Importance Of Pricing Strategy

Next, the third pricing strategy is prisoner’s dilemma. Merrill Flood and Melvin DresherIt (1950) conceptualize it is one of the most famous game theory. It is also a framework for figuring out how to drive a balance between cooperation and competition (Elvis Picardo 2016). The examples of firms we are using here are Ford and GM. We assume that Ford and GM build identical cars so that price is the volatile. Each firm has two possible strategies for pricing its vehicles, whether to set a high price or low price. If both Ford and GM set high price, they are trying to collude and gain favorable profit of $500 million. However, this means that one firm sets a high price, and then the other firm can cheat and set a lower price to gain more profits.

A cost-plus pricing strategy is a business method to identify how to set the price of goods and services of a company. The price may be include a portion of the fixed costs of operating the business and the variable costs of a good of a company. Companies that faced to a very high competition intensity in the market may know the importance of cost-plus pricing (Guilding 2005). In US, Ford had set the price of their products based on this strategy. As one of the largest company in automobile industry in US, Ford produce luxury cars and it use the ‘one price for all’ method to attract consumers in the industry market. The company set prices by including profit on its basic cost (Hunter 2008). It believes that customers and market may determine the selling price of products and the company profit growth will rise if the company reduces their operating cost. For instance, in 1908, the founder of the Ford Motor Company, Henry Ford released the first Ford Model T Car and the cost is $850 (around $20,000 today), was a very reasonable price at the time. By using the concept of cut down the production cost to gain the market shares unceasingly, Ford reduced the car price to $300 (around $6,000 today). This strategy worked blazingly as the Model T car’s sales have been increase [refer to appendix 6] and became the first best-selling car that sold out over 1,5million units in 1927.

Market-oriented pricing strategy is also known as a competition-based strategy. By using this pricing strategy, company will compares the similar products with the competitor in the market and by depending on how well their company product matches up, they will set the price of their product to be lower or higher than their competitors. In US, this market-oriented pricing strategy is used by General Motors (GM). GM is one of the biggest company in automobile industry in US and want to surpass Ford to become the ‘Number One’ company in the automobile industry. It believes in the strategy of ‘a car for every purse and purpose’ (Hunter 2008). By segmented and surveying the automobile market in US, GM manufactures their car products for different market consumers which based on the gender, age or business class and the consumer preferences such as the favourite car’s design. Besides, GM set their products price based on the income level of market consumers as the high class society would prefer to buy a more luxury vehicle while a basic class society would prefer to buy a vehicle which is more affordable for them (Kopalle 2009). In 1927, GM exceed Ford as the largest automobile company in the world. The graph shows that from year 2003 until year 2015, sales profit of GM have been exceed over Ford. (refer to appendix