The difference between value-based pricing and cost-based pricing
Pricing is one of the main components of doing business. There are different approaches to how a product or service should be priced. Two main and principally different methods are cost-based pricing and value-based pricing. Cost-based pricing primarily considers the cost of manufacturing a product or providing a service as a reference point in setting the price. Value-based pricing considers what value is offered to customers and certain products and services and examines how much customers are willing to pay for this value. Cost-based pricing focuses on the company and the costs it incurs; value-based pricing focuses on customers.
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The strength of the cost-based pricing is that it establishes competitive prices that are usually lower than those set by value-based pricing. However, a weakness is that companies that employ cost-based pricing are highly affected by competition, continuously have to spend resources to strengthen their competitive advantage, and generally depend more on market forces and conditions that they cannot control. The strength of value-based pricing is that it relieves companies of aggressive competition and generates higher profits. A weakness, however, is that value-based pricing can only be employed when a company deals with a relatively narrow customer group, usually, high-income people who can afford more expensive products and services, i.e., the number of potential customers for products and services priced based on value may be limited.
Hershey’s current prices for its main products or services
Hershey’s is a company with an established reputation, and it is recognized as one of the largest, oldest, and most reputable chocolate manufacturers in North America. Its international reach is also extensive. Despite several controversies (for example, the company was accused of the lack of ethics as it purchased cocoa beans from suppliers who might have exploited child labor), Hershey’s remains a famous brand and has a broad audience. This is why it can employ value-based pricing, especially for its iconic products, such as Hershey’s Kisses. Value-based pricing is justified by the fact that, when buying chocolates from the company, customers do not merely buy sweet snacks—they buy Hershey’s. However, the company is also most affected by competition, as many manufacturers produce similar products, which is why Hershey’s is forced to use cost-based pricing. Hershey’s is not a luxury brand; one of its competitors, Ferrero Rocher, is much more of a luxury brand. It positions its products as more exclusive, so it uses value-based pricing and high prices to a more considerable extent. In using the combination of value-based and cost-based pricing, Hershey’s demonstrates a wise strategy, as it allows the company to effectively address competition and strengthen the recognition of their brand at the same time.
The traditional approaches of skimming and penetrating
Market-skimming pricing is the practice of initially setting high prices for a new product to skim the “cream” of high-value customers. Market-penetration pricing, on the contrary, is setting low prices to reach more customer groups. When introducing shareables, which is the product of interest, Hershey’s did not have to resort to penetration pricing because it is already established and recognized. Skimming allowed obtaining larger profits; further, the price can be lowered over time.
The difference between a vertical marketing system and a horizontal marketing system
The concepts of a vertical approach and a horizontal approach can apply to different contexts in business. As to distribution, vertical and horizontal systems differ in terms oh how companies treat their products or services, their customers, and how goals are defined. A horizontal marketing system is applied when needed to deliver as many products and services as possible to larger and wider customer groups. A vertical marketing system focuses on a particular product or service and a specific customer group or several groups. It can be said that the horizontal approach is about spreading goods, while the vertical approach is about targeting and conveying goods.
The Hershey company’s distribution approach
Vertical and horizontal systems are theoretical concepts used to differentiate between two major approaches to distribution. Like all theoretical concepts, they rarely can be observed in a pure form in the real world. In large corporations, distribution is a complex process, and it often features combinations of approaches. For Hershey’s, a horizontal marketing system can be beneficial because it reaches broad audiences, as eating chocolates is something that people with highly diverse backgrounds can do. On the other hand, Hershey’s uses targeting and positioning. One of the customer groups the company tries to address consists of young, mostly urban people, which is why a vertical marketing system can be applied to convey certain products to particular groups in a targeted manner.
Primary marketing channel’s strengths and weaknesses
Hershey’s primary marketing channel’s strengths and weaknesses
Hershey’s uses several different marketing channels, including agents, wholesalers, retailers, and online sales. It should also be noted for online sales that distribution occurs in two ways: direct (via Hershey’s web store) and indirect (via retailers’ websites). Retailers remain the company’s primary distribution and marketing channel. One of this channel’s main strengths is customer convenience: the products are made available and easy to access in various places. Also, customers may receive financial support from retailers when buying various products, including Hershey’s, which makes this distribution channel more attractive. The channel’s weakness is that a part of revenues is lost through including intermediaries in the distribution process. Also, the manufacturer’s control, i.e., Hershey’s, over its products and communication, is reduced.
Cutting costs while providing more value
In distribution management, it is crucial to understand that distribution channels are more than just channels. Instead of regarding them as simple connections between businesses and customers, it has been suggested to consider them as separate businesses having their operation and goals. Their primary purpose is not different from the conventional goal of all businesses: to maximize value for customers and maximize profit for themselves at the same time. This perspective is more comprehensive and insightful in determining where costs can be cut and the increasing value. For Hershey’s, disintermediation, i.e., eliminating some intermediaries and some distribution components, can bring these benefits. For example, by reinforcing and promoting online sales, the company will be able to reduce costs. The value for customers will be increased because customers will be able to buy any of Hershey’s products, which is not always possible in a store.
The promotion mix of Hershey’s
The five elements of the promotion mix, also called the marketing communication mix, are sales promotion, personal sales, advertising, public relations, and direct marketing. Efforts in these five areas need to be combined to successfully promote products and services in the modern world. Hershey’s is engaged in all five processes. The company encourages higher sales by continually offering new products along with classic ones. It employs direct distribution channels along with indirect ones and heavily advertises what it produces. It maintains a dialog with audiences by showing such initiatives as reducing environmental impact and adopting more sustainable practices. This can build a more favorable image among existing and potential customers. Hershey’s can also benefit from the leveraged sales approach because this approach is designed to focus on activities by integrating distribution channels. This is relevant for the company because it currently employs different channels. The approach can increase productivity and profitability by focusing on profitable accounts.
Hershey’s brand vision, brand personality and brand positioning
The brand vision is what a company wants to represent to customers. Brand personality is the appeal to the customers’ preferences and emotional characteristics. Brand positioning is distinguishing the company from its competitors. To ensure its business’s growth and success, Hershey’s has established a vision of a company that produces classical treats and new and diverse goods for people who may come from different backgrounds and have different lifestyles but are connected by the liking for chocolate goods. Brand personality is, therefore, not regulated by social factors but factors of personal preferences. Finally, Hershey’s brand positioning, especially in terms of its shareables, is based on providing target audiences with high-quality chocolate goods in various forms and flavors for anyone who would like to indulge in a sweet snack.
Building brand with PR and advertising
In his book Contagious: Why things catch on, Berger explores how things become popular and go viral and argue that there are no inherent characteristics of goods and services that can make them automatically catch on; instead, virality is made, i.e., the efforts of marketers, public relations practitioners, and similar professionals are what can make things catch on. This emphasizes the importance of building brands through public relations when launching them. Advertising is thus seen as product support: it maintains brands, while public relations is what creates them.
Levitt’s assertions on the nature of the global firm
In his 1983 article, Levitt discusses the differences between multinational and global corporations and explores the global market features. His ideas can be applied to Hershey’s case to test their validity and reliability in today’s world.
The world’s needs and desires have been irrevocably homogenized. This makes the multinational corporation obsolete and the global corporation absolute.
Hershey’s international operation does confirm that there is, in a way, universal demand for the company’s products everywhere, i.e., Hershey’s can treat the world as a single market rather than a combination of national markets with specific characteristics. From this perspective, it can be considered that Levitt was right, and some needs and desires across countries have been homogenized indeed.
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Technology drives consumers relentlessly toward the same common goals – alleviation of life’s burdens and expansion of discretionary time and spending power.
Concerning the technological aspect of life today, Levitt correctly identified the vector toward alleviating life’s burdens and expanding discretionary time and spending power. In Hershey’s, enhanced availability of wide varieties of its goods is the result of technological advancement that allowed such wide production. Indulging in sweet snacks qualifies for alleviating life’s burdens, which means that the example of Hershey’s confirms Levitt’s statement.
Cultural preferences follow one of two paths: they eventually lose relevance to economic decision making, or they diffuse to other groups and become the substance of global trends.
What essentially distinguishes multinational corporations from global ones is that the latter do not overestimate the importance of cultural preferences and sell the same products or provide the same services the same way everywhere. Levitt argues that cultural preferences either no longer matter at some point or spread and grow into global trends. The Hershey’s case seems to support this idea, as the company deals with universal demand without primarily relying on cultural preferences in its international sales.
The main globalization opportunity of Hershey’s
In their article, Holt, Quelch, and Taylor argue that maximizing the value of global reach requires companies to manage both excellence and obligations. The authors claim that consumers associate international brands with three characteristics: quality signal, global myth, and social responsibility. The latter is the area where Hershey’s has growth opportunities. Unethical operation accusations are what mainly undermined the company’s position, which is why addressing this issue through public relations and social responsibility can provide Hershey with a competitive advantage in the global market.