The four P’s of a marketing mix, product, promotion, packaging and price are of great importance. They form the basis as to where the product will be sold to achieve the most advantage, before the product is launched the marketing strategy is formulated and there is usually a trade-off between the product quality or price, this invariably becomes a deciding factor as to where and how the product will be positioned in the market. A minimum price is decided by looking at the costs and the estimated demand for the product also, it should focus on the competition on the market and their prices, the company’s objective, the target group and if they can afford the price and whether they are willing to pay or not. A break-even is calculated and a minimum price level can be set. Pricing is an important aspect of the product because if the price is not right, the target market might go elsewhere for the good. Pricing is one of the most important elements of the marketing mix, as it is the only mix, which generates a turnover for the organization. The remaining 3p’s are the variable cost for the organization. (http://www.learnmarketing.net/Price.htm.)Read also Major Pricing StrategiesBefore deciding on a pricing strategy the company should decide the reason for their price being too high or low. There are certain objectives which the company wants to achieve by setting a certain price, these can be: profit maximization, revenue maximization, maximize quantity sold, maximize profit margin, quality leadership, survival in the market, cost recovery and status quo. (http://www.netmba.com/marketing/pricing/.)To meet these objectives different pricing strategies are adopted. The firm can either adopt a price skimming policy or a penetration pricing policy. In price skimming a higher price is set, the objective is profit margin maximization. This policy is most appropriate when the expected demand is inelastic, it is expected that there will be high cost savings at high prices and/or when the company does not have the resources to finance the large capital expenditures that are required for a higher volume production.Penetration pricing is for when the company’s objective is to maximize the number of goods sold in the market. The price is set lower than the competitors or equal to his price. This policy is most appropriate when demand is expected to be highly elastic, decreases in cost are expected as the volume of goods produced increase, the product can gain mass appeal quickly and is a threat to the competition. (http://www.netmba.com/marketing/pricing/.)The pricing objectives depend on many factors such as: production cost, economies of scale, barriers to entry, product differentiation, rate of product diffusion, the firm’s resources and the product’s price elasticity of demand. To achieve the objectives there are methods which correspond with the pricing policies discussed earlier. There is cost-plus pricing, target-return pricing, value-based pricing and psychological pricing. The description of some of the pricing methods is: Penetration pricing; where the organization sets a low price to increase sales and market share. Skimming pricing; the organization sets an initial high price and then slowly lowers the price to make the product available to a wider market. The objective is to skim profits of the market layer by layer. Competition pricing; Setting a price in comparison with competitors.Product Line Pricing; Pricing different products within the same product range at different price points. An example would be a video manufacturer offering different video recorders with different features at different prices. The greater the features and the benefit obtained the greater the consumer will pay. This form of price discrimination assists the company in maximizing turnover and profits. Bundle Pricing; The organization bundles a group of products at a reduced price. Psychological pricing; The seller here will consider the psychology of price and the positioning of price within the market place. The seller will therefore charge 99p instead £1 or $199 instead of $200Premium pricing; the price set is high to reflect the exclusiveness of the product. An example of products using this strategy would be Harrods, first class airline services, Porsche etc.Optional pricing; the organization sells optional extras along with the product to maximize its turnover. This strategy is used commonly within the car industry. (http://www.learnmarketing.net/Price.htm.)Wal-Mart has decided not to lower costs that much so that it can recover on the loss of last year when they had lowered costs much more than that of its competitors. Their pricing strategy for this year will be different from last years with fewer discounts on many of the toys. On the other hand, Toys R Us received losses last year and are deciding to leave the toy market it they can not manage to make a profit this year. They have already started marketing their new discounts and when the season starts many new consumers might go to them for there toy shopping. Before making any decision, Wal-Mart should study the market and decide whether it should or should not reduce the price of the toys. As Toys R Us is closing down they need to sell the extra inventory and if there are no competitors matching their prices, they might just stay on in the market. Sean McGowan, analyst at Harris Nesbitt says, `this year, while they will be the lowest priced and very promotional, they may, for example, be only a $1 less than Toys R Us rather than $5 less on some items.’This strategy might help the company, but since the prices of Toys R Us will be much lower than last year, there is a possibility that Wal-Mart might also be selling at the same or even lower prices than last year. The pricing method or strategy that Wal-Mart is adopting is competitor based pricing. Loss leader pricing is when the company is willing to go in a loss just to gain more market than its competitors, in this pricing method the price of goods are set very low so that the competitor will have not much to do rather lower its prices. In the competitor has not enough capital to survive this he might just have to leave the market, in this strategy a lot of money is lost. The company that has initiated this pricing strategy will later on recover the losses by charging higher prices; this will be possible as all the small firms will have left the market. If done incorrectly, loss leaders can actually cause the business to lose money. (http://retail.about.com/od/marketingsalespromotion/a/loss_leaders.htm.)It has many advantages as well; Customers from different sectors can be attracted to your business by using the loss leader strategy, Gives you a competitive advantage due to reduced prices, Creates brand building for YOUR business as people will associate you with ‘good quality for less money, Potential related sales and return visits for similar goods, Good for ‘word of mouth’ promotion. (http://www.bizhelp24.com/marketing/the-loss-leader-3.html.)Apart from the competitors there are many other challenges that the toy industry has to face, the electronic market is gaining wide popularity very quickly, kids want electronic toys more than they want a soft toy or a train set. This means that all these company’s need to look in their departments and come up with toys which will catch the children’s eyes and become a must have toy. Also, because of the situation of the economy consumers are no so willing to spend money on stuff toys and Wal-Mart is taking into consideration this challenge as well. It has been predicted that sales will be generally lower than before because of many reasons which are affecting the industry as a whole.The analysts are saying that Toys R Us will need more ideas, such as unique gift card options and co-op branding with other retailers to survive. “We’ll have great products, lots of exclusives, fantastic value and a great store experience,” says Ray Arthur, CFO of Toys R Us. Consumers may be of the opinion that the last specialty toy store must not go out of business and buy products from them in this enthusiasm.It might be beneficial for Wal-Mart to adopt the loss leader pricing policy for one more year to become market leader for good. If they can afford to, this strategy will be beneficial in the long run, another strategy that might work is that the competitors have lower prices anyway this year, Wal-Mart can match their prices but also provide better quality products. They should not just concentrate on price but improve their overall marketing mix, especially their selling strategies. They should adopt those strategies which will make the kids want to come and buy their products, make it more colorful and enticing. They should advertise the new toys everywhere.In my opinion I think that Wal-Mart should not continue with the loss leader pricing, it may cause them to increase the loss as the sales will anyways be lower this year and as the demand is decreasing the opportunity to carry out such rivalry pricing is also decreasing.
“Should Wal-mart use loss leader pricing” Essay
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