Pricing Methods

Pricing Methods

Introduction

Pricing is a critical strategy that impacts the success of a company. According to Feurer, Schuhmacher, & Kuester, (2019), pricing approaches are closely linked to the business’ understanding of connections between its business processes and its market. Varying pricing methods are selected by business management to drive better profitability for the company. The selection of these methods is based on a critical analysis of the best pricing approaches that are relevant to the company. Mark-up pricing and price bundling are strategic pricing approaches that impact organizational performance in varying settings. According to Wang, Sun, & Wang, (2016), mark-up pricing is a cost variation pricing approach, where organizations calculate mark-ups as percentages of their selling price. Mark up pricing determines the price of the product by adding a fixed rate or amount to product costs. In the case of price bundling, the price of commodities is determined by the combination of multiple services and products to create a comprehensive package to reduce general pieces. Understanding the relevance of these pricing approaches requires explicit case studies that assess their relevance and applicability. This report assesses the appropriateness, advantages, and disadvantages of both methods. The Natural Grocery Store is a medium-sized enterprise based in England. The enterprise offers a range of products that include organic groceries, wines, baked foods and snacks, drinks, dairy products, households, and personal care products. The business operates on the principle of reducing individuals’ carbon-footprints to ensure environmental sustainability. The Natural Grocery Store operates at an average annual revenue of £ 3 million. The business is relevant for the study since it offers retail services, which can be easily assessed (NaturalGrocery, 2020). The company also operates in a competitive business environment, which helps in drawing plausible arguments on the best pricing strategy. Understanding various pricing strategies is critical in implementing appropriate pricing strategies in the business.

Mark-up Pricing

Mark-up pricing is the pricing approach where enterprises determine the prices of the products by adding a predetermined figure or percentage to the cost of the product. According to Giri, Mondal, & Maiti, (2019), organizations that employ mark-up pricing are cost-oriented and seek to identify mark-ups that can cater for organizational expenses and maintain a right profit margin. Mark-ups vary from the type of industry that a business operates to macro-environmental issues that affect the enterprise. Employing mark-up pricing provides multiple advantages and disadvantages to the company. A critical assessment of these advantages and disadvantages should be assessed to identify the appropriateness of the approach to business.

Advantages of Adopting Mark-up Pricing

The mark-up pricing strategy is a simple method of bookkeeping and calculation of profits. According to Wang, Sun, & Wang, (2016), mark up pricing requires simple walkarounds in determining the product prices. Organizations that deal with multiple products can take advantage of this approach to save the turnaround time used to develop product prices by creating unified mark-ups that are applied to all products. Research by Aldrich et al. (2017), showed that the approach is convenient and necessary to enterprises that have large product catalogs.

Mark-up pricing is a mechanism that results in fair and competent prices quickly. Giri, Mondal, & Maiti, (2019), explains that mark-up pricing allows enterprises to develop prices with a win-win consideration where organizations set mark-ups that consider their markets as well as the costs incurred in delivering the product. Companies using the model are able to determine reasonable profit margins, which allow them to maintain stable growth. Reasonable prices will enable the company to attain a substantial price advantage against competitors.  The organization also has the autonomy of revising product prices from a defensible moral perspective, since updates are made from progressive information on product costs. The organization gains the ability to refactor its mark-up to suit various applications and purposes, such as fluctuations in demand.

Disadvantages of Adopting Mark-up Pricing

Despite the substantial benefits of mark-up pricing, there is a considerable range of disadvantages that affect the organizations that employ the approach. Applying sunk costs in the determination of product prices makes it critical for organizations to determine products that fit discounts. The merchandise requires discounting, especially the slow-moving items, require high analytical evaluation of sales data to protect the business from losses. Such assessments are costly and place the organization in a critical situation, where it can experience inefficiency in the provision of incentives.

Price Bundling

Price bundling is a strategy that is used by businesses where sellers combine several services and products to sell them at a single price instead of charging each differently. According to Saini, Sahay, & Kalyanaram, (2019), price bundling is a marketing strategy that businesses use to increase the sales of slow-moving merchandise and increase the gross revenue of the business. Price bundling requires significant consideration of the type of products and services to include in the bundle to maximize sales, including discounts, and increase the company’s profits. Implementation of the price bundling strategy requires a critical analysis of its advantages, disadvantages, and appropriateness to ensure leverage.

Advantages of Adopting Price Blinding

The highest advantage that the company benefits from implementing the strategy is the ability to increase the sales of the inferior and weaker products by bundling them up with stronger ones.  Dominique-Ferreira & Antunes, (2019), explains that companies can clear dead stoke by charging higher for the bundled products. Aldrich et al. (2017) assessed the price bundling strategy of ice cream sales during winter when the product’s sales are meager. Companies employ the price bundling strategy to ensure sales of ice cream through bundling it as desserts.

Price bundling is a strategy that makes it easier for companies to give discounts to bundled products and ensure higher sales. According to Saini, Sahay, & Kalyanaram (2019), the pricing of bundled products creates considers a wholesome profit of the bundle, which allows the company to leverage the power of discounts. Customers view the purchase of the bundled as cost-saving, which increases the gross revenue of the business that employs the strategy.

Price bundling is a strategy that allows businesses to market less popular products to their customers and increase their demand. According to Aldrich et al. (2017), companies bundle products that are less known with those with high demand to increase their demand among customers. Increasing demand among customers creates new sources of revenue for the company.

Disadvantages of Adopting Price Bundling

Price bundling strategy is disadvantageous to customers as they have to purchase products even when they do need them. Dominique-Ferreira, Vasconcelos, & Proença, (2016), explains that price bundling is disadvantageous to customers who are specific on the products they need. This also disadvantages the company since customers may opt for alternative sellers that sell unit products. Price bundling also reduces the profit margin of the company as it discounts are mandatory. Selling bundled products utilize discounts to attract customers. These discounts significantly reduce the companies profit margins and can substantially affect its performance it the sales of the bundle do not meet the projected volumes.

Appropriate Pricing Method for The Natural Grocery Store

The Natural Grocery Store operates within a competitive macro-environment with strong competitors like Tesco, Asda, Farmfoods, Iceland, and Jack’s grocery. Competitors like Jack’s have been developed have developed robust price bundling strategies to ensure high price differentiation strategies. Arguably, these competitors only offer alternatives of organically produced products. This argument makes it plausible to assess that the competitive advantage of the business should not be based on price differentiation but rather on its business model. Also, the production of organic products is relatively expensive. Therefore, the best pricing strategy for the business is mark-up pricing. Mark-up pricing would insulate the business against losses. Also, the company is likely to come up with considerable prices that favor its customers while promoting its business performance. Price bundling also allows companies to give discounts on their products, which will increase their public preference. While price bundling is appropriate for groceries and other agricultural produce, the method is not plausible for the model because of the high production costs. The benefits of the products sold by the enterprise align with environmental sustainability campaigns, which increases public preference; therefore, the benefits of product bundling are already taken care of by the risen culture.

Conclusion

Understanding various pricing strategies is critical in implementing appropriate pricing strategies in businesses. Mark-up pricing and price bundling are strategic pricing approaches that impact organizational performance in varying business environments. The mark-up pricing approach allows enterprises to determine the prices of their products by adding a predetermined figure or percentage to product costs. The mark-up pricing strategy is advantageous since it is simple to implement and calculation of profits. The method also results in fair and competent prices quickly and allows for quick updates of prices. Also, the mark-up pricing strategy makes reduces the turnaround time for developing prices for businesses that have long product lists. Despite the advantages, mark-up pricing makes it hard for organizations to determine products that should be discounted. It also leads to the stalling of weak merchandise. On the other hand, price bundling is a strategy that is used by businesses where sellers combine several services and products to sell them at a single price instead of charging each differently. Companies that implement the strategy get the ability to increase the sales of the inferior and weaker products by bundling them up with stronger ones.  Price bundling also makes it easier for companies to give discounts to bundled products and ensure higher sales. However, bundling might reduce customers, especially those who specifically need a single product. Discounts also reduce the company’s profit. The Natural Grocery Store is a medium-sized enterprise based in England, which offers a range of products. The mark-up model is suitable for the business because it deals with high-cost products that do not favor discounts. Price bundling is not suitable since it requires the implementation of discounts that are not suitable for the business model of the enterprise.

References

Aldrich, B. R., Alkhaledi, F., Pelland, G., & Toomey, J. T. (2017). Developing a Sustainable Pricing Strategy for the Worcester Regional Food Hub.

Dominique-Ferreira, S., & Antunes, C. (2019). Estimating the price range and the effect of price bundling strategies. European Journal of Management and Business Economics.

Dominique-Ferreira, S., Vasconcelos, H., & Proença, J. F. (2016). Determinants of customer price sensitivity: an empirical analysis. Journal of Services Marketing.

Feurer, S., Schuhmacher, M. C., & Kuester, S. (2019). How pricing teams develop effective pricing strategies for new products. Journal of Product Innovation Management, 36(1), 66-86.

Giri, B. C., Mondal, C., & Maiti, T. (2019). Optimal product quality and pricing strategy for a two-period closed-loop supply chain with retailer variable mark-up. RAIRO-Operations Research, 53(2), 609-626.

NaturalGrocery. (2020). About Us | The Natural Grocery Store. Retrieved 18 March 2020, from https://www.naturalgrocery.co.uk/about/

Saini, G. K., Sahay, A., & Kalyanaram, G. (2019). How do complementarity and discount choices interact with the latitude of price acceptance in price bundling?. Journal of Consumer Marketing.

Wang, Y. Y., Sun, J., & Wang, J. C. (2016). Equilibrium mark-up pricing strategies for the dominant retailers under the supply chain to chain competition. International Journal of Production Research, 54(7), 2075-2092.