Definition of strategic pricing, how it works and its data requirements
Strategic pricing is the act of setting a product price based on its value to a customer. The pricing can also be based on the forces of demand and supply rather than input cost. This approach proves that a customer’s choice is based on emotions and not logic. Customer’s perception and the market demand was considered by Washkewicz in adopting this strategy at Parker Hannifin.
In this strategy, marketers or salesmen usually set prices contrary to the traditional pricing where the operation and development teams are the only ones allowed to price items. For every increase in price a customer is willing to pay, a company receives higher profits. It also involves a lot of research on the consumption habit of customers before arriving to any decision. The five competitive forces are also analyzed and assessed in order to take care of future uncertainties.
The data required about the product includes what a consumer values most in a product and to what extent he values value it. The number of suppliers and their perception on the items they supply is also very important information. Knowledge on the market prices which involves conducting a research on the competitors’ prices also makes part of this data. This information can help a company increase its price or even know whether a new product has a chance in generating profits.
I.S roles in strategic pricing and individual roles in a strategic pricing system
The information system combines data from all sources including customer type and the volume of the product and applies the pricing policies to establish the set rules. Unlike in the traditional pricing where reports and spreadsheets were done manually, the system automates the entire process and distribution of information across all levels of organization is fast.
Once the information has been processed by the system, a company makes a choice on the most profitable product. With the help of more advanced sophisticated software, a system also analyzes more factors other than costs such as terms and conditions of sales, products and customers at large. The system also acts as a store where information are kept for future reference especially when comparing trends of consumer over time.
Since strategic pricing helps in making effective marketing decisions, it should be based on dialog with customers. The salesmen who set prices should engage the customers in discussions in order to capture their perception.
Once such information is obtained, the system administrators should provide that information to users who can be given access by the database administrator. Examining competitors is also an essential role in ensuring a successful strategic pricing system. By comparing with competitors, it is easy to identify areas which need improvements.
Impacts of strategic pricing on a business such as Parker Hannifin
Considering a customer’s perception in setting prices is in itself a marketing strategy for companies such as Parker Hannifin. Once a company has understood the rational choices that shape the consumption of customers, more people will identify with the company hence an increase in the customer base.
A company that adopts a strategic pricing system also easily maintains its customers. This creates an impact on the customer’s loyalty because their opinions are factored in pricing decisions hence they feel as though they are tied to the organization. All these factors results into increased sales hence high revenues and profits to the organization.
Application of strategic pricing
Software companies can as well adopt strategic pricing and benefit from it. Software companies cannot price on cost and usually have no idea of how many copies to sell. This means that there is minimum or no increase in cost of producing more units.
By conducting a research study and polling potential customers, such companies can easily distinguish between regular customers and those who use their services less frequently. Two different types of customers also lead to two different pricing levels for the same software. For instance a company can come up with a $20 per use fee and a $100 monthly subscription.
In real estate business, strategic pricing is used in listing price for a new home. Real estate market is dynamic and characterized by frequent changes. Strategic pricing can therefore be adopted to ensure that a customer’s needs are used to fix prices for new homes.
Some customers in this market environment are in need of a home and are always ready to pay even higher prices to acquire one. The same home, depending on the needs of an individual can therefore be sold at different prices. An increase in prices leads to more revenues hence such companies end up with a good profit margin.
How the value chain and competitive forces analysis relate to Parker Hannifin’s strategic pricing
Chains of activities performed by Parker Hannifin are set to handle forces that determine power in a competitive environment in order to fully implement the company’s strategic pricing. In supplier power for instance, the company considers the possibility of suppliers to drive up price because it sets its prices according to the market demands. A strategic pricing strategy also ensures perception of the suppliers is considered in identifying the uniqueness of a product and its strength in the market. The company has few suppliers making them so powerful.
The buyer power is another competitive force closely related to Parker Hannifin’s strategic planning as portrayed by Washkewicz. In order to survive the competition in the global economy, he hired a president of corporate strategic pricing to analyze what drives buyers to drop prices down. The president also tries to know the responsibility of the buyers toward the business and how they impact to the sales. Other functions include determining the cost of a buyer switching to other companies.
In order to resist the force of competitive rivalry, Washkewicz had to stop the company from holding back by using traditional pricing. The greater competition is characterized by heavy-cost cutting models, which is why Parker Hannifin considered thinking twice about raising its prices.
This company also set chains of activities such as consumer watch, target market research and sales analysis to ensure customers are given superior standard quality products to avoid threat of substitution. Due to the fact that substitution reduces an organization’s power, the company’s management system works to gather all the data necessary in making improvement of quality standards.
To this company, success does not necessarily mean building a market share but connecting with the target. There is a threat of new entry into this market which is why the company focuses on a customer driven strategy in order to increase sales and outdo the competitors. The company does this to avoid those who enter into the market from weakening their position.