Part A: Pricing Strategy
Those in the marketing field are familiar with the “4Ps” of marketing mix, which consists of Place, Product, Promotion, and Price. Marketers capitalize on the 4Ps to reach and persuade prospective consumers. All marketing initiatives incur costs and thus have an impact on the price of a product.
The price of a product depends on many factors, including demand for the product and the volume of product that exists in the market (i.e., supply). As Jay B. Lipe points out, pricing strategy is a critical element in a company’s efforts to capture a market.
In this paper, I will address pricing strategies for retail financial institutions, particularly Royal Bank of Canada (RBC). In addition, I will discuss strategies that a retailer can use to transform its supply chain to gain competitive advantage.
Q: What financial objectives do you think the retailer is attempting to maximize through its pricing strategies? Explain your answer.
Pricing is an important issue for retailers, as it predicts and determines the destiny of their merchandise, whether it is saleable, like a glass of Coke in summer, or more difficult to promote, like ice cream in winter. Retailers generally decide to slash prices during periods of slowdown. Retailers must make precise decisions on the kind of merchandise to discount, when to offer the discount, and at which store to offer the discount in order to boost sales.
For a retail bank, pricing strategies are somewhat similar. Retail financial institutions such as Royal Bank of Canada (RBC) offer varied interest rates in order to attract customers.
Q: Describe the pricing strategies/polices the retailer follows. Explain why you think the retailer is using these particular pricing strategies. Do these pricing strategies support the financial objectives the retailer is attempting to maximize?
Royal Bank of Canada (RBC) has three major services: personal banking, business banking, and corporate banking. For each service, the company sets a revenue target. In this regard, RBC always routinely coordinates with sales managers and package coordinators to ensure that targets are in line with corporate objectives.
According to its corporate web site, RBC has the following objectives:
As one of the world’s most highly rated financial institutions, Royal Bank of Canada is committed to delivering excellent long-term returns to our shareholders.
Maintain the corporate performance in order to obtain the best corporate valuation as described in the RBC stock price.
Achieve CAGR of more than 8.1%.
Maintain strong annual Net Income growth of over 25.1%.(Royal Bank of Canada, 2008)
The company uses several methods to calculate prices:
Costing out a Price – this takes into account costs and desired profit and then evolves a price strategy.
Pricing competitively – After a product’s cost-based price is determined, this price is compared with market prices, especially competitors’ prices.
Pricing by position. This method concerns how the company wants its product to be perceived in the market. The price is decided based on its positioning for prospective customers.
For any pricing strategy that a company adopts, there are several challenges. Companies often begin to offer a product or service at a low price and then raise prices when there is greater demand for the product or service. This is not a good strategy, because the company will struggle initially to cover costs. When there are two choices for a price, and one is not sure which one to choose, it should choose the higher price. A company should commit to one pricing strategy. If a company changes the price of its offerings, it will make customers wonder about the true value of the product. Once a company has finalized its pricing strategy, it should commit to it.
By committing to remain aware of challenges in pricing, I think that RBC will ensure that its pricing strategies support its financial objectives and thus give more value to stakeholders.
Q: What value does the retailer create for its customers through the price positioning it has chosen?
It offers cost advantage through its attractive interest rates and differentiation advantage through its services like internet banking.
Part B: Supply Chain as Competitive Advantages
Today, manufacturing and service firms face growing challenges in their efforts to increase profit margins amidst increasingly fierce competition. Under such circumstances, industry analysts and supply-chain experts suggest that manufacturers and service providers promote more effective supply and demand planning, management, and execution to achieve higher profit margins.
In Supply Chain Management, the author defines supply chain management (SCM) as the overseeing of materials, information, and finances as they move in a process from the supplier to the manufacturer, then to the wholesaler/retailer, and finally to the consumer. The main goal of any SCM system is to reduce inventory, assuming that products are available when needed. SCM improves the time-to-market quotient of products, reduces costs, and allows all parties in the supply chain to manage current resources and plan for future needs.
Harcourt and Hutchinson suggest that although companies must have the products and supplies available to generate sales revenue or to provide public services, excess and outdated products and supplies will deplete the funds that are available for investments in plant, people, service delivery, and product development. Therefore, in order to achieve successful SCM, there should be close collaboration among customers, suppliers, and business partners.
SCM is an important source of competitive advantage for a retail bank. Tutor2U (2005) defined competitive advantage as a company’s particular advantage over its competitors, which it obtains by offering consumers greater and appropriate value through lower prices or by providing greater benefits and services that justify higher prices, such as customized services that exactly match customers’ needs. Michael Porter defined competitive advantage as the capability of a company to generate profits that exceed the industry average. He further noted two basic types of competitive advantage: cost advantage and differentiation advantage. Figure 1 depicts Porter’s model of competitive advantage.
Figure 1.Michael Porter’s Competitive Strategies model. From Competitive Advantage, by QuickMBA, 2007. Retrieved October 31, 2008, from http://www.quickmba.com/strategy/competitive-advantage/QuickMBA
With regard to transforming the supply chain into a competitive advantage, RBC has gained competitive advantage by introducing internet banking for its customers.
Figure 2.Online Banking at RBC. From Personal Banking-RBC Royal Bank, by Royal Bank of Canada, 2008. Retrieved December 1, 2008, from http://www.rbcroyalbank.com/RBC:SQp73Y71JscANdAaNr0/perindex.html
The application of SCM through the web, as displayed by RBC in its online banking Website, in general, alters the typical non-Internet financial supply chain management services (FSCMS) of Bank of America.
Figure 3.Example of Supply Chain in a Bank. From Ironing Out the Kinks in the Financial Supply Chain, by D.Scanlan, 2004. Retrieved December 31, 2008, from http: corp.bankofamerica.com/public/products/pdf/trade/wcm_ ar_ iron.pdf.
A non-Internet supply chain is a drawback for buyers due to concerns such as excess cash balances and an inability to take advantage of discount terms as it takes times more time to conduct business in a brick-and-mortar establishment.
This situation has changed as banks have realized the opportunity loss caused by the time-consuming brick-and mortar business model. They have developed a Web-based global supply chain to improve their performance.
Barovick, R. (2005). Global Supply Chains Challenge Banks To Do More. Retrieved October 31, 2008, from http://www.worldtrademag.com/CDA/Articles/Banking_and_Trade_Finance/268982712aaf7010VgnVCM100000f932a8c0____
Kotler,P., & Armstrong, G.(2006). Principles of Marketing. Prentice Hall
Nagle, T. T., & Holden, R.K. (2006). The Strategy and Tactics of Pricing. Upper Saddle River, NJ: Prentice Hall.
QuickMBA. (2007). Competitive Advantage. Retrieved October 31, 2008, from http://www.quickmba.com/strategy/competitive-advantage/
Royal Bank of Canada. (2008). Investor Presentation. Retrieved December 1, 2008, from http://www.rbc.com/investorrelations/pdf/presentation102008.pdf
Scanlan, D. (2004). Ironing out the Kinks in the Financial Supply Chain. Retrieved December 31, 2008, from corp.bankofamerica.com/public/ products/pdf/trade/wcm_ar_iron.pdf
Tutor2U. (2005). Strategy – Competitive Advantage. Retrieved October 31, 2008, from http://www.tutor2u.net/business/strategy/competitive_advantage.htm