The purpose of any business irrespective of its geographical location is to make profits; the company must therefore strive to reduce expenditure in order to increase its income. In addition to that, most companies apply different pricing strategies in order to cover up for the extra costs it incurs during production and transportation of goods. According to Mutton, there are various pricing strategies that business use in quest to increase its sales and profits and they include; Premium pricing: This is where the quality of services / goods produced is high but at the same time the prices are equally high. Penetration pricing: Also be referred to as price for the “common man”. The purpose of this pricing strategy is to penetrate the market and capture the clients but increase prices at a later date. This strategy is mostly applied by new entrants into the market (Mutton, 2009).
Other pricing strategies are Economy pricing: This is the pricing that blends with the economic status of the moment. It is the price levied on common goods like food stuffs and drinks in the restaurant. Price skimming: In some scenarios, the company may enter the job market with high prices with an aim of making a “statement” and send a message to its competitors; however with time the prices reduce to the normal level. The prices are mainly placed on new products like cloths, music or movies (Mutton, 2009). Psychological pricing: This are prices that get clients to respond or purchase the goods or services based on their emotions and not rationality and needs (Mutton, 2009). The purpose of this essay is however to focus on another form of pricing that has caused controversial among buyers and stakeholders; Dynamic Pricing. The paper will briefly define and explain dynamic pricing, select a company that uses (or has used) dynamic pricing and explain how the company uses dynamic pricing. In addition to that it will discuss the benefits and drawbacks of dynamic pricing for that particular company.
According Fitzsimmons, there are companies that apply “discriminatory” prices to their goods and services depending on the geographical location of its consumers. They achieve this by dividing consumers into different geographical groups and they (consumers) are charged different prices on the same commodity which has the same quality (Fitzsimmons, 2009). Even thou this type of pricing has caused uproar among consumers because some of them (consumers) feel companies use ethnicity as one factor when placing the price, economists claim that it’s a method they use to fill the “consumer surplus” gap. This is the difference between what the consumer is willing to pay for a particular good or service and the amount they essentially have to pay.
The rapid growth of the information and communication technologies industry has revolutionized the way most organizations conduct business, from the ancient form of trading to the modern day E-commerce. This is one factor that has greatly contributed to companies implementing dynamic pricing because of stiff competition between suppliers and also the high demand by consumers. Other factors that influence the dynamic pricing of goods and services is the quality and the durability (life span) of the goods. To be able to comprehensively understand the concept of dynamic pricing it is important to look at a company or industry that has incorporated dynamic pricing as one of its main selling point.
The Information Technology Industry
From the onset of the 21st Century, most organizations and government embraced the use of information technology in conducting most of their activities; this has in turn turned the world into a digital village. This means that a person can conduct business from any location as long as they have access to the internet. The question therefore is; where does the concept of dynamic pricing come in? According to ecommerce (2010) most hard ware and software manufacturing companies like Dell, IBM, Compaq and Hewlett-Packard opted to embrace the idea of dynamic pricing for the hardware and software materials they produce in order to satisfy the needs of all their consumers. Despite the fact that these companies sell the same make and design of hardware and software to their consumers, the prices varies depending on the quality of the product. For instance the price of a 1 Gigabyte Random Access Memory (RAM) is different from that of 2 Gigabyte the same. The same applies to other hardware components like hard disks, monitors etc; the case is the same computer software’s. The price of the software depends on the complexity of the software and its life span. Apart from the computer accessories industry being the leader when it comes to dynamic pricing, the online auction is also another major beneficiary of the same.
The pricing of various assets on auction vary from auctioneer to the other and this is an advantage to the consumers since they go where prices are “friendly”. Other sectors that use dynamic pricing for their services are the rental cars, the airline and hotel industry. As indicated in the paper, the main force behind the implementation of dynamic pricing is the rapid growth and development of the information and communication technologies sectors and as the more computer related innovations came into place so will there be improvement in the pricing strategies.
The advantages of dynamic pricing outweigh its limitations; this however does not mean that there are no limitations of the same. As indicated in the paper, one of the main limitations of dynamic pricing is that for those consumers who pay more that they are required to then they feel that they have been discriminated in terms of pricing. This is worse if the product is manufactured by one ethnic group and it is the other ethnic group that is required to pay more for the goods or services.
In conclusion, it is important for the consumers to understand that it is the quality of the product that is more important than its quantity; it is for this reason that some companies have dynamic prices for their products. In addition to that the issue of cheap counterfeit products cannot be ignored, most electronic products in the market are sold at a relatively cheaper price because they are not genuine and in most cases they don’t have a warranty.