“Pricing strategy involves more than picking a number to charge. It involves creating good value that can be produced and sold profitably, communicating the benefits to potential customers, and designing price structures that reflect differences in value among different customers and applications. It means managing customer expectations that prices reflect value, setting price levels that allow the seller to capture a share of that value, and managing price competition to achieve sustainable profitability.”
“To create a viable pricing strategy, a firm must initiate pricing decisions proactively, base them on an estimate of economic value, and measure success in terms of bottom-line profit rather than just revenue or market share.” from a summary of the book 'The Strategy and Tactics of Pricing. -Thomas Nagel' by Deloitte retrieved from the Deloitte website.
According to the Bain Company “the fundamental pricing strategy question is: To maximize household penetration, should I take my average portfolio or brand price up or down? Many believe microeconomic theory dictates that the only way to increase reach is to lower prices. Yet pricing up is almost always better than pricing down in the long run. Extending reach requires innovation and marketing—and you need higher prices to fuel investment in both. Competitors have a much harder time following world-class innovation and marketing than they do lowering prices. ”
Auctions are unusual in the 21st century most things, even luxury items such as watches and clothes, sell at fixed prices although there is some room to haggle. Even many items on eBay, the electronic platform, are sold at fixed prices. In The Dynamics of Auction, Christian Heath, a professor of work at King’s College, London, describes them as “a somewhat anachronistic method of selling goods, more common perhaps too traditional agrarian societies than post-industrial capitalism.”
“They are still used for art because every painting is different and has no intrinsic value – it does not yield anything, and the cost to manufacture is usually small. They are also an excellant method to get high prices – when buyers compete against a deadline, they behave differently. The desire not only to acquire it but to beat others causes what Deepak Malhotra, a Harvard professor, terms the 'emotional arousal' of auctions. The strategy of pricing stems from the determination of the definition of value by the seller and the buyer.” reference: Eugene Wei - The art of the auction
On occasion, Christie's has a direct financial interest in the outcome of the sale of certain lots consigned for sale. This will usually be where it has guaranteed to the seller that whatever the outcome of the auction, the seller will receive a minimum sale price for the work. eBay allows the seller to select a reserve price that is a hidden minimum price—essentially, the lowest price you're willing to accept for your item. If the listing ends without any bids that meet the reserve price, the seller is not required to sell the item. A reserve price allows you to set a low starting price to generate interest and bidding but protects you from having to sell your item at a price that you feel is too low.
The Pablo Picasso’s auction Les femmes d'Alger (Version 'O') Christies realized $179,365,000, achieving a world auction record for any work of art. The monetary value at that point in time was established by the outcome of the auction. The role of value and price communications is to convey the value proposition in a compelling manner to accomplish three goals: enable customers to understand the benefits, quantify the value of those benefits, and raise customers' willingness-to-pay for differentiating features and services. The benefits to the buyer of Les femmes d'Alger are the exclusive ownership of a piece of art that identifies the owner's wealth. They achieve a sense of personal accomplishment from the pride of owning such a rare piece of art created by Pablo Picasso.
To learn more on auctions, pick a product for sale on eBay, and watch the bidding process.
Pricing is one of the key marketing strategies, but product or service price is often arbitrarily determined. If competitor one is charging $40.00 US dollars, competitor two is charging $20.00 as a marketer; you might arbitrarily set your price at $30.00. To determine the price of goods and services, you might use cost-plus pricing. Cost-plus pricing determines a product or service price by adding together the material cost, the labor cost, and the markup percentage to set the price of the product. This is a lazy method of determining the price and might create a lower profit.
The McKinsey Company conducted a study that looked at over 2,000 companies for actions they could implement to increase their operating profits. The study concluded one change a firm could effectuate to have the most impact on operating profit is to improve their price by only 1%. Here the potential exists that the firm could increase their operating profits by about 11%. Price is a critical factor and one that is often inaccurately determined.