Introduction
A toy company should take into account that there is no one best price to charge for a given product. Once the need to set or change a price has been recognized, the manager must determine what he or she is trying to accomplish with this particular price. The answer might seem obvious: to sell more products or services. But this response is too general, and may not even be the case. In fact, companies can have a number of different pricing objectives.
On the other hand, certain of these objectives conflict with one another. An emphasis on long-term profits may come at the expense of short-term profits, and vice versa. Similarly, charging low prices to discourage market entry may serve to irritate middlemen or detract from the desired image of the firm. Objectives should be measurable, which generally means they must be quantifiable. Primary research is necessary, such as surveys of middlemen or customers before and after the pricing action.
Pricing Decisions
In order to prove that the price is a matter of the problems, the company should analyze the market situation and competitors’ pricing strategies, product structure, and customers’ perception of the product. This will serve to coordinate all of the pricing activities related to the product line. By definition, the strategy adopts a longer-term time horizon, usually from six months to two years, and is flexible or adaptable to changing environmental conditions.
High prices and margins are charged, with relatively low volume expectations (Philips 2005). The central theme is exclusivity. Price is used to reflect the highest quality levels, and the firm is careful not to compromise its image with special deals or discounts. Pricing strategies generally fall into one of two groups: cost-based and market-based. The market-based approaches tend to focus either on the competition, customer demand, or both (Baker 2006).
Product Analysis
The toy market represents a unique market influenced by such factors as creativity, uniqueness, and a combination of price and product perception. Sales decline demonstrates that there are inconsistencies between overall marketing strategy and product design. The company that has positioned itself as a high-end or premium quality provider but then drops prices when confronted with competitive pressures is undermining its own market position, confusing customers, and giving away margins. Similarly, pricing strategies that focus on quickly recouping the initial investment in a product or service often result in prices that are too high given the firm’s desired position in customers’ minds (Philips 2005).
Products are means of solving problems for both buyers and sellers -bundles of expectations for both. The customer-product juxtaposition, particularly at the time of the purchase decision, is a critical relationship. The uniqueness of toys is that they should appeal to young consumers and their parents. Market analysis suggests that other products of the same category are selling very well. Such competitors as Martel, Hasbro, Bandai, and Lego succeed with this product and double their sales during the last two quarters. This information suggests that the product design is successful and meets current market demands.
Wrong Price Setting: Report to the Board Members
The market analysis of children’s toys suggests that products of the same category are sold well by such giants as Martel, Hasbro, Bandai, and Lego. The company proposes high-quality products of the same design but establishes a higher price. Thus, the pricing strategies of Martel, Hasbro, Bandai, and Lego are more effective because they rely on a unique brand image and international expansion while our company does not have the same brand image.
This situation suggests that the matter of a problem is the high price. Since products are basically means of solving problems for buyers and sellers, physical environment, biological, technological, and cultural forces change them. The very perceptions and interpretations of environmental developments by consumers create product opportunities. The children’s toy market is diverse in terms of supply so a brand image has a great impact on price and decision to purchase.
The root cause of the problem is inadequate positioning of a product based on high price but low-value proposition. Management cannot be satisfied with current products, regardless of how good they are. Such an attitude and expression of expectations achieve an even better match of corporate offerings with consumer expectations. The children’s toy market shows that market segmentation often results from substantial growth.
After markets are developed on some general basis, they reach the point where additional effort tends to yield diminishing returns, and attention is given to specific market segments that become large enough to be attractive. By cultivating specific market segments, companies seek to make use of a greater opportunity to maximize customer satisfaction. This maximization, in turn, results in the development of a more secure market position and posture (Philips 2005). As products are designed to serve the needs of individual customers, they assume a special character and increase their distinctiveness.
Report Presentation
The pricing strategies and data will be presented in the form of a report based on theoretical materials and practical results. The aim of the report is to persuade the Board to change pricing and respond to market demands with new product value. For the toy company, the pricing objective in this case involves maximizing annual profitability across the product and service line.
The strategic focus is on selective demand, where sales result from replacements and additions sold to the existing customer base and from taking accounts away from competitors. The selected pricing strategy is parity pricing, with the firm attempting to charge base prices at or near the average competitive price. The structure is designed to be flexible, where salespeople are given some leeway in arriving at a final price.
This is especially the case with mature products and those with the lowest manufacturing costs. The actual intent is to use the structure to place machines but then to sell customers a service contract, for which margins are considerably higher. In addition, significant discounts are provided to customers who purchase multiple machines. Finally, base price levels are established and adjusted monthly to reflect an index of the average prices of the three top-selling machines in each major product category. A discount of 20 percent is provided for each purchase of three or more units (Monroe, 2001).
A Research Plan Structure and Rational
Statistical Analysis and Evaluation
A research [plan will be based on the qualitative statistical approach of price analysis and product perception. Qualitative approaches rely on the intuition and experience of managers and other key company personnel (e.g., salespeople) regarding customer responsiveness to various pricing actions. The accuracy of these estimates will vary depending on how well managers understand the needs and buying behavior of their current customer base and the dynamics of their current competitive situation.
For instance, past experience with customers might suggest that they perceive few acceptable substitutes or that switching costs are felt to be high, leading managers to reasonably conclude that demand is fairly inelastic. However, changes in the makeup of the customer base, in the experience of buyers, or in competitor tactics can quickly undermine these conclusions. It is easy for managers to rapidly lose touch with their markets. A related problem is that market judgment may provide conflicting signals, such as where few substitutes are acceptable for a moderately priced product but the customer views the item as a low priority purchase (i.e., a nonnecessity) (Baker 2006).
The analysis will be based on the historical sales records. When historical sales records are used, the marketer is evaluating statistical relationships between changes in prices and product sales over factors affecting sales, determining the appropriate lag between price changes and sales, and disaggregating company sales data to enable an assessment of individual products or product lines. Where different prices are paid by various customers at a given point in time, the marketer must rely on an average price estimate.
The analysis is further limited by the tendency to rely on statistical techniques that assume a linear relationship between price and sales, although a nonlinear relationship is more likely to exist. Also, estimates of elasticity based on past trends may not accurately convey future demand behavior. The research plan will involve market analysis and competitors’ analysis, comparison of the results with current sales of the company, and comparison of historical prices (Philips 2005).
The next step would involve examining costs. A logical approach would be to cover the lost unit revenue from the price cut (i.e. to break even on the price cut) plus the sales necessary to increase the total contribution by 5 percent. The strategy will be a comprehensive statement regarding how the price will be used to accomplish the objectives. Implementation of the strategy requires managers to develop a pricing structure that details what aspects of each product or service will be priced. The last component, levels, concerns the daily management of prices and the tactical moves required to achieve the objectives within the strategy and structure.
Most importantly, all four elements (price objectives, strategy, structure, related tactics) must be closely coordinated, with objectives guiding strategy and strategy guiding structure and tactics. The pricing strategy must be consistent with the objectives of the firm’s overall market strategy. Considerable thought should be given to the pricing strategy and its implications when combined with product programs, promotion programs, and distribution programs. Also critical is the need to adapt pricing programs to reflect changes in these other areas over the product life cycle. Costs establish a minimum level from which to begin the evaluation of possible price alternatives.
Demand analysis attempts to ensure that final price decisions are consistent with customer perceptions of value. Competitive considerations serve to assess the realism of pricing actions given market structures and the resources of firms offering similar or substitute products. Finally, pricing strategies must be decided upon within the context of current legal and regulatory constraints. Price represents one of the attributes customers are evaluating when they buy. It is often a highly visible attribute, and frequently defines the customer’s ability to pay for a given product or service. Every customer approaches the evaluation of price in a unique manner, both in terms of the amount of importance placed on a product’s price and the extent to which their purchases are sensitive to different price levels (Philips 2005).
Survey Questionnaire
The survey research will aim to investigate the perception of the product and its price. Consumers live and act in a constantly changing cultural, social, technological, legal, and economic environment. Shaped by the environment, marketing institutions and activities, in turn, have an impact on it. The standards and values that stem from the environment greatly influence consumer behavior, affecting purchasing and consumption activities, and the business organizations concerned.
- Do you often buy our children toys? If so, how often?
- Do you often buy toys manufactured by other companies? Specify.
- How often?
- Are you satisfied with the quality of our toy?
- Do you like the design of our toys?
- what do you think of our current pricing?
- Would you buy more toys if the price is low?
Analysis of this questionnaire will allow me to say that customers are satisfied with the quality and design of toys but they do not want to pay a premium price. The simplest structure involves charging one standard price, with no discounts or variations, for a product or service. This is relatively simple to administer and easily understood by customers and middlemen. This does not suggest all customers or middlemen prefer such a one-price structure.
Either may feel they deserve price breaks or special concessions for a variety of reasons. The biggest problem with such simple structures concerns their lack of flexibility as markets become more competitive and new profit opportunities arise for the firm. Consider the case of a family restaurant that charges relatively moderate list prices on its standard menu items. The firm is basically making a trade-off between the customers who perceive high value from dining at the restaurant and those who perceive lower value. That is, high-valuation customers would likely pay more than the restaurant is asking, while lower-value customers may patronize the restaurant more frequently than would be the case at higher prices. Management may hope, in the process, to maximize revenue (Philips 2005).
The root cause of sales decline is price because toys satisfy the personal wants and needs of buyers but they prefer to buy a well-known brand instead of our products. The intermediate consumer purchases goods for business purposes with the profit motive in mind. Most of the literature focuses primarily on the ultimate consumer — on understanding his (her) role in our marketing and economic system; on consumers as decision-makers; on factors that shape consumer objectives and influence purchases; on the impact of consumer attitudes, opinions, motivations.
The demand curve is also based on the assumption that buyers are perfectly rational and behave so as to maximize their return per dollar spent. However, demand curves are fairly accurate descriptions of the basic ways in which customers behave and can be quite useful tools for price managers. These analyses can sometimes become quite sophisticated. At the same time, creativity is required in developing realistic estimates of figures for which no data is available, while both insight and experience are invaluable when making hard judgments regarding competitor actions and reactions or assessing customer value perceptions. The real challenge lies in putting these factors together and drawing implications for price decisions (Marn et al 2004).
Purchasing Decisions in Toy Market
Purchasing decisions are affected by the customer’s living space. The living space may be segmented into action and orientation space. The action space refers to the arena and methods by which transactions take place, including organizational constraints imposed by business (Philips 2005). The market analysis shows that it is illogical to think that the company manufactures the wrong product while the sales of the same type of products with different brands are increasing. In this case, the only difference between this product and other similar products is price. The vivid examples of poor pricing strategies are food products sold in Costco at higher prices obtain more market share than Lucky grocery stores.
Alternative 1
The proposed pricing program may serve the toy company for a number of years. Pricing objectives and strategy may remain largely unchanged for an indefinite time period. The structure may require periodic modification, such as the addition of a “frequent traveler” program or special price deals for those who fly a particular airline or work for particular firms. Levels and tactics will require ongoing modification as competitor tactics, production costs, and demand conditions fluctuate. As a second example, a major manufacturer of quality copiers has found that unit costs have been falling while competition has intensified.
At the same time, the product line has proliferated (Marn et al 2004). Product life cycles have been getting shorter, as brief as one year for some models. In response, the firm institutes an entirely new marketing strategy, of which price is a central component (Philips 2005).
Alternative 2
Another proposed strategy is called targeting (marketing strategy). This involves focusing on a particular market segment, such as a certain type of user, a specific product application, or a single geographic region. The toy company ballpoint pens are targeted to the low-end user, while Porter Paints are positioned solely to the professional painter, and the Bryan brand of hot dogs is marketed only in the southern part of the United States (Nagle and Hogan 2005).
Using the example, the price is set well below that of conventional fountain pens to convey the idea that the buyer is getting a reliable but disposable writing utensil. This represents good value for the money to a large segment consisting of students, office workers, and others (Nagle and Hogan 2005). An even lower rate is offered to those who rent for five days or more or over a weekend. Levels for the basic product groups are established at $16.95, $19.75, and $25.75, respectively (Monroe, 2001).
Conclusion
Beyond their ability to improve company profitability by taking better advantage of elasticities, price differentials can serve a variety of other managerial needs. They can be used to modify demand patterns, as in discouraging certain types of customers from buying or encouraging customers to purchase at off-peak hours. Or differentials could be used to support sales of other products or services in the company’s line. They can also help move goods that are obsolete or for which the firm has excess inventories. Another use could be to fill or utilize excess production capacity in the manufacturer’s plant or encourage volume purchases, which reflect lower production costs.
Differentials represent a means by which to selectively respond to competitor forays into particular markets. There are, however, some ethical and legal considerations affecting the use of differentials. The major ethical concerns include the possibility that differentials may take advantage of customers who are more vulnerable, and that some customers may be given a price break for seemingly noneconomic or arbitrary reasons. It would appear, further, that those who raise ethical questions do so on an egalitarian impulse. That is, all buyers should pay the same price for a good regardless of any other considerations, except perhaps cost differences.
References
Baker, R. J. (2006). Pricing on Purpose: Creating and Capturing Value. Wiley.
Marn, M et al (2004). The Price Advantage. Wiley; 1 edition.
Monroe, K. B. (2001). Pricing: Making Profitable Decisions. New York: McGraw-Hill.
Nagle, Th. T. Hogan, J. (2005). Strategy and Tactics of Pricing: A Guide to Growing More Profitably. Prentice Hall; 4 edition.
Philips, R. (2005). Pricing and Revenue Optimization. Stanford Business Books; 1 edition.