Pricing objectives and methods in the services sector

Pricing Management

Determinants of Pricing Strategies

In pricing a new, specialized electronic product, the product development, engineering, marketing, accounting and finance teams internally will rely on internal and external factors to initially set the price. Pricing objectives and the frameworks they require will determine the internal factors included and excluded from the long-term pricing strategy overall (Avlonitis, Indounas, 2005). The intent of this analysis is to evaluate the other internal factors that will affect the pricing of a new, specialized electronic product.

Analysis of Internal Factors Affecting Pricing

Based on personal experience managing high technology products and from anecdotal interviews with members of product marketing teams in high technology businesses, the decision of whether to choose a value-based vs. cost-based approach to pricing is foundational to how many other internal factors affect price (Wagner, 1981). Value-based pricing will have a direct effect on the price elasticity of demand for a given product (Michalakelis, Dede, Varoutas, Sphicopoulos, 2010) often accentuating tis unique value relative to another competing product. Value-based pricing of high technology-related products can either greatly accelerate or decelerate the speed of adoption of a given product as well (Michalakelis, Dede, Varoutas, Sphicopoulos, 2010).

A second series of factors are evident in how the product is pricing from a costing perspective. When a high technology product is priced using cost-based and cost-plus pricing, there is more of a focus on how to arbitrate and manage transfer pricing across global or international boundaries more effectively (Casey, 1985). Transfer costs' affects on elasticity over the life of a given new product, especially in high technology or electronics, can often be more rapid than plans initially anticipate (Lucke, Philipp, Schumacher, 2005). This often occurs when a business has a widely distributed business model and separate divisions located throughout different regions of the world, serving different markets. The ability of a product development and planning organization to unify these aspects of pricing into a cohesive pricing model that defies price erosion is critical to long-term profitable growth (Wagner, 1981).

Another series of internal factors revolve around the long-term sales cycle and lifecycle revenue model of the electronic product. If the product is going to be refurbishment and service lifecycle management including warranties are going to be sold to customers, then the pricing factors will revolve more around an annuity-based revenue stream in the latter stages of the product's life (Simon, 1979). The impact of these long-range annuity revenue streams will also bring a more long-term emphasis to transfer costs and the reliance on internal coordination of costs to ensure consistency and profitability (Casey, 1985).