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The Role of Effective Pricing

HomeEssaysDissertationThe Role of Effective Pricing
The-Role-of-Effective-Pricing
02.03.2020
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The Role of Effective Pricing: A Case Study of Sport Direct

1.0 Chapter – Introduction

The competition in the world of business has become stiffer in recent times. This competition can also be described as being quite dynamic and challenging as businesses have been competing against each other. According to Gamble, Thompson, and Peteraf (2012), the number of factors can be attributed to this growth in expansion, such as technological advancement, innovation, and globalization. However, this study will mainly look into customer awareness as the main source of competition among the firms. Customers over time have become more aware due to the development of the digital age. This has made it possible to search for information on the products and services that are being offered in the market among different businesses and firms. Consequently, customers have assumed a dominant position in relation to bargaining power. The resultant effect of this is that customers have become much more demanding towards the firms. Thus, it can be perceived that businesses are under the mercy of customers. Goksoy et al (2013) opine this great pressure emanating from customers is serving as a driving force for competition in the business world. This is due to the fact that each firm is attempting to outdo the other with the intention of capturing the attention of the customers. Therefore, firms have the opportunity to retaliate against the competition by adopting a number of options. This retaliation is aimed at gaining a competitive strategy that will enhance its market position.

This study will look into the application of effective pricing as a means aimed at achieving a competitive advantage. Thus, in order to gain a deeper understanding of the problem of stiff competition and the need to develop competitive advantage through effective pricing, this study will carry out a case study of Sports Direct International plc henceforth referred to as Sports Direct. This company is chosen for this study due to the fact that it has been operating in a highly competitive retail market and gaining competitive advantage has been one of its most urgent objectives.

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1.1 Background of the Study

As to the contemporary competitive advantage, it should be noted that even the most established firms face competition. Hinterhuber and Liozu (2012) observe, small- and medium-sized enterprises are slowly rising the ranks and posing a great threat to big firms. At the same time, market deregulation has eased the market entry barriers. This has made it possible for new businesses to start-up, thus further enhancing competition. Consequently, the need to stand out and be distinct has become the only way to survive in the market. The search for competitive advantage has been one of the main objectives for many firms. The need to create unique value and a competitive position has been one of the vital reasons for the firms developing the need for competitive advantage. This explains why business achievement and sustenance for competitive advantage have been a central focus for strategic management research. Ramaswamy and Namakumari (2013) find that in the face of rapid economic and technological changes, the current consumers have become more curious, educated, and sensitive when it comes to what they want. The above factors have caused managerial decisions to be directed towards economic performance, which has been referred to as a competitive advantage. It should be noted that this competitive advantage enables the firms to create more value than their competitors do. Singh (2012) considers that effective pricing has become one of the preferred means aimed at creating a competitive advantage among the firms. Price serves as a market stimulus and has the ability to influence consumers’ buying decisions. When price is set just right, it has the ability to propel a business into a market leader position, thus facilitating competitive advantage.

1.2 Problem Statement

Competitive advantage and its sustainability has been a recurring problem in many markets. Kannaiah (2015) affirms, this problem has mainly leaned on the firms having difficulties in developing competitive advantage and sustaining it. The difficulty in sustaining the developed competitive advantage has mainly emerged from the problem of substitution and imitation by the competitors. It is evident that Sports Direct, which is UK’s largest sports retailer, is currently facing a threat in the market (Ashcroft 2016). The opening up of the market that is followed by the relaxation of the market entry barriers implies that more and more enterprises are willing to enter the market. Further, change in consumer behavior has further instigated the hard-hitting competition the company is currently facing. In this regard, people have become more health-conscious. This has served to expand the market segment for sportswear and equipment attracting new entrants and further increasing the level of competition. The firms operating in the sports retail market, just like Sports Direct, are constantly fighting to maintain their market positions (Sports Direct 2016). Sports Direct is currently facing a much difficult time given that it is a market leader. The loss of this position could turn out to be a tragedy for the company. It is the reason why it is essential to find a strategy that the company can use to gain a competitive edge over its competitors in order to maintain its market leader position.

1.3 Research Aim and Objectives

This study is aimed at exploring the competitive retail environment that Sports Direct operates in order to assess the extent to which effective pricing cab be applied to successfully facilitate the creation of competitive advantage. The following study is carried out considering the following objectives:

· To evaluate the extent to which competition in the retail market as demonstrated by Sports Direct is influencing the companies to take action towards enhancing their position;

· To discuss the role of effective pricing in the development of competitive advantage in the retail market;

· To determine the extent to which effective pricing can be utilized to successfully facilitate the creation of competitive advantage despite the existing stiff competition.

· To determine how Sports Direct can integrate effective pricing as a strategy aimed at creating a competitive advantage in its overall marketing strategy.

1.4 Company Overview

Sports Direct is a UK retail company that was established in 1982 by Mike Ashley, who is the company’s current CEO (Sports Direct 2016). It is considered to be one the largest sport retailers as it operates close to 670 sports stores globally with an estimated employee number of 11000 (Ashcroft 2015). In Africa and the Middle East, the company operates under various franchising agreements. The company has over time acquired a significant number of sporting brands. In two years since the moment of its creation the company managed to acquire the Preston Sports Shop in London. In a decade, it was first established the company had a total of 12 open stores (Sports Direct 2016). The company continued to increase its retail stores and finally managed to incorporate itself in 1999 (Ashcroft 2015). Sports Direct continued to expand through several acquisitions. For example, it made the acquisition of such companies as Dunlop Slazenger, Carlton, Kangol, and Umbro, which was sold to Nike in several years. Sports Direct went public in 2007 debuting on the stock exchange (Ashcroft 2015). The company has also utilized mergers as an expansion strategy. This saw the company becoming integrated in such companies as Black Leisure Group, Matalan, Everlast, John David Group, Republic, and Debenhams. While Sports Direct continues to chase its expansion dream, it cannot be denied that it continues to face stiff competition from its rivals that are pushing it towards finding a competitive strategy that will enhance its market position.

1.5 Research Questions

The research aim and objectives are essential in guiding the process of development of the research questions considered for this study. Accordingly, the research questions prepared for this study are as below:

· Can effective pricing be successfully used to help Sports Direct achieve sustainable competitive advantage?

· Is it realistic for Sports Direct to attempt to achieve sustainable competitive advantage through the use of effective pricing?

· Will the use of effective pricing as a strategy aimed at developing a competitive advantage be useful in making constructive recommendations in relation to the achievement of sustainable competitive advantage?

1.6 Overview of the Study

This study consists of five chapters that include: Introduction, Literature Review, Methodology, Findings, Interpretation, and Conclusions. The first chapter – Introduction – will introduce the research problem to be discussed. It will focus on such aspects as the field of study, the problem statement, and the aim and objectives of the following research. The second chapter – Literature Review – will explore various empirical and theoretical works on effective pricing as a strategy aimed at developing a competitive advantage. Thus, the literature review chapter is a generic overview of the applicable topics that are related to the subject of this study. The third chapter – Methodology – will include an account of the relevant methods that are considered for the following study. The rationale in terms of arguments explaining why the selected methods of investigation should be utilized will also be included. In addition, the benefits, as well as the disadvantages of the methods considered for the study will also be discussed in this chapter. The fourth chapter of the study will present the main findings of the research. Data analysis will also be included in this chapter. The final chapter of this study is interpretation and conclusions. Lastly, the assessment of whether the study questions were sufficiently answered will be carried out in the final chapter.

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2.0 Chapter – Literature Review

2.1 Introduction

The following review of the literature will explore past research on pricing and try to link it to its use in achieving competitive advantage for businesses. The review will begin by assessing the various ways that pricing has been defined by a number of past studies. This will then be followed by a review of the significance of pricing. This will be done analytically with reference to Sports Direct, which is the focus of this case study. Various pricing strategies as presented in past studies will also be assessed. A theoretical aspect of the literature review will be achieved through the section of theories and models of pricing. This literature review will conclude with an assessment of how pricing strategies can be used to achieve competitive advantage.

2.2 Defining Pricing

Many studies investigating pricing within a number of settings define it in different ways. Pricing can be considered as a method that is applied by a firm to establish in place its selling price (Dudu & Agwu 2014). In this regard, pricing heavily depends on the firm’s average costs, as well as on the perceived value that customers have on the product or service a firm is offering. Additionally, it can also be said that pricing depends on the price at which a firm acquired goods, the cost of manufacture, the market place and condition, its brand, and the extent of competition present in the market.

It is also essential to note that customers’ perception with regard to pricing is in relation to the perception of value that they have in comparison to competing products. Pricing can also be defined as kind of process (Dolgui & Proth 2010; Lipovetsky, Magnan & Zanetti-Polzi 2011). In this regard, it is a process that is taken as a critical part of a firm’s marketing plan and is used to set in place the prices for its products and services (Lipovetsky et al. 2011). Accordingly, given that Sports Direct has in place various prices for its products and services this confirms the company makes use of the pricing process.

Pricing has also been defined by some researchers from an economic angle. Within this capacity, it is seen as being a fundamental variable in microeconomics in terms of facilitating price allocation (Rohani & Nazari 2012). However, within a marketing perspective, pricing is known as a critical aspect of the financial model and thus is categorized as one of the 4P’s of the marketing mix. It should be noted that 4P’s include: place, product, promotion, and pricing (Tawalbeh & Abu-Rumman 2015). It is vital to take note of the fact that pricing is the most significant among these 4P’s of marketing because it focuses on generating revenue and subsequently profit for a firm.

For a company such as Sports Direct, pricing is thus critical as it controls the company’s ability to make profits and therefore survives within its market. In addition, pricing is considered to be the most essential in the 4P’s because of its role in determining the consumer group that a firm needs to target and thus the advertising, promotion, and process of distribution that the company needs to apply. Other studies define pricing as a technique that is used to set the value of the offerings that will be relevant to both the producers and the consumers of the product (Hinterhuber & Liozu 2014). In this sense, pricing is used as a means of getting the sellers and buyers into an agreement.

2.3 Significance of Pricing

Various studies have explored the concept of the significance of pricing to an organization, as well as business in general. Consequently, the significance of pricing is, it is an essential marketing tool used in the management of the decisions that affect many other critical aspects of the business (Dudu & Agwu 2014; Tawalbeh & Abu-Rumman 2015). Therefore, within this context, pricing is viewed as being significant because it is the one element among the 4P’s of marketing that has a direct impact on revenue. It is because of this that pricing can affect profit and consequently determine the potential for an organization, such as Sports Direct, either to survive or fall within the industry where it operates.

Other studies still find that the significance of pricing can be seen in the fact that it has an impact on the marketing strategy of an organization. This can be demonstrated by the adjustment of price and how this results in a profound impact on a marketing strategy (Dolgui & Proth 2010). At the same time, it is essential to also remember that depending on the price elasticity of a product, pricing is also essential due to the fact that it can affect the demand and sales of a product. Due to the above-mentioned fact, the firms are advised to set a price that is just right since a price that is too high or too low has the potential to limit growth (Ramaswamy & Namakumari 2013). This notion perfectly applies to Sports Direct. It is no wonder that the company has not been able to set the prices for its products that will promote its growth in the market.

Extant literature also perceives the significance of pricing in terms of its impact on the economy. Accordingly, the significance of pricing is enshrined in the fact that it is an essential mechanism through which resources are allocated and as a consequence reflects the extent of both the elements of risk and competition within a market environment (Lipovetsky et al. 2011). Therefore, within a free market economy and to a much lesser extent in a controlled economy, resources can be allocated using pricing. This is realized through either the process of a price reduction or increase.

Keeping within the context of the economy, pricing further emerges as being significant as it is perceived as a weapon that can be used to realize the objectives of a planned economy (Rohani & Nazari 2012). As a consequence, it is possible to allocate the resources as per the priorities that have already been determined. In addition, the significance of pricing within the context of the economy is seen in the fact that it is the main mover of what is taken to be the wheels of the economy. These wheels include such elements as production, distribution, and consumption.

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Some scholars consider that the significance of pricing is embedded in the fact that it is the most flexible marketing mix variable. That is, the marketers contend that pricing is the most adjustable among all the marketing decisions they make (Wilson & Gilligan 2012). As a consequence of this, price is the only variable that can be changed within the shortest time. Therefore, it is worth noting that the nature of pricing does show its significance. In this regard, the flexible nature of pricing facilitates the process of making urgent decisions. This is more so in the event that the marketers intend to stimulate demand or some kind of response to the actions of competitors.

Further, the significance of pricing lies in its role in triggering first impressions (Tawalbeh & Abu-Rumman 2015). In many instances, the consumers’ perception of a product is based on its price tag. Despite the fact that a final purchase decision may be influenced by the value of a product, it is probable that the customers may not even evaluate this value on the basis of price alone. Thus, it is paramount for the customers to assess the price to ensure that they do not avoid learning about a product as a consequence of its price.

2.4 Different Pricing Strategies

Pricing strategies are critical for the companies and businesses that wish to achieve excellent performance. These strategies allow businesses, such as Sport Direct, to determine the price point where they can maximize their sales and profits. Arguably, the literature shows that there is a variety of pricing strategies that businesses can choose. The choice of a pricing strategy relies on the marketing goals and objectives, as well as the situation and status of a business. Thus, some of the most significant pricing strategies that have been explored in studies will discussed in the subsections below.

2.4.1 Penetration pricing strategy

The penetration pricing strategy is designed to capture a snatch market share and raise business awareness (Dolgui & Proth 2010). This strategy is mostly applied by the businesses that are new and that seek to draw attention away from their competitors. Executing this pricing strategy entails offering significantly low prices for the goods and services sold by the companies (Tawalbeh & Abu-Rumman 2015). Therefore, this pricing strategy tends to result in an initial loss for the businesses. However, in the long run, once the businesses have successfully penetrated the market, they raise up their price in an attempt to better reflect their position in the chosen market.

2.4.2 Skimming pricing strategy

The skimming pricing strategy allows businesses to gain maximum revenue advantage ahead of their competitors. In particular, this strategy is developed with the intent of assisting the businesses in maximizing their sales on products and services that are new in the market (Dolgui & Proth 2010). Skimming thus entails setting high prices during the of commodities introductory stage. Gradually, the prices are lowered as more competitors enter the market or start selling similar goods and services. Besides the obvious profit that businesses are able to receive from this pricing strategy, another advantage that this strategy brings is that it helps the businesses recoup their developmental costs (Lipovetsky et al. 2011).

2.4.3 Premium pricing strategy

The businesses that utilize the premium pricing strategy usually set prices higher than their competitors. This pricing strategy is usually successful for the products or services that are unique and is best applied during the initial days of a product’s lifecycle (Ramaswamy & Namakumari 2013). This, therefore, has the implication that the businesses must work hard to create the perception of the product or service they offer as being worth a high price (Tawalbeh & Abu-Rumman2015). It is also vital for the businesses to ensure that they have in place appropriate marketing efforts, including packaging and d?cor that will integrate and support the premium price that has been set.

2.4.4 Psychological pricing strategy

The psychological pricing strategy is designed to have a kind of a positive psychological impact on consumers. This pricing strategy works on the basis of the fact that there are certain points where people are willing to make a purchase and other points where they are not (Dolgui & Proth 2010). Through this pricing strategy, the businesses are better placed to encourage their consumers to make purchases by appealing to them on an emotional level as opposed to a logical one. The most common psychological pricing is demonstrated by setting price at $99 instead of $100 (Ramaswamy & Namakumari 2013). Thus, this pricing strategy can increase demand by successfully creating the illusion of the enhanced value of products or services for consumers.

2.4.5 Economy pricing strategy

The economy pricing strategy is commonly used to attract price-sensitive consumers. This strategy is quite advantageous to the businesses in that it minimizes the associated cost of marketing and production (Tawalbeh & Abu-Rumman 2015). That is how businesses utilizing this strategy can keep their prices low. The economy pricing strategy works best for well-established and large businesses (Lipovetsky et al. 2011). Consequently, this strategy is therefore detrimental for small growing businesses since they lack large sales volume.

The factors influencing pricing are essential when it comes to a pricing strategy. Some of these factors include consumers’ price sensitivity. Some consumers who are concerned with the prices that they find on the products are less likely to purchase an item if its price is high. On the other hand, in the event that the price is low, they will be more open to making a purchase. Another factor is consumer purchasing power. Consumers with a higher income have a higher purchasing power and thus are more likely to make purchases despite high pricing. Consumers with a minimum income tend to have less purchasing power and thus can refrain from making purchases because of high pricing.

2.5 Theories and Models of Pricing

There are a number of theories and models that have been advanced in an effort to approach the concept of pricing theoretically. At the same time, this facilitates an improved understanding of pricing and how it functions.

2.5.1 Arbitrage pricing theory

The arbitrage pricing theory (APT) is one of the most essential pricing theories. This economic theory explains how financial assets can be priced. It is considered to a general theory on asset pricing (Lipovetsky et al. 2011). According to this theory, it is possible to model the expected return of a given financial asset. The asset can be modeled in terms of a linear function of different macro-economic factors. It is also possible to model the financial asset on the theoretical market indices. Consequently, any sensitivity to change that takes place on any factor can be represented by a factor specific beta coefficient (Wilson & Gilligan 2012). Through this, the pricing of the asset can be done using the model derived rate of return.

2.5.2 Van Westendorp pricing model

Other studies explore the Van Westendorp pricing model, which advances a price sensitivity meter. This meter is used in the construction of a range of what is considered to be acceptable prices for certain products (Hinterhuber & Liozu 2012). This is accomplished by asking four essential questions that concern the aspects of a product being so cheap, a bargain, getting expensive, and too expensive. Therefore, after the respondents have been asked the four questions, they are then requested to suggest their own price or select from a price on the pricing scale (Lipovetsky et al. 2011). Additionally, this model further makes it possible to clear out whether the respondents would consider making a purchase if the product or service offered to lay in their acceptable price range.

2.5.3 Discrete choice pricing model

The discrete choice pricing model is another pricing model that is greatly discussed in a number of studies. This model is usually utilized to determine the influence of the product features and price on the value of a brand (Dudu & Agwu 2014). In the studies related to this pricing model, the respondents are usually shown various full profile sets. They are then required to select the set that they most prefer. This model is used because it is found to be much more realistic in comparison to the rating scale (Lipovetsky et al. 2011). The choice that the respondents made thus represent the value that they assign to each attribute of a brand.

2.5.4 Price optimization model

Another relevant pricing model that is well researched is the price optimization model. Although this model is well advanced in the field of mathematics, it plays a fundamental role in marketing (Dolgui & Proth 2010). The model is described as mathematical programs that are used in the calculation of how demand varies at different price levels. The data derived from this model is thus combined with the information on costs and levels of inventory and is applied in the determination and recommendation of the prices.

The aim of the price optimization model is to determine the prices that can be used to improve profit (Wilson & Gilligan 2012). Accordingly, the following model makes it possible for businesses to apply pricing a prevailing profit lever. In addition, this model can prove beneficial in modeling pricing for customer segments. This is by overseeing the stimulation of the targeted customer segments so that they respond to the price changes through the assessment of various data-driven scenarios.

2.6 How Pricing Strategies Contribute to Achieving Competitive Advantage

Pricing strategies have proven to be one of the most effective ways for businesses to achieve competitive advantage. This is evidenced by the fact that pricing contributes to a company’s position in the market (Dudu & Agwu 2014). Thus, through effective pricing, a business is better placed to match its competitors and achieve a competitive advantage by establishing either a high or low price. The pricing strategies can be used to create a competitive advantage for businesses when the objectives of the related policies are well understood. Normally, this requires the existence of some clear advantage on a non-price element in the marketing mix.

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The competitive advantage as a consequence of the pricing strategies is therefore created as a result of different factors. The first factor is the association of a high price with high quality. There is a segment of the buyers who associate high pricing with high quality (Lipovetsky et al. 2011). It is worth noting that the premium pricing strategy has been successful in enabling the achievement of a competitive advantage. However, to be able to get some profit from this pricing strategy and the competitive advantage that it provides, it is essential that the businesses ensure that they stay ahead of the competition (Tawalbeh & Abu-Rumman 2015). This implies that businesses should have a unique product or service or be the first in the market of similar commodities. Competitors can lag behind given that it takes some time before they can copy the unique feature of the products or services.

The pricing strategies that focus on pricing below competitors are also fundamental when it comes to positioning a business above the competitors by facilitating the gaining of competitive advantage. In this sense, businesses can use the concept of pricing below the competitors to develop their own market niche supported by the competitive advantage gained (Dolgui & Proth 2010). This competitive advantage will also enable these firms to record their high sales volume through the pricing strategy of low prices. Competitive advantage is realized through the businesses appealing to the price-conscious consumers (Avinash & Kulshrestha 2013). Similarly, when the organization’s cost structure is much lower than those of the competitors, this pricing strategy can be used to enhance the competitive advantage of an organization.

In utilizing the concept of low pricing as a measure of creating a competitive advantage, businesses tend to reduce the associated cost by increasing their efficiency and economies of scale. Both penetration and economic pricing strategies are examples of pricing below competitors (Dudu & Agwu 2014). The penetration pricing strategy assists those organizations that need to gain a competitive advantage over the already established businesses. The economy pricing strategy is utilized by businesses that need to maintain a competitive advantage in the market.

2.7 Summary

The above review of literature has been essential in enabling this research to assess some past studies on pricing and the role that it has played in enhancing competitive advantage. Researchers are yet to come to an agreement in relation to their understanding of pricing and thus the varying definitions of the term. Nonetheless, pricing remains a critical part of the financial model and is vital in determining the profits of an organization. The significance of pricing in business is wide. It includes an effective marketing tool, influences marketing strategy, impacts the economy, and allows flexibility in the marketing mix.

Since there are different pricing strategies, each business has its own determined strategy that meets its needs. Therefore, the businesses should carefully assess their marketing goals and objectives before selecting the pricing strategies that they will use. In being used to facilitate the creation of competitive advantage, pricing strategies are applied in a manner that will either lower or increase the price.

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