Pricing is viewed differently by consumers than company’s that set the pricing structure and it can be viewed as either a deterrent or reason to buy. Companies need to understand the effect that price can have on their overall marketing strategy.
According to The Entrepreneur’s Guidebook (2001), pricing objectives must take into account one or all of the following goals:
∙ Increase sales volume
∙ Increase sales revenue
∙ Keep or build market share
∙ Meet or prevent competition
∙ Target low-cost buyers
∙ Increase profits or ROI, such as each 15% ROI or increase market share by 30% by end of the fiscal year
Pricing reflects a lot about a company and coincides with their financial history, company mission, values and revenue objectives. No matter what industry, the prices that are charged depend on a number of factors:
∙ What it costs do to business—operating costs, inventory, etc.
∙ Profit goals
∙ The competition’s pricing structure
∙ How your product is valued, i.e. customer’s assessment of the value
According to The Entrepreneur’s Guidebook (2001), there are several different pricing strategies that can be implemented:
∙ Break even pricing
∙ Buying a market position pricing
∙ Competitive advantage pricing
∙ Discount pricing
∙ Full-cost pricing
∙ Keystone pricing
∙ Loss leader pricing
∙ Matching the competition pricing
∙ Multiple unit pricing
∙ Odd pricing
∙ Penetration pricing
∙ Pre-season pricing
∙ Price –is-no-object pricing
Companies like McDonald’s, Starbuck’s and Tesco have developed pricing structures, based on their industry and their competition. But each company also has a pricing policy that is tied closely to profit goals and cost structures.
The fact that these three companies are in very different industries and markets provide a sampling of different pricing structures. Advertising plays a major role in both McDonald’s and Starbuck’s but probably not as much for a local Tesco store. Their big draw is word of mouth and their rewards program for their customers. Shoppers can see for themselves if the items they are buying are fresh and have the quality they are looking for. Buying a cup of coffee or a fast food hamburger is different.
No matter what type of pricing strategy is used, companies must constantly evaluate the effects that their strategy is having on their overall success.
McDonald’s
The fast food marketplace is highly competitive and strategies for providing consumers with offerings they will want requires pricing that will produce long-term results and keep customers coming back.
According to Marc Ballon of the Los Angeles Times (2001), “McDonald’s is working to shore up its domestic operations, largely by tightening operations and encouraging franchises to offer consumers better value.”
McDonald’s conducted extensive research into sales and customer count, competitive offerings and prices and began to create “value” offerings for $.99. After testing certain segments of the marketplace, they launched a “discount” pricing program. By cutting down on operating costs and improving efficiency, the savings can be passed along to the customer. The customer believes that they are getting a bargain through special pricing. McDonald’s continues to outpace Wendy’s and others with annual sales of over $1.6 million. Their discounted pricing strategy does pose some problems, particularly with maintaining high quality and service.
Although McDonald’s has faced some economically hard times, they continue lead the competition because of their brand recognition and perceived value for the price. Now, the bigger challenge that the company faces is trying to create healthier fare to meet consumer’s changing tastes.
Competition is a key factor in McDonald’s pricing and as the market continues to be flooded with newcomers offering different and healthier fare, the current pricing structure may change. Discount pricing may no longer provide McDonald’s with the revenue stream they need to meet their goals. Matching the competition may be a better tactic or using some type of multiple unit pricing in some cases by offering two for one or some type of multiple and desirable pricing to entice the consumer.
Starbuck’s
Starbuck’s is in a fairly unique position as an industry trendsetter catering to upwardly mobile young successful business people. In this case, money is often no object and their pricing policy reflects that.
Their pricing also reflects their image, which caters to a more affluent client. This targeted group wants to be recognized and admired for their ability to buy Starbuck’s coffee. It’s almost a status symbol among yuppies.
As for the company, their strategy clearly says we are worth more so we are charging more. You won’t see “sale” or discount signs in Starbuck’s. According to The Entrepreneur’s Guidebook (2001), this pricing will only work if the product or service is:
∙ Highly innovative
∙ In demand
∙ One of a kind
∙ Threatened by little or no competition
∙ Within a market where price is less important than other factors
Starbuck’s has been able to be successful using this strategy but one disadvantage may be that they are losing potential customers because they are perceived as too expensive. Why pay $3.00 when you can pay $.90 somewhere else. The average customer wants a good cup of coffee not a “boutique” cup of coffee.
Starbuck’s remains successful because their pricing policy supports their marketing strategy.
Tesco
Food sales have always been a playing ground for pricing wars and over the past ten years, Tesco has taken an aggressive approach in the marketplace. Although they remain highly competitive as far as pricing, they initiated a club card program that provides discounts and rewards for loyal customers.
Supermarket chains across the country constantly try to beat their competitors and Tecso is following suite. They have based their strategy on being highly competitive and by providing a wide selection of products.
According to Loop Consulting (2000), in the grocery market it would appear that you could compete on price and service but the two may be mutually exclusive. In a price war, the only way to win is by reducing the overall cost base, no the profit margins. Once a price has been reduced, it is less easy to return prices to their previous level without alienating customers. In fact, it will encourage shoppers to go wherever the price promotions are.
So Tesco, although they implement pricing promotions are relying more heavily on their club card program, not only for customer loyalty but also to learn more about their customers buying habits. This can be an effective tool in planning promotional selling.
Tesco must also consider competitive pricing policies based on what the competitors are charging for the same or equal products. The rule of thumb here is that even though less is being paid for an item, the company will make up the revenue on volume sales. Tesco closely follows its competitors pricing policies.
Information Sources
http://www.thoughtheloop.com. Loop Consulting. 1996-2000.
The Entrepreneur’s Guidebook Series. Patsula Media. 2001
Ballon, Marc. “McDonald’s Looking for a Break” Los Angeles Times. December 2001.
