Pricing Strategies for Clearwater Technologies QTX Server Capacity Upgrades

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Introduction: Case Presentation and Thesis Statement

Price capacity upgrades for Clearwater Technologies’ QTX server is the main discussion of the company’s top officers in their meeting.

The finance department wises to increase revenue thus suggesting having prices as high as they could while for the sales side, prices should be fair enough to produce volume and for the management team prices should stay within the margin model. The Vice President of Marketing suggested that the 3 departments should consider having prices meet the following factors, namely:

The prices of the capacity upgrades should not be lower than the original or current market price of the brand new 30 seat QTX server.
Considering that not all customers will come back and purchase upgrades, the team should push to sell the 30 seat QTX server the first time around.
The company should capitalize on customers’ commitments but should not rip them off thus it is important to determine the pricing limits.

This paper aims to present strategies for Clearwater Technologies’ dilemma in pricing capacity upgrades from 10 to 20 seats, 10 to 30 seats, and 20 to 30 seats given that they conform to the Vice President of Marketing’s advice to the 3 officers.

Value Optimized Pricing Strategy

Capitalizing on customer’s commitment, the company should adopt value optimized pricing strategy in producing price computation for the QTX capacity upgrade. Basing on the benefits and values Clearwater Technologies’ QTX servers may offer and provide its customers, the prices will be focused on these factors.

“Value-based pricing depends on the strength of the benefits a business can offer to customers” (Price your product or service). Thus, before pricing products and services, the company’s competitive advantage over its competitors must have been clearly-defined in order for it to charge its customers accordingly with regards to the benefits and value of its products and services.

Though this strategy may generate income, the risk in implementing such may result to the alienation of potential customers who are driven by market pricing and this strategy may even invite new competitors in the industry for the company. In implementing value optimized pricing strategy, the company must understand that the goal is to better align prices directly with the value offered to customers.

Prices can be customized for clients in order to reflect a given value delivered. Such strategy is intended to make Clearwater Technologies become more competitive in the industry at the same time earn more profits and maximize value for given clients. This strategy’s crucial success is dependent on the company’s understanding of customer’s measurement of value, willingness to pay, and attributes to products and services.

Cost-Plus Pricing Strategy

In order to satisfy the finance department’s request in increasing revenues, cost-plus pricing strategy must be considered in calculating the needed price for the upgrades since such method is concerned with maximizing the company’s profits.

Also known as markup pricing strategy, this approach determines prices that include the cost of production added with a part of that cost as mark up, thus providing enough profit margin to the company to earn its target rate of return (Hutt & Speh 2009).

In this strategy, prices of production and services using direct and indirect costs or fixed costs are determined even if they are not related to the manufacturing and sales of the products and services. Cost-plus pricing is a simple strategy where cost of production is calculated and markup over costs is determined.

When both variables are given pricing becomes easy because these 2 will be added and thus prices are already produced. Wide usage of such method can be attributed to the simplicity of its structure. Full cost is calculated in this strategy and thus prices are based on factual and precise grounds making prices more defensible in its establishment (Maheshwari, 2005).

Limit Pricing Strategy

In order to sustain the monopolistic control of Clearwater Technologies in catering small and medium sector businesses, a limit pricing strategy must be adopted. The limit price should be implemented in the 30 seat QTX server products, which would be desirable for customer purchase.

Clearwater Technologies would adjust the prices of initially purchased 30 seat QTX servers, slightly lower than the average cost, making it a limit price to avoid having competitors from entering the market since it would be non-profitable for them (Milgrom & Roberts 1982).

Loss Leader Pricing Strategy

Since the goal of the company is to make customers purchase the 30 seat QTX server on the initial transaction, thus the 30 seat server must be considered a leader in strategizing prices (Van den Poel, De Schamphelaere & Wets 2004). Loss leader pricing strategy or leader products are primarily pushed products that cost lower or below production costs to generate other profitable sales (Van den Poel, Vindevogel & Wets 2005).

In this case, 30 seat servers are cost low so that the company will capture a higher market share and maintain market monopoly. Loss leader strategy is used to draw more customers to buy not only the leader product but also other goods and services provided by the vendor.

When customers buy other products the same time as buying the company’s leader products, profits made from the purchase of other items will cover the loss of the price drop from that of the leader product.

The concept illustrated in the loss lead pricing strategy is that lowering down a price of a certain product (leader), offering it at a reduced price, is intended to lead to the sale of other regular priced items, sometimes also priced higher than their actual market value, which will generate more profit for the vendor since buyers tend to buy in greater numbers if items are on sale.

Leader products are often priced below its profit margin and sometimes below cost.

Penetration Pricing Strategy

The initial goal of Clearwater Technologies is to gain market share by making customers purchase the 30 seat QTX server on their first transaction with the company. The main idea here is that the company gains market share, capturing the loyalties of customers and later on capitalizing on such commitments.

Penetration pricing strategy is ideal in this case since prices are set at a lower cost in order to attract customers and gain market share. After achieving such objectives prices will be raised back to its original price (Monroe 2003).

The 30 seat QTX server should be priced low compared to its other competitors and other lesser seated products in its category (10 and 20 seat) so that Clearwater Technologies will capture a huge amount of market share and fulfil the senior officer’s objective of getting customers to purchase the complete product on the first transactions which will later be useful for the company since it will be capitalizing on its clients’ commitments.

Premium Pricing Strategy

Since the price for the 30 seat QTX server is low, customers may have the perception that Clearwater Technologies is not a premium brand and product quality and services is not of good standard. In order to position the brand of the company premium pricing should be strategized by the company.

Premium pricing strategy is the exercise of making prices of products and services high so that customers or probable buyers’ perception of the brand would be favourable. This strategy exploits buyers’ perception that expensive items are of exceptional quality (Gittings 2002)

The 30 seat QTX server is already priced low, thus prices of capacity upgrades must be made artificially high in order for customers to see the advantages of buying the 30 seat server initially and satisfying their notion that the brand of Clearwater Technologies’ is of premium quality and standard.

Contribution Margin-based Pricing Strategy

The management team’s concern with regards to keeping prices within the margin model can be satisfied with the contribution margin-based pricing strategy. This concept describes the maximization of profit from a product basing from the difference between the products price and variable cost.

Massive amounts of 30 seat server is expected to be sold with the low pricing of such product line but balancing such we have the high priced upgrades which would come in smaller amounts but will be able to cover and generate more profit for the company.

Psychological Pricing Strategy

Pricing products with 0.99 or 0.98 has a psychological impact driving more demand from customers (Psychological Pricing Strategy 2011).

According to a study conducted by the Marketing Bulletin in 1997, 60% of prices in advertising materials end with 9, 30% end with 5 and 7% end with 0 (Holdershaw, Gendall & Garland 1997). Psychological pricing strategy allows sellers can charge “the largest possible cent component (99¢) without significantly affecting the average of cent components and without changing customer behaviour” (Basu 1997).

Price Leadership Strategy

Developing a systematic pricing strategy in positioning Clearwater Technologies in monopolizing the industry, the company should consider itself a price leader setting and dictating the industry’s price for servers and services (Price Leadership 2008).

Absorption Pricing Strategy

In price absorption strategy all costs must be recovered. Prices of products must include variable and fixed cost.

In the QTX server pricing, since the 30 seat servers are priced lower than its original cost and capacity upgrade prices are priced higher thus prices for all products must be balanced out making sure that all costs for all products produced and manufactured are recovered avoiding company lost at the same time generating more profits.

High-Low Pricing Strategy

In a high-low pricing strategy, products and services are priced higher than their competitors but market share and customers are drawn in because of low marketing activities such as advertisements and sales promotions (High-Low Pricing 2011).

These activities that drop prices of products and services temporarily are geared towards bringing in customers and capturing market share, earning clients’ loyalties towards the vendor (Kolter & Armstrong 2010).

Clearwater technologies can adopt the high-low pricing strategies in complying to the Vice President for Marketing’s request in considering the 3 factors in pricing. 30 seat servers should be cost low but may be done only during a specific period of time as a sales promotion.

Premium Decoy Pricy Strategy

The premium decoy pricy strategy is a method in which the vendor prices a certain product exceptionally high in order to shift customers’ attention in buying another product thus boosting sales of the cheaper product.

This strategy is ideal in drawing attention and making Clearwater Technologies’ 30 seat QTX server as the primary choice of customers since it is priced lower compared to other alternative products in the vendor’s line for the 10 and 20 seat servers may seem a bit pricy with limited slot usage.

The 30 seat server must catch the attention of customers with its affordable price, the quality and service it can provide with its huge capacity. By pricing other alternatives a little higher than their original price, this strategy will divert the attention of buyers and customers.

Conclusion

A mixture of different pricing strategies overlapping in an organized manner is essential in producing the right price in accordance to the Vice President of Marketing’s suggestion. The 30 seat QTX server must be priced lower than the others because it is important to get as many customers to purchase the said product on the initial transaction.

By doing so not only does the company illuminate competition from entering the market and industry but also capturing the market share making Clearwater Technologies a monopoly in the small and medium sector of QTX server product and service provider.

Other products such as the initial purchase of 10 and 20 seat servers and the upgrading of seat capacity must be price according to their manufacturing cost with value added margin.

Such execution of cost-plus pricing strategy gives both clients and vendor a factual basis on the pricing while for upgrades after the first and second purchases would be price a little bit higher for the company to earn and generate revenues. Combinations of pricing strategies are needed in coming up with the right price which conforms to the 3 factors the Vice President for Marketing advised the 3 officers.

It is important for the company to understand customers’ definition of value and what they are willing to pay for. At the same time prices must be fair in order to satisfy the market’s wants.

Clearwater Technologies must position itself as a price leader in the industry but in order to do so it must first capture the market and become a monopoly, thus price strategies which help the company capture markets with low pricing but without sacrificing its premium branding is essential in its way of managing its prices.

In this paper 12 pricing strategies are recommended for Clearwater Technologies’ finance, management and sales team to use in computing for the proper prices of QTX servers from the 10 seat to the 30 seat capacity servers.

As of the moment the company has a competitive edge because of its initial involvement in the industry but over time competitors will be present thus the teams need to plan not only for the present prices of the QTX server but also anticipate competition as early as the present.

Reference List

Basu, K 1997. “Why are so many goods priced to end nine? And why this practice hurts producers?”, Economic Letters, vol. 54, no. 1, pp. 41-44.

Gittings, C 2002, The Advertising Handbook, Routledge, New York.

High-Low Pricing, 2011. Web.

Holdershaw P, Gendall P & Garland R 1997. “The Widespread Use of Odd Pricing in the Retail Sector”, Marketing Bulletin, vol. 8, no. 1, p.8.

Hutt, D & Speh, T 2009, Business Marketing Management B2B, 10^thedn, South-Western Cengage Learning, Ohio.

Kolter, P & Armstrong G 2010, Principles of Marketing, 13th edn, Pearson Prentice Hall, New York.

Maheshawi, Y 2005, Managerial Economics, Prentice Hall, India.

Milgrom, P & Roberts, J 1982, “Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis”, Econometrica, vol. 50, no. 2, pp. 443-459.

Monroe, K 2003, The Pricing Strategy Audit, Cambridge Strategy Publications, Boston.

Price Leadership, 2008. Web.

Price your product or service. Web.

Psychological Pricing Strategy, n.d. Web.

Van den Poel, D, De Schamphelaere, J & Wets, Geert 2004, “Direct and Indirect Effects of Retail Promotions”, Expert Systems with Applications, vol. 27, no. 1, pp. 53-62.

Van den Poel, D, Vindevogel, B & Wets Geert 2005, “Why promotion strategies based on market basket analysis do not work?”, Expert Systems with Applications, vol. 28, no. 3, pp. 583-590.

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