Determinants to Sell Both Low and High Price Products
Three or more decades ago, organizations used to manufacture and/or sell a limited range of products in terms of pricing. Thus, some of them chose to focus on low price products and others on high price ones. Nowadays, we witness price-diversified portfolios within the same organization that reach a wide number of consumer segments. The market, with all its components and characteristics a definitely a different place today than it was a few decades ago and some factors are strong determinants for these organizations to offer both low and high price products.
Competition. An organization may chose to have both high and low price products by adopting a differentiated market coverage strategy. This strategy implies that the producer/seller decides to target different market segments with different products for each segment. This way the organization has a broader customer reach and a stronger position on each segment. Indirectly it will be able to compete better on the global market, by increasing product awareness, mind share, accessibility and size among others. For example, Mercedes Bens has been perceived as a luxury car manufacturer for a long time and a high price level used to be the confirmation for high quality products. However, the increasing population density in the cities led to an increased demand for small cars, which in turn determined both car manufacturers and buyers to turn to cars of reduced size. In 1998, Mercedes delivered Smart to the market and nowadays is distributing this low price, small size model in 36 countries worldwide.
2. Technology. The external organizational environment increases in diversity following the technological and consumer heterogeneity rhythm. For instance, virtual markets register increasing market share from one year to another. In 2002, the U.S. ecommerce revenue was roughly $70bn, 40% more than the previous year (Hirsh, 2006) and this value is expected to exceed $270 bn by 2011 (Mulpuru, 2006). In a world with easy access to virtual markets, consumers’ options and their access to information, namely pricing, are exponentially increased. In theory, the law of a unique price should prevail in these markets, given that consumers are able to compare prices at no cost. However, empirical evidence suggests differently (Baye, Morgan & Scholten, 2003). One explanation could be that setting prices equal to marginal costs could drive those out of business, which is why they resort to price discrimination. Price discriminating strategies aim to both increase the producers’ profit and decrease consumer information, which in turn increases the gap between reality and perfect competition (Thorlacius, 2006). A good example of a company practicing both low and high prices would be a software developer. In the early stage of the product, the company needs to cover the fixed costs incurred while developing the products, but as time goes by the expenses made by the software’s sale get closer to zero on the virtual markets. Thus, mature products can be sold at a low prices and products in their early life stage at high prices, by the same company (e.g. Macintosh’s iPod is getting cheaper as time goes by).
3. Consumer heterogeneity. Consumer characteristics vary from one country/region to another, with reasons ranging from cultural traits to market regulations. Thus, companies base their pricing strategy on the set of segments characteristic to each market. A company’s products may be perceived as medium to high quality price (e.g. food products). However, the majority of consumers are neither sophisticated, nor interested to invest more than the average expensed in such products. Such a company would benefit from creating products that are addressed to a larger set of consumer to increase its profits by selling more products, rather than at higher prices. Many airline national companies used to maintain a high price level, but had to create cheap flights due to the emergence of low cost airline companies and market deregulation in the 70s in U.S. And 90s in Europe (Knorr and Zigova, 2004), and one example for this case is Iberia.
4. Markets. Market characteristics vary as well from one country/region to another, ranging from legal regulations (e.g. tariffs) to buying habits. The globalization phenomenon puts pressure on companies to be increase their worldwide reach. Usually companies resort to market segmentation before defining their products or pricing strategies and these strategies have to take under consideration the need to be present in as many and as different places as possible to be a global player. Thus, in markets with low-income consumers, low price products are more successful, whereas markets with high-income consumers have a large number of consumers willing to purchase high price products. L’Oreal has adopted different product ranges to better fit its current market segments: low price – mass products and high price – professional products even though initially the company positioned its products as medium to high quality products with corresponding prices.
Reasons for either low or high price products
Companies use positioning to create a certain image of their products in the consumers’ mind. Price is one of the ways to create this image as in many instances is proportional to the products’ quality or the social status reflected by purchasing them.
Thus, a company famous for its luxurious products is not likely to start producing/selling cheap products under the same brand as the expensive one. Aston Martin is a good example for this case. The car brand has stood as a symbol for luxury lifestyle for a long time and between 1994 and 2007 it was a division of the Ford Motor company. In this interval Ford Motor never tried to manufacture a cheap vehicle under the same brand, which could have jeopardized the brand’s image and indirectly its value.
Conversely, a company known for its low prices may not find it opportunistic to adopt high price products in its portfolio because that could undermine its reputation as a cheap dealer. Ryanair is the largest European low-cost carrier and its low cost strategy was maintained from the company’s creation. Given the emergence of low cost carriers, a change in the pricing strategy could be followed by a change in the consumer’s perception.
Baye, M. R, Morgan J. & Scholten P. (2003). Temporal Price Dispersion: Evidence from an Online Consumer Electronics Market. Journal of Interactive Marketing, Vol. 18(4): pp. 101-115.
Hirsh, L. 2006. How Big is Ecommerce? Ecommerce Times, February 27, www.ecommercetimes.com
Knorr, a. & Zigova, S. Competitive Advantage Through Innovative Pricing Strategy: The Case of the Airline Industry, Berichte aus dem Weltwirtschaftlichen Colloquium der Universitat Bremen, nr. 93, ISSN 0948-3829.
Mulpuru, S. 2006. U.S. eCommerce: Five-Year Forecast and Data Overview – North American Consumer Technology Adoption Study. Forrester Research, www.forrester.com
Thorlacius, B. 2006. Price Differentiation – the Law of One Price in Retail e-Commerce. Kobenhavns Universitet – Okonomisk Institut.
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