisation performance.

In aggregate, this research presents only a glimpse towards the understanding of the underlying impact of cost-based pricing and perceived value pricing on company/organisation performance, thereby creating vast opportunities for further research.

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