Pricing strategies

Abstract

One of the four P's of marketing, price is an important factor that determines the profitability of a firm. This paper attempts to study concepts related to pricing, followed by a literature study of research in the area of Pricing of Services. A framework is then developed which is applied to the Pricing of IT Services. The framework is based on a conceptual approach to pricing. Costs, demand, competition and consumers are the four factors whose study is important to an effective approach to pricing. This paper explores in detail these four factors and their impact on pricing. Costs need to be understood and classified so that they can be attributed to particular product or service lines or geographies. In addition factors like the degree of operating and financial leverage and the product or service mix of the firm affect its profitability. The firm needs to understand the effect of a change in price on demand. Research on consumer behavior leads to various theories about price perception. The impact of price thresholds and price-quality perceptions need to be studied by the firm. There are a number of other factors in addition to price that affect price sensitivity and these are listed out in this paper. The third factor that needs to be studied is competition. In a world where the consumer's choice is wide, the competitive, pricing and signaling strategies of competitors need to be understood and monitored in order to price effectively. A study of the consumers needs can be done by using value assessment methods. This can lead to a value-based pricing approach where elements of the product or service that provide value to the customer needs to be mapped and then assigned a monetary value to help in the pricing decision. Pricing of services is particularly challenging given the differences that exist with respect to products. These differences vary from intangibility to the dependence on human capital. A study of relevant literature throws up a few strategies that could be applied to pricing. Depending on what factors are important to the customer, the firm needs to find the right pricing strategy. The framework developed for the IT services industry puts these concepts together and suggests a methodical approach to studying costs, demand factors, competition and the customer before evolving a pricing strategy that provides value to the consumer and charges on the basis of the delivered value.