Category: Pricing Strategy

Promotion strategies

• Fitness /exercise products – black women aged 18-30.
• Vocational products – gay men or women.

A marketing strategy is an overall and a companywide program for selecting a particular target market and then satisfying consumers in that market through carefully blending the products/services, promotion, and price (Boone& Kurtz 2012). There are several promotion strategies used in marketing a product. The methods implemented may include media advertisements, printing of T-shirts and distributing them to the population after the sale services, exhibitions and road shows are employed as means of promotion.

The most common methods used are the push and pull strategies which are famous among business men and women who do not want to incur the cost of advertising in the newspapers and other media sources. A push method of advertising is when the products are first delivered to the retailers and wholesalers direct from the manufacturing firm. To attract the customers, a pull strategy has to be devised so as the customers are able to associate themselves with the products and can get them at any retailer or wholesaler.

In promoting fitness and exercise products amongst black women, television advertisements would help in considering many of the black women’s desires to keep their physical fitness through exercising, while watching television. Therefore, through television advertisement, a person offering exercise and fitness products or services would be able to easily reach out to their clients and explain the features of these services and products, such as the quality, durability, ease of handling as well as affordability.

In promoting vacation products among gay men and women, personal mail would be the most appropriate mode as gay rights and recognition have been a contentious issue in the world, and hence having distinguished your clients, you would just communicate with them smoothly without attracting the attention of the uninterested population. This would also help in reaching out to other customers who could be in need of the products through referrals and words of mouth from their already existing clients (Mullin 2008).

Television promotion strategy is different from a personal delivery mail due to various factors. Television advertisement targets all the customers though it is main auditory is black women. The message content will be accessed by all the customers who will be able to associate themselves with the products features and suitability. This method can as well help promote the products to the other markets. Hence this mode of advertisement is not discriminating on the access of the information about the subject product.

Television advertisement also helps easily indicate the various brands of the products. Personal mails, on the other hand, are more confidential, and the message contained in the mail is only targeted to the specific client. Personal mails are mostly used to only communicate the message between the dealer and the client and, therefore, not suitable for tapping new customers in this field. However, they can be effective if there exists an agreement between the dealer and the client that influence the customers to deliver the message to the others within the same group.

Personal mails also have a challenge where the client has first to do a thorough market research to be able to recognize their customers. Television advertisement is cost effective, when reaching out to client in large populations and long distances as the message is broadcasted to millions. In personal mail delivery, large costs are incurred in delivering and posting mails to every client in all the corners of their locality, and hence this does not contribute to a large population.

Television advertisement mode of promotion is more advanced, fast and reliable since the targeted market is assumed to have devices to enable them to receive the information. The opposite is true for the personal mail delivery as the reliability of the mode depends on the means of delivery.

Pricing methods

• Vacations – handgun owners.
• Non-lethal personal security products – black women aged 18-30 years.

While setting up a price for any commodity, the customer’s taste and preference as well as capital abilities are taken into consideration. Costs, demand and competition define different pricing methods that a firm may adopt (Rajan, 2009). In pricing personal security products for black women aged 18-30 years, demand pricing should be taken into account. Demand pricing is the most customer oriented form of pricing method since it derives entirely from consumer demand (Blithe, 2009).

Young black women are very sensitive about their security, and hence due to the need to secure themselves, they tend to demand the products in large numbers, hence raising the demand for such commodities. A businessperson dealing with such products can, therefore, set the price at his or her preferred heights since the commodity shall still be bought without considering the cost. The pricing method for the vocational products among handgun owners can suitably be set as per the competition. Going by the assumption that a handgun owner is a financially stable person and can be able to afford various services without much consideration of the costs of the same products, thus the competition pricing sets the best strategy for any dealer in such a market.

A handgun owner will, therefore, want to use products of best quality in regard to the finances available. This impacts the market by causing vast competition for the same commodities and by setting the price as per the level of competition and the willingness of the client to acquire the product at a competitive price, the dealer is able to effectively provide a fair price to the client and win the trust of the customer, at the same time making a handsome profit.

Demand and competition pricing strategy

Demand and competition pricing strategies are similar considering the fact that in the case of the study the prices are influenced by the customers, not the dealers. The need for the handgun owner to get access to high quality products develops a competition, and the dealer finds an opportunity to set a price based on competition. A black woman’s need to secure herself makes her to reach out to personal security products. Demand for the commodity develops, and the dealer sets the price based on its high demand.

Demand and competition pricing strategy are similar in the sense that the dealer is the ultimate beneficiary of the strategy in both the cases. The client benefits relatively from getting access to the product desired but at a cost higher, while the dealer makes an extra income that would not be gained if the conditions in the market were relative. The strategies similarities are further noted in both cases where the customers are concerned not about the cost but about the need to acquire the desired commodity. In competitive pricing, the firm sets the same prices as those of the competitors or above or below the competitor’s ones (Baumol & Blinder, 2008). This is more or less the same as the price set per demand pricing depends on the retailers’ decisions since the customers are at will to acquire them at that cost.

References

Baumol, W. J. & Blinder, A. S. (2008). Macroeconomics, principles and policy. (11th ed.). Mason, Ohaio: South-Western Cengage Learning.

Blithe, J. (2009), Key concepts in marketing, London: Sage.

Boone, L.E. & Kurtz, D.L. (2012). Contemporary marketing. Mason, Ohaio: South-Western Cengage Learning.

Mullin, R. (2008). Sales Promotion: How to Create, Implement and Integrate Campaigns that Really Work. (5th ed.). Philadelphia: Kogan Page.

Rajan, S. (2009). Marketing management, New Delhi: Tata McGraw-Hill.

Introduction

An effective pricing strategy is one of the keys to attracting more customers and ensuring the continuous growth of the company. The TJX Companies, Inc. has managed to gain an immense competitive advantage with respect to pricing thanks to its unique pricing strategy relying on the benefits of the off-price retailing.

Pricing

The TJX Companies, Inc. uses a sales orientation objective, as its pricing strategy relies on the principles of providing constant quick sales of the products offered by the company. The company is aimed at delivering steady sales growth and broadening the network of its stores and the population of its customers. Such an objective lets the company stay devoted to satisfying the customers’ needs and able to maintain its financial stability at the same time. The strategy employed by TJX provides the retailer with an opportunity to achieve a bigger market share and more sales. The company can keep the shareholders satisfied and continuously broaden the customer population even when the buying capacity of the customers decrease, as its pricing strategy is rather flexible.

TJX is an off-price retailer, which means that the prices it offers for the products sold in its stores are considerably lower than the ones available in most department stores – the regular prices for comparable merchandise in other stores are up to sixty percent higher (What is “off-price” retailing? n.d.). TJX employs a one-price policy, as the company offers a continual flow of rapidly changing merchandise for stable low prices. Thanks to the strategy of buying off-price merchandise from a wide range of vendors, including manufacturers making up too many products or retailers eager to clear the items at the end of the season, TJX can offer branded products and exceptionally low prices. The company does not change prices over the product life cycle as it is aimed at selling the items in the shortest period by offering the lowest possible prices and does not organize clearance sales. Such a strategy is based on the belief that buying new products at low prices is much more attractive to the customer than buying old items for cut prices. In such a way, TJX manages to ensure continuous high-speed sales.

The company has expanded its network outside of the U.S. successfully by employing the discussed pricing strategy. Understanding target customers and their cultural traits are the keys to ensuring the high demand for the company’s production, and TJX utilizes this principle well with respect to pricing (Grewal, Roggeveen, Compeau, & Levy, 2011). The company thoughtfully enters the markets where its current pricing methods are most likely to attract lots of customers. Western countries with a brand-aware population appear to be most favorable to the discussed strategy, and this aspect motivates TJX to open in its stores in such countries as the United Kingdom, Ireland, Canada, Germany, etc.

Competitive Advantage in Pricing

The TJX Companies, Inc. has a strong competitive advantage with respect to price. Off-price retailing enables TJX to keep its stores highly attractive for the customers interested in buying high-quality clothes items manufactured by well-known brands for unprecedented prices and retain a significant competitive advantage with respect to pricing over most apparel retailers. Besides, the company’s determination to providing a continuous flow of fresh merchandise enables it to avoid facing the need to cut the prices at the end of the season, which is often experienced by its competitors.

The pricing strategy employed by the TJX Companies, Inc. can be considered effective, as it enables the company to maintain a considerable competitive advantage with respect to price and remain one of the most popular American clothes retailers.

References

Grewal, D., Roggeveen, A., Compeau, L., & Levy, M. (2011). Evolving pricing practices: the role of new business models. Journal of Product & Brand Management, 20(7), 510-513.

What is “off-price” retailing? (n.d.). Web.

When Dean Kamen launched his product the Segway, it was without any doubt a welcomed and innovative product. It had the potential to offer consumers a long overdue alternative to oil dependency, unmatched convenience, affordability and effectively increase the productivity of all parties (Engelson, 1995, pp 21). However, barely two years into the venture, a mere six thousand were sold, as opposed to the projected at least fifty thousand. Despite being priced at $ 3,000, it failed to receive the audience it had been set out for, and by 2003, all sold Segways were recalled. Its failure was largely attributed to its pricing, which is central to any marketing venture (Tecsoc, 2008).

An effective pricing strategy is one that offers the most long-term profits to the seller. An efficient price would therefore ensure that the seller maximizes his profit after factoring in the promotion prices, discounts and incentives all the while the consumer is willing to spend for the good. Segway attempted to offer a low price as an attempt o either undercut the competition or they failed to factor in all the associated costs. Before pricing, exact cost quotations must be scrutinized, with considerations for a percentage of overhead costs. Segway should have compared the prices that were offered by the competition for similar products.

When the price was set for the Segway, the manufacturers thought that they had set a price that would encourage highly elastic demand. They anticipated that the price sensitive customers would embrace the offer and thus, they would record many cumulative sales. This was basically an attempt at penetration pricing. Unfortunately, the nature of the Segway as a product did not appeal to the consumers (NetMBA, 2008).

In the case of Segway, it is possible that the low price turn off many potential buyers. For many buyers, the $3, 000 was used as a guide for the quality level, especially considering the fact that there was relative uncertainty about the product. Furthermore, lowering the prices or offering the lowest industry prices does not guarantee the loyalty of the clients. In an industry such as the transport industry, the competition is cut throat, and players are perpetually undergoing progressive discounting rounds. If careful attention is not paid, a product is likely to go under. On the other hand, consumers opted for actual vehicles which would go for around $5,000. Further, the potential clients didn’t not get a sense of high esteem balancing through traffic on a human transporter, not for the $3, 000.It thus failed to fit with the realities of the consumers (Engelson, 1995, pp 31).

It is also possible that Segway failed to accommodate mark-ups in the industry. This to mean that the projected selling price failed to consider the actual channels of distribution; the distributors needed to offer a price that would offer returns on their initial investments. Furthermore, when Segway entered the market, they did not anticipate any failure, that is, they had overestimated the market reception. They thus did not price the product in that way that would enable their survival in case things did not turn out as they anticipated (NetMBA, 2008).

In my opinion, several effective pricing strategies should have been applied, which would have improved the chances of the Segway’s survival chances. Firstly, Segway’s pricing strategy should have dominantly have been demand based. This should have been the central guiding element as far as the perceived value went, which would have gone a long way in determining its potentiality in the transport market. It is important to understand that when the price is right, the seller will make more profit.

Secondly, Segway should have developed a marketing strategy that would have given then a better analysis on the market, its segmentation, target market and potential positioning. This would have been instrumental in making accurate estimates on the demand thus enable the planner to calculate costs, understand environmental details and set pricing goals. This would have also assisted in determining the best client for the Segway. As it later emerged, not everyone would use, let alone use a Segway. It would appeal to a segment of the population, such as students (Business Works, 2008).

Segway should also have taken advantage of psychological quirks. Pricing strategies guru, Dr. Marlene Jensen (2007) proposes that the emotional responses of human brains to seemingly cheaper prices. For example, an item priced at $9.99 is more likely to record higher sales than a similar item priced at $10. She says that ‘There is a learned pattern response in our brains that makes us see $9.99 as much lower than $10. And it persists, even though most of us know this trick.’

It is important that the price be flexible, that is, the price should be in sync with other factors such as the prevailing market conditions, demand and competition. It should be possible to adjust the price either upward or downwards (Business Works, 2008).

All factors considered, it is not always the best strategy to offer the lowest prices in town. In fact, price is not the surest ways to attract and maintain customers. What emerges as the most determining factor is the level of customer service and relevance of the service to the customer.

Works Cited

Business Works (2008). The Price is right. Web.

Jensen Marlene (2008). Pricing Psychology. Web.

Morris Engelson. 1995. Pricing Strategies: An interdisciplinary Approach. Joint Management Strategy: Portland.

NetMBA. 2008. Pricing Strategies. Web.

Tecsoc (2008). Today in Technology History. Web.

Bundled pricing program for the amenities of the hotel

The suggested bundle would include a sauna, spa treatment, massage therapy, and paddle boating/kayaking on the river and would have a price of $170. The program would include a standard 30-minute massage session and a standardized kayaking route from the dock to the hotel that would not exceed 50 minutes. When taken separately, the said amenities would cost $180 and would have an average profit margin of 35%. Therefore, the combined cost of services can be estimated at $117. A minimum desired profit margin would thus produce a bundle price of $156. An additional $4 would raise the PM to 26.8%, which would be an acceptable difference. However, if the elasticity of demand is 1.3, even the small increase in price could lead to a disproportionate decline in demand (LOKAD, n.d.). In this case, it would be advised to keep the price of the bundle at $156, or even drop it to $155 (24.5% PM) if acceptable.

Develop a package or set of packages to offer to non-hotel residents

Since the hotel already has an inventory and staff necessary to run the kayaking service, it can be expanded to include more starting points, routes, and levels of difficulty. The primary target market for this project would be the individuals interested in sports and outdoor activities. Hence, the current 60 minutes rental would probably be insufficient, so the time of the services is to be expanded to 5-hour and 8-hour programs. Considering the desired 40% PM, the hourly price must be $27. Thus, the recommended pricing of the service is $140 for a five-hour trip (41.9% PM) and $215 for an 8-hour trip (39.5 PM). In the case when the price sensitivity of the customer group is high, the primary concern would be the existence of the competing services specializing in outdoor programs, which would likely have more attractive pricing strategies.

Reference

LOKAD. (n.d.). Price elasticity of demand. Web.

Pricing Strategies

A firm must set a price for the first time when it is developing or acquiring a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters its bid on new contract work. The two shopping networks: Home Shopping Network (HSN) and Quality, Value, Convenience (QVC) consider several factors in setting their prices. Since their products and services are deemed to reach millions of households in America, the firms consider the following factors before setting their prices: selecting the price objective in order to increase sales growth, determining the demand in relation to responses and testimonies, estimating the cost involved in online promotions, analyzing the competitor’s prices, costs, and offers, and more importantly selecting the pricing method or strategy.

In essence, the pricing strategies used by HSN and QVC include penetration pricing through promotion, product line pricing, destruction pricing, and psychological pricing. From the case study, both firms follow a penetration pricing strategy because when goods and services are introduced to the target market, they follow a reverse order – they start at a discounted amount or a rather low price in order to penetrate the market. These are shopping networks and hence there is a need to set a lower price for the introduced product in order to attract customers from different market segments. Same as penetration pricing, the firms use a destruction pricing strategy by selling a new product at an artificially low price in order to destroy other mail orders or online firms. Consequently, product line pricing is depicted in the case as both firms offer special case pricing according to the products being promoted; for instance “a special price might be good for a day—or an hour”. On the other hand, psychological pricing can be derived from the way the firms set their payment plans. For example, HSN’s pair of earrings is priced at $199.95 instead of $200, and QVC’s bird birth costs $87.84 instead of $88.

Promotional Pricing

This pricing is common in both firms especially during the introduction of a new item to the customers. The potential benefits of this approach are:

• Invitation: It targets buyers who are searching for new deals and are willing to engage in the transaction now. As for the case of HSN and QVC buyers are invited for purchases through discounted prices.
• Communication: This approach gains attention from the customers and provides information that may stimulate the demand for the products being promoted.
• Promotional pricing increases sales due to high demands, hence clearing excess inventory.
• Incentive: It includes some discounts, inducement, or contribution that gives consumers the value for their purchases. For instance, the pricing of the special event is exercised by the firms.

On the other hand, there are some drawbacks of promotional pricing which may interfere with the marketing objective of a firm. These include:

• High promotional costs in case the product is not well received in the market.
• Promotional pricing or discounts can raise doubts about the quality of a product and thus consumers may view the product negatively.
• There may be increased price sensitivity, in case of changes in prices leading to a weakened brand.

Low Prices and Consumer Perceptions

In the process of selecting, organizing, and interpreting information input through the shopping networks, consumers are able to produce meaning from a product. In regard to the perception of quality, different consumers have different attitudes towards the market products. A low price may be seen as a low-quality offer by a certain market segment as opposed to a better product value by a different market segment. To support this view: outlining the two most common marketing concepts may be appropriate. Firstly, the production concept proposes that “consumers will favor those items that are readily available and low in cost” and secondly, the product concept states that “only those products that are of high quality and having innovative features are favored by consumers”.

Conclusion

Therefore, there is a need for the firms to understand the behaviors of various consumers in different market segments in order to set prices that are in line with the desired quality of the product. This will enable them to balance the two concepts. Since the firms have a capability of interactive marketing, they should opt to gather information relevant to the consumer perception and try also to educate consumers on various products and services, thus segmenting their markets. Other psychological influences such as motives, attitude, personality and self-concept, and lifestyle are to be considered in order to set favorable prices.

The rule-of-thumb model and Hubbart formula pricing strategies present a weakness during the pricing of hotel rooms, mainly because; they do not consider market conditions and changes, which are competitive and complex. These market conditions are the characteristic traits of the hotel industry or a certain sector within the industry, as they influence the buyers and sellers of hotel services within the sector or industry.

These factors include the number of business rivals, where a surplus may mean that new entrants will find it difficult to enter the industry. The complexity of the market conditions further makes the pricing strategies of competitors change, which may threaten the businesses using these two pricing strategies.

Therefore, as Gu (1997, p. 44 – 45) notes, the hotel industry requires pricing done based on a quadratic room-pricing model, which considers operating costs, as well as the dynamics of the market environment, especially when operating in a highly competitive market (Mattila & Choi, 2005, p. 25-27).

The break-even pricing model may be cited as one that imposes the weaknesses onto the pricing exercise, because it bases its compilations on the assumption that sales volumes equal stock amounts (Sales = Stock), or that total revenues realized and the overall cost functions are related in a linear manner. Further, the model is static, thus cannot be used in accounting for variations within the market environment (Reid & Bojanic, 2010, p. 565).

The weakness that lies with using value-based pricing is that it requires extensive skills and knowledge from the revenue managers, as it centers its variations for pricing on the customer’s perception of the value of hotel services. This is especially the case, as the value creation and value perception channels involve the different principles within the hotel industry, including the hotel, distributors, and the customers of the hotel services.

This is the case, as the communication of value is effectively communicated to the customers through the intermediaries, who are all dynamic in unique ways (Lovelock et al., 2001). As a result, the channel of value communication should be reflected through management dynamics, carrying out extensive research of the changing consumer behavior, and the need to maintain the quality of services, which make it very difficult for revenue managers to attach an accurate value-based price.

Another weakness of using value-based pricing is that customer dynamics are often not reflected, including the increasing customer negotiating power and the high expectations they may link to the attached value (Hayes & Huffman, 1995; Richardson, 1996).

The core motivation for discounting in the hotel industry in the hope that the promotional strategies will make the customers repeat their purchases, due to the experience gained from the marketing strategy. However, discounting strategies are applied in a cautiously calculative way, to ensure that the reduction in revenues will be recovered from the increase in sales volumes.

Therefore, the usage of this strategy in creating more markets requires extensive market research in the area of customer dynamics and approach models (Nagle, 1987). Further, the discounting strategy of market creation works better for new products, which are perceived to present better value for the customers, as the customers are also interested in trying the new products and not only the discount deal, which may take the form of a price-reduction (Schwartz, 1981).

It should also be noted that discounting presents a threat to the business, in the form of cannibalizing the existing business and market, as revenue is foregone to existing customers, besides serving as a model of attracting new customers. Therefore, this shows that the usage of this strategy should be used carefully, towards ensuring that it does not affect the business negatively (Reid & Bojanic, 2010, p. 576).

References

Gu, Z. (1997). Proposing a room pricing model for optimizing profitability. International Journal of Hospitality Management, 16 (3), 44-46.

Hayes, K., & Huffman, M. (1995). Value Pricing: How Long Can You Go? Cornell Hotel and Restaurant Administration Quarterly, pp. 51-56.

Lovelock, C., Patterson, P., & Walker, R. (2001). Service Marketing: an Asia-Pacific Perspective. Singapore: Prentice Hall.

Mattila, A., & Choi, S. (2005). The impact of pricing information on guest satisfaction and fairness perceptions. Journal of Hospitality & Leisure Marketing, 13 (1), 25- 27.

Nagle, T.T. (1987). The Strategy and Tactics of Pricing. Upper Saddle River: Prentice Hall.

Richardson, J. (1996). Marketing Australian: Travel & Tourism Principles and Practice. Victoria: Hospitality Press.

Schwartz, D.J. (1981). Marketing Today: A Basic Approach. New York: Harcourt Brace Jovanovich.

Recent years, inventory starts to play a dominant role in supply chain management determining the main management strategies and techniques. Modem supply chain management is aimed to help organizations deliver services at the best possible and cost effective way. Customers and products are separated in time, space, and ownership. The conduct of human activities presupposes the availability of an appropriate assortment of goods and services. Channels of distribution bridge the separations and support our life style. In a broad sense, channels are composed of middlemen and facilitating agencies wholesalers, retailers, financial institutions, and transportation agencies.

In inventory, a special attention should be given to process. Supply chain decision influence prices, middlemen activities, and margins. They strongly affect inventory situations and production fluctuations, as well as marketing policies in such areas as advertising, branding, product lines, personnel selling, and physical distribution. Yet channel selection often receives less attention than such areas as the allocation of advertising budgets or the motivating of salesmen. Although a continuing task, channel selection is often treated as a decision to be made once for a relatively long period of time. Whereas channel decisions usually involve long-run commitments, channel policy is not irrevocable. It must be reviewed and changed to improve efficiency. The wrong channel choice can severely handicap a program, especially for a new product, and yet switching channels is not likely to be a frequent occurrence because it is a disruptive and costly undertaking (Cohen and Roussel, 2004). These decisions govern and affect other aspects of the marketing mix, including physical distribution, personal selling, advertising, credit, sales promotion, and product service. Through time, changes in the channels of distribution are not readily made, though, in theory, managers should continuously evaluate pertinent factors and select and shift channels accordingly (Chase and Jacobs, 2003).

Notwithstanding, supply chains are shaped by changing demand configurations and current business structures. The alternative policy is to join short time and long time product lines and propose them in one menu. It will help to meet the contract and deliver the heist possible quality of services. The concentration or diffusion of states and customer wants and needs affect menu selection. In most situations, however, the choice is neither direct nor simple. Workable rather than optimal choices must be made because of the lack of complete information. Since existing alternatives present limitations and the wisdom of decisions is determined by unpredictable future events and long-run commitments, management must deal with expectations. Nevertheless, the consideration of channel factors can make the decision a very logical one. Thus, channel analysis and evaluation is important; it is part of the marketing audit. Adjustments must be made continuously, based on criteria of channel performance (Purchasing Harding, n.d.).

New techniques in supply chain management and inventory are RFID (radio frequency identification device) technology and information-based supply chain. The best choice varies with both the restaurant and market situations. Developing a balanced, smoothly functioning and efficient channel is a demanding task. It is based on considerations of markets, products, customers, company constraints, information about competition, current business practice, and feasible alternatives. Basic to all factors are cost-revenue considerations. A distribution channel may be a complex network. It can comprise a number of separate and distinct organizations that have independent legal and functional status. Yet their activities are coordinated to form a vertical system that seeks joint opportunities in the marketplace. A channel is thus a super organization, an ecosystem, governed not only by desires of producers and middlemen but also by consumers and socioeconomic environment. Because supply chain involves changes in numerous functions and organizations, it is important to consider the sensitivities involved with this controversial subject matter.

Value delivered lies not only in what is done at each stage but equally in how the stages are connected to each other. Undoubtedly, early stages of the chain limit the potential of later stages. A poorly-designed product severely constrains how much value can be built into it, just as there is only so much marketing one can do with a poorly-made product. However (and this is the core of our argument) a well-designed product does not necessarily result in a well manufactured and made one. Even if ninety percent of a product’s or service’s quality sprang from its concept and design, the other ten percent could mean the difference between top-notch and second-rate final quality. Granted, quality as designed is an important determinant of final quality and it could be crucial to newly-introduced products since unexpected defects and malfunctions may have to be designed out. But as products mature, competitors come out with copycat offerings, and in general, design know-how gets diffused across the industry, value construction tends to emerge as the determinant both of quality delivered to customers and of quality differences among competitors. A poorly designed product, therefore, will almost certainly be deficient in quality. A well-designed product, on the other hand, is no guarantee of superior quality. Having stated our stand on the strategic importance of quality constructed into the product, we return to our assertion that the nexus of setup, processing, or scheduling times can have a strong impact on quality (Naylor, 2002).

Acceptance of the inventory philosophy demands changes in organizational structures, and quite possibly an organizational revolution will ultimately result from its widespread acceptance. Much organization thought dwells on such concepts as the centralization of business management. Moreover, the viewpoint of the firm in its socioeconomic system, with interdependent and interacting elements dominated by the consumer and shaped by competitive action, creates new organizational problems.

References

Chase R.B., Jacobs R.F. (2003). Operations Management for Competitive Advantage, Hill/Irwin; 10 edition.

Cohen, S., Roussel, J. (2004).Strategic Supply Chain Management McGraw-Hill; 1 edition.

Naylor J. (2002). Introduction to Operations Management, 2nd Edition Pearson Education.

Purchasing Harding. (n.d.) (Chapters 1- 4, 8-10), PowerPoint slides. Colorado Technical University

I think that in some instances customers may receive products or services of lower value than the price of the firm’s products or services. This is especially the case for monopolistic firms which exploit customers with exorbitant prices for goods and services. Although monopolistic firms may offer some low-value products and services (in terms of quality or prices), the customers do not have an alternative and thus may continue buying even when they do not get value for their money.

I am convinced that there are cases where a firm may sell its services or products at a lower price than the cost of producing these products or services. This may however be done on a temporal basis as the firm looks for ways of lowering production costs. A firm may find itself in price wars especially where there is unhealthy competition. This may force a firm to lower its prices to match those of its competitors in order to curtail the migration of its customers to competing firms. Sometimes it may even lower prices below those of the competing firms. The new prices may be lower than the production costs of the firm’s products and services and may therefore be unsustainable. However, a firm may embrace this strategy in order to safeguard its market share as it seeks more sustainable ways of dealing with competition. Therefore, unhealthy competition such as price wars may cause a firm to temporally lower the prices of its products and services to a level below the production costs. However, this strategy is not sustainable but only a short-term measure aimed at stifling competition.

The idea of a lag between when a firm incurs cost and when it receives revenue was a little confusing to me. The section “products as cost objects” suggests that firms store products as inventory for some time until they are sold. This suggests that the products are cost objects as long as they are still stored. My question is founded on firms that enter into contracts with some customers. For example, if a leading supermarket was to enter into a contract with Cadbury for the supply of a given quantity of chocolate, would the product still be considered a cost object? If the supermarket had paid a certain percentage of the total amount due to Cadbury for the supply of the agreed quantity of chocolate, how does it affect cost allocation?

The explanation on period costs was also not very clear to me. There lacked examples to make it clear what these costs are in a firm. Therefore, it is possible that some of these costs although classified as expenses could actually be beneficial to a firm in the future. The allocation of indirect costs was also very confusing. Even with the Cadbury example, the allocation of indirect cost allocation was confusing.

I was very excited by the concept of attaching costs to cost objects. I was excited to realize that it is crucial for managers to know which aspects within a business are contributing to the firm’s profitability and which are not. I think this is a good thing because it will help the managers to control costs so that areas that do not contribute to a firm’s profitability do not end up incurring very high costs. However, it was not very clear to me how some customers are “more important” than others. I believe that the wide range of products and services produced by a given firm make every customer crucial and therefore there is no special customer. The allocation of costs to basic units of work such as warehousing, operating a store, recruiting new staff, and sending customer bills was also an exciting concept. It helped me understand that costs could be allocated to every activity of a firm and thus help a manager to be able to control costs. In my opinion, the understanding of cost allocation by a manager and especially understanding how costs are linked to cost objects in a firm is important in helping them to make decisions. The reason for control of costs is based on the premise that people in a firm are spending “other people’s money”. However, we have witnessed emerging trends in the business world where firms are allowing employees to own company shares and thus become owners of the business. In this situation, how are people in a firm spending “other people’s money”?

The apportionment of indirect costs to a cost object was hard for me to understand. For example in the case of council rates in the Cadbury factory example, it was assumed that the rate would be apportioned according to space occupied by each department. Since reducing the space does not reduce council rate, how do firms ensure that they choose realistic assumptions that would have an impact on the allocation of overheads?

Although I have long believed that there existed a clear difference between products and services, I was surprised that this line could become blurred especially where products and services are supplied together. The example of a meal in a restaurant (a product) that comes with a waiter serving (a service) was a very good example of how the line between a product and a service can be blurred.

I was able to clearly understand job costing as a technique of allocating costs to a particular product. This was made possible by the use of the examples (i.e. the 90,000-tonne luxury cruise liner and the chocolate-making process in the Cadbury). In the case of separately identifiable products such as the case of the luxury liner, it is possible to use the job-costing technique. However, attaching costs to the process of making chocolate during manufacturing as explained in the case of the chocolate-making process is impossible since the processes are not separately identifiable. Chocolate making process will thus use process-costing as opposed to job-costing. This information was very exciting to me.

In conclusion, I would say that chapter six provided very exciting information and an in-depth understanding of various costs, cost allocation techniques, and the need for a manager to understand all these. For example, I was able to learn that allocation of direct costs to a cost object is normally comparatively simple. On the other hand, the apportionment of indirect costs to a cost object is more difficult and requires making a number of judgments and assumptions. In my opinion, it is not easy to clearly understand the judgments and assumptions entrenched in the allocation of indirect costs. However, this understanding is crucial in enabling insights into the economic and business realities of a firm.

In order to increase sales, companies use many strategies to attract customer’s attention. Making such a micro-adjustment as reducing the price by one or five cents can make a big change; therefore, this method has been applied by many firms. It becomes especially evident when someone observes prices at retail stores since there are a number of products with a price just below the nearest round number. This tendency clearly demonstrates that businesses believe in the effectiveness of this strategy. However, the reasons why making odd prices increases sales and profit need to be investigated further.

Several researchers offered their own explanation as to why this strategy produces such results. For example, it is argued that “customers see an odd price as being much cheaper than it actually is in relation to the nearest round figure” (Holdershaw et al., 1997, p. 53). In other words, when an item is priced just below a whole number, such as 9.99$ instead of 10$, the consumer automatically focuses on the first digit and perceives the price lesser than it actually is. In the mind of a customer, it may seem like a good discount.

Moreover, another reason for implementing this strategy may be a company’s desire to seem like an affordable brand or a discount retailer. As Naipaul and Parsa (2001) state, “those operating in the low end of a market prefer to use the odd-digit as the rightmost digit in a price-most likely as an indicator of great value” (p. 28). In other words, prices are capable of creating a reputation for the brand, which can also attract more customers.

There are also several factors that may have an impact on the effectiveness of this strategy. For instance, they include the quality of a product, its type. The price level can also influence odd pricing as some companies tend to use even prices for expensive products. It is usually done to create an image of a company that produces high-quality goods. Nevertheless, further research is needed in order to figure out if this pricing strategy is actually effective for every firm.

References

Holdershaw, J., Gendall, P., & Garland, R. (1997). The widespread use of odd pricing in the retail sector. Marketing Bulletin-Department Of Marketing Massey University, 8, 53-58.

Naipaul, S., & Parsa, H. G. (2001). Menu price endings that communicate value and quality. Cornell Hotel and Restaurant Administration Quarterly, 42(1), 26-37.

Rate parity is the practice of including a fixed price across all sources of customer attraction into the agreement between a hotel and a platform. Its inclusion in contracts between hotels and the leading online travel agencies (OTAs), such as Expedia, Priceline, and Booking.com, became a controversial topic for discussion in the hotel industry. Booking.com, being the largest platform of that type, holds up to ~40% of the booking market in various countries (Davies, 2015).

The article by Phil Davies provides an analysis of the situation with rate parity and related antitrust concerns, which puts OTAs in a dominating position and allows them to control prices in the market. It describes the recent deal between Booking.com and antitrust commissions and its consequences. This report aims to assess the necessity of the agreement between Booking.com and several EU authorities regarding rate parity across all distribution channels.

Prior to this agreement, Booking.com did not allow hotels to use different prices on other platforms. Essentially, this meant that hotels were unable to control the lowest price they were able to give to a customer. Rate parity has been implemented as a tool to regulate the relationship between hotels and OTAs since both parties need each other (Nicolau and Sharma, 2018, p. 525). However, as the platforms continued to grow exponentially, their leverage has increased to the point where they became able to control the market. Nowadays, Booking.com stays the number one platform for booking services, while smaller companies struggle to increase their market share.

The article gives an in-depth look at the state of the hotel industry. The author makes it clearly visible that the current state of OTAs, especially Booking.com, gives them an influence that prevents the market from operating in favor of its customers. There are several considerations to the changes that are introduced by European authorities that make these new regulations ineffective at their task (Davies, 2015). Several sources mentioned in the article argue that new laws will not promote competition, instead, they will further increase the expenditures of hotel owners and increase the influence of the top OTAs on the market (Davies, 2015). In general, the article presents substantial concerns regarding the efficiency of the new policy against OTAs and Booking.com in particular.

There are several key issues that put Booking.com under the suspicion of antitrust agencies from many countries. The largest online travel agency has been targeted by European authorities for being too restrictive in regard to price competition (Davies, 2015). Its behavior made it impossible for other platforms to compete against Booking.com successfully due to the fact that fixed prices would hurt hotels that use multiple OTAs with varied rates. Moreover, the website produces more favorable results in terms of scoring for hotels that choose to adhere to its strict rules about pricing. Figure 1 shows that it is visible from the evidence by Mellina et al. that the Booking.com scoring system leads to inflated scores due to its unorthodox scale.

It is essential to understand what rate parity implies for both hotels and customers before drawing conclusions regarding its effect on them. Oskam and Zandberg (2016, p. 270) state that “price parity constitutes an important cornerstone of the business model of OTAs, as it prevents hotels from regaining market share through rate discounts.” While its origin holds valid concerns regarding the fairness in relationships between booking platforms and hotel companies, the disproportionate growth of customers who use OTAs and travelers who do not put hotels at a disadvantage. Its current form brings into question the primary role of OTAs in the hotel industry and has a significant impact on the prices.

First of all, its effect on customer experience can be perceived as a positive one. Travelers are able to find the best possible price without having to look through the multitude of platforms to determine which one to use. Moreover, the fact that hotels rely heavily on OTAs implies a higher validity of reviews. However, since the prices are fixed while rates that OTAs charge from hotels vary significantly, hotel owners have to adapt their prices in accordance with these expenses. Therefore, the lowest price on the market becomes higher than it could be without rate parity in place.

Rate parity can be perceived as a tool for OTAs to monopolize the industry. Nicolau and Sharma (2018, p. 523) state that “some hotel managers might view it as a fair revenue management tool that benefits the customer and a device to handle complex online distribution systems.” Despite this fact, many hotel owners express their concerns that these systems can restrict their ability to set the prices as they deem appropriate (Nicolau and Sharma, 2018, p. 523). It is difficult for hotel companies to perform well without the reliance on OTAs whose influence on the market continues to grow with each year (Oskam and Zandberg, 2016, p. 275). Therefore, from hotel owners’ point of view, rate parity is a way for OTAs to ensure that hotels are using them as a primary source of customers.

The trend is being picked up by many countries outside of the European Union. Many countries picked up on the toxic relationship between hotels and OTAs, and antitrust watchdogs started to examine some of the largest accommodation platforms on the subject of creating barriers to entry (Panichi, 2020). Panichi (2020) states that “Asian regulators now view price-parity clauses as having the potential to harm competition in the hotel industry.” According to Panichi (2020), it is necessary to make platforms to be unable “to require that hotels and other lodging operators always offer a specific platform the best room prices and conditions.” It is expected that including price-parity clauses will be forbidden to incentivize market-controlled price generation.

As the initial concerns were raised several years ago, it is now possible to observe the effects of this strategy on the market. Oskam and Zandberg (2016, p. 272) state that “it was expected that the suppression of price parity would help the hotel recover market share that had previously been lost to OTAs.” However, these expectations did not change the market in a way favorable for customers, as the market concentration only went up (Oskam and Zandberg, 2016, p. 272). Rising concerns regarding the necessity of a more thorough intervention by the antitrust authorities imply that the current limitations are insufficient.

The future of hotel distribution channels is still under the threat of being completely dominated by a small number of large platforms. According to the analysts, the trends and potential developments of this situation without the intervention by authorities lead to an overwhelming power in the hands of OTAs (Oskam and Zandberg, 2016, p. 273). Hotels will be forced to accept their prices, which will lead to a decline in the quality and quantity of available booking locations. The majority of antitrust agencies in both Western and Eastern countries came to the conclusion that online platforms have to drop the practice of adding rate parity clauses in their contracts with hotels (Panichi, 2020).

In conclusion, the removal of the limitations that Booking.com placed upon the pricing strategy of hotels was harmful to the industry and needed to be removed. However, as the author of the article suggests, it is not enough to incentivize true competition among online travel agents. Moreover, it can lead to additional expenditures by hotel owners who want to advertise their services on multiple OTAs outside of the most popular ones.

Due to the restriction on pricing strategies outside of Booking.com, the hotels’ ability to control their revenue was significantly impaired, and the agreement between the largest OTA and the countries’ authorities was essential. Rate parity is a complicated issue that has a lasting adverse effect on both the prices of hotel rooms and the revenue of hotels across the globe. Sharma and Nicolau (2019, p. 429) state that there are “significant increases in the market value of hotels stemming from shareholder optimism brought about by the aforementioned rate parity bans in Europe.” There is a drastic need for additional restrictions aimed toward affecting the OTA’s ability to control hotels’ pricing strategies, sense it puts both botels and their customers at a disadvantage.

Reference List

Davies, P. (2015) Three countries agree on hotel pricing deal with Booking.com but critics say it doesn’t go far enough. TravelWeekly. Web.

Mellinas, J. P., María-Dolores, S. M., and García, J. J. (2016) ‘Effects of the Booking.com scoring system’, Tourism Management, 57, pp. 80-83. Web.

Nicolau, J. L., and Sharma, A. (2018) ‘To ban or not to ban rate parity, that is the question… or not?’ International Journal of Hospitality Management, 77, pp. 523-527. Web.

Oskam, J., and Zandberg, T. (2016) ‘Who will sell your rooms? Hotel distribution scenarios’, Journal of Vacation Marketing, 22(3), pp. 265-278. Web.

Panichi, J. (2020) Booking.com, Expedia’s Asian woes may thrust parity-clauses back onto the global stage. MLex Market Insight. Web.

Sharma, A., and Nicolau, J. L. (2019) ‘Hotels to OTAs: “Hands off my rates!” the economic consequences of the rate parity legislative actions in Europe and the US, Tourism Management, 75, pp. 427-434. Web.