Almost any discussion with managers of smaller firms about buyers, customer relations or any facet of marketing will sooner or later get round to the problem of price. It is at the centre of the relationship between the supplier and his customer. It provides the former with the resources to survive and prosper, while measuring the value the latter places on the goods.
In many smaller firms the price decision has a significance far greater than for larger companies. They may lack the resources to invest in advertising, and to build brand or supplier loyalty to protect them against cut-price rivals. Large numbers of small firms supply industrial and commercial customers on a contract or tender basis. Here specifications might be tightly defined and a number of competitive tenders received. In these circumstances, pricing policies can be a constant battle to keep prices as low as is compatible with holding on to business.
This can lead to a vicious circle in which low prices can produce a steady deterioration in the firm’s position as funds are starved from product development, promotion and improving customer relations. The firm can easily become vulnerable on two major fronts: product improvements by rivals meeting customer needs more effectively and price cutting by competitors with lower costs. The marketing approach to price seeks to overcome these problems.
Underlying this is the proposition that pricing is a strategic decision which over time is geared to building a business rather than winning specific orders. To some extent these are inseparable. But, although it is impossible to build a business without winning orders, some orders can contribute towards weakening a firm.
The objectives the firm wishes to achieve through the prices under specific market conditions are particularly important. Understanding these is as important as incorporating operating production and material costs into the price. This calls for systematic information gathering to build up a picture of the likely reactions in the market, among customers and competitors, to price changes.
The close links that top managers of small firms have established with many of their customers can help in this. Industrial buyers can be surprisingly helpful in providing guidance and useful information. The right approach to them, allied to a well-organised system of cross-checking and organising this material, can provide significant insights into the results of changes.
Effective use of the information derives from clearly setting the objectives of the firm’s pricing policy. A company seeking increased volume sales will follow a policy totally different from one looking for a particular return per unit or a specific high-quality image for its goods.
A foundry in the Midlands faced a problem common today. Should they increase prices because of an increase in materials costs, and put their prices in line with the rest of the industry? The managing director and his two salesmen raised the issue with a few of the major customers and, perhaps more importantly, some of the firms they part serviced. It soon became clear that the volume would increase so much with prices held that overall operating costs would be dramatically cut.
A furniture company based in West London found a totally different situation. Their customers saw discussions of holding or cutting prices as part of an overall cheapening exercise. For this firm, high prices were a major part of the process of reassuring customers of the overall quality of its products. Reviewing the alternative pricing policies open to the firm led to a decision to increase prices significantly in the new season, while backing it up with heavy investment in design, development and promotion.
The introduction of a new product, the company start-up or the launch into a new market bring the problems of setting prices into their sharpest focus. Costs can be determined with a fair degree of accuracy for certain volumes. There may be no competition to get clues from. Customers will have no benchmarks by which to judge responses. Here there are two basic strategies: penetration prices seeking to win large volume at low prices or skimming prices seeking to earn maximum returns from an initial high price. Although specific circumstances are the best guides to action it does appear that it is easier to correct problems caused by high prices. A firm looking to expand will generally find it easier to ‘spin down’, ie launch lower priced new products, than ‘up’.
The decisions the firm makes about its prices affect, and are in turn affected by, all other decisions the firm makes about its offering- At its most basic the income earned will determine the resources for investment in product development, promotion and distribution initiatives. Price is probably the clearest clue the consumer has about quality, and, like all other aspects of the firm’s offering, prices have to be designed to make a positive contribution to the firm’s performance in the market.
Ultimately, each element in the firm’s offering – product, price, promotion and distribution – has to be designed to maximise both their individual and, probably more important, their joint contribution to meeting customer needs more effectively and to building a more profitable business. Small firms, with their shorter lines of communication, clearer decision making system and greater flexibility, have the potential to exploit fully the marketing concept.
