APPLICATION OF SCIENTIFIC METHODS IN PRICING
Thereare various approaches that businesses can use in finding solutionsto the problems they encounter in their operations. Scientificmethods have proven to be an effective strategy to problem-solvingand improvement of production processes. They provide businessmanagers with figures on the relative advantages and disadvantages ofall possible courses of action. The objective of scientific methodsis to substitute facts for opinions, guesses and vague generalities(Parlier G. H., 2011). The approach can be applied to the problems oropportunities in any business process or department. Scientifictechniques enable a business to come up with an appropriate option tomaximize revenue. A good example of the application of this techniqueis setting the price of a product in the market. This paper focuseson the application of scientific methods in establishing the price ofa new product.
Thedevelopment of new products in the market is one of the strategiesthat organizations employ to address specific market gaps andincrease their market share. However, a company cannot achieve thisobjective unless it develops a suitable price for their product.Customers are sensitive to the cost of a product in relation to itsvalue. Therefore, setting an affordable price is an invaluablestrategy of increasing the sales of a product. The price should befair to both consumers and the organization. Balancing the returnsand cost of production is a challenging task to many organizationssince they must consider their interests and that of consumers.However, the scientific approach simplifies this process.
Ascientific approach to establishing the price of a new product is asystematic process that involves problem definition, formulation of ahypothesis, hypothesis testing, analysis, and recommendation. Everystage is dependent on the previous one. Therefore, investigators mustbe careful throughout the whole process to achieve desired results.
Thefirst step involves defining the problem. In order to find anappropriate solution to the issue, it should be adequately definedand quantified (Choi T. 2016). In this case, the problem is settingthe price of a new product. Necessary data must be collected toenable sufficient problem description. The definition must state thepeople who are affected by the product price. It should explain how,where, and to what extent are these individuals affected. Forexample, a company developed product x to address a market gap. Theproduct is unique and has additional features compared to thealternatives in the market. The additional features were supposed toaddress unmet consumer demands. It has few suppliers since thecompany is the first to come up with the product model.
Formulationof the hypothesis is an informed prediction of the outcome orproposed solution. In order to solve the defined problem, thehypothesis should be measurable. The hypothesis, in this case, is“Setting the price of product x slightly above the market pricewill result in increased revenue.”
Hypothesistesting refers to the experimental procedures that are carried outwith the aim of confirming or rejecting the hypothesis. The techniqueemployed in this process is determined by the problem, objective, andhypothesis. The theories and concepts associated with the problemsare what dictate the test. In this case, the technique employed isthe demand and supply model. The success of this step is based on thedemand and supply curves. According to the law of demand, theconsumption of the new product increases with reduction in its price(Hendry & Nielsen, 2012). Therefore, a higher price of the newproduct than the alternatives will result in the reduction ofquantity demanded.
Analysis stage is where the hypothesis is rejected or confirmed. Thehypothesis is true on the supply side. There are few suppliers of thenew product and thus consumers have relatively low bargaining power.Therefore, the company will have an added advantage. Since there arealternatives in the market, consumers are less likely to buy productx based on the price comparison. When the quantity demanded is low,the revenue will reduce (Oliveira A. & Gimeno A., 2014). Thedemand side does not support the hypothesis and therefore, it shouldbe revised to increase its revenue.
Reducingthe price will increase the amount of product x consumers are willingto purchase. However, there should be considerations of theproduction cost to avoid losses. The ultimate price of the productshould guarantee the organization profit maximization withoutreducing the demand for the product. The company will be in aposition to increase its market share and create a competitiveadvantage when the price is appropriate.
Thescientific method is a systematic process of improving businessoutcomes by making the right decision. It gives decision makers theopportunity to manipulate variables in order to develop theappropriate solution. The manipulation is based on theoriesassociated with the problem at hand. Scientific technique considersthe factors that influence the outcome of a process. Increasing therevenue of an organization through product pricing requires theconsideration of production costs as well as its impact on demand.The relationship between the variables and the outcome improves theunderstanding of the problem by decision makers. A company becomesable to improve its performance by operating at optimum conditions.
Choi, T.-M. (2016). Analytical modeling research in fashionbusiness. Springer
Hendry, D. F., & Nielsen, B. (2012). EconometricModeling: A Likelihood Approach. New Jersey: Princeton UniversityPress.
Oliveira A. & Gimeno A. (2014), A Guide to Supply ChainManagement: The Evolution of SCM Models, Strategies, and Practices,FT Press
Parlier, G. H. (2011). Transforming U.S. Army supply chains:Strategies for management innovation. New York, N.Y.] (222 East46th Street, New York, NY 10017: Business Expert Press.