The purpose of this study to investigate the impact of discount pricing strategy on organizational profit and the importance of planning for a discount; the study was conducted depending on unreal numbers, and it clarify that discounts increase sales volume, but not always increase the profits.
Pricing decision is a decision that must be taken carefully, because of its nature and its effect on the overall goals and objectives of the organization, which is mainly profit maximization. Hilton (2005:633)
Generally, to run any business develop a pricing strategy for a product after performing a marketing analysis is necessary. A pricing strategy is formulated taking into consideration factors of cost, competition, and profit objectives. Possible pricing strategies include a full-price strategy, competitive pricing, discount pricing or a mix of these. In this research paper, we are focusing on discounts pricing strategy. Retailers uses discount strategy as a way of increasing demand, poling share of business away from competitors, and to increase total sales.
Objectives of Study
The aim of this study is to study the impact of discount pricing strategy on organizational profit and the importance of discount planning.
Research Problem
Due to people preference to buy things on sale, discounts play an important role in attracting people to buy and this lead to increase sales volume and thus profits, but the issue that some managers miss-planning which leads them to lose profit rather than to gain.
Research Importance
Discount can help organizations to enhance their sales; however, most organizations usually don’t take into consideration the impact of discount on the long term because they miss planning and testing the discount. This study aims to explain the impact of discount on organizational profit, when the organization must discontinue discounting and the importance of planning for discount.
Research Hypotheses
Ho1: there is no impact difference at (α = 0.05) of discount pricing strategy on organizational profits.
Research Model
An overview of the research model is presented in Figure 1. The model articulates the independent and dependent variables.
Independent variable Dependent variable
(Organizational Profits) (Discounts pricing strategy)(Figure1: Research Model)
The diagram above shows the relationship between variables. It shows Discounts pricing strategy the independent variable. Organizational profits are the dependent variable, which is directly affected by Discounts.
Sources of Information
We have used books, journals, personnel meeting, and various websites to gather information and gain knowledge in order to help us expand prospects in writing this study.
Literature Review
Generally price is defined as amount to be paid for any goods or service.
Different scholars defined price such as Prof. William J. Stanton’s, “Price is the amount of money and/or other items with utility needed to acquire a product.” Prof. Philip Kotler, “Price is the only element in the marketing mix that produces revenue, the other elements produce cost.” Last David J. Schwartz, “Price is the exchanged value of the product or service expressed in terms of money.
According to Agwu and Carter (2014), ‘among the four Ps, price is the only income generator and it is the value attached to a product. It is the sum of all the values that customers give up in order to gain the benefits of having or using a product (Kotler et al 2010).
Pricing is the process of setting the price for products and services at which it will be sold and it may be part of the business’s marketing plan, which is a report that outlines your marketing strategy for the coming year, quarter or month.
Pricing has always been an integral component of marketing (Borden, 1964); of the traditional marketing elements, only pricing creates revenue (LaPlaca, 1997; Shipley & Jobber, 2001). As Morris (1987, p. 79) notes, “one of the more basic, yet critical decisions facing a business is what price to charge customers for products and services.”
Pricing strategy is the policy a firm adopts to determine what it will charge for its products and services. There are several different pricing strategies, such as penetration pricing, price skimming, discount pricing, product life cycle pricing, and even competitive pricing.
A discount sale consists in selling a given set of items at a reduced price for a limited period. Some examples are proposed in (Bolton, 1989), (Blattberg and Neslin, 1990), (Bemmaor and Mouchoux, 1991). This reduction should generate enough supplementary sales to compensate the reduction in income. However, this is rarely the case. Few companies realize the true discount cost. When a product discount is offered for a given period, it applies to all sales, which often leads to disastrous consequences.
One of the pricing policy is discount-pricing strategy, which is defined by most of the researchers that it is selling products in low priced to increase sales volume and thus profit, and it has different type:
Quantity discounts: which is offering quantity discounts to customers who purchase in bulk.
Seasonal discounts: which is offering discounts to customers who purchase during off-peak time.
Promotional discounts: which is offering discounts to customers to drive sales and it is short-term.
Loss-leaders: which is offering discounts to customers by selling products at price below its market cost in the hope that they will purchase more profitable goods and services.
Profit is the revenue remaining after all costs are paid. There are three types of profits: Gross Profit, Operating Profits and Net Profits.
Important definitions of Profit according to different authors are as follows:
Prof. Marshall – “Profit is the earning of management”
Walker – “Profit is the rent of ability”.
Croome – “Profit is the reward for uninsured risks”.
Ely – “Profit is a surplus over and above the expenses of production”.
Also according to economist profit is defined as:
Profit = Gross Profit – (Rent + Wages + Interest)
According to different studies there is no standard relation between profits and discount it varies according to the case of each organization, but we have concluded that when an organization do a discount it has to increase its sales and production to gain the same margin of profit it used to gain before the discount or it will lose profits.
(Figure1: Relation Between Discount & Profit)
Research Method and Data Collection
Data was collected after conducting interviews with different organizations from their financial and marketing departments, however due to confidential reasons companies refused to provide us with their actual numbers. Table (1) was built with approximate figures.
Most of the organizations’ answers upon purpose of applying discount were matching as follow:
Encouraging and attracting customer to buy their products.
Incresaing their sales volume and profits.
Increase their market shares.
High competition.
Data Interpretation
The table below briefly explain how discount impact sales volume and profit which can be adapted as a reference for planning and testing discount ratio.
The table was calculated as follow:
Fixed Cost = Given Number
% Profit From Variable Cost = Given Number
Profit rate from sales (CM) = % Profit From Variable Cost – (% Profit From Variable Cost * Discount Rate + Discount Rate) / % Profit From Variable Cost – (% Profit From Variable Cost * Discount Rate + Discount Rate) +1
Breakeven Point = Fixed Cost / Profit Rate From Sales (CM)
The % Of Change In The Break-Even Point = (Breakeven Point x+1 – Breakeven Point x) / Breakeven Point x
Expected Sales = Given Number
The % Of Change In Expected Sales = (Expected Sales x+1 / Expected Sales x) / Expected Sales x
Difference Between Expected Sales & Breakeven Point = Expected Sales – Breakeven Point
Expected Net Profit = Difference Between Expected Sales & Breakeven Point * Profit rate from sales (CM)
Net Profit Ratio = Expected Net Profit / Expected Sales
Expenses Ratio = Fixed Cost / Expected Sales
Total Expense Ratio And Net Profit Ratio = Net Profit Ratio + Expenses Ratio
(Table 1: Impact Of Discount On Profits)
Case No.
Fixed Cost
Profit % From Variable Cost
Profit Rate From Sales
Discount Rate
Break-even Point
The % Of Change In The Break-Even Point
Expected Sales
The % Of Change In Expected Sales
Difference Between Expected Sales & Breakeven Point
Expected Net Profit
Net Profit Ratio
Expense Ratio
Total Expense Ratio And Net Profit Ratio
1
1,500,000
70%
41.18%
0%
3,642,545
0.00%
4,000,000
0.00%
357,455
147,200
3.68%
37.50%
41.18%
2
1,500,000
70%
38.73%
4%
3,872,967
6.33%
6,000,000
50.00%
2,127,033
823,800
13.73%
25.00%
38.73%
3
1,500,000
70%
36.34%
8%
4,127,683
6.58%
8,000,000
33.33%
3,872,317
1,407,200
17.59%
18.75%
36.34%
4
1,500,000
70%
33.23%
12%
4,513,993
9.36%
10,000,000
25.00%
5,486,007
1,823,000
18.23%
15.00%
33.23%
5
1,500,000
70%
29.97%
16%
5,005,005
10.88%
12,000,000
20.00%
6,994,995
2,096,400
17.47%
12.50%
29.97%
6
1,500,000
70%
26.93%
20%
5,569,996
11.29%
14,000,000
16.67%
8,430,004
2,270,200
16.22%
10.71%
26.93%
7
1,500,000
70%
22.29%
24%
6,729,475
20.82%
16,000,000
14.29%
9,270,525
2,066,400
12.92%
9.38%
22.29%
8
1,500,000
70%
18.86%
28%
7,953,340
18.19%
18,000,000
12.50%
10,046,660
1,894,800
10.53%
8.33%
18.86%
(Table 1: Impact of discount on profit)
Case number one:
Discount Rate: 0%
Expected sales: 4,000,000 JD
Expected Net profit: 147,200 JD
Case number two:
Discount Rate: 4%
Expected sales: 6,000,000 JD
Expected Net profit: 823,800 JD
Case number three:
Discount Rate: 8%
Expected sales: 8,000,000. JD
Expected Net profit: 1,407,200 JD
Case number four:
Discount Rate: 12%
Expected sales: 10,000,000 JD
Expected Net profit: 1,823,000 JD
Case number five:
Discount Rate: 16%
Expected sales : 12,000,000 JD
Expected Net profit : 2,096,400 JD
Case number six:
Discount Rate: 20%
Expected sales : 14,000,000 JD
Expected Net profit : 2,270,200 JD
Case number seven:
Discount Rate: 24%
Expected sales : 16,000,000 JD
Expected Net profit : 2,066,400 JD
Case number eight:
Discount Rate: 28%
Expected sales : 18,000,000 JD
Expected Net profit : 1,894,800 JD
As shown, sales volume increased by increasing discount rate, on the other hand expected profit continually increased until case number six. This means the organization must not apply discount more than 20% to prevent loses.
The graph below simply explains how expected profits increases and decrease due to discount rate.
(Graph 1: Impact of discount on profit)
Limitations
Time we have to write the study.
Non-cooperation of companies to provide us with desired data.
Lack of available research paper discussing this topic.
Conclusion and Recommendations
Discount effect organizations by increasing sales volume, but not always increases the profits due to that each organization should do discount planning strategies as well to test discount before implementing it to avoid loses.
During process it was noticed that small-medium enterprise do not take planning in a serious matter which led them to lose. We recommend that all organization should specify departments to do such a plans in detailed.
Future Research
This research was conducted based on unrealistic numbers, in order to get better result real numbers must be used in the future, also we have noticed that most of the research papers were discussing discount as a part of pricing and marketing strategies and few discussed discount strategies individually. We suggest to increase number of research papers discussing this kind of topic, moreover to take in consideration factors affecting the discount effect such as seasons.
References
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Dudu O.F., Agwu M.E. (2014). ‘A Review of The Effect of Pricing Strategies on The Purchase of Consumer Goods’, International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264), Vol. 2, No. 2, p. 88-102.
Imoleayo O.F (2010), ‘ The Impact of Product Price Changes on the Turnover of Small and Medium Enterprises in Nigeria’, BRAND. Broad Research in Accounting, Negotiation, and Distribution ISSN 2067-8177, Vol.1, No. 1
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Kotler, Burton, Deans, Brown, and Armstrong, (2015), are of the viewpoint that dynamic pricing is considered to be referred as that surge pricing strategy, in consideration of which a business entity sets the flexible pricing for the goods and services it offers to the potential customers and the end market. This price of the goods and services is known to be set on the basis of the demand of the current market and its situation (Kirschen & Strbac, 2018). In this connection, the given paper is focused on determining the past researched studies that have explained the synergy of dynamic pricing in different ways.
Literature Review on Dynamic Pricing
Based on the viewpoint of Babaioff, Dughmi, Kleinberg and Slivkins (2015), it was examined that the problem of designing the revenue-maximizing pricing strategies mechanism becomes difficult for the seller when the same has a limited supply. Concerning to this, the author suggests in the article that the business organization should follow the strategy of posted price mechanism which would ensure that the pricing of the product and services are implemented on the basis of the demand of the customers as well as the availability of distribution capabilities of the organization. In this concern, it was examined that the Commonwealth bank uses the synergy of dynamic pricing as the intermediating algorithm to match the supply and demand that arises in the financial industry.
On the other hand, Jia and Tong (2016), states the problem related to the concept of dynamic pricing concerned to the aspect of electricity in connection to the retail market. The game named as Stackelberg is recorded to be used by the experts with regards to undermining the interactions that exist between a retailer and the consumers of the electricity. The retailers are known to set the dynamic hourly price of the day ahead for the electricity consumed by the consumers. This pricing strategy is known to be set based on the dynamic pricing strategy of the real-time consumption made by the consumers in order to adjust as well as maximise the individual consumer surplus. This dynamic synergy of pricing has recorded to be an optimal aggregated demand-based pricing strategy. Take, for instance, the dynamic pricing strategy used by the Commonwealth Bank in the concern of providing real-time loans to its clients because the same provides the bank with the advantage of more flexible lending to the clients.
Moreover, as opined by Papanastasiou and Savva (2016), when the products that are of uncertain quality are first introduced in the market, the consumers may take time to choose the product based on their purchasing decisions. This is because the consumers would wish to anticipate the peer reviews made for the products. In this connection, undermining the importance of the dynamic pricing, the articles suggested that the synergy of dynamic pricing strategy would help the organizations deal with the sale of these kinds of products. This is because social learning affects the strategic decision and interaction that lies between the monopolies of the dynamic pricing as well as the population of the customers that is looking forward to buying the product
As opined by Den Boer, (2015), the synergy of dynamic pricing and its learning have turned its coins in recent years from the help of the different scientific communities. In this connection, the precise aspect of the importance of the dynamic pricing strategy in the subfields of the marketing, economics, finance, econometrics, as well as computer science has been discussed. It was undermined with the help of the article that the author has explained the relationship that lies between the methodology of surge pricing strategy and the success of a business entity. The author also identified that the aspect of surge pricing would help give directions to the future success and research of any productive business organization. Concerning to this ideology, the Commonwealth bank uses the surge pricing strategy in its business transactions because it increases the capability of the concerned financial organization to re-bundle their needs and cross-sell their services to the clients.
According to the viewpoint of Chen and Farias (2018), every business organization should consider the system of the canonical revenue management in the concern of selling any product over a finite horizon of customers under the theory of posted price mechanism. The dynamic pricing mechanism will help the customers choose their desired products and services on a random over time and strategic basis of their purchases. This, in turn, will increase the interest of the customers about the time of their purchase and they will make sure that the goods and services are purchased over time. Customers would not like to purchase any goods or services at a high price because of the timing, unless and until the same is determined to be an emergency for them. In light of this, the article was concluded with a statement that the mechanism of the surge pricing could be stated to be optimal for both the customers and the business organization. Comparing this aspect with the business transactions of the Commonwealth Bank, it is undermined that the flexibility in the contextual awareness of the client needs of the bank is increased with the use of the surge pricing method. This, in turn, also increased the loyalty and stickiness of the clients connected to the Commonwealth bank.
Case Study Analysis
Based on the analysis of the case study named as CommBank Retail Insights, it is undermined that the impact of pricing strategy primarily affects the marketing condition of the products as well as the services that are offered by the financial firm of Commonwealth bank (Commbank.com.au. 2019). As opined by Porter and Heppelmann, (2015), the customers are profoundly sensitive towards the pricing strategies a business implements on the products and services it offers to the customers. This is because the customers in the current market condition wish to purchase the best of the goods or the services at the lowest of the price (Nagle & Muller, 2017). The price theory connected to the marketing mix is determined to be the most complex one because the same is recorded to change the purchase decision of the consumers on the first paradigm as compared to the other theories of the marketing-mix that are related to place, people, promotion a process (Becker, 2017).
Commonwealth Bank in 2011 stepped up its discounts but re-instated them this year clearly demonstrating its aggressive pricing policy. Commonwealth bank captures the home loan market by pressurising net interest margin by providing big package discounts. Commonwealth bank has become most competitive in $300,000 home loans and $1,000,000 loans by adopting ‘barbell’ pricing strategy, due to which they have the cheapest EAR of 5.3% on $300,000 loans and 5.15% EAR on $1,000,000 loans clearly indicating that is giving equal importance to the smaller & jumbo loans (mba sKOOL.com, n.d.)
Therefore, it can be stated that financial organizations can effectively use dynamic pricing strategies as per the demand response of potential customers.
Conclusion
Given the above research findings based on the pricing strategy of the marketing-mix theory, it can be seen that the pricing method is recognised to be an optimal strategic implementation that can be taken into consideration by any business organisation as the customers change their purchase decision mainly depending on the price of the products. When comparing the findings from the literature review on dynamic pricing method with the real world case-study of Commonwealth Bank, it can be seen that the financial firms can turn flexible on the effective use of the surge pricing method and also gain the sustainment of their potential clients for a more extended period of time. However, the point of dissimilarity that arises s that the customers do not will to purchase the goods or services at a higher price of the timing of the surge pricing unless and until the same is an emergency for the customers and this would turn to be a loss for the business organisations.
Lululemon a well-known athletic apparel company, founded by Chip Wilson, who initially embarked in the surf, skate, and snowboard apparel business for more than 20 years, when in the mid of 90s was introduced to Yoga for the first time, he got hooked and moved into the yoga trend at just the right time.
In 1998 in Vancouver, Canada Lululemon was developed and defined as a yoga-inspired, technical athletic apparel company for women and men. The first designs that brought the company name into the market were made for women to wear during yoga.
Lululemon uses vertical integration model. All Lululemon products are made only in Lululemon-approved factories. Additionally, Lululemon products are only available at Lululemon retail stores, or online at their Lululemon website. The company has a no discount strategy, and for all products that are old stock the company sells them in a very modest discount either in special selected stores or online.
The main differentiation offered by the brand is the offering of their first unique fabric, their own signature ‘Luon’. With their new approach to athleticwear, Lululemon paved the way for offering high-quality and performance athletic apparel, available to customers at a very premium price, priced higher than most of the competition setting the brand at a higher position than the rest. Lululemon’s strategy was clear when the founder was able to highlight a gap in the fitness-fashion industry that Wilson successfully seized the opportunity to control a considerable portion of.
Initially, the brand started by an objective to focus on a specific segment of the market the yogis. As the brand started growing it continued to adopt a focused differentiation strategy based on its brand identity, however with the extended line of apparel athletic wear, its market segment started growing to target a wider range of user.
The success of the brand was not only for yoga practitioners and yogis but also other athletes and customers looking for fashionable and functional apparel even for their daily use, setting the brand to influence a new dimension of a product that represents a lifestyle with core values of promoting a healthy, active socially responsible brand.
There are many reasons as to why consumers buy Lululemon products.
the high quality of all products. Products from the company are meant to last for a long time and not show wear and tear through the times.
Lululemon product is comfort. The design of all Lululemon products includes the key concept of comfort. All customers feel comfortable while wearing or using Lululemon products. They feel free to move as they wish.
Lululemon products are stylish and innovative and always up to date.
Lululemon products are constantly changing but always ensuring to keep the basic collection which is the most favorite of their consumers.
Products for athletic consumers have to be comfortable and have to perform well, and lululemon products due to the material used offer both.
Lululemon products are considered order winners as they stand out from their competitors due to their high quality, style, and innovation.
Q1- Relative to customer value, explain customers’ willingness to pay premium prices for Lululemon’s products.
Since Lululemon uses competitive pricing strategy with a premium pricing approach versus its competition, it is also part of customer value-based pricing strategy, where the brand clearly has something more to offer than the competition, and accordingly sets a higher value perception to its customers, and the willingness of the consumers to pay a full price based on their set perception of the brand and the value it represents.
There is no secret formula for Lululemon’s pricing strategy, its basically the product benefit and its offering as a functional garments at a high but consistent price point, the continuous set strategy of no or minimal discounting, even in peak sale periods, give a clear understanding to customers willingness to have to pay full price.
The brand entered the market with a skimming pricing strategy targeting a certain segment, as the segment grew to become a trend and a lifestyle the brand was able to grow, moreover, the startup of the brand was using all the yogi trainers who are role models to their teams, so this furthermore helped the brand attract more of its customers (the yogis and athletes) who are ready to accept their price and willing to pay for the value not only but as a product but a lifestyle.
Consumers buy fancy-branded luxury goods because it makes them look and feel good, the same applies for Lululemon target audience who believe Lululemon products are a statement, a lifestyle and a mean to live by
Q2- Based on principles from the chapter, explain how price affects customer perceptions of the Lululemon brand.
Lululemon has used customer value perception model in its pricing, the prices for their basic products have been set higher than the competition but not too high, so it stays at the range of price celling, where no demand will be available above this level of price, this value is set purely by the mindset of the consumer and the perception he has for the value offered.
Since the pricing is made on the buyers’ perception value rather than the sellers’ cost, Lululemon created special products, with special features to meet a niche market segment by creating a new demand which never existed before.
At Lululemon offers an extremely high-quality product for a high-price that matches the value of the product. When looking at the major pricing strategies, Lululemon definitely engages in customer-based value pricing. This means the company prices products based on the benefits and value it brings to customers.
Lululemon’s products want to be perceived as innovative and cutting edge in the athletic apparel industry.
Q3- Could Lululemon have achieved the same level of success had it executed an alternative pricing strategy?
In my personal opinion, Lululemon did the exact right pricing when it introduced the brand, by simply pricing it higher than its competition and immediately positioning it at a higher level. It is a proven fact that companies have more success with premium pricing when they concentrate on creating value that makes their products worth the higher prices.
Lululemon used a premium pricing strategy and thus they charge higher prices than their competitors for their products. They have set a goal to create the perception that their products must have a higher value than competing products because they offer something the competition lacks and thus their prices are higher. Lululemon used the premium pricing strategy to establish its product as a high-quality product in the minds of consumers.
Since the premium pricing was introduced based on the following situations for lululemon, I think having a different pricing wouldn’t have led the brand to reach the same level of success, from its start the brand had all it takes to be priced higher than the market and the competition
From its early introduction Lululemon introduced Premium pricing which is the most effective way if established when a product is first introduced to the market.
Lululemon products are unique. Small businesses that have unique products can differentiate their merchandise with higher prices and a quality image.
Lululemon Consumers perceive that the product high-value value luxury product and has exceptionally high quality and provides comfort with an exclusive design.
Simply by setting the higher point of pricing Lululemon created a strong barrier to entry
Lululemon created a product patent only for the brand, that gave the brand special feature and set its unique selling proposition and thus the higher justified price then competitors
Q4- Can Lululemon continue to succeed by employing the same premium-pricing strategy? Explain.
I believe in today’s world though a consumer would always want to get the best prices but offering your brand at a discount can undermine profits and threaten viability.
I believe Lululemon should exploit more strategies to keep on designing and creating a difference in its brand vision, product and innovation, so it always gives its consumers a justified reason to spend more by buying lululemon products.
Lululemon has done an enormous achievement by identifying the right audience and understanding their needs and demands and creating products to meet with those demands, then they have gone further by understanding their competition what is more based on this they have built a unique product that has a unique characteristics , and finally they have built a brand with a meaningful difference, always ensuring to set the mindset of their consumers to perceive the brand as premium and worth a higher price.
Changing their pricing strategy and moving from premium pricing would jeopardize the brands image and will drastically affect its position.
This consistency is key to brand success, this is different from premium brand pricing where the product is freely available to those willing to pay the price. In premium consistent pricing strategy the brand aims to display the quality and experience associated with a product, setting it on a different dimension from its competition, any change to this method of pricing will result in loss of trust in the brand and accordingly loyal consumers to the brand will start shifting from the brand.
Reference:
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Export pricing strategy is considered to be a fundamental tool for market growth, lack of literatures still exists. The gap is related to lack of both qualitative and qualitative studies specifically for small businesses which can produce an improvement in the industry and for managerial directions which needed to in exporting practices. Through this paper is aiming to explore the main factors and determinants that influence the export pricing strategy.
Introduction:
Pricing strategy can be regarded as an organization’s plan to objectively set prices in a competitive basis in order to achieve it objectives, that linked to the implementation of pricing strategy that can be explained by its behavior and execution, and performance. (Walker & Ruekert, 1987). According to Porter1980, price implementation is formed in way to achieve planned strategic pricing goals and objectives. The supposition of pricing strategy consider an interlinked part of the organization dimension (Motivation, Mentality, and interpretation), (Dutton, 1988). Though, Mintzberg suggested that pricing strategy part of future activities planned, which very sensitive to changes from internal and external factors observed from the business environment.
On other hand, Nagle and Holden suggested that strategy configuration and strategic analysis are elements of pricing strategy, this set of activities of price planning may be share common factors such as time terms, future-looking, and target orientated. The result of pricing planning is tending to be complex and not standard in a specific way. The planning strategy is not focused only on single transaction or event but a set of categories of marketing mix segments, classification, and competitions. Which all based on strategic agenda, the critics on the strategic agenda is can espouse the strategic plan to such high instability, therefore the current pricing issues on the strategic agenda, depend on the expected result of pricing problem on the company’s goals achievement. Therefore, firms’ actions will be implemented if oly managements believe that strategic pricing matters have a reasonable impact on the firm.
This bring up the importance of firm’s obligation level on export activities, and if exports are perceived as a significant part of the overall firm strategy, then pricing strategy will have to play major role in firm plan. Such decisions normally will be taken by senior management, best-practice companies have a pricing committee responsible for the pricing decision-making process, to establish procedure and commitment. Because price eventually impact on profits, the marketer has to set the right price otherwise negative impact will appear on financial result (Raymond, Tanner, & Kim, 2001). (Weekly, 1992)
literature sight that marketers face certain challenges in export pricing, such as competition, grey markets, economic zoon, regulation, fluctuation in exchange rates, and geopolitical (Cavusgil & Sikora , How multinationals can counter gray-market imports, 1988) (Myers, Incidents of gray market activity among US exporters: occurrences, characteristics and consequence, 1999),(Myers. et.al. 2002, Weekly1992). Though, literatures indicate that export pricing strategy (EPS) is influenced directly by micro-factors, nature strategies and practices. In this paper we will analyse three main export strategies factors.
2. Exporting Pricing (EP)
According to (Tan & Sousa, 2011)The phenomena of EP can be described as the hidden forces that drive firm’s EP decisions, consider skimming pricing strategies which includes high price and more often used for new pricing, which come under umbrella of differentiations where the firms hold a important cost advantage. Cavusgil and Zou, (1994) suggested four factors that attributed to the configuration of (EPS).
First, EPS is influenced by organization and management attitude which is translated by the managerial capability, expertise to have high probability to create and effectively execute EPS and to achieve competitive advantages, and firms’ factor such as size, internal resources, location, and centralization (Douglas & Carig, 1989). Second, products and services factors; emerged from the theories related to products/ services exported, which have a significate influence in EP which considered as core factors in pricing decisions such as ( Product range, type, cost structure, and stage on life cycle as most important factors( Myers and Cavusgil, 1996), where cost is the most used as benchmarks in price determination because it minimum price which cannot be accepted in long-term.
Third factor is associated with industry nature; which referred to market structure, regulation, degree of innovation which is the most important in global competition due to the fact that advancement in technology regarded as success factor (Abratt & Pitt, 1985). Fourth, the difference between local and abroad market; which result of the environmental difference between local and foreign market such as currency volatility.
2.1 Export pricing strategies and practices.
(Tan & Sousa, Research on Export Pricing: Still Moving Toward Maturity, 2011) suggested that this group of factors based on manager experience that influences the EPS namely are; Competitive position, price fundamental, price process, and practices. Which they will be examined in detail her after.
2.1.1Competitive position
Since mid of 90s export market gone through major development du to rapidly advancement in technology and reform of regulation as well as economic fundamentals (Simon,1995). In fast pace environment change happened very often which is explained by increase in use of differentiation, in some particular markets the client base is equally homogenous and provided by various sellers with certain technologies. (Tellis, 1986) argues that in such a situation with this type of buyers the level of differentiation become less attractive in terms of superior advantage and sales driven by competitive price, this theory call to the adoption of a competitive pricing position.
Where in competitive pricing strategies, rivals’ prices are lively reviewed, and the objective is to set price at the same level of competitors. But this approach embodied disadvantage rivals in export market, as domestic market will not be affected by this factor regarding the differences between domestic and foreign marker. For instance, economic and regulation reform effect only external marketers not local rivals. On other hand Myers et al, 2002, demonstrated that marketers adopting this strategy, will constrained their pricing strategies to competition, setting their level of prices at either more and less than their competitors’ prices. In addition, (Kirpalani & Macintosh, 1980) (Mintzberg, 1987) suggested that international experience in positively correlated to export performance and because of pricing is element of marketing strategy, the selection of the adoption of competitive export pricing by management will be enabled by the company’s international experiences. C suite commitment in competitive pricing is in line with degree of importance of the management grant to exports, according to Gundlach 1996, company that engage in competitive pricing strategy such as predatory, fix prices to low level or reduce profit in short terms in seeking long term profit margin objective, and it’s the long term strategy which deliver profit with high commitment to pricing strategy.
Moreover, currency influence the competitive pricing strategy, one of competitive tools of currency is the strategic choice by marketer when they in country with a weak local currency, therefore the price can be used in way to overcome market share gain. Though, in a situation where the export market suffers from currency depreciation, which will affect the marketer competitive advantage, also when the export market hit by high inflation rates, the marketer can use the competitive advantage as aforementioned, with weaker currency, setting the prices below the domestic competitors without losing profit.
3. Price Setting Fundamentals
Price setting concepts is managerial principle used by companies to enable their pricing strategy, it included manly four concepts, pricing objectives, centralization, method, and orientation which we will examine in more details.
First, pricing objectives (PO) is the first step in determine the EPS, its logical to define pricing objective as strategic and economic goals, set by management in product or service pricing, (Diamantopoulso and Mathews 1995). Which reflect not only a company’s export factors but also represent the pricing aims of the company as part of overall corporate strategy (Morris and Morris 1990), change in the markets at different stage of product life cycle also differ within the markets, result in changes in pricing objectives frequent change over time. Sight found in literatures found several pricing objectives segments related to content, the desires level of achievement, and the associated timeline, in addition Morris 1990 suggested 21 different objectives, which can be profit or competitive positioning ( Samiee, 1987). Such as return in profit (RIO) and growth, where competitive objectives are barriers to entry, markets hare, and matching competitors’ practice.
According to Guiltinan and Gundlach, (1996) PO can also contradicting and same time complementary, subjects to hierarchical concern, because of this contradiction derived from temporal problems, related to mismatch of short/ long terms objectives that are not well connected to each other. Hence PO are influenced by pricing factors for instance, at the stage of produce life cycle, at the time of product/ services changes status from new to mature status the PO also should change; at the start stage is common to have profit orientated objectives, where in mature stage is common to adopt a competitive orientated objective (Porter 1986). In addition, in market growth, when competition within the market intensifies it will be required to adopt a competitive position in order to survive, (Simon 1995). Moreover Cavusgil 1996, suggested that exchange and inflation rate fluctuations affect the PO, because are fundamental elements for pricing decision.
Second centralization of and EPS; its men the level organization at which the price decision is decided, who is responsible, or level of duty assigned, is important for EPS. Exporters have to manage different customers preferences and demands that totally different from local. Therefore, (Anderson , 1985) suggested that the sales people play major role, sales man has to deal directly with demand of customers and most of the time sale point decision increase the responsiveness of well-informed customers. Hence, any division between salespeople and management because of the former is usually focused on sales volume and its factors, on other hand management is usually more concern on profit figures. Regardless of the fact that sales people have limited awareness of the determinants that effect the costs, salespeople remines the at last stage of centre of decision control because its has to deal with different preferences of customers that are taken into account to address price objection to them and they better meet the client needs (Winkler, 1983).
The third concepts of EPS related to the method used, which is the exact way of calculating and achieve the price, there are many methods to calculate the price and they differ depend on the industry, product types, and production and distribution channels. For that, many organizational and environmental factors affect the method used. The most well knowing method are either market-based or cost-based, the cost of product and resources which they influence the pricing strategies, used as base for a price determination. The drive is, the costs provide minimum prices for long term, cost are easy to implement, setting the prices covers the cost and mark-up profit. Cost-based pricing strategies are sign of firms that seeking profits, particularly for companies with short-term expectations within the markets ( Cavusgil 1996).
In price sensitive markets, EPS formed taken into account demand and competitive spectrum result to be more appropriate than cost-based pricing. At some point choice to adopt a market-based strategy is driven by the fact that are operating in intensive competition markets and the prices are chosen the market leaving little room for discretion for the marketer, this is approved if the latter is not a market leader. According to Myers et al, (2002) “firms adopting a market-based approach focus on the customers’ ability to pay for the product/ service, or the value placed on that product, or both”. For instance, EPS set to penetrate the market, the practice to set a low price for new product in order to accelerate the adoption and establish in this tactic normal standard. Last concept of EPS is price orientation, Smith and Meiskins 1995, where the first to explore it, and based on behavioural account of managerial pricing orientations such as cost, sale, competition, strategic pricing. Pricing orientations are the factors that affect managerial choices of pricing strategies and are directly connected with the firm. Such, (Product life cycle, no of competitors, marketing costs, logistic, foreign customers, production costs).
Conclusion
The concept of EPS which examined the factors that are considered as an integral part of the general strategy and their sub-factors impact result of internal or external environment. These factors are outlined in literatures, in the business economic environments in which the companies operate and directly affect EPS decision. Factors can have different route identified in four main categories; namely (Industry, product, managerial and countries differences).
Its important to take into account four aspects of EPS; competitive position if the firms is operating in highly competitive markets and the level of standardization is high; the pricing aspects related to the methods used in price setting, the hierarchy and who take the decisions, the objectives of export pricing orientation; the price cycle-related mainly to quotations, the level of control and frequency of pricing renegotiations.
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Internationalization present great opportunities for international companies to exploit new international market opportunities with a goal of higher customer reach to increase sales revenues, profitability and overall growth of the companies. Yue-Sai Cosmetics has changed the face of China through its recognition as a completely owned foreign cosmetic company in 1990. The company starting from zero in 1990 in the cosmetic segment has made efforts and improvements that have seen it become a favourite brand enjoying a brand recognition of 95% (Yue-Sai, 2019a). Its acquisition caused further growth of Yue-Sai Cosmetics by L’Oreal, the largest cosmetic company in the world in 2004 which helped the company in its developing beauty products for Chinese women (L’Oreal, 2019). The most famous products of the company include Ganoderma Life, Cordyceps Huanyan Constant Colour, perfection cream, custom essence, and skin cream. The specific product that the current study plan to recommend for an introduction to the UK market is the Ganoderma lucidum product due to its unique natural features specifically being 99% natural (Yue-Sai, 2019a). According to Vox (2018), the demand for natural products has been increasing due to increasing concern for healthy consumption and health effect of non-organic-made products. Therefore, the introduction of this product in the UK, Ganoderma lucidum may be viable based on the unique organic features of the product. In order to introduce the product in this new market, the goal of the essay is to introduce the product features and benefits, target client segment, the pricing strategy for each segment, the value proposition as well as sales channels with the sale techniques for each channel.
2.0. The Product to the UK
The product that we choose to introduce in the UK is the Ganoderma Lucidum which is suitable for all skin types. The Ganoderma Lucidum contains pure Qiongyuan extract condition liquid which makes it have a limited edition (Yue-Sai, 2019a). The product is made of Lingzhi mushroom which is a traditional Chinese medicine and has mainly been used for skin care due to its anti-oxidative effects when it is supplemented. Specifically, the product was mainly recommended traditionally due to its therapeutic effect on insulin resistance, reduction of prostate cancer risk. The product has an anticancer effect on the body and increases the skill cell activity if used as a lotion as Yue-Sai Cosmetics. Besides the benefits of the Lingzhi mushroom raw materials used in the product, the product has other benefits and features which are illustrateded in Table 1;
Ganoderma Lucidum Product Features
Product Benefits
The product ingredients are Ganoderma Lucidum, which is an original product of Huoshan used for traditional Chinese skin medicine, extracting organic purity of more than 99%.
Has curative features that can help in reducing the chances of skin problems and diseases such as dullness, roughness, and loss of elasticity
The product is packaged in 150ML packet sold at ¥360
Enhances the skin breathing
Smooth and translucent when applied to the skin.
It reveals the skin new radiance
Promotes skin health benefits in addition to reducing the chances of skin cancer
Fit for skin problems such as pores caused by night, day and nights as well as fatigue
99% produced from organic raw materials so have no skin side effects.
Table 1: Ganoderma Lucidum Product Features and Benefits (Yue-Sai, 2019b).
The product benefits of Ganoderma Lucidum brand make it appropriate for the UK market because they have a range of different choices for this product as shown figure 1 for facial repair, fresh essence, lipstick and Ganoderma Lucidum body lotion applied in complementing way.
The three main target client segments that we would choose are based on the rules of Business to Customer (B2C), Business to Business (B2B) and Business to Government (B2G). These three categories are identified in the table below with a suitable product that would fit the target client category.
Target Client Segment
The Target Segment Description
Big Retailers
· Tesco, Boots, Sainsbury’s etc.
(B2B)
The business who directly selling the products to companies can either buy them as raw materials and further process the cosmetic product or sell it to their specified category of consumers. In this case, the B2B in the UK would fit customer segments in big markets such as Boots, Tesco and Sainsbury’s where we would sell the products directly to these big retailers who would further sell the products to consumers without direct engagement by Yue-Sai in marketing activities.
The advantage of using this strategy is that the once it has established the target customers and relations have been formalised, the company is assured of huge and consistent sales. However, the limitation of this is its limited to control the distributors pricing (Raus et al., 2010).
Female between the age of 18-35 who likes beauty
(B2C)
As we need direct contact with consumers and need to establish our distribution channel. Therefore, this can be done through establishing direct offline stores that complement online shopping which can act as customer collection points. In this case, the target customers would be young UK female consumers between the age of 18-35 years who greatly mind about beauty, appearance or even modelling and would love flawless skin. The key product categories for this target segment would fit in skin care products with different brands such as facial repair, fresh essence, lipstick and Ganoderma Lucidum body lotion applied in complementing way.
The advantage of adopting the targeting strategy is that the business is easy to penetrate to other new markets in addition to being able to interact with the customers directly.
Government pharmacies and public health centres
(B2G)
The target customer for the public sector would be the public health sector due to the curative properties of the skin care product produced by Yue-Sai. We are aiming to sell to the government pharmacies and public health centres with facial repair, fresh essence, due to their curative skin measures. Furthermore, the product is also suitable in this target segment due to its use in preventing skin cancer among other related skin allergies and problems (Yue-Sai, 2019b).
The benefit of adopting this targeting strategy is that it is easy to do production and sales quoting in addition to a guaranteed specific market share. However, the disadvantage of this strategy is that intensive documentation is required in addition to low sales margins because sales are made when the sales stock is replenished, and there might also be many negotiations leading to highly lowered prices (Scheulovs & Gaile-Sarkane, 2010).
Table 2: The Target Client Segment
4.0. The Pricing Strategy for Each Segment
There are key factors highlighted by Lobel et al. (2015) that are required to consider when setting prices for products. The first factor is the cost of the product which is important in understanding the cost at which the products have been produced with and that which the business must not go below to earn a profit. Furthermore, the company objectives determine the pricing strategy because it helps to understand the profits the company wants to earn and the prices that can help earn a profit. The level of competition, customer needs, and characteristics, as well as economic conditions, determine the prices of products in new markets (Lobel et al., 2015). For instance, in highly competitive markets and harsh economic conditions, lower price than competitors might help the business penetrate the new markets while customer perception either product as a luxury or essential may impact the pricing as higher than the market. In consideration of these factors, three pricing strategies can be implemented when using B2B, B2C or B2G target client segment as table 3 shows.
Pricing Strategy
The Pricing Strategy Features
Client Segment Fit
Penetration price Strategy
The penetration pricing strategy is that the business using a lower price than the normal market rate to make faster the process of market penetration. This strategy is appropriate in increasing the market share where product acceptance is low (Lowe & Alpert, 2010). The appropriateness of this pricing strategy is that new competitors are discouraged from entering the market niche if they mistakenly see this pricing strategy as the long-range prices of the industry. However, the limitation of using this strategy is that the company must be willing to sacrifice some of its profit to penetrate successfully (Spann et al., 2010).
We plan to use penetration price strategy on B2B clients which are those big retailers. Basically, we will be selling the products to our taeget customers for lower prices than what the competitors are selling and further renegotiate for better prices after the market has fully been penetrated. Therefore, if B2B customer is targeted, then the penetration price strategy will be adopted to attract businesses.
The average current price is at ¥360(£40.59), and the prices can be set lower at £34.99 to attract businesses.
Skimming price Strategy
The skimming pricing strategy needs to set a very high price in a market for a limited period before it is reduced to a more competitive level (Lowe & Alpert, 2010). It is assumed in this strategy that customers are willing to pay relatively high prices because they see the products as either essential, luxury or prestigious to them. However, the skimming strategy is only practical in situations where the threat of competition is shorter or where there is a need for rapid cover up for startup cost.
The skimming strategy is suitable for products are viewed as prestigious. Yue-Sai Ganoderma Lucidum is considered to be highly prestigious and bought by female middle-high income level consumers. For this reason, we plan to use skimming strategy when entering the UK may be most appropriate in the B2C segment to identify how the consumers value the new product. Later on, the business may re-adjust the prices higher or a bit lower to meet the consumption demand.
Considering the current average price is at ¥360(£40.59), products can be set at £49.95 to see the customer reactions and later be lowered to £47.99 to meet the current market price of UK cosmetics category (Euromonitor, 2018).
Variable price Strategy
Variable pricing strategy is suitable for which more than one product is offered to and there is a concession with specific customers (Ingenbleek et al., 2013). Various reasons may lead to offering variable pricing strategy, one of them being the bargaining strength of consumers in addition to customer knowledge about the product. While the benefit of this pricing strategy is that the company can charge more when it wants to identify the financial strengths and desire of the customer to purchase the product. One key limited factor is that there is high bargaining power by the buyer which making the company charge very low therefore reducing its profitability.
The variable pricing is appropriate where the client or customer has high negotiation power. In this case, it can be applied in the B2G customer segment because the government has higher negotiation power than us. This will cause we selling products at lower prices than the market price, but due to consistent sales and guaranteed payments, the target client segment is still viable.
Table 3: Pricing Strategy for Each Segment
5.0. The Client Value Proposition
Based on table 2 of the most suitable pricing strategy, it is showed that the most feasible client segment would be business to customer segment due to a high value in terms of quick and high returns in addition to the high need in the UK for organic cosmetic products by consumers as cited by Vox (2018). Vox (2018) further notes that consumers are not only scared of the rise in chemical use in cosmetic products but are shying away from non-organic products making Ganoderma Lucidum brand appropriate for the target market which is young female consumers who have a taste for beauty between the age of 18-35 years. In this section, the environmental scanning, competitive analysis and sales, and promotion channel strategy are evaluated.
5.1. Market Research and Environmental Scanning
The PESTEL framework critically assesses the firm’s macro-environment to help understand the forces in the external environment and address them. Table 4 provides critical PESTEL evaluation and impact on the Cosmetic industry.
Environmental Forces
Critical Assessment
Political
The key political environment that may affect non-domestic cosmetic companies in the industry is Brexit. Following the UK withdrawal from EU, the terms may affect the political, legal and economic framework which may directly impact the cosmetic industry. For instance, the Brexit may lead to high importation cost due to trade barrier cause non-domestic cosmetic firms impacting Yue-Sai Cosmetic as well (Market Inspector, 2018). However, the targeted reduction of taxes from the current 19% to 15% by 2023 may act as an advantage for the cosmetic industry companies because the reduction means higher profit after tax (PKF, 2019).
Economic
The UK GPD grew to 1.3% in 2018 and is expected to increase to 1.6% in 2019 which shows a better economic performance (PWC, 2018). The good economic performance in the UK means beneficial business environment for both local and multinational cosmetic companies. Furthermore, the unemployment rate went down from 5.4 in 2015 to further 4.4% in 2017 and 4.1% in 2018 as showed by Statista (2019). This means that the dispensable income is high and customer purchasing power for cosmetic products has increased over the years which is a positive indicator for the growth of this industry.
Socio-Cultural
The ageing population in the UK is on the rise which means that the customer segment for young women between ages 18 and 35 years tends to go lower, which means negative signs for cosmetic firms that target this customer category (Kaynak & Kahle, 2019). However, the perception of beauty among the UK is positive and high and young women value their beauty as a way of reflecting their personality and feminism. In addition to the fact that there is a high demand for organic products due to the rise in cosmetic products that have high chemicals, companies selling organic cosmetic products may benefit (Vox, 2018). Therefore, there is a market opportunity for an organic product which our product Yue-Sai Cosmetic can exploit.
Technological
With the current advancement in technology especially the internet technology, online purchasing and consumption have been enhanced in the cosmetic industry. Companies are using e-commerce platforms such as Amazon to ensure high chances of sales considering the high brand names (Han & Kim, 2019). Therefore, such platforms can be beneficial for new entrants who can benefit from the high-value proposition of Amazon and other online channels.
Environmental
The beauty industry in the UK is now focusing on going green and organic. Specifically, there is a need for eco-friendly packaging due to the high emphasis on ensuring less stress to the environment when consuming cosmetic products (Li & Leonas, 2019). Furthermore, the growing concern on plastic packaging in the skin care segment which Yue-Sai Cosmetic products are sold promotes the company to use greener packaging techniques which Yue-Sai Cosmetic can adopt. Furthermore, the company can thrive in the industry because its products are 99% natural and have no heavy chemical ingredients.
Legal Environment
Finally, the legal forces that affect the cosmetic industry in the UK are ingredients regulations. FD&C (Food, Drug and Cosmetic Act) and FPLA (Fair Packaging & Labeling Act) are some of the regulations that the cosmetic industry has to follow. FDC ingredients used to ensure that customers are not misinformed as well as ensuring that the ingredients are not harmful for health (Smolinske, 2018). Therefore, companies entering the UK should understand these regulations to avoid legal implications that might affect the operations of the business in the UK.
Table 4: PESTEL Analysis
5.2. Competitive Analysis and Comparison
Porters’ five forces have been used as a good measure to understand the level of competition helping existing and new entrants understand the level of competition. Table 5 shows the Porters Five forces analysis for the UK cosmetic industry.
Porter’s Five Forces
Critical Assessment
New Entrant threat
The threat of new entrant is high because of the competitive nature of skin care and cosmetic products which attracts new entrants leading to decrease profits for existing companies. However, some of the entry barriers include strong brand Identity, high cost of manufacturing set up and moderate level barrier in accessing distribution channels and retaliation from key competitors (Haung et al., 2016). However, Yue-Sai Cosmetic may reduce these barriers.
Threat of Substitutes
There is a relatively low threat of substitution from homemade remedies and other skin care products that contain natural ingredients. This type of products is mainly in rural areas, and most UK women take such products as outdated (Nadkarni et al., 2016). Furthermore, the buyer preference and switching cost to substitute are low which means that our product, Yue-Sai Cosmetic, may offer the option to such women who would require natural ingredients which are 99% of the company product.
Supplier Bargaining Power
There is low supplier power because there are large suppliers in the industry and low input differentiation (Laba, 2017). The threat of forwarding integration and specific switching cost exists in low limits and impact of switching to substitute suppliers is also low which makes it possible for Yue-Sai Cosmetic to acquire suppliers for natural raw materials easily.
Buyer Bargaining Power
Due to the availability of the products and increased competition, the bargaining power of the buyers is relatively higher. This gives them a higher position to influence prices which further affects firms’ profitability. Specifically, the higher bargaining power by consumers may force firms to reduce prices because consumers can switch products with low switching cost (Haung et al., 2016). Therefore, unique products are needed by UK female consumers where Yue-Sai Cosmetic comes in because of our natural organic Ganoderma Lucidum brand.
Competitive Ribaldry
The competition in the sector is very high especially from international brands such as Clarins, Espa, Elemis and other local companies. There is a medium degree of differentiation in addition to high barriers to exit and negligible difference among different brand’s products (Laba, 2017). Therefore, for a company to develop in this market, it must enter with a unique brand proposition such as Ganoderma Lucidum brand which is more than 99% pure organic.
Table 5: Competitive Analysis and Comparison
5.3. Promotion and Pricing Strategy
The target client segment was selected in Table 2 as B2C so as the company can target female customers aged between 18 and 35 years who have a great taste for beauty. The pricing strategy was identified in Table 3 as being skimming pricing strategy because the skin beauty products are considered as prestigious and lowering the prices may make consumers question the beauty products (Euromonitor, 2018). Therefore, the current price in China for the Ganoderma Lucidum brand is at ¥360(£40.59), increasing the price by 23% to £49.95 may help test the most appropriate price for the product and later change the prices lower if the consumers complain of higher prices. This pricing strategy is feasible considering that the UK economy has been growing and consumers have higher income to spend on prestige products. Furthermore, considering the need for organic skin care products which our products address, this pricing strategy is appropriate as it makes the product look prestigious to the target market (Lobel et al., 2015.
In addition, this pricing strategy will be accompanied by some promotional strategies such as sales promotion and publicity. The use of personal selling and telesales in itself will act as a marketing technique for the product as the company calls different dealers and prospect customer segments and physically sends personal selling representatives to advertise the brand (Spann et al., 2014). Furthermore, discount and delivery of products purchased online for select customers based on London will help market the products because consumers will be motivated to buy the product online considering the free delivery and high discount for products bought in bulk. Use of publicity through public figures and celebrities in the UK engaged in different modelling, and sporting activities will help attract female consumers who admire to be like such celebrities.
6.0. Suitable Sales Channel for Ganoderma Lucidum Brand
A sale channel is viewed by Jobber et al. (2011) as the route to be taken by goods through the process of selling to customers from the supplier. While sometimes the channel is direct especially when goods are incorporated in the process of manufacturing, others are indirect where goods are sold through different channels. The key factors that should be considered when selecting a suitable channel for Ganoderma Lucidum brand product are channel cost, the market, the type of product, profit potential and channel structure (Dinner et al., 2014). Specifically, the channel must be compatible with similar products which are critical in distribution success. In consideration of the stated factors, sales channel can be through direct, intensive, extensive and selective. When the direct channel is used, middlemen are not used to delivering and selling products to end consumers unlike selective where a few middlemen are selected because of their special facilities or abilities to enable proper product marketing. Furthermore, intensive have maximum exposure to the point of sales where many outlets are used, unlike exclusive where restricted number dealers are used (Haung et al., 2016).
Considering the type of product that requires to reach as many female customers as possible and has low cost and narrow product line, it will be suited for intensive channels. Furthermore, the use of selective channel may also enhance the profitability of the firm. Therefore, the company will use Direct, Selective and intensive channels in distributing its products as figure 1 below details.
Figure 1: employment of Direct, Selective, and Intensive Sales Channels (Self-Generated)
Specifically, the selective channel is appropriate because we will employ online selling techniques and may need distributors who have unique capabilities such as Amazon who can better market the online product due to their high brand awareness (Jobber et al., 2011). Therefore, the use of Amazon through selective channels will allow Yue-Sai Cosmetic to easily market its product in a well-known platform that has a high customer base. Furthermore, the direct channels will ensure that the company delivers products directly to its end uses thus increasing the chances of understanding the customer demands and making product adjustment as they have direct contact with consumers. Finally, the intensive will help maximise the sales specifically in physical outlets which will increase the high level of awareness of this product among the target consumers (Familmaleki et al., 2015). The use of intensive strategy will also help our brand products to reach consumers even in the rural and other remote areas which the company is not able to reach due to the high cost of establishing outlets in the areas in addition to increasing customer targeting for those in need of cosmetic products made of organic and natural ingredients.
7.0. Sales Techniques for the Sales Channel
The key sales technique which a company can use includes telesales and personal selling. Specifically, the use of telesales will be great importance in reducing the cost of sales, finding new direct customers and sales outlets to be used for the sales channels. For this reason, the telesales technique will mainly be employed in intensive and direct sales channels which require high levels of relationship between the business and consumers or business, seller and final consumers. Furthermore, the use of telesales will ensure that in these two channels, the customer service is improved to final customers and process information requests and incoming orders have fully been handled (Dinner et al., 2014). This will be assisted by the establishment of call centres in the UK where large incoming calls can be handled with the staff being fully trained for marketing success and reasons.
The second sales technique that will be used mainly in making the selective strategy successful is personal selling. Personal selling will be critical in identifying and reaching specific distributors such as Amazon who have great market knowledge and can be of great use in product marketing. The use of personal selling is important as it helps to build customer-to-seller relationships in addition to determining the customer needs therefore influencing the buyers to make a purchase based on communicated product benefits (Jobber et al., 2011).
8.0. Conclusion
The current report critically evaluated how Ganoderma lucidum product can successfully be introduced in the new UK market by introducing the product features and benefits, target client segment, the pricing strategy for each segment, the value proposition as well as sales channels with the sale techniques for each channel. The product features were found to be unique with the target client selected as B2C customers consisting of female consumers between the age of 18 and 35 years. Also, the best pricing strategy for the customer segment is skimming is that it will help measure the price perception of the category of the consumers due to the perception of the products being prestigious. Both PESTEL and competitive environment analysis showed that the product is viable and can be introduced in this new market. Specifically, the healthy economic environment, use of online technology and acceptance of organic products by female consumers makes our product acceptable in the UK.
Furthermore, the low supplier power, low substitute threat, and low entry threat is an advantage for Ganoderma lucidum products. In introducing the product, the sales promotion strategies used will include telesales and personal selling which are also sales techniques and publicity selling. In addition, the channels that we plan to use will be Direct, Selective and intensive channels due to
Hutchison 3G UK Limited (3 Company) is a UK based cell phone company, which concentrates on delivering the internet oriented advantages to cellular communications through which people would be able enjoy Mobile Broadband internet on both laptop and handset and create texts and calls. It offers smart pricing and delivers the target audiences with the broadest preference criteria to connect them with home and abroad through useful, easy, and better-valued approach with an intention of structuring a diversified data transformation network. The company offers components, which are prepared by internet indicating development of internet oriented services into the cell phone. Common delivered items include IM (Instant Messaging), e- mail, social networking, VOIP (Voice over Internet Protocol), location and maps. It also offers “dongles” service through their USB Mobile Broadband modems for building capacity through easy routings for linking the customers to the internet while they are in moving position, for example, 3 Skypephone. According the initial value generation theme, 3 Company incorporated on direct customer involvement and learning by its retail storing and marketing functions. Additionally, one of the other objectives is to assist the controller for realizing the necessary functions for emphasizing the potential growth variables of mobile future as what are the capabilities and lacking of handset internet regarding the projected associated costs. Three.co.uk (2010) reported that this company had already penetrated 91% of the total population locally (UK market) and has a forthcoming vision of capturing 98% of total market share within 20101. In accordance with its operational strategy, 3 UK has revealed the opportunity that permits a person with 3 SIM along with a well- suited 3 handset for taking the advantage of endless Skype- to- Skype SMS and calls without any payment. It also possess the largest 3G (3rd Generation) network within UK by implementing various techniques for estimating its total network size with a potential prediction of obtaining 95% of total domestic population with about 13000 sites among which 9000 sites have already been owned by the company (three.co.uk, 2010, p. 1- 8).
Value based market segmentation
In terms of applying the value based market segmentation strategy, the selected company’s circumstances can be evaluated under the following 6 subsequent phases, as:
Determining the basic segmentation criteria: As there is no single way for making appropriate market segmentation, 3 generally implements some specific segment variables associated by the related combination for developing the desired market structure for the purpose standardized pricing program. Broadly speaking, 3 Company follows the geographic and benefit criteria for segmenting their overall market while any of such criteria are mostly influenced by different pricing contexts and services charges incurred by the company. Demography is another factor, which tends to be considered by any cell phone operator in setting the perceived call rates and other optional packages (Kotler & Armstrong, 2006, P. 195).
Identify discriminating value structure: Several drivers are responsible for creating different values for individual segments being activates among the selected segmentation criteria. Thus, geographic factor incorporates target region, country, and population, which focus basically on the company’s separate national and international pricing structure. On the other hand, demography is initiated by age, income, occupation, and nationality of subscriber while benefits involve quality, service, convenience of the call rates and other charges for internet, voice mail, video mail and message, photo message etc. (Kotler & Armstrong, 2006 P. 196). Thus, the zest statistics of corporate global charges, abroad roaming and other services can be shown as:
Determining operational constraints and advantages: In both global and local functioning, 3 Company is a subject of some integral competitive advantages and challenges. In stead of facing potential threats from Skype like other operators, it can enjoy leverage from MTR (Mobile Termination Rate) by charging approximately 4.7p or above for per minute call. It is being expected that within this year, the company would be able to complete the consolidated network with T- Mobile with MBNL (Mobile Broadband Network Limited) enabling it to cover 98% of local density over 13000 masts. Introduction of Broadband service in 2007 had been resulted into gaining of 1 million new customers within 1 year while “Ethernet” is another symbol of 3’s sophisticated technology of data transformation between masts and domestic mobile network. It will also permit the projected enhancement of speed at 100 MBPS within 2010 with an extra potential of 1 GBPS along with an association of advanced 3G services. Conversely, relative market regulation from Ofcom seems to create high charge, which restricts the company, is delivering more value to the subscribers. Since the market is posing with a higher chance of fruitful merging, such effort would enhance extra competition and price war by increasing the chance lowering 3’s price below than marginal level (three.co.uk, 2010, p. 1- 5).
Create primary and secondary segments: In the primary segments, 3 Company would consider retail selling to final subscribers while secondary segments would incorporate linking with wholesale mobile voice call termination served to other communications dealers pursuant to situation MA5 from the year 2007. On the other hand, the noted geographic segment can be termed as primary while demographic and benefits segments of this company (three.co.uk P. 1- 4). A part of such pattern of wholesaling can be presented as:
Create detailed segment description: In this regard, it has promoted the “Bringing about change” strategy through which it promises to deliver actual solutions to their subscriber’s problems challenging everyday. Since 3 is considered as a new comer in Europe, it is lobbying greatly for roaming charges. Because of placing below than Vodafone and T- mobile, it is also targeting subscribers of other networks with internal connection at less revenue, more services. For such procedure, the traveling subscribers of 3 would use its network at lower charges but whey they roam off that and enter into other network, usually a higher rate will be charged (three.co.uk, 2010, p. 1- 10).
Develop segment metrics and fences: The stream- through impacts from competition based pricing closely associated with Mobile Broadband and a sudden fall in prices over all other industry partners is acting as a favorable impact of 3 on simulated pricing fences (three.co.uk, 2010, p. 1- 7).
Second Assignment
Price structure
A price structure is generally be defined as a series of price levels which represents how a product will be priced. Such levels allow flexible and favorable pricing in relation with the estimated differences in price based on service features, subscriber needs and preferences and consumption behavior (Hanna & Dodge, 1995 p. 9).
As a part of this strategy, 3 Company has introduced the charge free calls in association with Skype while its believes that MTRs are a split- off for outdating required expenses UK landline subscribers at £750m yearly which is over £2m daily. In reducing more costs and illegal MTRs, it is trying to combine the influential power of MoneySupermarket.com, BT, GMB, NUS and so one which is expected to be effective within 2011. In the situation of lower or insignificant termination rates, 3’s pricing structure will also be modified since once the company had adopted an expensive item for capturing the market with a mass-market pricing strategy of £15 for 3GB data (three.co.uk, 2010, p. 1- 5).
However, the seven generic approaches for segmenting market regarding price fences and identification consideration of 3 Company are being elaborated as below:
Segmentation by buyer identification: Basically, the company has to incorporate on two forms of buyer groups in terms of final subscriber in consumer market located both within and outside of UK and wholesaling market as other telecommunication operators as a part of business market. Today, through Skype, 3 is being able to connect other internet tools and functions regarding Face book, Twitter and other sites to locate potential buyers of their services for a fixed charge (three.co.uk, 2010, p. 1- 6).
Segmentation by purchase location: It encompasses on core items of geographic segmentation criteria since most of the networking offers are sold through the company directly. It means that, 3 tends to charge heterogeneous prices in EU, other European countries, Australia, Canada, Hong Kong, Singapore, U.S.A and other selected bands of the world (Hutchison 3G UK Limited, 2010 p. 17).
Segmentation by time or purchase: Here, the company differentiates its price regarding season and celebration since service scenario would be modified from time to time (Kotler & Armstrong, 2006 P. 337).
Segmentation by purchase quantity: It involves identification of customers in terms of number of services subscribed by them. It would incorporate the subscription of USB devices, modems, e- mail, IM etc. mostly enjoyed by a single one (three.co.uk, 2010, p. 1- 7).
Segmentation by product bundling: In this issue, the mobile company would prefer to segment the market in terms of bunched order, like- offering a parson with a compatible 3G cell for enjoying the benefits of charge free Skype calls which may not be a 3 phone. That person would also utilize 3 SIM for dialing and receiving free Skype- to- Skype calls and IM option (three.co.uk P. 1- 9). Flexible bundling also involves free voicemail, choosing additional free offers, free alerts for knowing the latest usage information, free IM and 300 free 3 to 3 minutes in UK per month etc. (Hutchison 3G UK Limited, 2002, p. 7).
Segmentation by tie- ins and metering: It implies an implementation of price segmentation strategy based on forecasting or logical prediction through analyzing the past price performance record of the company (Hanna & Dodge, 1995 P. 10).
Segmentation by product design: Since the company aims to roll on a competitive and fair pricing strategy which basically inspires it to keep a lower pricing through careful designing of news and info, sport, communication, meet and share, games, TV and entertainment, restricted and music and tunes options (Meyer, 2007) and (Hutchison 3G UK Limited, 2010 p. 15).
Importance of segment pricing
Segment pricing strategy has been proved greatly efficient, especially when 3 sells wide ranges of differentiated online communication options in mobile devices to different customers as that estimation has not been made upon costs. Since the projected segmented divisions are showing various degrees of actual and potential demand, there should be a conscious force of not encroaching total costs over the individual price revenues. Additionally, the price structure can understand the difference between customer divisions allowing for various customer evaluations and projected value perceptions. It will also allow in charging more price for one option for leaving another as full free in terms of competitive offers and subscribers perception in leaving value for that. It also assists the company with a cost effective incentive for people by sharing costs along with an assessment of low pricing strategy. Moreover, it is effective enough in keeping the company highly competitive enough than other players regarding technology, innovation and pricing module (Hanna & Dodge, 1995 p. 9- 11).
Third Assignment
Product importance
In this new edge of globalization, communication is becoming one of the basic needs of people throughout the world. 3 Company is running on the motive of satisfying such need of people in terms of combining online communication services within the handset by meeting the formal purpose of talking over mobile network. Thus, it can be said that the company is concentrating on two conditional bundled services which tend to be equally important to the modern generation regarding their traditional and upgraded communication needs. As mentioned earlier, along with the generalized features of conventional mobile phone services, 3 delivers some extra offers related with electronic media posing high demand potential. For estimating such demand, the company applies their described population coverage maps for investigating the network coverage in criteria affecting the subscribers, like- the living and working place. Moreover, the faster technical expertise per site at 7.2 MBPS and developing uplink and downlink act as High Speed Packet Access can meet the subscriber needs if data throughput. Introduction of LTE (Long Term Evaluation) technology is also altering pattern of cell phone utilization by emphasizing on customer preferences with the most potent demand of accessing high-speed mobile coverage (Hutchison 3G UK Limited, 2010 p. 3- 18).
Demand
Demand acts as the most influential factor for running any cycle of production or servicing. Since the demand for getting a bundle various integrated items including voice and video mail, fax calls, text messages and IM etc. is increasing at a continuous rate, 3 has planned for a structured pricing schedule for delivering different types of offerings to meet such rising demand (Hutchison 3G UK Limited, 2010 p. 7- 8), such as-
Some other demand related factors are:
The market and demand: Whereas costs set the lower limit of prices, the market and demand sets the upper limit. Since 3 is operating in an oligopoly market, the related nature of competition refers it to make an immediate price change as a response of other marketers pricing initiatives (Kotler and Armstrong, 2006 p. 315).
Consumer perceptions of price and value: The Company adopts its overall pricing decisions with a close concern of target audiences by understanding how much value are they willing to pay on the received benefits (Kotler and Armstrong, 2006 p. 316).
Analyzing the price- demand relationship: Measurement of such relationship refers to not consider other factors influencing the projected demand variation, which can be gauged by the demand curve below that depicts the number of units the market will consume in a specific time frame in terms of company’s effort in charging distinguished prices (Kotler and Armstrong, 2006 p. 317), as-
Price elasticity of demand: After understanding the service responsiveness or sensitivity to the change in price, the next question is related with the measurement of that degree of price responsiveness for changing. It is commonly known as price elasticity of demand. The type of communicative and technological offerings served by the company is basically elastic in nature. It means, according to the noted demand curve, a small fall in price from P2 to P1 creates a huge increase in subscription of 3’s telecommunication offers. The opposite position is known as inelastic demand (Kotler and Armstrong, 2006 P. 318). Price elasticity can be expressed by the following equation:
Ed = % Change in quantity demanded / % Change in price
Recession period
The factual analysis of recent economic downturn poses a major impact on most of the industrial growth while the telecommunication sector of UK has been gained a mixed experience from such incident. During the 1st half of 2008, handset sales have been increased than 2007 and thus benefiting this company. In this regard, some mega industry associates of 3 including Nokia, Samsung and LG have experienced a higher revenue margin while Motorola was an exceptional case for lose shipment ratio of 40% (ITU, 2009). Although such volume of handset sales has enhanced the consumption ratio of 3’s offerings, price structure tends to be lower and lower in order to match featured benefits with public affordability. Thus, the comparison of lower costs and technological sophistication are pressuring the company to adopt aggressive pricing structures for beating this intense competition both in emerged and saturated market segments (Missphones, 2008).
Economic Value Estimation
The EVE is a model or structure that is generally used by a company in order to estimate prices for its offers for gaining maximum price without loosing money (Levy, 2010) as:
EVE = Competitor’s price + Positive discrimination value – Negative discrimination value
As, 3 Company has not yet actively implemented this model, it can do so by following several stages below:
Understanding customer economies: 3 would realize business structure of subscribers since as the basic value drivers and hypothesis will be developed upon service essence (Levy, 2010, p.1)
Quantify value drivers: After, 3 would quantify the financial importance of those drivers for testing hypothesis by providing core EVE input (Levy, 2010 p. 1).
Estimation of differential value: It involves developing algorithms for quantifying value by considering subscriber ability, competitive dynamics, and different functional data (Levy, 2010 p. 1).
Conclusion
Finally, it can be concluded that the selected 3 Cell phone Company operator generally considers many factors in setting a sustainable pricing strategy by delivering differentiated services which are not available for any other networks regarding IM, email, social networking, Skype and maps. By tackling some constraint and challenging issues like- recession and price cut, the company would be more efficient.
References
Hanna, N., & Dodge, H. R., (1995) Pricing- Policies and procedures. 3rd ed. Macmillan Press Limited.
This chapter contains a review of existing literature concerning hotel pricing strategies and customer booking behaviors. The analysis is centered on reviewing the main factors influencing pricing in the hospitality industry and their contribution towards understanding customer behaviors in hotel booking. However, before delving into the details of this analysis, it is (first) important to understand the critical forces influencing the hospitality industry.
E-Commerce
Many studies consider e-commerce to be a critical force defining how hotels interact with their customers (Chae, Koh & Prybutok 2014; Buil, Martínez & Chernatony 2013b). The growth of this form of technological advancement means that the hospitality industry has a new reality in the way it operates. More importantly, the growth of e-commerce means that stakeholders in the sector have to rethink how they do business with each other and with their customers. Studies that have investigated how companies operate on the online platform have shown that consumer-buying behavior is mostly influenced by functional, hedonic, innovation, and aesthetic needs (Chae, Koh & Prybutok 2014; Buil, Martínez & Chernatony 2013b).
Before the growth and spread of the internet in the hospitality industry, global distribution systems (GDS) played a key role in facilitating international commerce. According to Buil, Martínez, and Chernatony (2013b), the GDS played a functional role in the industry by coordinating the functions of brick-and-mortar businesses and travel suppliers. However, with the growth and development of e-commerce in the 1990s, hotels and travel agencies changed how they operate their businesses by embracing the virtual platform (Jang, Tang & Park 2013).
At the time, major global hotels embarked on an aggressive marketing campaign to popularise their brands online (such as through their websites) (Chen 2014). A more interesting trend that emerged at the time was the reclaiming of value chain controls by hotels from travel agencies, which were their main source of business. Afiouni, Karam, and El-Hajj (2013) refer to this trend as “disintermediation.” Today, hotels and airlines have fully embraced this trend because they reach out to their customers directly to improve their business-customer experience and enhance customer satisfaction standards.
Buil, Martínez, and Chernatony (2013a) say that online direct distribution is more important for hotels that have loyalty programs than those that do not have the same programs. This is because when customers visit their websites, they are rewarded for doing so (repeat business). At the same time, loyalty programs are important to these businesses because they allow them to maintain a database for improving their products and services further (Jang, Tang & Park 2013). Many hotels that develop individualized services commonly use this strategy (Afiouni, Karam & El-Hajj 2013). Moreover, most of them have used the same plan to forge relationships that are more intimate with their customers. Based on the success of such methods, several research studies have pointed out the need for hotels to use direct marketing platforms to build effective customer relationships, and bolster customer loyalty standards (Chae, Koh, & Prybutok 2014; Buil, Martínez & Chernatony 2013b).
Hua, Morosan, and DeFranco (2015) say that the growth and development of e-commerce have increased business opportunities in the hospitality industry. Online travel retailers have realized the potential that exists in this space and exploited it to account for about 50% of all online hotel bookings today (Chen 2014). Four main types of travel intermediaries have done so and they include virtual travel sites, meta-search engine sites, social media sites, and flash sales sites. Online travel agencies that have relied on e-commerce for growth include Orbitz.com, Expedia.com, and Hotel.com (Chen 2014). Other companies that have achieved the same level of success include Travelocity.com and Priceline.com. These online travel agencies operate using one of three business models: a commission-based model, a merchant framework, and the opaque selling model (Chen 2014).
Meta-search websites operate differently from online travel agents because they obtain information from a list of websites and package the same data to create a common database for customers to select a hotel, based on individual preferences. Google is one of the most commonly used meta-search websites for making hotel bookings, but others that provide the same service, and have a relatively significant following, include Kayak.com and Bookingbuddy.com (Hua, Morosan & DeFranco 2015). Generally, these websites streamline the search process for their customers. In other words, they not only allow users to view available accommodation facilities but also compare them with each other.
Social media websites are different from meta-search websites because they provide user-generated data. Many hotels ignored this platform for a long time because of its unregulated nature, but have recently reconsidered this decision. Consequently, many of them run social media accounts on various platforms, such as Facebook and Twitter, to direct customer traffic to their websites and to address some of their customer issues online. TripAdvisor is one of the world’s most popular user-generated online platforms in the industry (Hua, Morosan & DeFranco 2015).
Lastly, flash sale platforms offer customers limited products for a subsidized price and for a limited time (Chiu & Chen 2014). Usually, these offers last for up to 48 hours, and they are often given to customers who have registered accounts on the platforms. Some of the most common websites that fit this description include Groupon-Getaways and Living Social-Escape. Many hotels collaborate with such companies for several reasons, including increasing off-season occupancy rates and enhancing the profile of their properties (usually to appeal to new market segments) (Chae, Koh & Prybutok 2014; Buil, Martínez & Chernatony 2013b).
The Impact of E-Commerce on Hotel Pricing
Customers are often on the lookout for deals that give them value for their money. This point of view suggests that the perception of hotels and their customers regarding product value and risks are the main forces influencing pricing strategies. Studies also show that consumers often have different risk reduction strategies that they employ while shopping online because of the uncertainty associated with making virtual reservations (Hua, Morosan, & DeFranco 2015).
For example, some customers are hesitant to make reservations because of the belief that better deals will show up if they wait. Based on this analysis, many hotels are starting to realize that they are working with a group of well-informed customers who are always out to exploit suppliers’ pricing strategies. Based on the realization that the number of tech-savvy customers is slowly rising, many hotels are under pressure from experts who suggest they should use a dynamic pricing strategy across all their distribution channels (Hua, Morosan & DeFranco 2015). However, Monga and Kaplash (2016) caution that the application of this dynamic pricing strategy requires a full realization (by hotels) that it involves the interplay between a customer’s perceived value of the hotel’s products and the perceived risks of the hoteliers.
Several researchers have identified the dynamic pricing strategy as having the potential to increase hotel revenue because it not only attracts price-sensitive customers but also uses analytical pricing models that include different types of information, including the history of customers and their characteristics, to ascertain the right price (Monga & Kaplash 2016). This pricing model also focuses on real-time reservations, which are critical in the establishment of customer behavior in the long run.
Online Consumer Decision-Making Processes
According to the consumer decision-making model (CDP), hotel guests often undergo three key stages before they decide to purchase a good or service. The first one is “need recognition,” whereby they establish why they want to purchase in the first place (Afiouni, Karam & El-Hajj 2013). The second stage involves searching for information, whereby they seek to find alternatives in the market that would allow them to fulfill their desired needs. The third stage of the purchasing process involves the evaluation of alternatives. The three steps of the purchasing process are considered part of a wider cognitive process that explains the decision of customers to make a purchase.
The growth of the internet has affected how the traditional CDP works because it has influenced how customers gain access to information regarding their purchasing decisions. In one study, researchers pointed out that most customers believe the internet influences their decisions to reserve hotel rooms at least 40% of the time (Riley 2015). Since the internet and technological advancements are not static, experts believe that online consumer behavior is set to become more complex (Afiouni, Karam & El-Hajj 2013).
Different factors influence the consumer decision-making process. At the top of the list are economic issues, such as the time spent searching for the best deals online and its associated monetary costs (Riley 2015). The second issue is computing requirements, which encompass search-engine optimization needs and the involvement of online third-party agents in hotel booking (Riley 2015). The last consideration is psychology, which influences how guests undertake their search processes. Based on the multiplicity of these factors, Chen (2014) says it is important to understand the complexity of customer purchasing decisions
Bambauer-Sachse and Massera (2015) presented a model for understanding online consumer behavior by re-examining traditional CDP. Using his model, the researcher demonstrated that consumer behavior was partly influenced by external factors, including individual characteristics and social influences when making online purchasing decisions (Bambauer-Sachse & Massera 2015). Other contributors to the process include situational and economic factors that influence decision-making processes in the online environment. The diagram below shows the makeup and structure of this model.
Figure 1. Consumer purchasing model (Bambauer-Sachse & Massera 2015).
According to the diagram above, processes that involve problem recognition, search engine optimization, alternative evaluation, purchase, and outcomes guide the decision-making process. Different external factors support this decision-making process and they include individual characteristics, social influences, situational and economic factors, and the online environment. Generally, these findings show that the consumer decision-making process has evolved into a complex and dynamic system, especially when it is analyzed in the context of the virtual environment.
In terms of making online purchases, Becerra, Santaló, and Silva (2013) contend that a customer’s experience and the heterogeneity of hotel products have the greatest effect. Comparatively, Becerra, Santaló, and Silva (2013) say that many consumers attach both informational and transactional aspects of consumer purchasing decisions to their online booking decisions (especially when evaluating travel products). Although most customers spend a lot of time evaluating existing travel and accommodation options, their decisions are mostly informed by informational aspects of their purchases. Notably, consumers are keen to analyze all existing information before they make their purchases online (Vimi 2013).
Evaluation and Comparison Process
Several researchers have investigated, evaluated, and compared the experiences that customers undergo before making online bookings (Orisys Infotech 2018; Reis & Judd 2014). For example, Dolansky and Vandenbosch (2013) have shown that the process is subject to many individualistic and context-specific factors. Researchers who hold similar views have commonly cited the rational choice theory as an instrumental framework for identifying the right booking options to pursue (Adhikari, Basu & Raj 2013). This theory proposes that the process of evaluating consumer alternatives is premised on their ability to weigh the cost and values of all options available (Orisys Infotech 2018; Reis & Judd 2014).
The same theory postulates that consumers should use rational and logical processes when making their buying choices (Dolansky & Vandenbosch 2013). However, different observers have also pointed out that the consumer buying process is a complex one because it involves emotional cues that affect people’s perceptions of the value of products they intend to buy (Adhikari, Basu & Raj 2013). Many researchers have contextualized these feelings as part of cognitive systems that influence the buying process (McGuire 2015; Bambauer-Sachse & Massera 2015). The same concepts have been highlighted as utilitarian and hedonic shopping values, which affect consumer buying behaviors. They have also dominated consumer research studies by explaining how hotel guests make purchasing decisions (McGuire 2015; Bambauer-Sachse & Massera 2015).
Studies by Falk and Hagsten (2015) have investigated how utilitarian and hedonic values influence consumer perceptions through sales promotions and found that utilitarian benefits are often functional and cognitive, while hedonic values are experiential. The same researchers suggest that customers often use the two types of values when evaluating hotel bookings (Falk & Hagsten 2015). For example, promotional benefits in hotel bookings that convey utilitarian values may appeal to a selected group of customers because they provide monetary savings and increase the value of products they are getting (Falk & Hagsten 2015). Comparatively, promotional campaigns that have hedonic values have emotionally gratifying and emotional benefits.
Some researchers also argue that utilitarian values are associated with consumption utility values (Johnson & Cui 2013). News, anticipation, and memory utility benefits are also associated with utilitarian values. Comparatively, consumption utility is primarily linked to the perceived value consumers get from the consumption or purchase of goods and values (Falk & Hagsten 2015). For example, it could manifest when guests book a hotel room through coupon redemption. Comparatively, news utility refers to the perceived value customers get from receiving timely and informative messages. For example, advertisements for monetary savings fit the description of this type of utility (Falk & Hagsten 2015).
Comparatively, anticipation utility refers to people’s perceived consumption value. For example, desired discounted levels fit this description. Lastly, memory utility refers to customers’ experiences, which often create assimilation effects that could be linked to their current experience of the booking process (Johnson & Cui 2013). At the center of investigations that strive to understand consumer behavior when making online purchases is a growing body of literature that is premised on new and existing theories that have also tried to investigate the same behavior.
Theoretical Analysis
Transaction and Acquisition Utility Theory
Proponents of the transaction theory postulate that consumer behavior is often influenced by several types of activities that have different consequences, depending on the type of decision made (Dixit 2017). The decision-making process is modeled around a framework, which Lee and Jang (2013b) call a “mental accounting system.” Many researchers say the framework is informed by transaction and acquisition utility systems (Dixit 2017). The transaction utility is defined by the difference between the selling and reference prices. Generally, it refers to feelings of pleasure or disappointments that customers may feel when making a deal. Thus, the value of transaction utility largely refers to the ability of customers to understand whether they are getting a good or bad deal through a purchase. Comparatively, acquisition utility refers to the economic value of a transaction.
Transaction and acquisition utility theories have been widely used to understand consumer-buying behaviors. Notably, marketers have used them to understand how different groups of consumers react to different promotional messages. The same researchers have investigated why certain groups of customers do not positively respond to different promotional messages (Hung & Li 2016). Research studies investigating coupon usages have also adopted the two theories to understand how customers perceive purchase values and how they are prone to the deals they make (Dixit 2017).
Nonetheless, researchers such as Lee and Jang (2013a) say traditional theories have failed to explain customer groups that respond well to certain promotional messages, and why they may fail to do so in others. In line with this view, Liang (2014) says customers are often influenced by specific experiences and have different perceived values of products and services when making purchasing decisions. In other words, both utilitarian and hedonic benefits are always in play.
Amaro and Duarte (2015) adopted the transaction utility theory to understand consumer buying behaviors in the online marketplace. The theory was used to understand how customers perceive the value they would get from their online purchases and the nature of their purchase intentions. Their study showed that both monetary and non-monetary values influenced how consumers made their purchasing decisions (Amaro & Duarte 2015). In other words, the two elements were intrinsic motivators to their consumer decisions. Another theory that has been used in a similar context is the goal-setting theory.
Goal-Setting Theory
The goal-setting theory traces its roots in the field of human resource management, where researchers strived to understand the relationship between goal attainment and job performance (Chakrabarti, Barnes & Berthon 2014). This theory postulates that customers’ values and intentions are cognitive processes that influence their behavior. Specifically, the theory encourages the development of goals because it helps people to realize their intended objectives and avoid undesirable outcomes (Chakrabarti, Barnes & Berthon 2014). At the same time, the satisfaction that one gets when achieving a certain goal is the motivation for continuing to pursue them.
The goal-setting theory has been applied in consumer psychology to understand customer-buying behaviors among different groups of consumers. Rong-Da Liang (2014) says that online purchase is an example of goal-oriented behavior among customers. Although many consumers often have a specific desire to pursue a certain goal, their actions normally follow a predetermined behavior, which ultimately contributes to satisfying their desires. Therefore, goal setting is deemed a satisfying behavior that motivates consumers to make specific purchasing decisions.
Theory of Planned Behaviour
The theory of planned behavior (TPB) is linked to the goal-setting theory because they both focus on the “expected” value of consumer behavior and actions (Farah 2017). The same analogy is true for the theory of reasons action (TRA). Both models are designed to predict voluntary behaviors, which are influenced by two determinants of human behavior: the attitudes of a consumer when influencing his/her buying decisions, and the social or subjective norms that influence the same buying decisions (Londoño-Roldan, Davies & Elms 2017). The TRA has been further modified to investigate perceived behavioral controls as another determinant of consumer buying behavior. The TPB, which is an extension of TRA, shows how a consumer’s judgment about his/her purchasing decision may ultimately affect the entire purchasing process (Farah 2017). Generally, these insights reveal that a customer’s attitudes, subjective norms, and perceptions of behavior control all have a profound impact on their behavioral patterns of purchasing.
Researchers have used the TPB and TRA theories to examine different social marketing concepts (relating to consumer behavior), but most of their research has been focused on understanding how consumers buy familiar and unfamiliar products (Londoño-Roldan, Davies, & Elms 2017). Several pieces of literature have also shown the efficacy of the theory in the examination of traveler behaviors and destination choices, while others have demonstrated its usefulness in understanding how customers use coupons online and adopt e-commerce (Farah 2017).
TRA and TPB theories largely help us to understand how cognitive processes inform consumer behaviors and how the same models help people to perceive the consequences of making purchasing decisions, which ultimately influence their behavioral patterns. The biggest criticisms voiced against the two theories center on their inability to explain the main causes of the cognitive influences that affect human behavior (Farah 2017). Nonetheless, most studies that have investigated consumer behavior show that it is goal-oriented (Ivanov 2014). The goal-orientation process is defined by people’s quest to attain specific desires and their intention to disassociate themselves with undesirable outcomes.
Van Oest (2013) says that, in an attempt to get what consumers want, they need to trade something of value. For example, consumers have to spend long hours researching the best deals on the internet before they settle for something that they want. Although achieving a specific goal is at the center of consumer purchasing decisions, TRA and TPB models were not inherently designed to accommodate any of these goals. Consequently, the component of goal attainment was ignored in their application. Thus, the two models have not been voiced as viable frameworks for understanding goal-oriented behaviors (Van Oest 2013). They are also weak in describing the psychological processes behind goal intentions.
Model of Goal-Directed Behaviour
Based on the weaknesses of the TRA and TPB models, some researchers developed the model of goal-oriented behavior to understand human purchasing decisions (Li 2015). Like the TRA and TPB models, this framework strives to explain human intention and behaviors when making purchasing decisions. However, these two sets of theories differ on the premise that the model of goal-directed behavior suggests that human intentions are hinged on a volatile desire to achieve a specific goal, while the TRA and TPB do not (Li 2015).
From a psychological perspective, motivation explains an elicit intention by customers to achieve a specific goal by following a particular behavior. Therefore, under the right conditions, a person’s motivation will be ignited, subject to his/her personal beliefs, intrinsic attitudes, and emotions. Consequently, in a customer’s decision-making process, an individual’s motives will be directed towards the achievement of specific intentions. However, the need to do so has to be recognized first. This analysis shows that a specific motive is often targeted towards the achievement of a known intention. Figure 2 below demonstrates the main tenets of the model of goal-directed behavior.
Figure 2. Goal-directed behavior (Chen 2014).
According to the model highlighted above, human desires could be explained using one of three methods: human emotions, subjective norms, and personal attitudes. Human desires play a mediating role in understanding how the three factors mentioned above influence customer purchasing behaviors. Perceived behavior control also has a similar effect. Nonetheless, the model of directed behavior postulates that the nature and frequency of past human behavior significantly affect current consumer behaviors (Chen 2014). An individual’s intentions and future behaviors are also bound to be affected similarly. The concept of “recent past behavior” also postulates that a customer’s current behavior will most likely shape his/her future purchases (Chen 2014). Based on the insights highlighted here, this theory provides a perfect bridge for understanding how human behaviors and intentions interact. In this regard, it accentuates the tenets of the TPB and TRA models because it provides a more powerful explanation of consumer purchasing decisions.
Wearne and Morrison (2013) investigated the role of the goal-directed model in understanding the relationship between the image of a shop and the number of customer visits it registered. The moderating variables were anticipated emotions and desires (Wearne & Morrison 2013). Additionally, the results of the investigation showed that desire and positive emotions were directly correlated to the frequency of customer visits (Wearne & Morrison 2013).
A different researcher investigated the efficacy of the model of goal-directed behavior in understanding customer loyalty standards in a business-to-business context and found that consumer desires were largely influenced by human attitudes and positive anticipated emotions (Chen 2014). Subjective norms were seen to have the same effect as well (Chen 2014). Recent studies have also used the same theory to investigate consumer behavior in the hospitality industry and their findings have revealed that desire is a vital impetus in the intention formation process (Van Oest 2013).
Although the model of goal-directed behavior has been credited for expanding people’s understanding of the relationship between customer attitudes and paradigms, it has not been extensively used in consumer and marketing research. Presently, few research studies investigate how the model affects purchasing decisions in the hotel industry. The current study exploits this research gap by using its salient features to explain consumer behavior and buying intentions. The goal of using this theoretical approach is to provide a holistic framework for understanding the buying behavior of Chinese customers in their hotel booking decisions. The conceptual framework for this investigation appears below.
Conceptual Framework
Based on the findings of this study, several pieces of literature have shown that a customer’s motivation to secure hotel deals is partly influenced by his/her attitudes, emotions, market mavens, subjective norms, and perceived self-efficacy (Jang, Tang & Park 2013; Chae, Koh & Prybutok 2014). The frequency of past behaviors also moderates the relationship between customer motivation and the intention to book a hotel. Collectively, these dynamics form the main tenets of the conceptual framework, which outlines the study’s framework of analysis (Saunders, Lewis & Thornhill 2007). It appears in figure 3 below.
Figure 3. Conceptual Framework.
As seen from the conceptual framework above, the current study will investigate Chinese consumer behaviors by investigating how their attitudes, emotions, market mavens, subjective norms and perceived self-efficacy influence their decision to book hotels (Viglia & Abrate 2014). Past behaviors will also be used as a moderating factor to understand how an intention to reserve a hotel room will translate to a confirmed purchase. This conceptual framework is based on the findings of this literature review.
Summary
This chapter has explored the theoretical and empirical foundations of consumer behavior in contemporary research studies. It has shown that the main models underlying this relationship are the theory of planned behavior, the model of goal-directed behavior, the goal-setting theory, and transaction and utility frameworks. These frameworks have been instrumental in highlighting the main factors influencing consumer-purchasing behaviors.
Key motivating factors that influence their actions have been highlighted in the conceptual framework and they include consumer attitudes, people’s emotions, market mavens, buyers’ subjective norms, and their perceived self-efficacy. Although this literature review explains what other researchers have noted about consumer purchasing behavior, their reviews fail to note how different customer segments respond to the same influences, subject to economic, social, and political contexts. This paper fills this research gap by exploring the behavior of Chinese consumers when making hotel bookings.
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For a business to be successful, it must have a working product pricing system. There are several factors that should be considered when setting the price for your products. The methods applied when setting your pricing include; cost-based pricing, completion-based pricing and customer based pricing.
Competition should be considered when determining the price of a product. As competition increases in the industry, the product pricing strategy becomes more flexible. When your competitors sell the same product and at a lower price might impact negatively for your business (Jeff & Mary).
Perceived value of the product is a factor that must be considered before deciding on the price for your product. This is because of the fact that many customers tend to associate low price with low quality (Howard & James, 2004). The ability to balance between the perceived value and the price of the product is an idea in coming up with the best price for your product.
Development costs must be considered when deciding on the price of a product. These costs get incurred when a new product introduced in the market. The costs are from research and experimentation when developing the product (Jeff & Mary). The price of the product should not be below its actual cost price.
The economic factors such as labor cost, currency exchange rate, taxation rate, inflation rate, and monetary policies have an influence on the product pricing strategy. The level of market demand also has an effect on the product pricing strategy (Bathgate, 2004). When demand exceeds supply, the prices get inflated due to reduction of available products.
Demographics have an influence on the pricing of the product. Factors such as age bracket, business location, and education status influence the product pricing strategy (Jeff & Mary). The product pricing strategy based on the targeted customers. Class of targeted customers also influences the product pricing strategy. The product targeting the rich will be high priced than products targeting the middle class and the low income earners.
Cost-based pricing is coming up with product cost subtotal. All cost for running the business must be included. The costs include transportation, wages, raw materials, rent, advertising and any other costs (MasterPack, 2010). The product subtotals help to come up with the right price for the product.
Competition-based pricing enable your business to know its competitors, which help in focusing on your business. Being acquainted with your competitors helps in deciding on the right price for your product (MasterPack, 2010). A unique and innovative product can be priced high thus increasing your product value.
Knowing your customers is an influence on setting product prices.
Paying attention to customer’s views on your product helps in coming with a better product pricing (MasterPack, 2010). Customer’s satisfaction is the primary need for all businessmen.
In conclusion, for successful businesses, product pricing becomes essential. Product pricing takes time, record keeping, flexibility and creativity (C.U.M, 2010). Balancing on cost of production, competition and customer reaction help in deciding on the right product prices.
References
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Coffee among the chief produce traded on the global market. Germany and the United States are the major buyers. The trading in coffee and its products are regulated by various bodies. The principal legal entity in Germany that control the channels and pricing in coffee is the government. It decides the income duty on the product. There is no import duty on green coffee while the roasted coffee is charged 2 euros per kilo. The Federal preserve committee is another group charged with the management of the government money. The national central bank is a significant economic player. It determines the interest rates of the financial institutions in Germany (Horst, 2004). Fiscal administration is another prime financial player.
Antitrust agency is another body which is concerned with the control of coffee prices in Germany. It checks the companies and individuals who fix their own prices. It imposes high charges as a penalty to the offender like it did to Melitta and Tchibo. This keeps the level of price of coffee. The federal state monitors the hiking in coffee prices. A lobby group called German national cartel office comprising of four largest coffee roasters in Germany. They play a key role in shifting the prices because of the monopoly they enjoy. The international treaties like the double taxation agreement with the United States government play a decisive role in monitoring the market. It penalizes tax evaders during their trade in coffee. Some investors may hesitate because of the stern measures (Korner M. 2002).
The political wing plays a crucial role in the pricing of the products. The political temperature in the country significantly affects the market especially during elections. The form of liberal government creates an enabling environment for coffee traders because of the peace in the country. This crates favorable conditions for companies and even mid level businesses due to high-capital circulation. This finally increases the demand of a commodity like the coffee.
When the government increases purchase by a unit, then the unemployment is also reduced by a unit. The resultant outcome is an increase in inflation (Michael, 2008). Inflation will affect the cost incurred in the importation of the coffee products thus lowers the profit accrued. The investment ratio of Germany has fallen from 18% in 1970s to stand at 3% currently.
The economic risks of the decisions of the legal bodies are massive. Some rules create unfavorable grounds for trade. Tension during elections may reduce the flow of customers, consequently reducing the profits (Bernd, 2001). Other risks associated with politics are negative rumors about a company or organization.
Monetary policies include two actions by the government. Taxation is where it receives proceeds from the general population. Another fiscal policy is the government spending. The two fiscal rules affect asset movement which at the end affects the coffee market. The policies are fixed for the quality of trade, budget, unemployment, inflation, among other economic aspects. Some government actions lead to inflation. Germany has experienced steady increase inflation from 2004 to 2009 (CIA, 2010).
The German coffee roasters were reluctant to change with the international increase consumption of flavored coffee. Imbalances exist between supply and demand because of the unstable inconsistent consumption of coffee globally. An organization called fair-trade says that coffee price depends on the conditions under which they are produced but not the price. Organizations and companies can formulate strategies to avoid risks of the financial decisions and exchange rates. The company should have enough resources to compete the major rosters like the Melitter and others. The companies should accumulate large sums of a currency to appreciate better rates of exchange and earn bonuses on their currencies. The organizations should have business analysts and advisors to advice on the prevailing economic place of the country. They should know when there is depression, inflation and unemployment.
References
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Experts would undoubtedly agree that pricing of a product is an art as well as a part of the scientific approach. And pricing is most probably the toughest decision taken by an organization because many believe that proper pricing can enhance the sales of a product. According to Ellickson, Misra, and Nair (2012), revenues received by a firm are conditional to a certain pricing strategy, so a firm must find some sources of independent variations that induce it to switch its pricing strategy and remain active in the market.
To estimate the product price of our product “Allround” we considered our target customers, competitors pricing, and product quality. The production costs and margin were also taken into account in deciding the manufacturer suggested retail price (MSRP) of the product. The important thing that needs to be considered is that the price of the product that would be paid by a consumer would depend on the promotional allowances and volume discounts apart from the manufacturing cost of the product.
In the period one, the simulation suggested a manufacturing cost of $1.24 and we decided to offer a plain 14% promotional allowances on the MSRP. For volume discounts, we specified four layers of the purchase order from the sales force agents, the layers of purchase order offer a volume discount from 25% to 40% on the MSRP. The respective volume discounts are 25% for less than 250 units, 30% for less than 2500 but more than 250 units, 35% for more than 2500 units, and wholesalers get 40% volume discounts, whereas our suggested MSRP was $5.29 for the period one.
In the period two, we experienced a little rise in the production cost due to inflation adjustments in the raw materials which have pushed the price to $1.27. Also we took a different strategy of promotional allowances. Instead of offering a flat promotional allowance we offered different promotional allowances for different sales force members: wholesale agents received 10%, department stores and chain drug stores – 17%, grocery stores – 14%, convenience stores – 10%, and mass merch received 16% promotional allowance on the MSRP. Due to changing promotional allowance and an increased manufacturing cost, the suggested MSRP for period two was $5.59 while the volume discount remained unchanged.
During the period three, the cost of manufacturing went down to $1.2 and volume discounts remained the same. The promotional allowance was increased for department drug stores and chain drug stores to 19% and for grocery stores to 15% because of their improved sales performance. The dedicated performance of the sale force and active advertisement has increased the demand for the product “Allround” so it was decided to set the MSRP to $5.99.
In the fourth period, we introduced a new product “Allround+” and also the regular “Allround” has been performing as it was expected. The manufacturing cost of “Allround” rose to $1.25, volume discounts for the product remained the same, promotional discounts were equal to the ones in the third period except for a reduced allowance of 12% for mass merch, and the suggested MSRP remained $5.99. And for the new product “Allround+” the manufacturing cost was $1.09 with the same promotional allowances and volume discounts for the respective sales force agents; the suggested MSRP for the product was $5.29.
In the fifth period, both the product was performing better without any significant sign of changing the current pricing strategies, so it was decided not to change anything. The suggested price for both the products remained the same ($5.99 & $.5.29), also the offered promotional allowance and volume discounts equaled to the ones in the last period, except for slight changes in the manufacturing costs (Allround =$1.31, Allround+ = $1.13).
In the sixth period, a new product called “Alright” was introduced while the other two products were performing as it was expected. The new product’s manufacturing cost was $2.04 and we suggested a MSRP of $5.69. No changes in the promotional allowances and in the volume discounts were made in the period, but the inflation adjustment has increased the production cost for “Allround” ($1.35) and “Allround+” ($1.17). The suggested price for both products remained the same for the period.
For the periods Seven, Eight, and Nine all three products of the company were following a standard pricing strategy that we have set before. The strategy is to follow the promotional allowance of 10%, 19%, 19%, 19%, 10%, 12% respectively for whole sellers, department drug stores, chain drug stores, groceries, and mass march. Also, volume discounts (25% to 40%) were offered for the sales force agents in four different layers of order amount. Considering all the elements of product pricing we suggested a profitable MSRP for our sales agents: “Allround” – $5.99, “Allround+” – $5.29, and “Allstar” – $5.69.
The results of the pricing strategies suggest that it had a positive impact on the sales improvements, which has initiated two more products to be launched in the subsequent periods. Also, the share price of the company would be a good indicator for measuring the strategic performance of the company. Moreover, the Salesforce agents had a strong support in increasing the sales, and as a result we had to adjust the promotional allowance for some of the sales force agents.
Promotional Budget and Allocation
For promoting the company products, we had to carefully consider different promotional activities both inhouse and outhouse. We allocated our promotional budgets in four different promotional activities which include cooperative advertising, product display, trial size, and coupons. Among these strategies cooperative advertisement can bring extra profits for manufacturer under certain conditions, and it occurs only when both manufacturer and retailer decide to play fairly (Yang, Xie, Dang, Xiong, 2013).
In the span of nine periods of our simulation activities, we had to increase our promotional budgets for the mentioned promotional strategies. Our promotional budgets increased by 297% (from 8.8 M$ to 33.4 M$) over the nine operational periods.
We have used trial and error strategies to determine the optimum level of promotional input for each mentioned strategy. At the very beginning we allocated the highest value (47.62%) to product display, then to cooperative advertisement (20.24%), the next strategy was the coupon (20.24%) and the least importance was given to the trial size (11.90%). During the next period we kept the same order of importance but increased the budget allocated to product display (51.14%) and co-op ad (23.86%) to see the changes in output.
As the strategy paid off it was decided to put more value to product display (53.41%) and kept cooperative advertisement allocation the same. The fourth and fifth period was not different to the previous strategy but here we increased coupon (16%) and kept product display around 50% while cooperative advertisement allocation was around 24%-25%. In the sixth period, we significantly decreased the allocation of product display (36%) and increased co-op (32%) while the coupon promotion was receiving 20% of the budget. The further strategy suggested that we increase cooperative advertisement as it had a significant impact on the sales.
Thus, we increased the co-op advertisement budget to 40% keeping the product display at 36% and reduced the coupon-production to 14% which resulted in the best possible outcome. It was finally decided to follow the budget allocation of cooperative advertisement the highest (40.42%), followed by product display (36.53%), then coupon promotion (14.07%), and the least amount (8.98%) was allocated to the strategy of trial size.
