Pricing strategy—a technology perspective

Journal of the Academy of Business and Economics, March, 2004 by Rahul Bhaskar, Malini Krishnamurthi

ABSTRACT

Pricing is a critical lever that needs management attention. Current pricing practices are replete with shortcomings which can be overcome by combining management and technology strategies. In doing so, firms can realize exceptional profits. We examine an Integrated Revenue Management system and pricing optimization system as a valuable and essential framework for undertaking strategic pricing initiatives. The paper presents the case of United Parcel Service, which has been successful in adopting this framework and as a result has realized a 3-5% increase in its revenues.

1. INTRODUCTION

Pricing is a crucial management responsibility that has serious strategic and operational consequences. Among the important items in the marketing mix, price is the only variable that can cause immediate financial impacts. Price can ring the cash register, generate revenue and can influence the profitability of a company. Therefore, it is viewed as the ultimate marketing lever (Shipley & Jobber, 2001; Feldman 2002; Wyner 2002; Clemons & Weber, 1994; Monroe, 2001). Pricing has tremendous ramifications that permeates into nearly every area of an organization: the marketing process (Wyner, 2002), competitive strategy (Clemons & Weber, 1994) and corporate performance (Shipley & Jobber, 2001) and yet it is the most disregarded, least understood and ineptly managed variable (Shipley & Jobber, 2001, Wyner 2002; Monroe 2001). Pricing is highly complex and too important to undertake without deep analysis.

The purpose of our study is to highlight the importance of treating pricing as a process issue, and then to demonstrate that when this process is supported by Information Systems, it can result in identifying valuable pricing strategies. In section two, we draw upon Shipley & Jobber's (2001) pricing wheel, which adequately summarizes the pricing activities and presents pricing as a multistage process. We also present some of the shortcomings in current pricing practices. In fact, it is the lack of a strategic focus on pricing that served as an impetus for this study. In section three, we discuss the Integrated Revenue Management framework and the value of technology in the pricing decision. In section four, we present United Parcel Service's success in incorporating decision support systems in the pricing process. Section five has our conclusions.

2. PRICE SETTING AS A MULTISTAGE PROCESS

Shipley and Jobber (2001) believe that pricing decisions should be a multistage process that takes into consideration a wide range of forces that are both internal and external to the company and that impact pricing effectiveness. Stages in the process are described as follows (also, see Figure 1):

[FIGURE 1 OMITTED]

Decide on Strategy Role. The role of price in the overall corporate strategy is important and requires astute judgment, because once an image of a company has been established it takes a very long time to change it, if it is inappropriate.

Prioritize Pricing Objectives. Pricing objectives must be consistent with the company objectives. Among the most important and widely specified pricing objectives cited in the marketing literature are: 1) profits, 2) survival, 3) sales volume, 4) sales revenue, 5) market share, 6) image creation, 7) competitive advantage, 8) barriers to entry, and 9) perceived fairness. These objectives are often mutually exclusive and conflicting; therefore it is necessary to determine their relative importance so that when conflicts arise, priority can be assigned to the most important pricing objective under a given circumstance.

Assess Pricing Determinants. A critical task in the multistage process of pricing activities is assessing the determinants of price. These are internal and external factors that affect price, such as the conditions of customer demand, competition, and the firm's own cost structures.

Decide a Price Strategy. This entails positioning a product in the market in such a manner that customers perceive the product to offer benefits that are of value to them. This issue becomes even more challenging when companies have to introduce a new product in the market. Price positioning cannot be established effectively without consideration of the value of customer benefits included in the product offering and the relative position of a competitor's product. Price is the cost that customers incur to obtain the benefits bundle. If the price exceeds the perceived value of the benefits, a rational customer will decline to purchase. Conversely, if the perceived value substantially exceeds the price, the supplier is foregoing an opportunity to obtain a higher price. Achieving a just balance and trying to be the ruler in the market can be hard to accomplish.

Select Pricing Method. Many factors affect pricing effectiveness. Prominent among these are: cost, demand, and competitor's prices. Erroneously, many companies focus on only one of these three factors when setting prices, sometimes to the exclusion of other relevant variables.