Introduction
Price is a very essential aspect in every business as it is the fundamental determinant of the profit to be achieved after the sale of a commodity or service and therefore influences the success or failure level of the business. Pricing is the process of determining the cost of a product or a service so as to identify what a business will obtain in exchange of its products or services.
It is one of the components of the marketing mix, the other ones being; product, place, and promotion. The factors associated with pricing are; the production cost, competition, the market place and condition, and also the quality of the product or service. Value of the product towards the customers should also be considered in determining a price to ensure that the customers pay what is equivalent to the value gained (Pratt, n.d).
Pricing Strategy
According to Phillips (2005), pricing strategy is a logical choice from a list of alternative prices that seeks to maximize profit within a specific period of time under a certain situation. There are various approaches that can be adopted by companies or businesses in pricing their goods and services and there is no single model identified for the purpose of pricing.
However, every pricing strategy should seek to maintain fairness and integrity throughout the pricing process. Here is a guideline on how a company may undertake its pricing process. The company or business should undertake a marketing strategy which involves carrying out a marketing analysis, segmentation, targeting, and positioning of the product in relation to its quality and that of other products in the market.
Decision on the market mix is then made where the definition of the product or service is done, and distribution and promotion strategies identified. The other step involves analyzing the demand curve as pricing is directly affected by the prices of the particular products.
Calculation of cost is also crucial and the company should put into consideration all costs associated with the product, the fixed and variable costs, so as to make sure that profitability is achieved. The surroundings factors like competition and legal conditions should be considered too. In pricing the product, a business should assess the influence of its pricing towards the pricing of competitors.
The price should be in line with that of competitors to avoid unhealthy competition and should also adhere to price control aspects of the government. The business should also establish pricing objectives so as to come up with the most favorable price of the product.
The objectives may touch on aspects like maximization of profits, revenue, quantity and quality of the product among others. It is after consideration of all the above that that the price is agreed upon.
Classification of Pricing Strategies
Pricing strategies can broadly be categorized according to the business objectives and consumer distinctiveness.
On the basis of business objectives, there is differential pricing which entails selling a product at different prices to different consumers, competitive pricing where prices set aims at exploiting the competitive position and product line pricing that involves selling related products at prices that maximize reciprocated dependency.
In regard to the characteristics of the customers, their uniqueness is identified and pricing based on it. There are those customers that are ignorant of where they can locate the products they require and may buy from any place to avoid wastage of time in tracing the best suppliers at affordable prices.
Some consumers are however very sensitive on cost issues and would rather take a lot of time looking for a business that offer the product at the lowest price than buying the commodity at a convenient place but at a higher cost. The last categories of consumers consist of consumers that may incur extra costs and risks for example transportation cost and investment costs (Phillips, 2005).
Methods Used In Pricing
Different businesses adopt different pricing methods depending on the particular situations and the expected or desired results. The common pricing methods are; psychological pricing which aims at evoking a customer’s emotional rather than rational decision on buying a product by setting the price just a little bit lower than those of competitors for example a shoe worth 20 dollars may be priced at 19.99 dollars. P
rice skimming involves a business setting the price of its products higher than that of competitors especially when the business has a competitive advantage though the price usually lowers after many competitors come in and lower their prices. Economy pricing entails keeping the production and marketing cost at a minimum.
Penetration pricing is achieved by introducing the new products at a relatively low price to capture customers’ attention after which the prices of the commodities go up but the business still retains the customers. Premium pricing on the other hand entails charging a high price where the products involved are unique in nature thus giving the business a competitive advantage over the others (Dean, n.d).
Customers
Customers are a very important element in any form of business for the reason that there cannot be a business transaction in the absence of customers. They are the reason for the production of goods and services without which no business could take place. Businesses should therefore put the consumer in mind when undertaking any process concerning goods and services from production to final sale not forgetting pricing.
It is for this reason that the business should at all cost invest in determining what best suits the customers and try satisfying their needs by providing the value they require.
When the customers are served well they develop loyalty towards the business and may be willing to do any good deed on it’s behave for example doing some marketing by inviting other consumers to the business. Poor or lack of satisfaction of consumers on the other hand leads to lack of trust on the company and may lead to loss of many customers (Hoek and Evans, 2005).
Pricing War
A price war can be defined as an unhealthy competition whereby competitors seek to increase their market share by lowering the prices of their products and services. There usually exist pricing wars whenever there is a new introduction of products in the market.
This is usually so because the products are introduced at a relatively low price and this is not received in appreciation by the existing competitors as they see the business as a threat on the grounds that it may take customers from them. This forces the other businesses offering the same product to cut down their prices hence reducing their profit margins.
Another version is where a new business offers similar products and services but which posses some unique features at a price higher than the existing competitors. This will attract a large pool of customers because of the competitive advantage associated with the products and the business at large. This is perceived negatively by the other existing businesses and they may react by also raising their prices to attain much profit.
This however affects them negatively as the possibility of loosing their customers due to switching costs is too high while the possibility of the new business retaining its customers is high as the prices, though high, do not increase. Switching costs in the market leads to price wars and may subsequently lead to limitation in pricing options.
Another cause of a price war is the existence of consumers who do not have a specific business from where they buy their products and services. The consumers are therefore swayed by many factors and lowering of prices by one business may attract and capture them and if well served and satisfied, they can continue to be customers to the particular business entity.
Deviation of customers from the market and introduction of new customers also lead to price wars. Some customers may also feel deceived when there are switching costs as they expect that the low costs at the entry of the business will be maintained even in future and so raising of the prices result in price wars (Klemperer, 1989).
Adidas versus Nike Pricing War
Nike is the world’s biggest shoe company in regard to its market share and investment on capital. Nike is involved with the manufacture and marketing of athletic shoes, casual footwear, and other sports accessories and equipment. It was founded by Phil Knight and Bill Bowerman.
Adidas is the second largest in the world, after Nike. Nike and Adidas have for long led in the shoe industry because of the quality of their products, brand names, and image. There has been however war between these two companies over advertising and superstar support agreements. The war can for example be seen clearly in regard to the 2010 world cup through their sales and influence.
Before the world cup, the Nike Company made better sales of soccer shoes than Adidas did. This was brought about by the influence of the advertisement by Nike which read; write the future. This influenced a lot of soccer fans and consequently increased the sales of the Nike soccer shoes. When the world cup commenced, Adidas sales went higher than the sales made by Nike.
This was due to the domineering aspect of Adidas as it occupied the billboards in the football field attracting all the attention to it. Success in the sales of the soccer shoes also followed Adidas as it supported Spain which had many funs due to its good performance.
Adidas and Nike compete in production of quality products. Adidas seem to be fast to meet demands of various teams especially soccer in regard to sports facilities, for example, the Major League soccer relies on Adidas for its supplies. It has gained competitive advantage because of its popularity in producing unique footwear for different sports especially soccer and most countries make use of Adidas footwear.
Nike is also popular and its brand name has been known for ages in the world of sports. Its popularity has also been drawn from its support for various sports teams and athlete groups all over the world. Nike has particularly gained much favor accrued to its latest design of the Mercurial Vapor, which is the lightest shoe that is efficient in enhancing speed and reducing friction.
There has been stiff competition between Nike and Adidas with each struggling to outdo the other. The major guiding principles are; attitude, this is the view and affiliation people feel towards either Nike or Adidas. Quality is also a contributing factor as people usually value the quality of the products they purchase.
Competitive advantage is as well a key element for example Nike has been recognized for being the best in basketball shoes while Adidas is known for better football shoes though not all. Pricing is also a very critical element in determining the success of the companies. It influences the consumers in making their final decisions about purchase of various products produced by different companies.
The pricing strategies adopted by the Nike and Adidas companies are a contributing factor towards the sales they make as price is directly dependent on demand. When one company reduces its shoes prices and still retains the quality it is likely to attract more customers than the other. This will cause pricing war between the two as the other one will be forced to lower its prices so as not to lose its customers to the other.
Nike for example is expected to launch low-priced products following its defeat by Adidas in the 2010 world cup. The lowering of prices is aimed at attracting many customers toward its variety of footwear, equipment, and accessories. This will also enhance its positioning in the market.
This is a form of price war and although it will attract many customers, it may lower its profitability margins. Nike also employs strong marketing strategies that helps keep its brand name and image high through gaining trust and loyalty of the consumers (Anonymous, 2010).
Dealing with Price War
Since price war is a negative impact especially to businesses, certain strategies should be employed to curb the effects of price war. They include; anticipating the reactions of the competitors; one should asses how the competitors may react if he/ she lowers the products’ prices as this will definitely affect the sales and the profit to be made.
Another step is giving some indications to the competitors that there may be price changes to alert them and make them aware of your intention in adjusting the prices. A business should also try to construct unique price structures to reduce the likelihood of consumers comparing terms (Rao, Bergen & Scott, 2000).
Conclusion
Pricing is an important aspect in the business sector and care should be taken in making any pricing decisions. The customer should be the focus and the price should directly reflect the value accrued to the product or service provided.
Price war is a phenomenon that occurs when businesses wish to increase their market share at the expense of lowering their profit margin. It should however be avoided since it is to the disadvantage of the business as it reduces their profits though to some extent is an advantage to the consumers as they can buy products at cheaper prices.
Reference List
Anonymous, (2010). Heated War Between Nike Air Max 2010 And Adidas – Begin From World Cup. Web.
Dean, J. (n.d). Pricing Policies for New Products; Pricing Strategy. Web.
Hoek, V.R., & Evans, D. (2005). When Good Customers Are Bad. Harvard: Harvard business school publishing.
Klemperer, P. (1989). Price wars caused by switching costs. Review of economic studies Vol. 56, 406-420.
Phillips, L.R. (2005). Pricing and Revenue Optimization. Stanford: Stanford University Press.
Pratt, A. (n.d). The Price Is Right (or is it?). New York: Director Publications ltd.
Rao, A. R., Bergen M, E., & Scott, D. (2000). How to Fight a Price War: Analyzing the Battleground. Web.