Traditionally, price is determined to cover both variable and fixed costs to make profit. Any reduction in price results in erosion of profit. If negotiations are expected, prices are quoted higher than the set price so as to allow some space for concessions given in the negotiation process. However, there is a cut-off below which the negotiated price cannot go without incurring a loss. This becomes a major obstacle in the current dynamic environment where customers have multiple options from competing sources. The customers can be classified into the following categories :
- Loyal customers, who believe that the company will charge a fair price and hence, pay whatever, is asked. This customer base, where decisions have been pre-made, cannot be taken for granted with the fast changes taking place in demography, fashions, tastes, and the impact of competition.
- Convenience customers and impulse buyers are those who find it convenient to buy from a particular place at a particular time and who are not price-sensitive.
- Price-conscious customers search for the lowest price and for them price is always a primary consideration.
- Value-based customers accept a price as justified based on their own set of value considerations.
Each business dealing is unique and price has to be fixed for every individual transaction. This is the case where the value of each individual transaction is large - as in B2B purchases, construction contracts, machinery purchases, and large-value consumer items. In the Information Technology age, there are time pressures for price quotations and hence, pricing has to move dynamically. Companies have discovered that fixing one price based on differentiation alone is not enough. With the choices offered, customers now look for what will meet their specific needs. "One-size-fits-all" approach is no longer valid.
Value changes with time. Thus, dynamic price changes are called for. For example, once a flight takes off the value of an empty seat is zero. Pricing is changed to attract customers to fill vacant seats. Possible vacant seats are anticipated in advance and offered at discounted rates, thereby guaranteeing a minimum load. Latecomers/last-minute arrivals pay the full or even enhanced fares, thereby ensuring a full and profitable flight. Pricing is also adjusted to liquidate slow - moving stocks, stocks reaching their expiry date or over supply in the market caused by dumping. Opportunities arise for higher prices to take advantage of special situations, such as shortages and emergencies.
When price rise in the cost of the ingredients going into a product or service is anticipated, it may be necessary to cover these higher costs by selling current products and services at higher prices. This is also termed as pricing on a "re-placement cost" basis. Pricing takes into account differentiation, giving value in monetary terms for differences from a reference point. The total effect of the differences gives the price difference at which the product or service could be set around the reference price. In dynamic negotiations, some differences can be apportioned or offset - like features, packing, services and payment terms. Pricing can be reduced by dropping or changing items. It can be increased by additions and add-ons. Cross-selling can happen by offering related products and services like desktop with printer.
The current system and organizational structuring are impediments in meeting the new imperatives. Information from the field has to go to the central decision-making authority and decisions have to be communicated to the field back and forth several times before a final decision is taken. Further, within the centralized decision-making authority itself, it has to move to various specialisations like pricing, scheduling, product development, operations and logistics. The whole process involves long cycles, a lot of effort, communication cost, loss of information and objectivity, possible loss of orders and profits and orgnaisational conflict. Therefore, with vibrant price changes and uncertain market place there has to be dynamic decision making. Organizations need to acknowledge the shift to more data centric decision making. The proliferation of Information Technology tools is aimed to improve the decision making by providing access to more information and competitive edge in the fluid business environment.
Information Technology facilitates effective decisions to be made at the point of operation by providing transparency, traceability and recording of the mechanism of decision-making, thereby minimizing the need for confidentiality and protecting the decision-makers by having the procedure and rational of arriving at the decisions recorded for subsequent use, scrutiny and review. Further, empowering those, who are at the point of operation to take decisions results in cutting down time, effort and costs. It needs to be ensured that decisions are within permissible limits through appropriate controls, checks and balances. Only complex exceptions need to be referred to senior management for decisions. An overall perspective of all aspects should be provided to influence the decisions by access to all information, based on access rights granted by the organisation.
Information should be procured from structured sources like SAP or CRM or from unstructured sources like market intelligence, media reports, etc. Since all possible information can be made available for taking a decision transparency is improved. The Win-Win can be achieved for all concerned by offering a number of alternatives, assessment of these alternatives (even hypothetical), considering all perspectives and thereby managing conflict, and optimising the goal based solutions. Effective decisions at the point of operation can also be made possible by applying human judgment and blend of hi-tech with hi-touch. Since the latest online information is essential for taking a decision, an ongoing search for new information and novel ways is necessary to ensure continuous refinement for fulfilling the aspiration to achieve newly set goals.