Khanh Nguyen
Craig Clark
MRKG 1331 Sections: 86001 and 86002
April 17, 2022
Product pricing strategy
Determining the pricing strategy for a new product or service is an integral part of the development process of a project. It is a step that determines the amount you will charge for your products, which is crucial in maintaining sales and keeping the revenue levels healthy to stay afloat. Therefore, pricing strategy entails all the processes and methods a business uses to set the prices for its goods and services. An effective pricing strategy builds and solidifies your customers’ trust and ensures business goals are realized. The cost of a price reflects the perceived value to its potential customer. It paints a picture of the features of the product, like usability, durability, quality, and popularity. A cheap item could be favorable in a competitive market, but some customers will view it as having low value (Haron, A.2016).
When choosing the price strategy to use on your products and services, there are a couple of things to consider to maximize your chances of optimizing the price of the product or service. The objective of the strategy is to ensure a successful entry into the market during the launch. In the pioneer stage, the first step in determining the price is estimating the demand for the product. Nike is a well-known brand worldwide, so the number of potential buyers is relatively high. Therefore, a challenging task in this step is exploring the preferences and tastes of the potential buyer to ensure the product in some way satisfies these needs. Prospective buyers can be asked, in a disguised way, the amount they are willing to pay for a product that satisfies their tastes and preferences. Another thing to consider at this stage of estimating demand is possible retaliation from competitor companies and the repercussions on demand.
The second step of the pioneer stage is deciding on the market target. After designing a specific shoe, Nike has to make strategic decisions on promotional plans to reach the target market. The new shoe brand is designed to reach a part of the entire population. This is usually a joint task for production and pricing. In production, projections about the cost of the final product are made to ensure that the production costs are captured in the final cost of the product. Thus, the price design vividly captures the capital expenditures and variable costs. The third step to consider is a promotion plan. The promotional strategy in pioneer is an investment in the product that will not be recovered until when the market has been established. At this stage, the plan is to obtain an optimum balance between the price to fix and the promotion model to maximize profits for a more extended period. During the launch, the price of the product is usually set to ensure a high margin profit to recover the revenue spent on the pioneering promotion and initial dealer discounts (Modak et al. 2010).
The last step of the pioneering stage is choosing the distribution channels. Distribution channels are the intermediaries between the producer and the final consumer of a product. The pricing procedure must consider the estimated cost of moving products through those channels. These distribution channel costs govern the factory price since it directly impacts the consumer price. The distribution costs can be considered partly promotional and distributive costs. These costs cover warehousing, handling, transportation, and order-taking. These costs are dynamic since constant fluctuations exist depending on production volumes, sales volumes, and other economic factors. There are three distribution channels: wholesalers, retailers, and direct-to-consumer sales. Determining the price for these different channels is a process that considers the current economic trend, penetration of the channel, the skimming level of the price, and premium selling options. When customers are more concerned with economic factors, the prices should be low, and thus production costs should be lowered. If there is a need to penetrate the market, the factory price for the channels should be considered and lowered to attract more customers. When there is a feasible option for premium selling, the high-quality products are produced and sold at correspondingly high prices to the distribution channels (Lancioni, 2005).
The last strategic decision to make is to determine the launching price, which lies between choosing a high initial price that skims the benefits of demand or having low prices from the onset to act as a promotional strategy to penetrate the market. The best strategy for a new product is price skimming. This strategy is all about fixing the price of the product or service high enough to maximize consumer demand and then gradually lowering the price over time. This strategy entails having high prices blended with heavy promotional campaigns in the early market development. Demand for a product is more inelastic with respect to price during the initial stages of the market than later. On the other hand, promotional elasticity is relatively high for high-priced products. Thus, a blend of heavy promotional campaigns and high pricing will yield more success during a new product launch. Price skimming also takes full advantage of the market part that is insensitive to price and also captures the remaining part of the market with the subsequent decrease in prices (Khouja et al. 2010). Price skimming imitates the systematic process of book editions, where it starts with a costly limited personal edition and ends with a cheaply priced paperback.
The fear of facing the unknown in the elasticity of demand also favors the choice of price skimming. Predicting the cost of operation with the increased market is problematic given that the design of the product may change depending on the efficiency of the production process. During the initial stages of production and distribution, huge cash expenditures make it difficult for the company to finance product flotation depending on future revenues. After fixing the launch price, policies for prices in later stages are to be determined. These policies will indicate the product’s approaching maturity. The policies will constantly be checked for signs of weakening in brand preference, the narrowing variations in products considered the best designs and the standard designs, the entry in force of other competitors, and market saturation. These are indicators of the competitive status of the product in the market.
Channels of distribution to be used
The choice of a distribution channel is a critical process in ensuring the success of a new product. There are factors that determine the distribution channel to use. The nature of the product determines whether to use a longer or shorter route of distribution. A direct-distribution channel is desired for perishable and custom-made products, whereas durable and standardized goods can be distributed using more extended distribution channels. Products requiring specialized technical skills must also be sold directly to the consumer. Nike shoes are durable standard products, and hence, the best channel of distribution is through the indirect long-distance channel. The nature of the market may also dictate the channel of distribution you opt for. A large market size spreading over a large geographic area desires a more extended distribution channel involving many wholesalers and retailers. The target market for Nike products is spread worldwide, so the desired distribution channel is indirect.
Having a more extended distribution channel contributes to the promotional efforts of the company. They conduct point-of-sale pushing, which will increase sales volumes for the company. Distributors also conduct local advertising as they find ways to increase sales. Distribution channels also have personal contact with the customer, and they will get feedback from the customer about the products (Karray, 2013). Thus, they will provide feedback that will be vital in maintaining product demand in the market.
References
Haron, A. J. (2016). Factors influencing pricing decisions. International Journal of Economics & Management Sciences, 5(1), 1-4.
Karray, S. (2013). Periodicity of pricing and marketing efforts in a distribution channel. European Journal of Operational Research, 228(3), 635-647.
Lancioni, R. A. (2005). A strategic approach to industrial product pricing: The pricing plan. Industrial marketing management, 34(2), 177-183.
Modak, N. M., Panda, S., & Sana, S. S. (2016). Pricing policy and coordination for a distribution channel with manufacturer suggested retail price. International Journal of Systems Science: Operations & Logistics, 3(2), 92-101.
Khouja, M., Park, S., & Cai, G. G. (2010). Channel selection and pricing in the presence of retail-captive consumers. International Journal of Production Economics, 125(1), 84-95.
