Marketing Research
Pricing Strategy and Line Extension.
This research paper includes pricing strategy and line extension as the main topics. This paper contains specific analyses of these topics and the relationship between them as well. Pricing is the 4th factor of marketing mix (the 4Ps) and is important as the others as well. All the other factors, Production, Promotion, and Place (Distribution), cost the firm lots of money to be fulfilled while Pricing is the only factor which brings revenues to the firm (Kotler and Armstrong, 2010). Therefore, following the appropriate pricing strategy is extremely important for a firm. There are many different pricing approaches and strategies that are designed for many different firms, segments, products, and product life cycle stages. Pricing includes ten types of pricing strategy. Penetration Pricing, Skimming Pricing, Competition Pricing, Product Line Pricing, Bundle Pricing, Psychological Pricing, Premium Pricing, Optional Pricing, Cost Plus Pricing, and Cost Based Pricing ( Kotler and Armstrong, 2010). However, this paper will focus on the Premium Pricing Strategy and will discuss the effects of line extension to the brands which follow this strategy.
Prior to explaining the Premium Pricing Strategy, let’s state the importance and the effects of selecting the appropriate pricing strategy. According to Bertini and Gourville, that the slow bleed way of pricing that most companies followed is not acceptable for today’s consumers. An example for this method is when a customer buys an airline ticket with a normal or cheap price the slow bleed starts. The slow bleed is fee that the customer will pay for many services that are included in this flight such as fee for checking a bag, fee for food, or fees for many other services (Bertini and Gourville, 2012). Consumers understood this trick and they carefully deal with those companies who apply this strategy. Those companies would lose a lot of money with today’s consumers. There are many examples for firms that tried to follow inappropriate pricing strategies and the results were upsetting. Let’s look to some examples.
Bank of America announced in 2011 a charge of $5 per month as fee to debit card. The public rejection for this decision forced the bank management to retreat the plan but the harms already occurred. The result was an increase of 20% in the account closings during the final months of 2011 compared with the same period of 2010 (Bertini and Gourville, 2012). Also, Netflix experienced a hard time when the company applied an increase in the price of 60% in 2011 for customers who both rented DVDs and streamed video. Instead of raising the sales the company lost 800,000 users and the company’s market share dropped by 70% (Bertini and Gourville, 2011). These are strong evidences of the significance of selecting the appropriate pricing strategy. And more important is carefully implementing any change in prices.
The Premium Pricing Strategy is setting a high price to reflect the exclusivity of the product. This strategy is followed by the luxury brands. For example, Rolls Royce is one of the most expensive luxury cars in the globe. Rolls Royce has six models that have prices ranging from $286,750 to $492,000. Rolls-Royce Phantom Drophead Coupe was ranked as the most luxurious car of 2015 based on price. The car price was $474,600 (Lyndon, 2015). So, a firm like Rolls Royce must have a unique and different product to set such a high price that shows the brand exclusivity. Those who buy the luxury products usually do that for social and enjoyment purposes. This segment of consumers dose not buy the luxury products for functional reasons. Look at this, a car from Hyundai can give the same task that a car from Rolls Royce does. But a car from Rolls Royce gives a clear sign that the owner of this car is not normal person. When a famous or a high class person needs to buy a car he or she won’t go to Hyundai dealer or any other brand from the same level. Instead he or she will go to one of the luxury cars dealers such as Rolls Royce, Bentley, or Mercedes Benz. A firm that has exclusive products does not need to sell as much units as a normal firm needs. For instance, Rolls Royce does not need to sell a large number of cars each year as Hyundai needs to do. If Rolls Royce sales 5000 car with an average price of $300,000 the total revenue will be $1,500,000,000. On the other hand, if Hyundai needs to earn the same revenue the company needs to sale 100,000 cars with average price of $15,000 to earn $1,500,000,000.
How does line extension affect companies that use the premium pricing strategy? Line extension has negative effects in the firms that have luxury products and apply the premium pricing strategy. Once a luxury firm extended the line of extension, the reason behinds this step is to cover more segments to earn more revenues. That required the firm to offer new luxury products with lower prices. Once that happen the firm will reduce the exclusivity of the original products and will hurt the brand. The strategy of extending a luxury brand and diversifying into new cheaper consumers segments affects the loyalty of the former consumers due to a possible change in the brand concept consistency and self-image congruence. Thus line extension carries threats and might harm the image the brand in the long run (Royo-Vela and Voss, 2015). Consumers believe that the higher priced product is the higher quality and exclusivity. So, once the firm reduces the price or extends the line with lower price product, the consumer will not accept that and will think there is a problem. That extremely hurts the brand.
When a firm, that produces luxury products, extended the line of production to get more market share and earn more revenue the new earned revenue might not be positive for the firm. The reason is because when the firm sells new cheaper products there will be an increase in this line sale but that might lead to a decrease in the sale of the former expensive products. The increase in one side leads to decrease in the other side. When a firm produces lots of products on all the price stages consumer will buy the lowest price product or will cancel the purchase at all (Roche, 1999).
Let’s look at firms that follow the line extension and others that do not do that and see the results to all of them. Samsung (the smartphone division) is one of the best producers for smartphone and one of the most innovative companies in this growing industry. Samsung is considered as a producer of luxury smartphones. Samsung innovates, designs, and produces so attractive smartphones but the company is facing problems in this growing industry and some analysts predict that Samsung won’t be in the smartphone industry during the next five years. Also, Samsung had very bad sales for the Galaxy S6 version last year although the product was one of the best cellphone that Samsung has produced. What is the reason behinds these drawbacks to Samsung. The reason is the line extensions that Samsung follows. Samsung released 56 new smartphone models in 2014 while Apple only released 2 new smartphone models (Amadeo, 2014). 56 models are extremely overextending the production line. When Samsung did that the reason is to cover more market segments and earn more revenues. The results were, Samsung lost the focus and lost the competition with Apple in the highest price level. Samsung sold lots of cheap smartphone but reduced the sales of the model that is the most profitable for the company and the only model that reflects the exclusive image of Samsung.
Samsung does not look like a producer of luxury smartphone because of the other cheap products that cost the firm a lot of money and do not bring enough profits. Even worse these products give a bad image about Samsung. When a consumer goes to buy a new smartphone and see many different kinds of smartphone by Samsung he or she will buy the lowest price product or will decide to buy Apple smartphone if he or she is interested in an expensive phone. “Samsung has been in a pretty tough spot lately. After several quarters of record profits in 2012 and 2013, the company has crashed back down to Earth. The low point for Samsung came last quarter, when it reported a 49 percent drop in profits” (Amadeo, 2014).
On the other hand, Apple created an exclusivity image for iPhone by keeping the price high and more important by not extending the production line. Apple only released two models of iPhone every year. That actually maintains an exclusive image for iPhone and for Apple in general. When a consumer is looking for a smartphone that reflects exclusivity, the first choice actually is iPhone. Samsung could be a strong choice if the line of production only includes one or two models.
In conclusion, line extension is very aggressive to a luxury-products brand since that take the exclusivity of the brand away. Line extension gives a chance of loss more than gain because Line extension would increase the sales of an unprofitable product and decrease the sale of other product that is profitable and gives a good image for the firm. Gain in one side can be a huge loss in the most important side.
References
Amadeo, R. Samsung decides 56 smartphones a year is too many, will cut lineup by 30%. (November, 18, 2014). Ars Technica. Retrieved from www.arstechnica.com
Bertini, M & Gourville, J. Pricing to create shared value. (June, 2012). Harvard Business Review. Retrieved from www.hbr.org
Kotler, P., & Armstrong, G. (2010). Principle of marketing. Pearson education.
Lyndon, B. The most luxurious cars of 2015. (December, 2015). Autobytel. Retrieved from www.autobytel.com
Roche, E. Why line extensions often backfire. (March-April, 1999). Harvard Business School Press. Retrieved from www.hbdp.harvard.edu
Royo-Vela, M., & Voss, E. (2015). Downward price-based brand line extensions effects on luxury brands. Business and Economics Research Journal, 6(3), 145-161. Retrieved from https://login.glacier.sou.edu/login?url=http://search.proquest.com/docview/1721583685?accountid=26242
MBA 512: Pricing Strategy and Line Extension Mdawi Alqahtani Page 5/4
