Introduction

Pricing strategy and practice The impact of market structure on pricing objectives of service firms George J. Avlonitis and Kostis A. Indounas

The authors George J. Avlonitis and Kostis A. Indounas are based at the Department of Marketing and Communication, Athens University of Economics and Business, Athens, Greece.

Keywords Pricing policy, Market system, Services, Greece

Abstract The purpose of this research paper is to explore the pricing objectives that service companies pursue to set their prices and to examine the impact of market structure. An extensive review of the literature revealed the complete lack of any previous work aiming to empirically investigate the impact of market structure on the company’s pricing behavior and pricing objectives. Thus, the value of the paper lies in the fact that it presents the first attempt to empirically examine this issue from a marketing perspective. In order to achieve research objectives, data were collected from 170 companies operating in six different services sectors in Greece through personal interviews. The findings of the study show that the companies seem to follow a hierarchy of pricing objectives where their main focus is on the maintenance of the existing customers and the attraction of new ones, in order to ensure their long-term position in the market without, however, disregarding financial considerations.

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Journal of Product & Brand Management Volume 13 · Number 5 · 2004 · pp. 343–358 q Emerald Group Publishing Limited · ISSN 1061-0421 DOI 10.1108/10610420410554421

Nagle and Holden (1995, p. 1) argued, “If effective product development, promotion and distribution sow the seeds of business success, effective pricing is the harvest. Although effective pricing can never compensate for poor execution of the first three elements, ineffective pricing can surely prevent those efforts from resulting in financial success”. Similarly, Lovelock (1996) has suggested that pricing is the only element of the marketing mix that produces revenues for the firm, while Palmer (2000) believes that price is the most flexible element of marketing strategy, in that pricing decisions can be implemented relatively quickly in comparison with the other elements of marketing strategy. However, Garda (1991, p. 17) suggested, “Pricing is a bit like the weather. People complain about it; they worry about it; and in the end they feel there is not much they can do about it. But unlike the weather, pricing can in fact be controlled. It can be managed. And it can be a powerful tool for business”. Within the same context Nagle and Holden (1995) have pointed out that pricing is the most neglected element of the marketing mix. The above statements illustrate a general consensus in the existing literature that although pricing decisions are important for the success and profitability of every firm, they have not received the necessary attention by marketing academics. Thus, the empirical studies that have been conducted in the field of pricing within the marketing discipline are very few, while this is even more evident in the case of services. As Hoffman et al. (2002, p. 1015) have pointed out, “Today, price remains one of the least researched and masters areas of marketing. Research and expertise pertaining to the pricing of services are particularly lacking”. However, the distinctive characteristics of services (intangibility, heterogeneity, perishability and inseparability) require a closer look at the way in which services are priced if an adequate body of empirically based theory is to be established (Langeard, 2000; Zeithaml and Bitner, 1996). Given this lack of empirical research, the current study endeavors to contribute to this neglected field by investigating the pricing practices of service organizations. In particular, the pricing objectives that they pursue to set their prices, along with the impact of the market structure in which they operate on these objectives, are examined. The decision to focus on pricing objectives instead of other elements of the pricing process (e.g. pricing methods, pricing policies etc.) has been based on their importance for making

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Impact of market structure on pricing objectives

Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas

Volume 13 · Number 5 · 2004 · 343–358

effective pricing decisions, since as Diamantopoulos (1991, p. 138) has suggested “they should be the starting point of every pricing effort”. Regarding the impact of market structure, a review of the literature on pricing reveals that there are general suggestions on how this structure affects the prices set, but there has been no previous attempt to empirically investigate this issue. Based on the above arguments, the objectives of this paper are: . to investigate the pricing objectives that service organizations pursue in order to price their services; and . to examine the impact of the market structure on these objectives.

measured easily and straightforwardly. However, an excessive emphasis solely on quantitative objectives may even risk the long-term position of a firm in the market. On the other hand, qualitative objectives are associated with less quantifiable goals such as the relationship with customers, competitors, distributors, the long-term survival of the firm and the achievement of social goals. Their main contribution lies on the fact that they help a company to adopt a market orientation towards its pricing decisions. However, these objectives “are hardly operational, in that it is very difficult to compare a specific outcome with the pre-specified target and establish the degree to which the later has been met. . . there is an inability to establish a sufficiently direct and explicit connection between an objective and the price-setting process to enable the former to serve as a clear guide for action” (Diamantopoulos, 1991, p. 141). The above arguments notwithstanding, it could be argued that these two types of objectives are in a sense intertwined. For instance, retaining existing customers or satisfying their needs has long been recognized as a prerequisite for a company’s long-term profitability. Similarly, distributors’ need satisfaction may also be required in markets dominated by retailers if adequate financial results are to be realized. Thus, there seems to be a hierarchy of pricing objectives where pursuing qualitative objectives may further lead to the achievement of quantitative objectives as well. Regarding the desired level of attainment, the quantitative pricing objectives may be further divided into those objectives that endeavor to achieve maximum profits, market share, sales or production volume and those which aim to achieve satisfactory results, regarding these indicators. However, it is interesting to mention in this point that the objective of “maximization” has been criticized by a number of different authors in the existing literature as being rather unrealistic to achieve. This may be attributed to the limited information that managers might possess, the lack of communication inside the company or even the avoidance of government intervention that an excessive profitability could cause (Boone and Kurtz, 2002; Keil et al., 2001; Kotler, 1997). With reference to the time horizon of attainment, pricing objectives may be categorized into short-term and long term ones. The short-term objectives endeavor to satisfy specific goals in a short time period (i.e. six months or one year), whereas the impact of the long-term objectives may be realized only after a long period of time. Moreover, the aforementioned authors have suggested that an excessive emphasis on

The paper is organized as follows: A literature review on pricing objectives and market structure is presented along with the research methodology used. Moreover, the data analysis and the discussion of results are reported, while at the end of the paper the conclusions along with the basic implications of the main findings of the study, their limitations and the directions for further research are presented.

Literature review Pricing objectives According to Oxenfeldt (1983), pricing objectives provide directions for action. As Tzokas et al. (2000, p. 193) have stated, “To have them is to know what is expected and how the efficiency of the operations is to be measured”. Thus, while pricing policies and methods refer to the explicit steps that a company has to follow in order to set its everyday prices, pricing objectives’ main function is to guide these steps. Table III summarizes the fundamental pricing objectives that have been derived from the services literature (Ansari et al., 1996; Bateson, 1995; Cannon and Morgan, 1990; Channon, 1986; Drake and Llewellyn, 1995; Draper, 1995; Hoffman and Bateson, 1997; Langeard, 2000; Lovelock, 1996; Meidan, 1996; Palmer, 1994; Payne, 1993; Woodruff, 1995; Zeithaml and Bitner, 1996). Diamantopoulos (1991, p. 139) suggests that pricing objectives can “fall under three main headings relating to their content (i.e. nature), the desired level of attainment and the associated time horizon”. As far as their content is concerned, both quantitative and qualitative objectives can enter the objective functions of firms. The quantitative objectives include those objectives that are related to the firm’s profits, sales, market share, cost coverage and production output and their main advantage relates to the fact that they can be

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Impact of market structure on pricing objectives

Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas

Volume 13 · Number 5 · 2004 · 343–358

short-term objectives may risk the long-term position of a firm in the market. Regardless of the aforementioned classification of the pricing objectives, the complexity of pricing decisions imposes the need to pursue more than one objective at a time (Diamantopoulos, 1991; Oxenfeldt, 1983; Smith, 1995). Moreover, not all of them are compatible with each other since the objective of sales maximization for example could lead to lower profits (Keil et al., 2001), while an excessive emphasis on profits could be in contrast with the achievement of social goals. The few empirical studies that have been conducted on the issue of pricing objectives in the services sector show that quantitative objectives tend to be regarded as more important than qualitative ones with a particular emphasis placed on profit considerations. More specifically, by studying 43 pest control companies in the USA, Schlissel (1977) found that the most popular objective was profit maximization followed by the achievement of a satisfactory profit. Similarly, Morris and Fuller (1989) investigated the pricing behavior of 71 US accounting companies and found that the achievement of a satisfactory short-term profit was the most popular objective among the companies in their sample. Moreover, Meidan and Chin (1995) examined the pricing practices of 45 building societies operating in the UK and concluded that more than 80 percent of the companies in their sample considered the objectives associated with cost (such as the cost coverage) as being the most important ones.

(9) extent to which customers are informed about the existing products or services offered in the market; (10) barriers to entry and exit from the market; (11) rate of technological change; and (12) growth rate (Boone and Kurtz, 2002; Diamantopoulos, 1991; Kotler, 1997; Morris and Morris, 1990; Palmer, 1994; Schlissel and Chasin, 1991).

The impact of market structure on pricing objectives A review of the marketing literature regarding the structure of a market revealed that the basic elements that comprise this structure are as follows: (1) extent to which the products or services that are offered in the market are homogeneous or differentiated; (2) concentration level; (3) size of the market (number of customers and competitors); (4) existing profit margins; (5) form of competition (perfect competition, oligopoly, monopoly, monopolistic competition); (6) degree of governmental intervention; (7) customers’ price elasticity; (8) extent to which customers are informed about the existing prices;

In addition to the above, Porter’s five forces model is another tool to analyze a company’s market structure, which includes the following: (1) bargaining power of buyers; (2) bargaining power of suppliers; (3) threat of new competitors’ entering into the market; (4) threat of substitutes; and (5) intensity of competition. However, there is a lack of relevant empirical studies that examine whether the structure of a market affects the pricing objectives set by the companies. This lack of empirical research is even more evident in the case of services. Nevertheless, it is to be expected that different characteristics of the market structure may lead to differences in price setting. For instance, a firm operating in a rather competitive environment may face a downward trend in prices in comparison with a company operating in a less intensive competitive market. Similarly, low profit margins or an increased bargaining power of buyers are expected to lead to determining low prices. Moreover, a differentiated product may justify a higher price than a homogenous one, whereas firms in oligopolistic situations with high barriers to entry may set their prices based on price collusions with the main competitors. Furthermore, the extent of governmental intervention also affects the general level of prices, since an increased intervention may force the existing companies to lower their prices for social reasons. Thus, the major research objective of this paper is to examine the impact of market structure on pricing objectives. Although there has been no previous attempt to link these two concepts theoretically (e.g. economists just refer to different market structures such as monopoly or oligopoly and their impact on the market’s general price level), such an approach might be justified by both the importance of pricing objectives in guiding pricing decisions and the need to examine pricing from a “contingency” point of view. More specifically, the existing marketing literature on pricing is dominated largely by normative statements, which imply that standard pricing procedures can be applied to all market contexts.

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Impact of market structure on pricing objectives

Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas

Volume 13 · Number 5 · 2004 · 343–358

However, such statements tend to ignore the need of the companies to adapt their pricing strategies to the particular characteristics of their own markets. Indeed, a “situation-specific” approach might be more useful in order to study the pricing phenomenon.

a total turnover of more than 1,5 million Euros in 1999, given the fact that pricing within small companies is treated in a less systematic way in comparison with large companies (Carson et al., 1998; Cunningham and Hornby, 1994). In this way, the sample was reduced to 558 companies and due to changes in addresses and/or the closedown of some of these companies, the original sample was eventually reduced to 464 companies. Next, a personalized pre-notification letter was mailed to each of these companies explaining the objectives of the study and soliciting cooperation, while a week after, a telephone call was made to each company, to examine the possibility of participating in the study. This approach has been found to increase the response rates considerably (Yu and Cooper, 1983). Hundred and seventy companies agreed to participate in the study representing a response rate of 36.7 percent, which is similar to other studies that have been conducted in the field of pricing (Hornby and MacLeod, 1996; Shipley, 1981) Table I summarizes the breakdown of the responses across the different sectors. The X2 statistic was calculated for variations among the number of companies in the initial sample and the number of companies that finally responded in each sector. This statistic (X 2 ¼ 30:000; p ¼ 0:224) indicated that service sector classification is not a source of non-response bias. An appointment was made with these companies and personal interviews were conducted. Our decision to use this method was based on its advantages comparing to phone or mail interviews. These advantages are related to the higher response rates associated with this method, the completion of every particular question and in the right order, the ability of the interviewer to explain ambiguous questions to the respondents along with the ability to ensuring the respondents’ eligibility to the survey (Chisnall, 1997; Churchill, 1995). Moreover, respondents within companies were selected on the basis of whether they had a deep knowledge of the company’s pricing strategies. At the same time, they had to be senior enough to provide information on these strategies. Based on the 26 in-depth interviews that were conducted in the initial phase of our research, it was emerged that, concerning smaller companies, the determination of prices was very much a top management decision, while with reference to larger companies the marketing, sales (where a marketing manager did not exist) or financial manager had the main responsibility for setting prices. Consequently, in the smaller companies

Research methodology Sample and data collection The present study is part of a wider research on the pricing practices of service organizations operating in Greece. Given the fact that the services sector includes a vast number of sub-sectors, it is almost impossible to investigate all the existing sectors. Within this context, it was felt appropriate to focus the current research on those sectors that may be considered as being significant for every national economy, namely, banks, insurance companies, transportation and shipping companies, airline companies, information technology companies, medical services and education services. Regarding banks and insurance companies, their significance may be attributed to “the implicit responsibility that they have in relation to the management of funds and the financial advice they supply to their customers” (Ennew et al., 1995, p. ix). Transportation and shipping services are important for the exchange of goods and the flow of information within an economy, while airlines reflect to a large extent the “image” of a country abroad. Furthermore, information technology companies are significant given the increasing role of technology in today’s marketplace, while medical and education services determine the prosperity of citizens within a society. In addition to the above, the importance of these sectors is reflected on their contribution to the country’s Gross Domestic Product. It is interesting to note that the total contribution of these sectors (25.3 percent) accounts for almost half of the services’ contribution to the Gross Domestic Product. However, a qualitative research that was conducted through 26 personal in-depth interviews in the initial phase of the research, to gain a better understanding of the research problem being investigated (Zikmund, 1999), indicated that prices in the education services sector are highly regulated. Thus, it was decided to exclude this particular sector from our study. According to ICAP’s Directory 2000 (Gallup’s subsidiary in Greece), which was used as the sampling frame of the research, the number of companies in the sectors in question was 1,495. At this point, it was decided that the research should focus only on those companies that had

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Impact of market structure on pricing objectives

Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas

Volume 13 · Number 5 · 2004 · 343–358

Table I Total population, sample, number of companies that responded and response rate across each sector

Transportation-shipping companies Insurance companies Medical services Information technology companies Airlines Banks Total

Population

Sample

Number of companies that responded

Response rate (percent)

585 202 257 256 134 61

136 76 64 72 62 54

56 29 28 21 19 17

41.2 38.2 43.7 29.2 30.6 31.5

1495

464

170

36.7

the managing director or an equivalent was typically the respondent, while in the larger companies the marketing, sales or financial director provided the results. The choice to use this “key informant technique” was compelled by the respondent’s familiarity with the research topic.

Research instrument The data were secured by means of a ten-page questionnaire. Following the suggestions of many marketing research academics an effort was made to avoid leading and unambiguous questions, paying particular attention to the wording and the sequence of questions and ensuring a professional style and format (Gold, 1996; Nicholls, 1996). Information was collected by adopting various kinds of scales such as binary, ordinal and Likert type. Furthermore, before using the questionnaire for data collection, a detailed pretest based on personal interviews among two academics and ten practitioners was undertaken to increase its validity. Moreover, the questionnaire was designed in such a way that data for specific services (one in each company), which had been priced recently, could be collected.

Measures Pricing objectives The respondents were provided with a list of 28 pricing objectives (Table III) and they were asked to indicate, using a 5 point scale (1¼Not important at all to 5 ¼ Very important) how important they considered each one of them in pricing the service that they had chosen for discussion (e.g. a loan in the case of a bank or a life insurance in the case of an insurance company). Market structure As mentioned earlier, an extensive literature review revealed the basic characteristics that comprise the structure of the market. The operationalization of these characteristics is shown in Table II.

Data analysis and discussion of research results Pricing objectives The mean scores along with the standard deviation of each pricing objective are shown in Table III, where it can be seen that the three most important objectives are those that are related to customers. More specifically, the most important objective is the “maintenance of the existing customers” (4.31) followed by the “attraction of new customers” (4.28) and the “customers’ needs satisfaction” (4.18). These findings indicate that the companies in our sample have understood the significance of taking into consideration those factors associated with their customers for making effective pricing decisions. Other important objectives are the “cost coverage” (4.08), the “creation of a prestige image for the company” (4.07), its “long-term survival” (4.06) and the “service quality leadership” (4.03). This emphasis on the service quality and a prestige image is in line with the suggestions made by a number of authors regarding their importance in the case of services (Kurtz and Clow, 1998; Langeard, 2000; Tse, 2001; Woodruff, 1995). On the other hand, it is noteworthy that the objectives related to profit, sales and market share are less important, while at the same time more emphasis is given on the achievement of satisfactory rather than the maximum results vis-a`-vis these indicators. As it was described in the literature review section, this can be attributed to the difficulties associated with maximizing profits or sales in reality. Moreover, the least important objective is the “discouragement of new competitors’ entering into the market” (2.56) mainly due to the high barriers to entry that exist in some of the sectors examined in our study (i.e. airlines, banks, insurance companies), as we will describe in the next section, which do not facilitate such an entrance. Furthermore, the mean values of the pricing objectives indicate that they seem to pursue more than one objective perhaps due to the complexity that characterizes pricing decisions (Diamantopoulos, 1991; Smith, 1995).

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Impact of market structure on pricing objectives

Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas

Volume 13 · Number 5 · 2004 · 343–358

Table II Operationalization of the characteristics that comprise the structure of a market Characteristics

Likert type statements The extent to which the services that are offered in the market are homogeneous or differentiated The concentration level The number of customers and competitors in the market

The existing profit margins The degree of governmental intervention The customers’ price elasticity

The extent to which customers are informed about the existing prices The extent to which customers are informed about the existing services offered in the market The buyers’ bargaining power

Suppliers’ bargaining power

Threat from substitutes Intensity of competition

Other statements Barriers to entry and exit from the market

Rate of technological change

Market’s growth rate

It is also interesting that these findings are in contrast with those put forward by Meidan and Chin (1995), Morris and Fuller (1989) and Schlissel (1977), which indicate that the profit-related objectives were considered as being the most important ones. However, these differences may be attributed to the fact that the aforementioned studies have focused on a particular services sector, contrary to our study, which has been based on a cross-sectional sample.

Statements “The competitive services that are offered in the market are homogeneous” “Our market is characterized by a high concentration level” “A large number of customers exist in our market” “A large number of competitors exist in our market” “More customers in comparison with competitors exist in our market” “The profit margins in our market are high” “Our market is characterized by an increased governmental intervention” “Our customers are characterized by a high price elasticity, which results in paying particular attention to the prices offered” “Our customers are informed about the existing prices in the market” “Our customers are informed about the existing services offered in the market” “Many of our customers have the power to negotiate and impose their terms when doing business with our company” Originally developed by Narver and Slater (1989) “Our company has the power to negotiate an impose its own terms when doing business with our major suppliers” Originally developed by Narver and Slater (1989) “It easy for our customers to find substitutes to our services” “Competition in our market is extremely intensive” “It is quite usual to have price wars in our market” “Every day we learn of a new action taken by our competitors” “Competitors are weaker in comparison with us” Originally developed by Kohli and Jaworski (1992) “How easy it is for new competitors to enter the company’s market” “How easy it is for the existing competitors to leave the market” Originally developed by Narver and Slater (1989) (1 ¼ Difficult to 5 ¼ Easy) “Have you been involved in new service development?” Originally developed by Narver and Slater (1989) and modified by Avlonitis and Gounaris (1997) (1 ¼ Not at all to 6 ¼ Heavily) “How did their market evolve during the last five years and what is your forecast for the next five years?” Originally developed by Avlonitis and Gounaris (1997) (1 ¼ Rapidly declining to 5 ¼ Rapidly growing)

Table IV shows the extent to which the pricing objectives that are pursued are varied across the six different service sectors. What can be seen from this table is that the customer related objectives are the most important ones for all sectors with the exception of medical services perhaps due to the confusing role of private and public companies in the medical sector in Greece. However, these objectives seem to be particularly important for the airlines, which endeavor to maintain their existing customers and attract new ones (e.g. through

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Impact of market structure on pricing objectives

Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas

Volume 13 · Number 5 · 2004 · 343–358

Table III Mean scores and standard deviation of the pricing objectives pursued by service companies

Maintenance of the existing customers Attraction of new customers Customers’ needs satisfaction Cost coverage Creation of a prestige image for the company Long-term survival Service quality leadership Achievement of satisfactory sales Achievement of satisfactory profits Sales maximization Market development Achievement of a satisfactory market share Determination of “fair” prices for customers Profit maximization Sales stability in the market Achievement of social goals Price differentiation Price stability in the market Liquidity achievement and maintenance Market share leadership Price similarity with competitors Coverage of the existing capacity Price wars avoidance ROI (Return on Investment) Market share increase ROA (Return on Assets) Distributors’ needs satisfaction Discouragement of new competitors’ entering into the market

Mean

SD

4.31 4.28 4.18 4.08 4.07 4.06 4.03 3.85 3.84 3.78 3.64 3.53 3.50 3.49 3.39 3.34 3.24 3.24 3.19 3.15 3.15 3.04 2.96 2.93 2.84 2.67 2.61

1.18 1.14 1.24 1.11 1.15 1.30 1.33 1.23 1.12 1.29 1.41 1.40 1.39 1.29 1.44 1.55 1.52 1.43 1.61 1.48 1.37 1.49 1.45 1.61 1.65 1.56 1.50

2.56

1.45

Note: Minimum: 1, Maximum: 5

“free-mileage” packages and high customer service such as the opportunity of self check-in for business class customers) to achieve satisfactory sales. The insurance companies endeavor to satisfy customers’ needs and also their distributors’ needs, to develop their market by charging “fair” prices and differentiating prices given the plethora of insurance services. On the other hand, banks are mainly guided by quantitative priorities and more specifically by achieving satisfactory profits and return on their investment. Moreover, as we should expect, transportation-shipping companies give more emphasis on Return On Assets and capacity than the other sectors given the difficulty that they face in utilizing efficiently the capacity of their assets (e.g. lorries, ships, etc.). Finally, information technology companies are keen in maximizing their sales by offering high quality services given the importance of quality in business-to-business sectors.

Market structure Table V shows the mean values along with the standard deviation of each of the environmental forces/characteristics constituting the market structure examined in this paper. Based on these values, it can be argued that the companies in our sample operate in a market characterized by the following: (1) an intensive competition with strong competitors and a large number of customers who are informed about the existing prices of the rather homogeneous services offered in the market and have moderate bargaining power and price elasticity; (2) high growth and concentration level, increased rate of technological change and moderate threat from substitutes; and (3) a low bargaining power of suppliers, low barriers to exit, low governmental intervention, low profit margins and high barriers to entry. The fact that many of the above variables/ characteristics were interrelated led us to conduct a factor analysis (principal components analysis, varimax rotation). On the basis of eigenvalue . 1.0 and factor loadings . 0.4 seven factors were identified. Having identified these factors, it was felt appropriate to classify the respondents on the basis of these factors. To this end, a cluster analysis was performed using the factor scores derived from the factor analysis presented above as the independent variables. The decision to use the factor scores rather than the initial market characteristics was justified by the fact that the cluster solution that was derived from these scores and which will be discussed below was more appropriate in terms of interpretability, internal cohesion and parsimony (Punj and Stewart, 1983). For the clustering of the data the Quick Cluster method was employed, which is an alternative to the more common hierarchical clustering, offering clear and distinct clusters. The goal of Quick Cluster is to form a predetermined number of clusters that will display a high degree of internal similarity, while being distinct with each other. Because the number of clusters needs to be determined in advance, in our analyses, the 6-, 7- and 8- solution were examined. Due to the fact that the 7- and 8- solutions resulted in very small clusters, the 6- cluster solution was adopted. For validating this solution we conducted a random split-half cluster analysis, which resulted again in the same clusters. Further, we performed multiple discriminant analysis with cluster membership as the grouping variable and

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4.38 4.59 [4.66] 4.10 4.21 4.41 4.21 4.03 3.97 4.00 [4.14] 3.86 [4.34] 3.66 3.69 3.97 [4.07] 3.72 3.66 3.14 2.97 2.80 2.90 3.07 2.86 [4.07] 2.78 2.72

2.64

Insurance companies (n 5 29)

4.50 4.27 4.13 4.18 4.09 4.18 4.16 3.86 3.91 3.77 3.59 3.36 3.46 3.41 3.55 3.27 3.09 3.32 3.41 3.20 3.30 [3.00] 3.25 (2.23) 2.77 2.50 [3.00]

Transportation-shipping companies (n 5 56)

350 2.25

(3.54) (3.75) (3.54) 3.68 3.68 3.75 (3.18) (3.18) (3.18) (3.18) (2.93) 3.00 (2.71) 3.11 3.00 3.39 (2.36) 3.00 2.71 2.68 2.96 2.88 2.36 2.39 2.46 1.82 2.88

Medical services (n 5 28)

2.76

4.10 4.05 4.38 4.33 4.38 3.62 [4.43] 4.00 3.95 [4.24] 3.95 3.95 3.67 3.43 3.19 3.10 3.62 3.00 3.19 3.52 2.76 (2.00) 3.00 2.90 2.90 2.29 (2.00)

Information technology companies (n 5 21)

2.47

[4.89] [4.79] 4.21 3.89 4.26 4.26 3.84 [4.21] 3.79 4.00 4.01 3.68 3.32 3.53 3.53 3.00 2.95 3.32 2.95 3.21 3.63 2.22 2.95 2.79 3.63 3.05 2.20

Airlines (n 5 19)

2.41

4.47 4.41 4.29 4.24 3.82 3.88 4.06 4.00 [4.35] 3.53 3.18 3.71 3.59 4.12 3.12 3.12 3.65 2.76 2.71 3.29 3.24 2.80 3.06 [3.47] 2.71 (1.65) 2.80

Banks (n 5 17)

0.489

4.201 2.760 2.641 1.223 1.319 1.495 3.626 2.259 2.979 2.247 3.356 1.819 4.441 1.461 1.043 1.346 4.861 1.381 1.614 0.888 1.179 1.906 1.469 3.804 1.228 9.016 2.576

F

0.784

0.001 0.020 0.025 0.300 0.258 0.193 0.004 0.051 0.013 0.052 0.007 0.112 0.001 0.205 0.394 0.248 0.000 0.234 0.159 0.490 0.322 0.096 0.203 0.003 0.298 0.000 0.028

Sign

Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas Volume 13 · Number 5 · 2004 · 343–358

Notes: The figures represent the mean score of each objective in each sector. Maximum values are in brackets while minimum in parentheses (based on Duncan’s multiple rang tests, p , 0.1). Sign indicates level of significance based on one-way analysis of variance

Maintenance of the existing customers Attraction of new customers Customers’ needs satisfaction Cost coverage Creation of a prestige image for the company Long-term survival Service quality leadership Achievement of satisfactory sales Achievement of satisfactory profits Sales maximization Market development Achievement of a satisfactory market share Determination of “fair” prices for customers Profit maximization Sales stability in the market Achievement of social goals Price differentiation Price stability in the market Liquidity achievement and maintenance Market share leadership Price similarity with competitors Coverage of the existing capacity Price wars avoidance ROI Market share increase Distributors’ needs satisfaction ROA Discouragement of new competitors’ entering into the market

Table IV Sector of operation and pricing objectives Impact of market structure on pricing objectives

Impact of market structure on pricing objectives

Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas

Volume 13 · Number 5 · 2004 · 343–358

Table V Mean scores and standard deviation of the characteristics that comprise the market structure

Competition in our market is extremely intensive A large number of customers exist in our market More customers in comparison with competitors exist in our market It is quite usual to have price wars in our market A large number of competitors exist in our market Market’s evolvement during the last five years The competitive services that are offered in the market are homogeneous Our market is characterized by a high concentration level Our customers are informed about the existing prices of the market Our customers are informed about the existing services offered in the market Rate of technological change Every day we learn of a new action taken by our competitors Forecast about the market’s evolvement within the next five years Our company has the power to negotiate and impose its own terms when doing business with our major suppliers Easiness for the existing competitors to leave the market Our customers has the power to negotiate and impose their own terms when doing business with our company Our customers are characterized by a high price elasticity It easy for our customers to find substitutes to our services Our market is characterized by increased governmental intervention Our competitors are weaker in comparison with us The profit margins in our market are high Easiness for new competitors to enter the company’s market

Mean

SD

4.22 4.09 3.88 3.79 3.73 3.65 3.65 3.60 3.59 3.54 3.53 3.53 3.52

0.65 0.75 0.90 0.91 0.90 0.80 0.92 0.80 0.89 0.92 0.91 0.93 0.83

3.51 3.42

0.84 1.40

3.30 3.23 2.98 2.75 2.64 2.30 2.23

0.78 0.84 0.93 1.10 0.81 0.85 1.20

Note: Minimum: 1, Maximum: 5

the seven factors derived from the factor analysis and representing different market structures as the independent variables. This analysis showed that 96.7 percent of the cases were correctly classified, giving support to this 6-cluster solution. Moreover, we ran an analysis of variance along with Duncan’s multiple range tests for each of the original variables and across each cluster that showed that the 6-cluster solution to fit the data in a meaningful way. Table VI summarizes the results of this analysis. As it can be seen from this table, Cluster 1 refers to a “highly competitive market with well-informed customers where the company possesses a competitive advantage”. Cluster 2 describes a “competitive market where the company does not possess a competitive advantage”, while Cluster 3 refers to a “competitive market with price sensitive customers”. Cluster 4 describes a “highly competitive market with homogeneous services”, whereas Cluster 5 a “competitive market with a high concentration level”. Finally, Cluster 6 refers to a “non competitive market where the company offers differentiated services in higher prices than customers are willing to pay”. It should be mentioned here however that companies in certain industries (i.e. banks, transportation-shipping companies) identified the same market structure, while companies in

other industries (i.e. medical services, information-technology companies, airlines and insurance companies) identified different market structures. More specifically, the vast majority of banks and transportation-shipping companies were identified as operating in highly competitive markets (i.e. clusters 1 and 2). On the other hand, companies operating in the other industries did not show a clear pattern (i.e. they were identified as operating in a variety of market structures). It seems therefore that the resulting clusters represent perceived rather than actual market structures. However, this “subjective” in a sense measure of market structure might be more realistic than a more “objective” measure, since managers are expected to act and behave on the basis of what they believe their market conditions are rather than what these conditions are in reality.

Market structure and pricing objectives In order to identify the extent to which pricing objectives are varied across the aforementioned different market structures, an analysis of variance along with the Duncan’s multiple range tests was performed, which is shown in Table VII. What can be seen from this table is that the customer oriented objectives such as “customers’ needs satisfaction” and “attraction of new customers”

351

Competition in our market is extremely intensive A large number of customers exist in our market More customers in comparison with competitors exist in our market It is quite usual to have price wars in our market A large number of competitors exist in our market Market’s evolvement during the last five years The competitive services that are offered in the market are homogeneous Our market is characterized by a high concentration level Our customers are informed about the existing prices in the market Our customers are informed about the existing services offered in the market Every day we learn of a new action taken by our competitors

Market characteristics

3.58

3.61

3.67

3.81

3.80

[3.89]

[3.82]

3.80

3.94

4.09

3.81

2.93

3.05

3.84

[4.25]

3.91

(3.36)

4.19

[4.45]

[4.02]

4.28

Cluster 2 Competitive market where the company does not possess a competitive advantage (24.8 percent) (2)

4.39

Cluster 1 Highly competitive market with well informed customers where the company possess a competitive advantage (30.3 percent) (1)

Table VI Cluster analysis of the characteristics that comprise the market structure

352

3.21

3.50

3.56

[3.93]

3.64

4.00

(2.57)

3.50

3.36

(2.86)

4.00

(2.64)

3.41

3.23

3.68

(2.30)

3.59

2.86

(2.95)

4.14

4.05

(3.82)

0.000

0.003

0.002

0.000

0.000

0.006

0.000

0.000

0.000

0.000

0.013

Sign.

(continued)

11.121

3.841

4.010

5.701

10.588

3.433

15.435

6.686

5.281

15.328

2.995

F

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[4.40]

3.00

(2.80)

3.60

[4.00]

3.40

3.70

4.20

(3.00)

3.80

[4.40]

Cluster 6 Noncompetitive market where the company offers services in higher prices than customers are willing to pay (15.2 percent) (6)

Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas

3.05

(2.89)

3.42

(2.79)

3.32

3.37

[4.11]

[4.26]

3.89

4.26

4.26

Clusters of market structure Cluster 5 Cluster 4 Competitive Cluster 3 Highly market with a competitive Competitive market with high market with homogeneous concentration price sensitive level services customers (13.1 percent) (6.9 percent) (9.7 percent) (3) (4) (5)

Impact of market structure on pricing objectives

353 3.22

3.83

3.39 2.50 (2.00) 2.17

2.59

3.32 2.09 [2.96] 2.23

3.06

Cluster 2 Competitive market where the company does not possess a competitive advantage (24.8 percent) (2)

3.98

[3.84]

Cluster 1 Highly competitive market with well informed customers where the company possess a competitive advantage (30.3 percent) (1)

[3.37]

2.84

(1.95)

[3.68]

3.58

2.74

3.79

(1.70)

2.90

2.00

3.30

[4.70]

3.60

(2.60)

1.71

2.43

2.14

2.93

(2.50)

(2.71)

3.57

Clusters of market structure Cluster 5 Cluster 4 Highly Competitive Cluster 3 competitive market with a Competitive high market with market with price sensitive homogeneous concentration customers services level (13.1 percent) (6.9 percent) (9.7 percent) (3) (4) (5)

1.91

2.89

[3.05]

(2.59)

3.82

[4.09]

3.68

Cluster 6 Noncompetitive market where the company offers services in higher prices than customers are willing to pay (15.2 percent) (6)

5.428

8.571

5.900

4.858

8.539

17.512

8.587

F

0.000

0.000

0.000

0.000

0.000

0.000

0.000

Sign.

Notes: The figures represent the mean score of each characteristic in each cluster. Maximum values are in brackets while minimum in parentheses (based on Duncan’s multiple rang tests, p , 0.1). Sign indicates level of significance based on one-way analysis of variance

Forecast about the market’s evolvement within the next five years Our company has the power to negotiate and impose its own terms when doing business with our major suppliers Easiness of the existing competitors to leave the market Our customers are characterized by a high price elasticity The profit margins in our market are high Our competitors are weaker in comparison with us Easiness of new competitors to enter into the market

Market characteristics

Table VI Impact of market structure on pricing objectives Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas Volume 13 · Number 5 · 2004 · 343–358

4.44 4.39 4.36 4.00 4.06 4.33 3.97 3.83 3.86 3.72 3.75 3.64 [4.03] 3.22 3.75 3.75 3.61 3.56 3.64 3.33 3.56 3.42 3.28 [3.47] 2.78 3.03 2.81

2.67

4.45 4.43 4.32 4.02 4.16 4.16 4.09 4.09 3.91 4.14 3.59 3.66 3.57 [3.80] 3.41 3.39 3.16 3.18 3.23 3.39 3.07 3.16 3.07 2.98 3.00 2.82 2.39

2.45

Cluster 2 Competitive market where the company does not possess a competitive advantage

354 3.32

2.40

2.50

2.40 2.40 (1.90) 2.20 1.90

3.00

(2.60) 2.50

3.00 (2.70) 2.90 2.90 2.90 2.60

(2.30)

3.00 3.10 2.90

3.20

3.80 3.50 3.80

3.80 3.50 3.90 4.30

2.43

2.43

3.50 2.64 2.86 2.79 2.57

3.07

3.07 3.00

3.07 3.21 [3.86] 3.50 2.93 3.14

3.64

3.71 3.86 3.93

3.86

4.07 4.36 3.79

[4.50] 4.29 3.86 3.93

2.68

(2.23)

2.68 2.73 2.86 3.59 2.41

3.09

2.64 2.86

(2.95) 3.73 (2.68) 3.27 2.82 2.77

3.64

3.64 3.59 3.27

3.55

3.77 3.55 3.68

(3.68) 4.05 3.82 3.68

Cluster 6 Non-competitive market where the company offers services in higher prices than customers are willing to pay

1.091

1.992

1.501 1.022 1.847 1.341 1.075

0.673

2.435 1.200

2.484 1.916 2.417 1.019 1.552 1.726

3.028

1.362 1.476 1.379

1.626

0.689 1.611 0.763

1.832 1.371 1.279 1.572

F

0.368

0.084

0.193 0.407 0.098 0.251 0.377

0.645

0.038 0.312

0.034 0.095 0.039 0.409 0.178 0.132

0.013

0.242 0.201 0.236

0.157

0.633 0.161 0.578

0.096 0.239 0.276 0.172

Sign.

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[3.47]

3.42 3.21 3.37 3.26 2.79

3.32

[4.05] 3.58

3.63 3.53 3.74 2.91 3.79 3.74

[4.32]

4.05 4.05 4.11

4.32

4.37 4.00 4.42

4.37 4.37 4.53 4.63

Clusters of market structure Cluster 3 Cluster 4 Cluster 5 Competitive Highly Competitive market with a competitive market with high market with price concentration homogeneous sensitive level services customers

Journal of Product & Brand Management

George J. Avlonitis and Kostis A. Indounas

Notes: The figures represent the mean score of each objective in each cluster. Maximum values are in brackets while minimum in parentheses (based on Duncan’s multiple rang tests, p , 0.1). Sign indicates level of significance based on one-way analysis of variance

Maintenance of the existing customers Attraction of new customers Customers’ needs satisfaction Cost coverage Creation of a prestige image for the company Long-term survival Service quality leadership Achievement of satisfactory sales Achievement of satisfactory profits Sales maximization Market development Achievement of a satisfactory market share Determination of fair prices for customers Profit maximization Sales stability in the market Achievement of social goals Price differentiation Price stability in the market Liquidity achievement and maintenance Market share leadership Price similarity with competitors Coverage of the existing capacity Price wars avoidance ROI Market share increase ROA Distributors’ needs satisfaction Discouragement of new competitors’ entering into the market

Pricing objectives

Cluster 1 Highly competitive market with well informed customers where the company possess a competitive advantage

Table VII Market structure and pricing objectives

Impact of market structure on pricing objectives

Impact of market structure on pricing objectives

Journal of Product & Brand Management

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Volume 13 · Number 5 · 2004 · 343–358

along with the objectives of “long-term survival”, “service quality leadership”, “creation of a prestige image for the company” and “cost coverage” seem to be significant regardless of the type of market, indicating their importance for making effective pricing decisions. As far as the companies, which operate in a highly competitive market with well-informed customers and competitive advantage, are concerned, they seem to place their emphasis on maximizing profits through the prices that they set. This finding indicates that the competitive advantage that they possess over their competitors may be such that it allows them to pursue this objective despite the knowledgeable customers that exist in the market. On the other hand, those companies that operate in a competitive market without possessing a competitive advantage, are particularly interested in determining “fair” prices for their customers. Thus, contrary to the companies described above, the intensive competition and the lack of a competitive advantage may force them to adopt a customer oriented approach by endeavoring to levy “fair” prices in order to compete in the market. Furthermore, these companies endeavor to achieve a satisfactory return on the investments that they have made for their services rendered in the market. Regarding companies operating in a competitive market with price sensitive customers, they seem to consider very important the “achievement of a satisfactory market share” along with the “achievement and maintenance of liquidity”, while at the same time they place some emphasis on satisfying their distributors’ needs. Within this context, the price sensitivity of customers may lead firms to determine prices, which cover their cost and give them the opportunity to increase their market share, achieve and maintain liquidity and at the same time satisfy their distributors’ needs. It seems, however, that those companies that operate in a highly competitive market with homogeneous services do not have many obvious pricing objectives. It is also a characteristic that these companies place the least emphasis on all the pricing objectives in comparison with the rest of the companies operating in different markets. This finding might be attributed to the fact that the conditions pertaining this market structure (intensity of competition and homogeneity of services) may prevent companies from setting clear pricing objectives when they set their prices. Companies that operate in a competitive market characterized by a high concentration level place an emphasis on stabilizing sales in their market. This finding is to be expected, since such markets resemble oligopolistic situations where companies

avoid pricing practices that could put in a risk the stability and balance of the market (e.g. price wars) and prefer practices such as price collusions (Shipley and Jobber, 2001). It is also interesting that the objective of “maintenance of the existing customers” was found to be the most important for the companies operating in this particular market. This again may be explained by the oligopolistic nature of the market, which permits companies, through the aforementioned collusions, to keep their existing customer base. Finally, the companies that operate in non-competitive markets offering differentiated services in prices that the customers are not willing to pay, are not keen in the objective of maintaining their existing customers, seeking constantly for new customers and are not interested, as we should expect, to the objective of setting fair prices in order to stabilize their sales in the market.

Conclusions The objectives of this research were to investigate the pricing objectives that service organizations pursue and to examine the impact of market structure on them. Collecting data from 170 service companies through personal interviews, it was found that the companies in our sample are fundamentally interested in the customer related objectives of attracting new customers, maintaining the existing ones and satisfying their needs. Moreover, other important objectives were the service’s “cost coverage”, the “creation of a prestige image for the company”, its “long-term survival” and the “service quality leadership”, while the companies in our sample were also found to pursue more than one objective simultaneously. When investigating the pricing objectives that are pursued across different sectors, it was found that transportation-shipping companies place their emphasis on managing their capacity and assets, while insurance companies are interested in satisfying their customers’ and distributors’ needs and developing their market. On the other hand, information-technology companies endeavor to offer high quality services in the market, whereas airlines are interested in maintaining and expanding their existing customer base and banks are interested in financial objectives. Finally, medical services adopt a less systematic pricing behavior perhaps due to the confusing role of private and public companies in the medical sector in Greece. Moreover, after conducting a factor and cluster analysis on a set of variables that were derived from the existing literature comprising a market’s

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Impact of market structure on pricing objectives

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Volume 13 · Number 5 · 2004 · 343–358

structure, six different types of market structures were identified. They are as follows: (1) a highly competitive market with well informed customers where the company possess a competitive advantage; (2) a competitive market where the company does not possess a competitive advantage; (3) a competitive market with price sensitive customers; (4) a highly competitive market with homogeneous services; (5) a competitive market with a high concentration level; and (6) a non-competitive market where the company offers differentiated services in higher prices than the customers are willing to pay.

performance are disregarded. On the contrary, covering the cost along with achieving satisfactory profits and sales were also found to be important, although not as important as the aforementioned objectives. In a sense, these findings reflect a hierarchy of pricing objectives. More specifically, relationship marketing strategies aiming at attracting new customers and retaining the existing ones may help a company to safeguard its long-term financial performance and prosperity without jeopardizing its present profitability and/or market share and sales. Within this context, managers responsible for their firms’ pricing strategy might have to gain a lot by endeavoring to adopt such a customer orientation towards their pricing behavior if a financial success is to be realized (Nagle and Holden, 1995). Moreover, pursuing more than one pricing objective indicates the complexity and multidimensionality that characterizes pricing behavior. This complexity and multidimensionality are also reflected in the fact that different objectives were found to be pursued by different service industries operating in different market structures. However, this variation of pricing objectives across different market situations necessitates some further insights. This is intensified by the lack of an adequate body of theory on this topic. More specifically, apart from a customer orientation in setting pricing objectives, which was evident in all the different types of market structures, companies that operate in competitive markets and have managed to develop a sustainable competitive advantage are mainly guided by the effort to impose prices that lead, as we should expect, to maximum profits, while those companies, which lack a competitive advantage, are forced to adopt more “conservative” pricing strategies (i.e. achieve a satisfactory return on their potential investments and determine “fair” prices for their customers). On the other hand, companies operating in competitive markets with price sensitive customers seem to pursue a variety of pricing objectives. More specifically, despite this customers’ price sensitivity, it is interesting that they are endeavoring to retain their existing clientele basis and attract new customers (both final customers and distributors) by differentiating on non-price elements such as offering high service quality that conveys a prestige image with an outmost goal to achieve adequate financial results and ensure their long-term survival in the market. Thus, contrary to what might be expected, companies in this market seem to invest on building a “high quality” rather than a “low cost” image through the prices that they set. This fact reflects that despite the customers’ willingness for low prices, these prices

What is interesting is that the most important pricing objectives found in this study (with the exception of the objective of “maintenance of the existing customers”) are significant regardless of the market structure in which the company operates. However, eight objectives were found to be associated with particular market structures. More specifically, the objective of “profit maximization” was found to be pursued by those companies that operate in a highly competitive market, possessing a competitive advantage, while the objectives of “determination of fair prices for customers” and “Return On Investment” are pursued by those companies that operate in a competitive market where they do not, however, possess a competitive advantage. Moreover, the objectives of “achievement of a satisfactory market share”, “liquidity achievement and maintenance” and “distributors’ needs satisfaction” were found to be pursued by the companies that operate in competitive markets with price sensitive customers, while the objectives of “maintenance of the existing customers” and “sales stability in the market” were found to be pursued by the companies that operate in competitive markets characterized by a high concentration level.

Implications The above findings indicate that the companies in our sample are interested in satisfying their existing clientele basis’ needs (e.g. through high quality services that convey a prestige image) along with attracting new customers, in order to ensure their long-term survival in the market. It is also interesting that these objectives were found to be significant regardless of the type of the market in which a company operates. Certainly, this is not to say that other objectives related to financial

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Impact of market structure on pricing objectives

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Volume 13 · Number 5 · 2004 · 343–358

might not compensate for poor service levels resulting perhaps to the need for what Kotler et al. (1996) call a “good-value strategy” that combines low prices with high service quality. Companies operating in highly competitive markets characterized by homogeneous services do not seem to pursue clear pricing objectives. More specifically, the lack of differentiation characterizing these markets, which along with the rather intensive competitive environment may gradually lead to saturation and lower profit margins, forces them to levy prices aiming solely at covering their cost without, however, placing any particular emphasis on their financial performance (e.g. profits, liquidity and ROI). Companies operating in competitive markets with a high concentration level are mainly interested in maintaining their dominant position in the market through the prices that they impose (i.e. stabilize total sales among them and maintain their existing customers). This is not surprising given the fact that this type of market resembles oligopolistic situations that are characterized by efforts such as price collusions and avoidance of price wars aiming at preventing the entrance of other companies in the market and establishing an environment that benefits all existing leading companies (Shipley and Jobber, 2001). Finally, companies operating in noncompetitive markets characterized by the existence of high priced services seem to place more emphasis on attracting new customers rather than on maintaining their existing customers (both final customers and distributors) by charging fair prices in order to stabilize sales in the market. It seems that the absence of a competitive environment may not impose the need to invest on pricing strategies that facilitate the development of long-term relationships with the existing customers. In a sense, this is in line with previous studies that have shown that the adoption of a customer retention orientation (as part of a broader overall marketing orientation) is bound to be developed in competitive rather than non-competitive markets (Avlonitis and Gounaris, 1997). Certainly, these findings require further validation if useful guidelines to managers are to be provided. However, they could be the starting point in helping managers to understand and investigate in detail the unique characteristics and conditions of their markets and design their pricing strategies accordingly.

market structure on pricing objectives pursued, its findings and implications should be interpreted in light of a number of limitations. More specifically, the context of the study (Greece) is an obvious limitation since it limits the ability to generalize the results in other countries. Thus, future research that replicates the current study in other countries could further improve our understanding of the concepts described in the present survey. Another limitation of the study is related to the increased heterogeneity associated with cross-sectional samples (as in the present study) due to the fact that they induce negative effects on the quality of the findings (Bilkey, 1977). However, such samples can increase their generalisability, while they have also been adopted by other studies in the field of pricing (Shipley, 1981; Zeithaml et al., 1985). Certainly, future research on individual sectors could lead to a more thorough understanding of how companies operating in these sectors set their prices. Another area for further research may be the refinement and re-assessment of the concept of market structure as it was underlined in the present study. Given the fact that this study represents the first attempt to empirically examine this concept in the case of services, future research could shed more light on this issue and aid in developing an empirically based and tested construct. Finally, it might be interesting to introduce some profitability information into the analysis to see whether the combination of market structure and pricing objectives work together toward profitability or whether a specific objective works best (as measured by profitability) in a specific environment.

Limitations and future research Although the current study represents a first attempt to empirically examine the impact of

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