Question

What are some of the key factors you would consider as a manager to decide on multi-product pricing?

In a monopolistically competitive market, advertizing plays a major role in keeping consumers informed of potential product differentiation features. Please share your personal thoughts about what massive advertising campaigns, do you think massive advertising budgets are complementing new product innovations or it is taking away from some funds that could have been used in new product innovations. Please feel free to use anecdotes if necessary in support of your thoughts.

Answer 1

Strategy # 1. Pricing a New Product:

Pricing is a crucial managerial decision. Most companies do not encounter it in a major way on a day-to-day basis. But there is need to follow certain additional guidelines in the pricing of the new product. The marketing of a new product poses a problem for any firm because new products have no past information.

Here the firm is also not in a position to determine consumer reaction. The question is, what do we mean by a new product? New products for our purposes will include original products, improved products, modified products and new brands that the firm develops through its own R&D efforts.

The firm can select two types of strategy:

(A) Skimming Pricing.

(B) Penetration Pricing.

(A) Skimming Pricing:

Skimming pricing is known as charging high price in initial stages. This can be followed by a firm by charging skimming price for a new product in pioneering stage. When demand is either unknown or more inelastic at this stage, market is divided into segments on the basis of different degree of elasticity of demand of different consumers.

(B) Penetration Pricing:

Penetration price is known as charging lowest price for the new product. This is aimed to quick in sales, capture market share, utilise full capacity and economies of scale in productive process and keep the competitors away from the market.

Strategy # 2. Multiple Products:

The traditional theory of price determination is based on the assumption that the firm produces a single homogeneous product. But firms usually produce more than one product. When firms produce several products, managers must consider the interrelationships between those products.

Strategy # 3. Product-Line Pricing:

Product line pricing is an important practical problem for most modern industrial enterprises. Since almost every firm makes several related products, product line pricing is an important phase of price policy.

Product line pricing refers to the determination of prices of the individual products which form units of an output package. From the viewpoint of management a typical modern firm produces multiple models, styles or sizes of output each of which can be considered a separate product.

Strategy # 4. Pricing over the Life Cycle of a Product:

The cycle begins with the invention of the new product. The innovation of a new product and its degeneration to a common product is termed as the life cycle of a product. It is an important concept in marketing that provides insights into a product’s competitive dynamics. The life cycle of a product portrays distinct stages in the sales history of a product.

Budgets may be embedded within a wider management control framework as a means of addressing formally the interplay between budgets and innovation. This approach enables conflict resolution at the interface between budgets and innovation. Managers were observed to combine formal procedures with more informal social interactions in their bid to micro-manage tensions arising between budgetary control and creative innovation. A fundamental aspect of this micro-managing was the ability to reallocate resources and funds through discussion and negotiation both within and across functions in the light of unfolding circumstances. Second, and in contrast to received wisdom, it appears that budgetary control may be exercised in broadly traditional ways without hitherto hindering innovation within the firm. The principal difference to traditional systems observed at the research site was the use of what we have termed ‘aggregated variance analysis’. This, however, enabled managers to manage flexibly and responsively within the overall discipline of traditional budgetary controls. These findings challenge the Beyond Budgeting debate, which advocates the demise of budgets on the grounds that budgetary systems deter innovation and learning

Given the evident differences between budgets and innovation, reconciling the two appears problematic. Yet, an increasingly globalised economy demands that both are achievable simultaneously. Fiercely competitive markets demand tight cost control in order to maintain profit margins, while a fast-moving and dynamic environment stresses the need for a high rate of strategic adaptation and change.

Embedding of budgets within a wider management control framework is integral to dealing with tensions arising between budgetary control, on the one hand, and creative innovation on the other. Findings also suggest that managers are willing to utilise formal control procedures along with more informal social interactions in a bid to micro-manage the budgeting-innovation interplay. The marrying of the formal with the informal highlights how management controls may play a positive role in managers’ work-related experiences. Rather than seeing formal controls as ‘getting in the way’, managers may welcome their existence for reconciling tensions arising at the interface between budgets and innovation. A broader control framework incorporating the budgetary system appears crucial to helping managers work through the processes of strategic adaptation and change.