Introduction
Price is an important element in a marketing mix. Companies use various pricing strategies in order to market their products as well as get profit from goods or services sold. The most common pricing strategy is the cost-based pricing strategy. In this strategy, the prices are highly determined by the cost of production. The cost-based pricing strategy is, however, being replaced with a value-based pricing strategy. In value-based pricing, perceived value rather than cost is used to determine the prices. The main intention of value-based pricing is to increases a company’s competitiveness as more is offered to customers. The strategy also seeks to maximize profits for a company.
Article Summary
The article reviews how the chemical industry can take advantage of value-based pricing. Companies in the chemical industry were going through tough economic conditions in 1998. Despite economic growth in North American and other parts, chemical companies were finding it difficult to raise prices. Inability to raise prices for chemical products implied that the chemical industry could not take advantage of the growing economy. With the increase in the cost of raw materials and production, the inability to raise prices lowered the profit margins. Chemical companies however can take advantage of better pricing strategies. A value-based pricing strategy can be used to increases profit margins.
There are various characteristics of the chemical industry. The sector is characterized by the high capital needed to set up chemical processing plants. Chemical companies are rarely restricted from trading in other countries. The industry also experiences fluctuating raw material prices and supply, apart from being highly regulated. Most chemical companies use these factors to determine their pricing strategy. These pricing strategies however have negative effects. The inability of chemical companies to control the prices has led to high losses when the prices drop. value-based pricing strategy can be applied in the chemical industry in order to overcome the shortfalls of the price drop.
The first step for developing value bases pricing strategy in the chemical industry is customer segmentation and targeting. Customer segmentation is used to identify the various market segments depending on value. This process appreciates that customers differ in value drives and thus responding to offering differently. Targeting, on the other hand, take advantage of difference in customer segments to determine how to apply company’s resources. After a target segment is identified, then values-based pricing can be used depending on customer values. Looking at the target customer as an operating system, the input can be viewed as the ability to enter into business. Transformation is the ability of a company to create a competitive advantage over other companies. Lastly, the output is the ability to gain and maintain customers.
After the customer’s critical success factors are known, chemical companies should assess the competitive set. This step is very important to value-based pricing. The value-based pricing should be based on a reference range of competing companies. In spite of using the price range, a chemical company should be able to use value differentiation. Ability to understand competitive set and value drive help managers to determine the price range for target customers. The price range sets the ceiling as well as determines the differentiation value. By doing this, the chemical company would determine the range of prices that ensure a good profit margin as well as create a competitive advantage.
After determining a price range, the chemical industry manager should focus on reaching the target customers. The first step is to identify a distribution process that would ensure customers’ access value created products. After identifying the distribution process, the chemical industry managers can communicate the strategy for the product to the target customers. The process from identifying customer targets, determining price range to developing a communication a marketing strategy ensures that chemical companies gain marketplace success. The advantage of value-based pricing in chemical companies is that they will be able to increase profit margin and well gain a competitive advantage. Apart from developing a value-based pricing strategy; chemical companies must be able to manage competition from other companies.
Analysis
value-based pricing in chemical companies is closely related to the concepts in the study book. To ‘comprehend value’, according to the study book means to understand customers’ values. Customer value differs from one customer to another. By using value-based pricing, one should be able to understand customers’ perceptions of value. In the chemical industry, this process is done through customer segmentation. Customer segmentation partitions the market by using various distinctive factors in the market. The process of comprehending the value drives in customers is the most important step in value-based pricing. Being able to identify customers’ value drives enables one to respond appropriately to the values. To comprehend value, one must be able to understand the customers’ needs and activities. Ability to identify the higher needs of the target customer is very important to this process. In the hospitality industry, one can comprehend the value of the customers. For example, in hospitality health and prestige are some of the factors to consider in pricing.
Creating value is the second step in five C’s pricing strategy. According to the study book, this process entails responding to value drives by creating products that respond to the values drives. Customers can only accept to pay higher prices to products that they perceive to be of higher value. Creating value entails designing products that correspond to the value drives. The product created should consider both references and differentiation. Value can be created in various ways. A company may decide to add additional features in a products, change packaging or add prestige. The ability of a product to respond to the value drives is the most important step in value-based pricing. In the chemical industry, creating value entails developing chemical products that correspond to the value drives in the target customers. If a company is able to develop products that respond to customer value, then marketing the product will be easier. A good example of creating value is various products in the hospitality industry that are priced not only on cost but also on perceived values.
Conclusion
value-based pricing strategy is a good pricing strategy to respond to increased competition and low-profit margins. value-based pricing bases the prices not only on cost but also on perceived value. Five C’s pricing strategy provides a systematic process to value-based pricing strategy. By comprehending values in customers, one is able to create products that reflect the values. After creating products that reflect the customers’ value, a proper marketing mix is used to communicate the product to the market. The other step is to convince the customer that the value is worth paying for and then capture the value inappropriate price. With increased competition, value-based pricing is the best strategy to increase profit as well as gain a competitive advantage.