Pricing strategies and levels and their impact on corporate profitability

Price policy definition is one of the most important decisions in management as it affects corporate profitability and market competitiveness. Despite the importance that prices take in organizations, it appears that this element has not received proper attention by many academics and marketers since it represents, according to estimates, less than 2% of the papers on leading journals in the field. Thus, the aim of this study was to propose and test a theoretical model showing the impacts of pricing policy on corporate profitability. To this end, 150 companies in the metal-mechanic sector situated in the Northeast of Rio Grande do Sul State, Brazil were studied, integrating customer value-based pricing strategies, competition-based pricing strategies and cost-based pricing strategies with price levels (high and low) and performance with respect to profitability. The results indicate that the profitability of the surveyed companies is positively affected by value-based pricing strategy and high price levels while it is negatively affected by low price levels. Such findings indicate that pricing policies influence the profitability of organizations and therefore, a more strategic look at the pricing process may constitute one aspect that cannot be overlooked by managers.

Keywords:
Prices; Pricing; Pricing policy; Price strategies; Business performance

Factor	Variables	Factor loadings	% variance	Cronbach's alpha	Mean	Standard deviation
F1: Competition-based prices	V09	0.847	33.22	0.826	5.14	1.13
	V05	0.798
	V08	0.775
	V06	0.755
	V10	0.619

F2: Customer value-based prices	V01	0.855	18.63	0.853	5.76	0.962
	V04	0.850
	V02	0.809
	V03	0.740

F3: Cost-based prices	V11	0.766	11.90	0.591	6.24	0.750
	V13	0.716
	V12	0.711

Factor	Variables	Factor loadings	% variance	Cronbach's alpha	Mean	Standard deviation
F1: Low prices	V21	0.871	40.09	0.824	2.83	1.51
	V22	0.870
	V29	0.776

F2: High prices	V23	0.761	19.49	0.720	4.11	1.23
	V26	0.712
	V30	0.644
	V19	0.617
	V25	0.567

Net profit margin	Frequency	%
Negative net profit margin	4	2.7
From 0% to 5%	29	19.3
From 5.1% to 10%	54	36.0
From 10.1 to 15%	40	26.7
From 15.1% to 20%	14	9.3
Above 20%	9	6.0

Total	150	100

Constructs	1	2	3	4	5	6
1 Business performance (net profit margin)	1
2 High prices	0.471^ Significant level of 5%. Obs.: all variables were standardized (mean = 0; standard deviation = 1).	1
3 Low prices	−0.453^ Significant level of 5%. Obs.: all variables were standardized (mean = 0; standard deviation = 1).	−0.362^ Significant level of 5%. Obs.: all variables were standardized (mean = 0; standard deviation = 1).	1
4 Customer value-based prices	0.481^ Significant level of 5%. Obs.: all variables were standardized (mean = 0; standard deviation = 1).	0.401^ Significant level of 5%. Obs.: all variables were standardized (mean = 0; standard deviation = 1).	−0.425^ Significant level of 5%. Obs.: all variables were standardized (mean = 0; standard deviation = 1).	1
5 Competition-based prices	0.075	0.205^* * Significant level of 10%	0.163^* * Significant level of 10%	0.287^ Significant level of 5%. Obs.: all variables were standardized (mean = 0; standard deviation = 1).	1
6 Cost-based prices	0.116	0.153	−0.219^ Significant level of 5%. Obs.: all variables were standardized (mean = 0; standard deviation = 1).	0.294^ Significant level of 5%. Obs.: all variables were standardized (mean = 0; standard deviation = 1).	0.169^* * Significant level of 10%	1

Constructs	Control variables	Main effect	Interaction effect	Interaction effect
	Model 1	Model 2	Model 3	Model 4
New products development (NPD)	0.170^ p< 0.01 - standard coefficients.	0.052	−0.009	−0.006
Imports	0.216^ p< 0.01 - standard coefficients.	0.095	0.112	0.110
Customer value-based price strategy		0.238^* * p< 0.05	0.475^* * p< 0.05	0.489^* * p< 0.05
Competition-based price strategy		−0.014	−0.003	0.003
Cost-based price strategy		−0.044	−0.076	−0.155
High prices		0.259^* * p< 0.05	0.241^* * p< 0.05	0.236^* * p< 0.05
Low prices		−0.228^* * p< 0.05	−0.240^* * p< 0.05	−0.247
Customer value-based price strategy versus NPD			−0.287^* * p< 0.05	−0.291^* * p< 0.05
Cost-based price strategy versus imports				0.096
Constant	0.569^* * p< 0.05	0.606^* * p< 0.05	0.618^* * p< 0.05	0.618^* * p< 0.05
Adjusted R²	0.079	0.326	0.348	0.347
R ²	0.092	0.357	0.382	0.386
ΔF		11.96^* * p< 0.05	5.982^ p< 0.01 - standard coefficients.	0.834

Hi	Research Hypotheses	Results
H1a	Adopting a customer value-based pricing strategy has a direct and positive impact on profit margin.	Confirmed
H1b	Level of development of new products (DNP) moderates the relationship between customer value-based pricing strategy and profit margin, and such relationship is stronger in those companies which launch more products into the market.	Not confirmed
H2	Adopting a competition-based pricing strategy has a direct and negative impact on profit margin.	Not confirmed
H3a	Adopting a cost-based pricing strategy has a direct and positive impact on profit margin.	Not confirmed
H3b	Import of raw materials and supplies moderates the relationship between cost-based pricing strategy and profit margin, and this relationship would be stronger for companies that import.	Not confirmed
H4	Adopting high price levels has a direct and positive impact on profit margin.	Confirmed
H5	Adopting low price levels has a direct and negative impact on profit margin.	Confirmed

Departamento de Administração da Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo Avenida Professor Luciano Gualberto, 908, sala F184, 05508-900 São Paulo / SP Brasil, Tel./Fax 55 11 3818-4002 - São Paulo - SP - Brazil
E-mail: rausp@usp.br

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[1] * Corresponding author at: Alameda João Dal Sasso, 800, CEP 95700-000, Bento Gonçalves, RS, Brazil. E-mail:dtoni2@ucs.br (D. De Toni).