Pricing Strategies

Overview of pricing, demand and revenue relationships

Question:

Does a fall in price always increase demand and profit of a firm?

Nzherald.co.nz (2017). Dairy prices: Keep calm and bake on - The Country - The Country News. [online] The New Zealand Herald. Available at: https://www2.nzherald.co.nz/the-country/news/article.cfm?c_id=16&objectid=11902020 [Accessed 14 Aug. 2017].

The newspaper article focuses specifically on the price hike of milk and dairy products in one of the biggest milk producing country, New Zealand and the effects of the hike on the national as well as global consumers. The main objective of this article is to find answer to why the nationals of New Zealand, especially those in Kiwi, which produces the major share of milk and dairy products in the world, pays such a high price (Foote, Joyand Death2015). For study purposes, direct consumers, national and international, suppliers, government officials, economists and analysts are interviewed and their views are taken into account. With reference to a detailed study of the dairy market and several extensive interviews, the study concludes that the local customers are also paying the global market prices of milk and other dairy products, due to an immense demand of the commodities in the international market (Malik et al. 2013). According to the study, to cater to the huge demand and to capture the client base as far as possible, the suppliers are redirecting their supply more towards the international market (the Kiwi citizens consist only 5% of the overall customer base of the major dairy companies) thereby increasing their revenue, but making it difficult for the locals (Chaston 2017). The article focuses on the positive impact on the revenue of the milk suppliers due to this upsurge in global demand of their dairy products.

The article, deals with a real case scenario of highly inelastic demand and the favorable revenue structures that the milk sellers of the country, especially those in Kiwi experience, due to the high inelastic demand (Doole, Romeraand Adler2013). However, though demand, price and revenue relationships are beng studied in this article, the same fails to address the actual research question that is to be dealt in the assignment. The news article specifically focuses on the dairy market of Kiwi, a small region in New Zealand and only studies about the effects on the revenue and oprice structure of milk and dairy products, in this region, due to a recent increase in the global demand. The cause and effect scenario studied in this article, is also opposite to what has to be studied in the concerned assignment (Becker2013). The geographical and commodity restriction of the news article reduces the relevance of the same significantly. Therefore, though this article is viewed, a very vague connection can be found between this and the main area which the assignment deals, thereby making the article inappropriate for usage in research purposes for the concerned assignment (D’arpizio et al. 2015).

Pricing and demand relationship in the dairy market

Copyblogger.com, S. (2017). Do Lower Prices Lead to More Sales? - Copyblogger. [online] Copyblogger. Available at: https://www.copyblogger.com/product-pricing/ [Accessed 14 Aug. 2017].

The article mostly takes into account the consumer side and their perspectives regarding pricing of a commodity. Indirectly, it tries to analyze the effect on the revenue growths of an industry, depending upon how the industry sets its prices and what the consumer perceives about the credibility of the product from the price level set by the industry (Solomon 2014). The article takes the example of a photography course, covering several lessons and tries to analyse the effect of different price levels set for the same photography course. According to this article, a course package, priced very high may intrigue the customer to see what is special in that course, though he may or may not be able to afford it. This article argues that in general, for services like this, high prices are seen as an indicator of better quality of service provided (Malik et al. 2013). According to this article, a sudden price rise or fall, both can lead to immense speculations on part of the customers, regarding the quality of the services. In this article, two types of buying phases are discussed about. In the initial phase, the consumer wants to buy a product but does not have any idea about the right price of the product, thereby guessing about the price (Nagle, Hoganand Zale2016). In the second phase the consumer gets an idea about the different prices of the products and its substitutes that prevail in the market and after comparing among the prices comes to conclusion about buying the products (Moshrefjavadi 2012). The study suggests the producers not to decrease the prices of their products abruptly as it may create more negative than positive influence on the revenue.

The article, though specifically focuses on the demand side of the problem, gives a useful insight about the relationship between price and demand of a commodity or service and therefore, the effect of this relationship on the revenue of the company producing this commodity or service can be indirectly portrayed. However, the article focuses on only one particular type of service while studying the consumer behavior with respect to changes in price levels (Nagle, Hogan and Zale 2016). It also fails to show the direct relationship between the change in price and the corresponding effect in revenue of the concerned company. It may so happen that the behavior of the consumers, in response to a change in price of other types of goods and services vary significantly from that of their behavior in case of photography courses, as these type of services are availed mainly for recreational purposes and is not primarily a necessary service. Demand for these types of services is in general highly elastic (D’arpizio et al. 2015). The article needs to extend its research regarding consumer behavior patterns to other types of goods and services and it also needs to take into account the effects of price changes in the revenue of the concerned producers and the service providers, to make it more relevant for study purposes (Nwankwo, Hamelin and Khaled2014). Due to the constraint of types of services chosen and the variables taken to study in the article, it cannot be used as a conceptual base for the article. However, the demand aspect taken into account in this article can be useful as supplementary information for structuring the research.

Impact of price changes on consumer behavior in photography industry

Mumbower, S., Garrow, L.A. and Higgins, M.J., 2014.Estimating flight-level price elasticities using online airline data: A first step toward integrating pricing, demand, and revenue optimization. Transportation Research Part A: Policy and Practice, 66, pp.196-212.

The article tries to estimate the elasticity of flight booking demand with respect to price, taking into account several endogenous and exogenous factors, which characterizes the demand for flight tickets. It takes Jet Blue Flights for research purposes and studies the data of this commercial airline in four of the transcontinental markets (Jetblue.com, 2017). The endogenous issues in prices, usually occurs while calculation and can lead to biased results and wrong recommendations for pricing strategies. These problems are corrected with the help of an approach of instrumental variable. The article tries to estimate the price elasticity with the help of Ordinary Least Square Method and Two Stage Least Square Method, taking the number of flight bookings as the dependant variable, measured in terms of departure dates and time, the type of markets and the number of days in advance the ticket is booked (Rao 2015).  The study results in several interesting observations with significant implications on pricing strategies of flight tickets. The study finds business travelers less sensitive to price changes than those who are pleasure tripping. This may be because of their inelastic demand for flight tickets as they are booking flights for professional purposes. Moreover, the demand for short distance flight tickets (the distances which can also be travelled by road if required) are highly price elastic as there are many possible substitute modes of transport available (Malik et al. 2013). Demand for tickets of Jet Blue become strikingly price sensitive in presence of sales and promotional offers of its competitors. The price sensitivity also varies depending upon whether the flight is departing on weekdays or weekends, with those booking weekend flights being more sensitive to prices than those booking weekday flights (Rios, McConnell and Brue 2013).

The article derives several important factors influencing the price elasticity of flight tickets, which directly implies that one price strategy for all will not be beneficial for the company as it may reduce the revenue. According to the recommendations of this article, the factors discussed above should be taken into account while planning a composite and dynamic set of pricing strategies, which can direct positive effects on revenue (Cowan2012). The article deals with price, demand and revenue relationships in a real business environment, making the article relevant for the assignment. However, the article is limited to only commercial aviation sector and deals with one particular commercial airline, thereby making it a targeted study. The general relationships between price and demand and their implication on a company’s revenue is not studied as a whole (Jetblue.com, 2017). A more generic approach can make the observations in this study more applicable in all economic fields. Nevertheless, the methodology used in the article seems robust and can be applied to other sectors as well. The article is appropriate to refer to for designing the instruments for studying the result of pricing strategies on revenue, via demand, in a general framework, which is one of the primary objectives of the concerned assignment.

Price elasticities of flight booking and influence on revenue optimization in aviation sector

Cachon, G.P. and Feldman, P., 2015. Price commitments with strategic consumers: Why it can be optimal to discount more frequently… than optimal. Manufacturing & Service Operations Management, 17(3), pp.399-410.

The article deals with two different pricing strategies that are commonly implemented and constructs a third type of pricing strategy, which can be used, especially in case of targeted or strategic customers; the customers who have a very high reputation of being loyal buyers of a particular good or service (Peppers and Rogers2016). According to the literature, a firm can either have a static price, which remains constant irrespective of demand situations or a always discounting one, which never increases even if there is an upsurge in the demand. A third kind of pricing introduced here, is that of starting with a hiked price level and then discounting frequently. According to the article, in case of presence of a large base of strategic customers and fixed as well as flexibility of capacity of the firm, the third pricing strategy or the high frequent discounting pricing strategy performs the best (Jahanshani 2014). The article argues that if the customers are strategic or targeted the frequent discounting strategy, though may reduce the revenue of the company in short run, may prove highly beneficial in keeping the loyal clientele satisfied, thereby, increasing the demand for the product of the company. This can prove beneficial for the long run revenue structure and the future prospects of the concerned company (Wieseke, Alavi and Habel2014).

The article deals with a research topic, which is closely related to the research question of this particular assignment. It tries to show the effect on a company’s revenue depending upon the pricing strategies the company takes. The author assumes the nature of the customer to be strategic or targeted and succeeds to portray a robust relationship between price reductions (in the form of frequent price discounting) and a considerable increase in the demand of the commodity, among the loyal and reputed customers (Cowan 2012). It also draws the relationship between price change and revenue restructuring via higher demand in the long run. The limitation of the article is that it only takes into account strategic customers of a particular company and its products. The article overall emphasizes on how to design pricing strategies such that the company can maintain and increase the strategic clientele and is mainly concerned with the long run revenue increase of the firms (Peppers and Rogers 2016). It does not take into account the demand of all types of consumers and highly ignores the possibility of decrease in the revenue in the short run, due to frequent price discounting, in order to keep the strategic clientele. In spite of this limitation, the article can serve as a important resource material for studying the problem posited in the concerned assignment an can also help in recommending pricing strategies in a general microeconomic framework (Rios, McConnelland Brue2013) .

Pricing strategies for targeted or strategic customers

Marketingmo.com (2017). Will Lowering Your Prices Increase Profits? | Marketing MO. [online] Marketing MO. Available at: https://www.marketingmo.com/strategic-planning/will-lowering-your-prices-increase-profits/ [Accessed 14 Aug. 2017].

The article reviews the effect of a fall in price of a commodity on its demand and the revenue of the concerned industry. It tries to examine whether with a fall in price, the revenue of the company always increases. To study the relationship between the variables, the article takes help of the basic microeconomic concepts of demand and supply and their relative elasticity with respect to price (Rios, McConnelland Brue2013). The research focuses on a range of price elasticity of demand and their effect on the revenue of the organizations in general. It tries to see the result of a price change on a commodity with high price elasticity of demand and on another with comparatively low price elasticity. According to this article, in case of inelastic price elasticity of demand, a fall in price does not tend to increase the demand substantially, thereby having a little effect on the overall revenue. However, this may not be the case for a commodity, whose demand is highly price elastic (Varian 2014). The article also suggests several optimal pricing strategies like analyzing pricings of competitors, calculation of profitability, forming plans for pricing strategies and others.

Although the article takes into account the subject of the assignment in a broad and general perspective, the microeconomic tools used in the article seems to be robust and applicable in studying the effect of fall in price over demand and overall revenue. The main drawback of this article is that, it studies the price revenue relationship in a broadly general framework. It fails to take into account the exceptions that can arise due to exceptional nature of the commodities (like those of Giffen goods, Veblen goods and inferior goods) or of the markets (in case of exceptional economic phenomena like recession or natural calamities, where law of demand usually fails in many instances) (Pielow, Sioshansi and Roberts 2012). For making the article more relevant, the article needs to take into account the outliers and the special cases where the law of demand is violated. It can also take into account a few case studies specific to industry types and economic zones to examine the feasibility of the concept that with a fall in price the demand of a commodity increases, leading to an overall increase in the revenue of the company (Baumol and Blinder2015). For the purpose of studying the problem mentioned in the assignment, this article can be used as a conceptual base. The tools used in this article are easy to understand and broadly applicable. Therefore, though not the sole foundation for this assignment, the article can provide a preliminary concept and it can also contribute in forming the methodology of the article.

References:

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Becker, G.S., 2013. The economic approach to human behavior.University of Chicago press.

Chaston, I., 2017. Entrepreneurship.In Technological Entrepreneurship (pp. 1-24).Springer International Publishing.

Cowan, S., 2012. Third Degree Price Discrimination and Consumer Surplus.The Journal of Industrial Economics, 60(2), pp.333-345.

D’arpizio, C., Levato, F., Zito, D. and de Montgolfier, J., 2015. Luxury goods worldwide market study. Bain & Company.

Doole, G.J., Romera, A.J. and Adler, A.A., 2013. An optimization model of a New Zealand dairy farm. Journal of dairy science, 96(4), pp.2147-2160.

Foote, K.J., Joy, M.K. and Death, R.G., 2015. New Zealand dairy farming: milking our environment for all its worth. Environmental management, 56(3), pp.709-720.

Jahanshani, A.A., Hajizadeh, G.M.A., Mirdhamadi, S.A., Nawaser, K. and Khaksar, S.M.S., 2014. Study the effects of customer service and product quality on customer satisfaction and loyalty.

Jetblue.com (2017). JetBlue | Flights and Airline Tickets at Discount Prices. [online] Jetblue.com. Available at: https://www.jetblue.com/flights/#/ [Accessed 16 Aug. 2017].

Malik, M.E., Ghafoor, M.M., Iqbal, H.K., Ali, Q., Hunbal, H., Noman, M. and Ahmad, B., 2013.Impact of brand image and advertisement on consumer buying behavior. World Applied Sciences Journal, 23(1), pp.117-122.

Moshrefjavadi, M.H., Dolatabadi, H.R., Nourbakhsh, M., Poursaeedi, A. and Asadollahi, A., 2012.An analysis of factors affecting on online shopping behavior of consumers. International Journal of Marketing Studies, 4(5), p.81.

Nagle, T.T., Hogan, J. and Zale, J., 2016. The Strategy and Tactics of Pricing: New International Edition. Routledge.

Nwankwo, S., Hamelin, N. and Khaled, M., 2014. Consumer values, motivation and purchase intention for luxury goods. Journal of Retailing and Consumer Services, 21(5), pp.735-744.

Peppers, D. and Rogers, M., 2016. Managing Customer Experience and Relationships: A Strategic Framework. John Wiley & Sons.

Pielow, A., Sioshansi, R. and Roberts, M.C., 2012.Modeling short-run electricity demand with long-term growth rates and consumer price elasticity in commercial and industrial sectors. Energy, 46(1), pp.533-540.

Rao, J.N., 2015. Small Area Estimation.John Wiley & Sons, Ltd.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Solomon, M.R., 2014. Consumer behavior: Buying, having, and being (Vol. 10). Upper Saddle River, NJ: Prentice Hall.

Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.

Wieseke, J., Alavi, S. and Habel, J., 2014, October. Willing to pay more, eager to pay less: The role of customer loyalty in price negotiations.American Marketing Association.