Question

1. There are three (3) primary factors, according to the Nagle, et.al. textbook, that adversely affect the implementation and maintenance of a supplier’s pricing strategies. What are the factors that contribute to the failure of pricing strategies, and how would a firm mitigate the negative impact of these primary factors?

Answer 1

Factors that contribute to the failure of pricing strategies -

Demand Curve -

A lower price will increase demand and a higher price will reduce demand. Any time you change pricing, track the demand changes closely. In most industries, you can't be constantly changing pricing, but you will still, over time, gain insights that will allow you to optimize your profitability.

You can supplement this with market research, asking research participants if they would buy the product or service at various price points

Market Control

A good demand curve model can help you optimize your pricing for maximum profitability, but that may not always be your best strategy.

For example, lower prices when you first launch may be critical to help you gain market share against established competitors. And higher revenues at a slim profit, or even a loss, signal that the company will likely reach profitability later by achieving economies of scale, volume discounts from suppliers, or upsells to existing customers of higher-profit products.

On the flip side, lower prices can be used by an established business to hedge against competitive threats from newcomers.

Psychological Factors

Even if you don't have any direct competition, customers will have a concept of what constitutes a fair price based on other things they are familiar with.

Also, there are often key price points that will make a significant different in people's willingness to buy.

Are you spending insufficient resources managing your pricing practices? Many companies resort to detrimental, simplistic pricing procedures such as cost-plus pricing, while others use highly sophisticated procedures and technologies to apply advanced pricing methods to really squeeze out the highest margin possible for all product and customer segments.

• Cost-plus pricing. You have to be able to turn a reasonable profit, period.
  
• Fair pricing. No matter your cost, no matter the value, if people don't perceive it as fair, they won't buy.
  
• Value pricing. This should be your upper limit. If it's not the highest number you calculate, something's wrong.

How a firm can mitigate ?

No matter what type of product you sell, the price you charge your customers or clients will have a direct effect on the success of your business.

Though pricing strategies can be complex, the basic rules of pricing are straightforward:

• All prices must cover costs and profits.
• The most effective way to lower prices is to lower costs.
• Review prices frequently to assure that they reflect the dynamics of cost, market demand, response to the competition, and profit objectives.
• Prices must be established to assure sales.

Review your prices if -

• You introduce a new product or product line
• Your costs change
• You decide to enter a new market
• Your competitors change their prices
• The economy experiences either inflation or recession
• Your sales strategy changes; or
• Your customers are making more money because of your product or service

Understand what you want out of your business when pricing your products. Aside from maximizing profits, it may be important for you to maximize market share with your product - that may help you decrease your costs or it may result in what economists call "network effects,"

i.e. the value of your product increases as more people use it.