A price-flexibility strategy usually consists of two alternatives: a one-price policy and a flexible-pricing policy. Influenced by a variety of changes in the environment, such as saturation of markets, slow growth, global competition, and the consumer movement, more and more companies have been adhering in recent years to flexibility in pricing of different forms. Pricing flexibility may consist of setting different prices in different markets based on geographic location, varying prices depending on the time of delivery, or customizing prices based on the complexity of the product desired.

One-Price Strategy A one-price strategy means that the same price is set for all customers who purchase goods under essentially the same conditions and in the same quantities. The one-price strategy is fairly typical in situations where mass distribution and mass selling are employed. There are several advantages and disadvantages that may be attributed to a one-price strategy. One advantage of this pricing strategy is administrative convenience. It also makes the pricing process easier and contributes to the maintenance of goodwill among customers because no single customer receives special pricing favors over another. Ageneral disadvantage of a one-price strategy is that the firm usually ends up broadcasting its prices to competitors who may be capable of undercutting the price. Total inflexibility in pricing may undermine the product in the marketplace. Total inflexibility in pricing may also have highly adverse effects on corporate growth and profits in certain situations. It is very important that a company remain responsive to general trends in economic, social, technological, political/legal, and competitive environments. Realistically, then, a pricing strategy should be periodically reviewed to incorporate environmental changes as they become pronounced. Any review of this type would need to include a close look at a company’s position relative to the actions of other firms operating within its industry. As an example, it is generally believed that one reason for the success of discount houses is that conventional retailers have rigidly held to traditional prices and margins.

Flexible-Pricing Strategy A flexible-pricing strategy refers to situations where the same products or quantities are offered to different customers at different prices. Aflexible-pricing strategy is more common in industrial markets than in consumer markets. An advantage of a flexible-pricing strategy is the freedom allowed to sales representatives to make adjustments for competitive conditions rather than refuse an order. Also, a firm is able to charge a higher price to customers who are willing to pay it and a lower price to those who are unwilling, although legal difficulties may be encountered if price discrimination becomes an issue. Besides, other customers may become upset upon learning that they have been charged more than their competitors. In addition, bargaining tends to increase the cost of selling, and some sales representatives may let price cutting become a habit. Recently, many large U.S. companies have added new dimensions of flexibility to their pricing strategies. Although companies have always shown some willingness to adjust prices or profit margins on specific products when market conditions have varied, this kind of flexibility is now being carried to the state of high art.

As a matter of fact, electronic commerce is further likely to accelerate the flexible-pricing trend. The Internet, corporate networks, and wireless setups are linking people, machines, and companies around the globe and connecting sellers and buyers as never before. This is enabling buyers to quickly and easily compare products and prices, putting them in a better bargaining position. At the same time, the technology allows sellers to know customers’ buying habits, preferences, and spending limits, enabling them to tailor products and prices. The concept of price flexibility can be implemented in four different ways: by market, by product, by timing, and by technology. Price flexibility with reference to the market can be achieved either from one geographic area to another or from one segment to another. Both Ford and General Motors charge less for their compact cars marketed on the West Coast than for those marketed anywhere else in the country. Different segments make different uses of a product: many companies, therefore, consider customer usage in setting price. For example, a plastic sold to industry might command only 30 cents a pound; sold to a dentist, it might bring $25 a pound. Here again, the flexible-pricing strategy calls for different prices in the two segments. Price flexibility with reference to the product is implemented by considering the value that a product provides to the customer. Careful analysis may show that some products are underpriced and can stand an upgrading in the marketplace. Others, competitively priced to begin with, may not support any additional margin because the matchup between value and cost would be lost.

Costs of all transactions from raw material to delivery may be analyzed, and if some costs are unnecessary in a particular case, adjustments may be made in pricing a product to sell to a particular customer. Such cost optimization is very effective from the customer’s point of view because he or she does not pay for those costs for which no value is received. Price flexibility can also be practiced by adding to the price an escalation clause based on cost fluctuations. Escalation clauses are especially relevant in situations where there is a substantial time gap between confirmation of an order and delivery of the finished product. In the case of products susceptible to technological obsolescence, price is set to recover all sunken costs within a reasonable period. The flexible-pricing strategy has two main characteristics: an emphasis on profit or margins rather than simply on volume and a willingness to change price with reference to the existing climate. Caution is in order here. In many instances, building market share may be essential to cutting costs and, hence, to increasing profits. Thus, where the experience curve concept makes sense, companies may find it advantageous to reduce prices to hold or increase market share. However, a reduction in price simply as a reactionary measure to win a contract is discounted. Implementation of this strategy requires that the pricing decision be instituted by someone high up in the organization away from salespeople in the field. In some companies, the pricing executive may report directly to the CEO. In addition, a systematic procedure for reviewing price at quarterly or semiannual intervals must be established. Finally, an adequate information system is required to help the pricing executive examine different pricing factors.

PRODUCT LINE-PRICING STRATEGY

A modern business enterprise manufactures and markets a number of product items in a line with differences in quality, design, size, and style. Products in a line may be complementary to or competitive with each other. The relationships among products in a given product line influence the cross-elasticities of demand between competing products and the package-deal buying of products complementary to each other. For example, instant coffee prices must bear some relationship to the prices of a company’s regular coffee because these items are substitutes for one another; therefore, this represents a case of cross-elasticity. Similarly, the price of a pesticide must be related to that of a fertilizer if customers are to use both. In other words, a multiproduct company cannot afford to price one product without giving due consideration to the effect its price produces on other products in its line. The pricing strategy of a multiproduct firm should be developed to maximize the profits of the entire organization rather than the profitability of a single product. For products already in the line, pricing strategy may be formulated by classifying them according to their contribution as follows:

1. Products that contribute more than their pro rata share toward overhead after direct costs are covered.

2. Products that just cover their pro rata share.

3. Products that contribute more than incremental costs but do not cover their prorata share.

4. Products that fail to cover the costs savable by their elimination. With such a classification in mind, management is in a better position to study ways of strengthening the performance of its total product line. Pricing decisions on individual products in the four categories listed here are made in the light of demand and competitive conditions facing each product in the line. Consequently, some products (new products) may be priced to yield a very high margin of profit; others (highly competitive standard products) may need to show an actual loss. By retaining these marginal products to “keep the machines running” and to help absorb fixed overhead costs, management may be able to maximize total profit from all of its lines combined. Afew items that make no contribution may need to be kept to round out the line offered. General Motors’s pricing structure provides a good illustration of this procedure. To offset lower profit margins on lower-priced small cars, the company raises the prices of its large cars. The prices of its luxury cars are raised much more than those of its standard cars. For example, in 1998 a Cadillac Seville sold for more than $60,000, four times the price of the company’s lowest-priced car. Ten years ago, the top of the line was three times as costly as the lowest-priced car. The gap is widening, however, because the growing market for small cars with low markups makes it necessary for the company to generate high profits on luxury cars to meet its profit goals. Thus, at the beginning of the next century, General Motors might sell a Cadillac for $80,000. For a new product being considered for addition to the line, strategy development proceeds with an evaluation of the role assigned to it. The following questions could be asked:

1. What would the effect be on the company’s competing products at different prices?

2. What would be the best new-product price (or range), considering its impact on the total company offerings as a whole? Should other prices be adjusted? What, therefore, would be the incremental gain or loss (volumes and profits of existing lines plus volumes and profits of the new line at different prices)?

3. Is the new product necessary for staying ahead of or catching up with the competition?

4. Can it enhance the corporate image, and if so, how much is the enhancement worth? If product/market strategy has been adequately worked out, it will be obvious whether the new product can profitably cater to a particular segment. If so, the pricing decision will be considerably easier to make; costs, profit goals, marketing goals, experience, and external competition will be the factors around which price will be determined. Where there is no specific product/market match, pricing strategy for a new product considered for the line will vary depending on whether the product is complementary or competitive vis-à-vis other products in the line. For the complementary product, examination of the industry price schedule, which is the primary guide for the bottom price, top price, and conventional spread between product prices in a given industry, may be necessary. There are three particularly significant factors in product line-pricing strategy. The lowest price in the market is always the most remembered and unquestionably generates the most interest, if not the most traffic; the top market price implies the ability to manufacture quality products; and a well-planned schedule structure (one that optimizes profit and, at the same time, is logical to customers) is usually carefully studied and eventually followed by the competition regardless of who initiated it. In addition, however, there can be a product in the line with the objective of pricing to obtain the principal profit from a product’s supplies or supplementary components. If the anticipated product is competitive, a start will need to be made with the following market analysis:

1. Knowledge of the industry’s pricing history and characteristics regarding the line.

2. Comparison of company and competitor products and volumes, showing gaps and areas of popularity.

3. Volume and profit potentials of the company line as is.

4. Volume and profit potentials with the new internally competitive product.

5. Effect on company volume and profit if competition introduced the proposed product and the company did not.

6. Impact of a possible introduction delay or speedup. With this information on hand, computations for cost-plus markup should be undertaken. Thereafter, the pricer has three alternatives to set price: (a) add a uniform or individual markup rate to the total cost of the product, (b) add a markup rate that covers all the constant costs of the line, and (c) add the rate necessary for achieving the profit goal. These three alternatives have different characteristics. The first one hides the contribution margin opportunities. The second alternative, although revealing the minimum feasible price, tends to spread constant- cost coverage in such a manner that the product absorbing the most overhead is made the most price attractive. The third alternative assigns the burden to the product with the highest material cost, an action that may be competitively necessary. No matter which alternative is pursued, however, the final price should be arrived at only after it has been duly examined with reference to the market and the competition.