The Research Proposal British Gas Pricing Strategy study on pricing strategy used by British Gas that gains them sustainable growth and allows them to be competitive in the Energy Market.
British Gas Pricing Strategy – Introduction
Conventional fossil fuels are being used by human population since ages to full fill their various energy requirements. Many countries in world have an economy entirely based on their fossil fuel production. Natural gas is one the very important fuels used for both domestic as well as industrial purposes and its pricing affects cost of many products and services indirectly. Gas manufacturing and marketing management all over the world uses various formulas and mechanism to determine their prices. Gas for consumption as a fuel is available in various forms in different markets like CNG (compressed natural gas) LPG (liquefied petroleum gas) LNG (Liquified natural gas) etc. In many countries fuel for domestic consumption is subsidized by the governments. Gas marketing organizations have to take care of that while deciding on prices they charge to a domestic costumer. Pricing in business is a measurable number that accounts for the profitability of the business. Gas prices in a free marketing environment are determined on the basis of international crude oil prices which fluctuates regularly because of change in various parameters like demand’ supply’ market sentiments and future prospects (Smith, 2011) regards pricing as an art that requires a careful analysis and understanding of the kind of prices in a business that would yield the highest profit. This is based on an accurate understanding of the current market scenario and gathering the appropriate information. However, setting prices is not an easy job as there are many uncertainties in the areas of “price structure, price point, and price discount” which “will vary over time, geography and customer situation”. Therefore prices are always set with many doubts in mind (Smith, 2011). With the high rate of competition in any market segmentation, business and firms choose to entice customers with bundles of smart products, reasonable prices, additional services and features that would rate their product over the other products present in the market. These bundles of services help the business maximise their profit whilst keeping the consumer satisfied. In this report we will be conducting a research on various strategic measures used by British Gas to determine their prices and how these strategies assist the organization in maintaining its long term sustainability in a free market. The report will consist an in depth analysis and literature review regarding entire business structure of fossil fuels and various measures taken to decide their prices by organizations (Ellickson and Misra, 2008).
As the title of the research suggests, the present research will be conducted on the UK’s leading energy supplying company British Gas which has the largest market share in the industry for the past few decades. The products offered by company are petrol ( gasoline) ; high speed diesel’ aviation fuel ( jet turbine fuel)’ gas for domestic consumption and gas for industrial and power plant consumption etc. The focus of this research will be on the pricing strategy used by British Gas. It will analyse the role of this strategy in helping British Gas gain a sustainable growth which keeps unharmed and whole even during recession in this fierce competitive energy market. The aim and objective of the study is to conduct a research and explore the pricing strategies used by British Gas to compete with other competitors and the different factors used by them to bring up a strong pricing structure. The research will also try to study the objectives, the powerful brand name and unique deliverance and assets of Centrica the parent company of British Gas. The research will include a literature review from various articles’ journals’ online publications and other research conducted on similar subject. The literature review will help us in gaining new insights on the pricing strategy followed by large organizations of energy sector and analysing their core logic behind pricing formulae and challenges faced by them in due course of determining prices (Data Book, 2010).
Background of the Organisation
British gas group or commonly known as BG group is one of the leading player not only in UK but in world in energy sector. The company is headquartered in UK but it has operations in approximately 25 countries. The company deals in various energy products but it is considered as a most efficient provider of natural gas. Company is considered as a total solution provider in gas needs and its operations begins with exploration of gas and ends at delivery of the product to consumers. British gas was a monopoly gas supplier in UK a couple of decades back and it was under government control. The privatization of the company took place in year 1986. Thus formation of organization British gas plc took place. The company was demerged in year 1997 into two separate companies Centrica Plc and BG plc. The Centrica took care of the production and supplies of north and south Morecombe gas field While BG group took responsibility of gas distribution’ transportation and international exploration for the company (Centrica, 2011). The company has entered into various markets and it also integrates the front and back end operations. It is now not only providing gas to its consumers but also providing electricity’ domestic and industrial heating systems’ installation services’ and domestic appliances for various purposes. The key sector in which British gas is working is production and exploration of new and existing energy fields’ development of a robust transportation and distribution networks’ providing end consumer behaviour services like installation and appliances selling and company has also shown its commitment towards keeping a strong focus on liquefied natural gas market which they consider as fuel which will be available in abundant amount and consumed by various sectors in future. The strategy followed by British gas for the market is to keep focus on understanding’ building’ and supplying gas to markets at both domestic and international level. Pricing of the gas is a very important part which needs to be decided with outmost care when focusing on the developing and understanding the marketing strategy (British Gas, 2011).
The research question for the dissertation are as follows
- Looking at the current energy market, what are the pricing strategies adopted by British Gas which allows them to come up with a competitive prices in market?
- How does the pricing strategy used by British Gas allow for a sustainable growth and edge over other players present in the market?
The aims and objectives of the present research are as follows.
- To analyse different aspects of pricing strategy followed by British gas in determining their product’s prices and rationale behind their current pricing strategy.
- To investigate various challenges faced by the organization from free market and other players present in the industry.
- To explore and assess various risk factors present in market which can impact the pricing mechanism in a negative way and disrupting all forecasting about future prices.
To evaluate the current marketing strategy of British Gas using various strategic analysis framework like SWOT and PEST analysis.
market for fuel and gas is entire world with every country having different type of needs and levels depending upon their population’ industrial development’ weather conditions and domestic production. Majority of countries are dependent on imports to sustain their energy requirements. There is a gap in demand and supply of the products by domestic purposes in all countries except oil producing countries. These producing countries have economies based on their oil producing business. Most of the oil producing countries is members of association of oil producing countries like OPEC etc. To maintain a healthy price in the market these association determines the level of production to be undertaken so that prices do not fall beyond a certain level (Barker et al., 2000) there are various other factors also which impacts the international crude oil prices like overall economic scenario of the world (growth phase or recessive phase)’ demands from other countries’ usage of alternative and renewable source of energy ( solar power’ wind energy etc)’ increased demand for heating fuel in cold weather conditions’ demand from developing countries’ discovery of new oil fields and their commissioning etc.
International prices are currently hovering in the range of (100 dollars to110 dollars per barrel of crude oil) with fluctuations depending on the market forces. The future market for crude oil is also giving signals of down trend in oil prices. Most recognized and traded international oil markets are New York mercantile ‘London crude’ Brent crude etc. The other markets for oil trading take cues from these markets in determining their prices. In last couple of decades the prices for crude oil has increased many folds and their demand has also grown exponentially. Market researchers claims that main reason for increase in the prices and demand are increasing level of globalization and industrialization’ a very high demand from developing economies which are consuming high amount of fuel for fulfilling their energy needs and power generation’ increased lavish life style with frequent flying and purchase of motor vehicles’ development of technologies in industrial sector which leads to automation of manual process by consuming fuel or electricity’ depleting existent source of fields and political instability and war like situations in majority of oil producing countries in middle eastern and African countries (McCullough, 2006).
To gain an understanding of what pricing strategy is all about, one must first understand the concept of price. Lancaster and Reynolds (2004) understand price to be the means using which a business would support its research costs, marketing costs, the costs of manufacturing and a few other activities. Boone and Kurtz (2009) have provided us with a simple definition of price where “Price is an exchange value of a good or service”. It is crucial for marketers to understand whether the price paid for a good or service is worth paying the price for it. Again while in some cases consumers are willing to pay a high price if the product is of a superior quality, in other cases high prices often drive customers away (Boone and Kurtz, 2009).
Kotler (1997) is of the view that for the marketing mix, pricing is one of the most essential elements as it can transform fast while, also, contrasting product features and companies commitments. To this, Lancaster and Reynolds (2004) add that for a company to generate huge revenue it is important to have a good pricing strategy, a marketing mix and a suitable method of marketing the service or product.
Although the pricing strategy of a product changes as time passes companies launching a new product often find it difficult to set a price for the first time. To assist them in choosing the right strategy, they can choose between two broad strategies. These are market-skimming prices and market-penetration prices. However many companies also uses a mixed type of strategy all of the strategies are explained below.
- Market-Skimming Prices: Here companies examine the maximum income for a newly launched product by setting a high price for it. This strategy targets the few customers who are willing to pay a high price. However, for this strategy to be effective it must meet certain conditions. Firstly, the high price charged for the product must be supported by its quality. Secondly, the production cost of the product should not be so high that it is disadvantageous to produce a smaller quantity of the product. Lastly, there should be differentiation. In this it should be difficult for competitors to enter the market and sell at a cheaper price (Kotler and Armstrong, 2010). Here the company’s internal costs and their profit margin determine the price which is either too high or relatively low in relation to their competitor products and the company’s brand equality and their brand name and reputation (Kotler, 1997).
- Market-Penetration Pricing: This strategy allows companies sell a new product at a low price so as to target a larger number of buyers. They penetrate the market at a fast pace and in a deep manner with the sole intention of attracting a large number of buyers as quickly as possible. As with the previous strategy, for this strategy to work several conditions must be met. Firstly, the market segment in target should be responsive to fluctuations in prices. Secondly, with the increase in the sales volumes, there must be a fall in the cost of production and distribution.
- Mixed strategy: In this strategy companies uses both market skimming and market penetration strategy with changing times. When a new technology or a new product is launched in the market with no other competitive forces applicable in environment then companies try to earn maximum profitability by market skimming strategy. Since there is no competitive player in market for that particular product so companies can charge a premium and earn profits till they can and in due time when competition catches up and launches their own product in competition then the first organization lowers its prices and take advantage of the brand name and customer loyalty it has formed over the time period.
Arbitrage Pricing Theory
In 1976 Stephen Ross introduced the Arbitrage Pricing Theory which deals with the practice of taking advantage of condition of difference thereby linking more than two markets and thus building a danger free profit. In this theory Ross argues that “if equilibrium prices oﬀer no arbitrage opportunities over static portfolios of the assets, then the expected returns on the assets are approximately linearly related to the factor loadings” (Ross, 1976).
This Arbitrage Pricing Theory sets a valuation which is important in the pricing of stocks. This theory argues that a financial advantage could be a linear role of different macro-economic factors or theoretical market indices and factor specific beta coefficient represents the sensitivity to changes in each factor. This theory was introduced to be used when the current price is too low or existing price is too high. Ross’s theory gives justification that by adopting a safe profit which is bereft of any risk through asset pricing could help a company or Organisation in maintaining a sustainable and competitive role. This theory can be measured well to recognize the ways in which a pricing strategy can resolve the necessary factors introduced in the current unstable market, even if the price is too low or too high (Huberman and Wang, 2005).
Theory of Price Elasticity
The Theory of Price Elasticity of Demand measures the effect of a change in the price to the demand and supply of a product. Products that are considered to be necessities are less affected by a change in the price as the consumers need the products and will continue to buy them. However, a product of less need will keep customers at bay owing to the high prices charged (Investopedia, 2011).
“To determine the elasticity of the supply or demand curves, we can use this simple equation:
|Elasticity = (% change in quantity / % change in price)|
If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic” (Investopedia, 2011).
Investopedia (2011) provides us with the factors that affect the demand elasticity. These are:
- The availability of substitutes: here consumers would readily substitute one product for another, if the price of the product is too high. For example, the substitution of coffee by tea.
- Amount of income to be spent on the product: an increase in the price of a commodity but not in the income of a consumer will force the consumer to lower his/her demand of the particular commodity. Here there is an elastic reaction to demand where demand is affected by the change in the price.
- Time: If the price of a commodity goes up and there are no substitutes, the consumer will continue buying the commodity which is here seen as inelastic. However, if the consumer cannot afford the high price of the commodity he/she will stop buying it for a period of time. Here the price becomes elastic for the commodity in the long run.
RATIONALE FOR STUDY
Entire world is facing a shortage of cheap and clean energy sources. Liquid petroleum products like petrol and diesel are getting rare and dearer. It has been observed in many studies that considering the depleting level of existing oil fields and abundance of gas in new discoveries gas could replace the other fuels in coming future. Gas is more cleaner and cheaper source of energy and can be used for domestic and commercial purposes easily. In current times a study on pricing theories of UK’S biggest gas supplier is relevant to understand the impact prices of gas will make on common population and economic growth. It is imperative for academicians’ industry’ competitors as well as government to keep a eye on the pricing structure and understand how a sustainable pricing formulae can be derived. This relevance makes the topic of study very interesting and attracted me to take this subject for my dissertation.
Dissertation on British Gas Introduction and Research methodology is next part of introduction and research proposal of british gas.
- British Gas (2011) About Us [Webpage]. Available at: <http://www.britishgas.co.uk/about-british-gas.html> [Date accessed: 11th Oct, 2011].
- Boone, L.E. and Kurtz, D.L. (2009) Contemporary Business 2010 Update (13th edition revised). John Wiley and Sons Publications.
- Centrica (2011) British Gas [Webpage]. Available at: <http://www.centrica.com/index.asp?pageid=279&Flash=Businesses> [Date accessed: 25th July, 2011]
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- Data Book (2010) Bg-group.com. [web page] http://www.bg-group.com/InvestorRelations/Reports/db2010/Pages/default.aspx Retrieved 11th Oct 2011.
- Dibb, S. and Simkin, L. (2001) An introduction – pricing strategy. United Kingdom: Prentice Hall.