Creative industries in Slovakia and their pricing strategies as the part of their marketing mix

The aim of this article is to contribute to the understanding of the possibilities of application of selected pricing strategies in the conditions of the creative industries in Slovakia. A creative product has interesting economic aspects, which are conditioned by its specific parameters. The economic potential of a creative product is a way of returning the investment in its creation, as well as a way of generating profit. In this case, the economic potential is the set of economic utility – uniqueness, intellect, knowledge, talent and skills added by each participant in the process of product creation. These characteristics make the products of the creative industries fundamentally different from those of traditional manufacturing. The added value of a creative industry product is not determined by the amount of work invested in its creation, but by the subjective perception of consumers, insofar as its consumption satisfies their personal needs. Pricing in creative industry enterprises results from a number of factors that determine the strategic direction of the enterprise and its output. This fact in turn influences the strategy of conceiving and creating individual prices. These play an important role in the strategic marketing of creative industry enterprises, despite their specificities (zero price or free entry, voluntary, list-based). It should be noted that prices are set differently in the non-profit sector and in the for-profit sectors producing in the creative industries. This means that in terms of the marketing mix of each tool, the pricing functions need to be taken into account.

Introduction

Price is the only marketing mix tool that generates, as opposed to other tools (product, distribution, promotion/communication). Very simplistically, it can be said to represent a certain amount of money paid by the customer to the institution. It can also represent the sum of all the values and benefits that the customer receives from the purchase of a product or service. Through pricing, an organization creates an image among consumers and seeks to maximize profit in relation to strategic financial objectives. Psychological factors are also taken into account in pricing where pricing is used as an indicator of product quality. Pricing for new products is usually a difficult task for a firm, for there always exists uncertainty of consumers’ valuation with respect to the new products. Moreover, the presence of strategic consumers even complicates the situation, due to their inter-temporal purchase choice behavior and their uncertain proportion in the whole demand pool. In this paper, facing the twofold uncertainty, we develop a stylized model to study the optimal pricing for new fashion products in the presence of strategic consumers. The optimal pricing strategy for the firm and the optimal purchase timing for strategic consumers are obtained; a framework is also built to investigate the expected value of demand information. Through numerical studies, we find that the price skimming strategy dominates the penetration strategy only when the firm’s discount factor is large enough, consumers’ strategic purchasing behavior diminishes the firm’s ability to adopt skim pricing, and the revealing strategy is most valuable when the firm is (almost) indifferent between skimming and penetration. In addition, some other managerial insights are also derived.

Pricing strategies in Creative industries

As we noted in the introduction, pricing strategy decisions depend on factors in an institution’s internal environment, such as the objectives of marketing, marketing mix strategy, costs, as well as the external environment, which may include the nature of the market and demand and competition. Du and Chen (2017) distinguish three external factors which influences on the creative industries. They emphasize that pricing is a key issue in the non-profit sector is specific (it does not have to be designed with a profit objective in mind). However, it is essential to know the values that customers are looking for, to apply adequate promotion and publicity, to get to know the mindset of different audience segments and to know what value they attach to different offers in the creative industries. Based on this, develop a pricing strategy.
It divides the input in three basic ways:
1. Free admission – this can be free admission all the time, free admission on a regular basis on a certain day of the month or week or at certain times of the week, free entry only occasionally. Its purpose is to make available cultural heritage to the public, to increase accessibility for underprivileged individuals. It may be exceptionally linked to the anniversary of an institution, the date of birth or death of an important artist.
2. Voluntary admission – this includes purely voluntary admission, recommended voluntary admission, in this way customers express satisfaction with their visit and contribute any amount depending on the level of satisfaction.
3. Admission based on price list – has the character of positive discriminatory admission based on price differentiation, it is the most commonly used type of admission, with selected target groups, children, students, pensioners, etc. pay less than the basic admission fees or have free admission.

Pricing in the creative industries results from a number of factors, which determine the strategic direction of the institution and its production. This in turn influences the strategy for conceiving and creating individual prices. These play an important role in the strategic marketing of culture, despite their specificities (free admission, voluntary admission, list-based admission). It should be remembered that otherwise prices are created differently in the not-for-profit sector and in the for-profit sectors producing on the creative market. This means that, in terms of the marketing mix of the different instruments, it is necessary to take into account the functions of prices.
Pricing strategies are an important tool for guiding price decisions in companies. The choice of pricing strategies is influenced by the nature of the products offered, their uniqueness, scope of production, location but also the way they are presented to the customer and also the company’s idea of profit: volume, speed, distribution over time. The basic pricing strategies can include strategies based on the relationship between price and product quality. Such strategies can be used by both small businesses (Scott 2019, Ingenbleck and van der Lans 2013) and large corporations. Penetration prices are a low-cost strategy as a means of attracting buyers and gaining a large customer base (Du and Chen 2017). It is a competitive struggle that can bring the company a lower profit than its competitors. The aim of this pricing is to increase product awareness, which in the long run can lead to several situations:
• The price will remain low for a long time and the increase in demand will cause an increase in profit, due to economies of scale.
• The low price will only be used to promote the product, and once the product has gained popularity with customers, this price will be increased, increasing the company’s profitability.
• The low price will prevent competitors from penetrating the market and will allow the company to maintain a certain market share in the long run.

Economic pricing uses low prices set by minimizing marketing costs in particular (but can also be production or logistics costs) (Scott 2019). With such an approach, a low price is still able to provide the company with a certain, albeit low, profit. The high danger of this pricing is a decline sales volume, which can be liquidating, especially for small companies, as they cannot keep costs low in such a situation. The danger thus concerns variable costs when it is not possible to claim better prices when obtaining production materials, but also to achieve economies of scale at fixed costs. Such pricing can only be applied at the beginning of the sale, when the first pieces of products or services provided will be sold at low prices and, after obtaining a minimum volume of sales, the other products will start to be offered at higher prices. Alternatively, products with low promotion costs will represent only a part of production and other products will be offered at higher prices. Selectively low prices due to reduced promotion costs can also be offered to loyal customers, for whom the company has a certain favor for several periods.
Premium pricing is used by companies with a unique product or brand that no one can compete with. They are used to attract customers from higher income groups (Farhan, Li and Mehmood 2017). The customer will focus on this product (or brand) and will not accept a product of the same quality from another manufacturer as a substitute. The company must focus on creating perceived value. Along with the production of high-quality products, it is necessary to invest in product packaging, the appearance of points of sale, promotion, which will enhance the impression of a premium product. This pricing method can also be used by small businesses that sell unique products, which is their main competitive advantage.
Skimming prices are used to maximize revenue from the sale of new products and services. At the beginning, the products are offered at high prices, which decrease with the arrival of competitors on the market (Du and Chen 2017). Such pricing is intended to ensure a return on the costs of research and development. It also evokes a sense of quality and exclusivity of products when they are launched on the market. At the same time, however, it allows you to gain price sensitive customers in the later stages of product life.
Psychological prices take advantage of the buyer’s emotional reactions to the price. The use of such prices is based on the assumption that customers tend to pay more attention to the first digit on the price tag than the last (for example, the price of € 998 is perceived better than the price of € 1,000). These prices simulate demand by creating the illusion of increased value for the consumer. According to Liu and Zhang (2003), psychological prices can also include – characteristic prices, respectively prices of price levels accepted by customers as typical for a certain product. It can be:
• Stylish prices – representing a certain lifestyle, or the customer’s assignment to a certain social group.
• Image prices – prices of products of artists, fashion designers, which belong to certain generally known price levels, thus complementing the image of the customer who owns such a product.
Price levels represent the definition of the maximum and minimum price that the customer considers acceptable given the perceived value of the product. This principle is also applied in the case of reference prices set for new products, which then significantly influence customers when assessing the prices of other products (Terzi, Sakas and Seimenis 2012).
Geographical pricing is pricing that takes into account the location of the point of sale (Su 2007). Such prices are set taking into account two factors:
• Covering different costs of sales in different locations (transport costs, taxes, duties).
• Differences in demand due to the nature of the product and customer behavior (higher prices in selected locations).

Promotional prices are the offer of certain discounts on specific products at a specified time. They arouse the customer’s interest in buying the product in a certain time interval. These can be, for example, vouchers offering discounts on certain goods or purchases. To support the positive effect, their application can be supplemented by promotional materials or marketing campaigns.
The prices of complementary products (price captivity) represent the setting of prices of products that complement each other. If we offer customers a basic product to which regular consumption of another product (such as a printer and toner) is linked, it is necessary to set the price of these products so that the customer is not willing to switch to competition (Scott 2019).
Product package prices offer a group of products (package) at a lower price that the customer would pay for individual products purchased separately. This can be a multiple packaging of one product, or a package by grouping several different products. The aim of such an approach to pricing is (Scott 2019):
• To ensure the sale of products for which customers are not so interested and thus achieve a reduction in their stocks.
• Increase customers’ impression of the perceived value of the purchase (the customer has the impression that their money has received more value).
• Accelerate the sale of products at the end of the life cycle.

In order to successfully apply this approach, it is necessary to ensure the profitability of the whole package and thus also the mutual compensation of the loss of one product by the profit of another product in the package. A positive for the company is also the saving of storage costs, speeding up circulation or removing older products.
The price of added value represents a strategy of increasing the price of a basic product by the value of an ancillary product or service (Su 2010). The price set in this way will make it possible to sell the basic product at a lower price and also to make an additional profit for the sale of the extended product.
Another option is dynamic pricing, aimed at flexibly adjusting prices at a specific time according to customer behavior and competition. Such a pricing strategy applies mainly to online sales and uses software tools to monitor customer behavior (for example, whether he has bought similar products and how much he paid for them) as well as competitors (for how much competitors offer similar products). Such prices can stimulate individual shopping behavior and offer the same products at different prices at different times, tailored to a specific customer. This principle is therefore based on price discrimination, which may pose a problem in the perception of fairness of prices.
A specific pricing approach is the application of a tripartite relationship based on the fact that the company offers its products to customers free of charge and benefits from secondary sources, which may be revenue from the sale of advertising space or the ability to perform additional work based on the reputation gained by the original production. When evaluating the profitability of such products, it is necessary to compare the cost of the original production with the profit from the benefits achieved.
The starting point for cost-oriented pricing is the determination of production costs and the addition of a profit margin. In the case of the creative industry, it is necessary to keep in mind the specific importance of human capital, which brings creativity to this business. In this context, the costs related to staff remuneration can be expected to be high. The second group of costs will be the costs of materials, services and indirect costs related to the implementation of a specific performance.
Pricing based on the value perceived by customers determines the price that customers are willing and able to pay. These prices may vary regionally depending on the perception of the value of certain products, the place of sale, the degree of satisfaction of customer needs and the level of their income. However, such pricing may also require additional costs to obtain information about customers’ perceptions of value. To assess the effectiveness of a product, it is appropriate to compile a back-up calculation that assesses the product’s ability to cover the company’s costs and contribute to profit.
Pricing based on competition takes into account the pricing behavior of competitors when determining the price. The price is set with regard to the similarity of the product with competing products and the possibility for customers to compare these prices. It is considered more advantageous to apply this price to companies producing products rather than services, as there is more variability in services and poorer comparability.

Methodology

The companies in the creative industries are a promising area of business representing the production possibilities of the future. To ensure the profitability of these industries, effective price management and the use of modern pricing strategies are essential. The aim of the paper is to contribute to the understanding of the possibilities of application of selected pricing strategies in the conditions of creative industries.
After summarizing the knowledge about the applied pricing strategies, we identified the sectors of the creative industries in which the most companies are concentrated. We used Eurostat data. The subject of our research was the creative industries, which according to a Eurostat survey consisted of more than 20,000 companies. An overview of them is provided in Table 1 and Table 2.

Table 1: Economic activities (NACE Rev. 2) that relate to creative industries – Part I
Source: Eurostat (2021)

Table 2: Economic activities (NACE Rev. 2) that relate to creative industries – Part II
Source: Eurostat (2021)

In the next step, based on observations, we outlined the characteristics of selected industries of the creative industries, which could influence the choice of pricing strategy. Subsequently, we summarized the possibilities of applying pricing strategies in these sectors.

Findings

When examining the possibility of implementing different pricing strategies in the sectors of creative industries, it is necessary to be aware of whether the resulting product will be more of a service tied to its implementer or a product that can be produced repeatedly, and in this context, whether it is possible to talk about custom or mass production. In terms of distribution and sales, it is important to consider whether it is ultimately a one-off offer or a recurring offer. From the point of view of the consumer paying for the product, whether a particular product is intended for one or more customers.

Table 3: A view of the creative industries in terms of the nature of production
Source: Author

Conclusion

Communication between creative enterprises and consumers is essential for the reduction of the risk of rejecting the creative product. The business challenge to managing creative businesses is to find a model for consumer feedback and an analysis of their consumer behavior after launching the creative product on the market. Business-oriented management enables creative enterprises to inform and educate consumers in a way that is conducive to the demand and consumption of the creative products they supply. Good communication allows modeling of consumer demand to continuity of new creative products. Well-designed consumer behavior is a prerequisite for reducing the risk of rejection of the creative product when it is realized on the market, due to mismatch in public needs and the creative decisions, presented by the industries.
In terms of the application of individual strategies, it is necessary to assess the specific situation of production and the subsequent existence of the product on the market. Strategies aimed at low prices can be applied if such prices do not give the impression of low quality and the product is offered to customers repeatedly. For products tailored to customers, produced in high quality, it is appropriate to apply strategies aimed at high prices. In the case of products purchased repeatedly, where customers are trying to get the highest value for their funds, it is appropriate to apply psychological and package prices. Geographic pricing is appropriate for offering creative products in various markets, such as the film industry, where the price of the original product must also take into account the cost of translating the original dialogues. Products that are offered online, such as books, magazines, can take advantage of dynamic pricing based on tracking customers’ shopping behavior and competitor prices. Offering visual recordings, music, magazines, or software in a virtual space can also use a tripartite relationship strategy. Businesses will thus gain a profit not only from the products they offer, but also from advertising or information obtained on customer behavior. Promotional pricing or captivity strategies can be used to motivate customers to make repeat purchases. But also from advertising or customer behavior information obtained.

Poznámky/Notes

This paper is the output of the scientific grant VEGA n. 1/0340/19 „The Entrepreneurial Dimension of Creative industries in the Context of Innovation and Smart Growth (100 %).“

Literatúra/List of References

1. Du, P. and Chen, Q., 2017. Skimming or penetration: optimal pricing of new fashion products in the presence of strategic consumers. In: Annals of Operations Research. 2017, 257(1), 275-295. DOI: 10.1007/s10479-014-1717-0.
2. Eurostat, 2021. Industry by employment size class (NACE Rev. 2, B-E). 2021. [online]. [cit. 2021-08-12]. Available at: <https://ec.europa.eu/eurostat/databrowser/view/sbs_sc_ind_r2$DV_665/default/table?lang=en>
3. Farhan, A. S., Li, C. and Mehmood, B. A., 2017. Study of premium price brands with special reference to willingness of customer to pay. In: International Journal of Academic Research in Business and Social Sciences. 2017, 7(7), 619-639. ISSN 2222-6990.
4. Liu, Q. and Zhang, D., 2013. Dynamic pricing competition with strategic customers under vertical product differentiation. In: Management Science. 2013, 59(1), 84-101. ISSN 0732-2399.
5. Ingenbleek, P. T. M. and van der Lans, I. A., 2013. Relating price strategies and price‐setting practices. In: European Journal of Marketing. 2013, 47(1/2), 27-48. ISSN 0309-0566.
6. Scott, Ch., 2019. How to choose a pricing strategy for your small business. 2019. [online]. [cit. 2021-08-13]. Available at: <https://quickbooks.intuit.com/r/pricing-strategy/6-different-pricing-strategies-which-is-rightfor-your-business/>
7. Su, X., 2007. Intertemporal pricing with strategic customer behavior. In: Management Science. 2007, 53(5), 726-741. ISSN 0732-2399.
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9. Terzi, M. C., Sakas, D. P., and Seimenis, I., 2012. Pricing strategy dynamic simulation modelling within the high-tech sector. In: Key Engineering Materials. 2012, 495(1), 167-170. ISSN 1662-9795.
   

   Kľúčové slová/Key words

   creative industries, customer, price management, pricing strategy
   kreatívne odvetvia, zákazník, riadenie cien, cenová stratégia

   JEL klasifikácia/JEL Classification

   M31, M39, Z10

   Résumé

   Kreatívne odvetvia na Slovensku a ich cenové stratégie ako súčasť ich marketingového mixu

   Cieľom tohto príspevku je prispieť k pochopeniu možností aplikácie vybraných cenových stratégií v podmienkach kreatívneho priemyslu na Slovensku. Kreatívny produkt má zaujímavé ekonomické aspekty, ktoré sú podmienené jeho špecifickými parametrami. Ekonomický potenciál kreatívneho produktu je spôsobom návratu investície do jeho tvorby, ako aj spôsobom generovania zisku. V tomto prípade je ekonomický potenciál súborom ekonomickej užitočnosti – jedinečnosti, intelektu, znalostí, talentu a zručností, ktoré pridáva každý účastník v procese tvorby produktu. Vďaka týmto charakteristikám sa produkty kreatívneho priemyslu zásadne líšia od produktov tradičnej výroby. Pridaná hodnota produktu kreatívneho priemyslu nie je určená množstvom práce investovanej do jeho vytvorenia, ale subjektívnym vnímaním spotrebiteľov, pokiaľ jeho spotreba uspokojí ich osobné potreby. Cenotvorba v podnikoch kreatívneho priemyslu vyplýva z viacerých faktorov, ktoré určujú strategické smerovanie podniku a jej produkciu. Tento fakt následne ovplyvňuje stratégiu koncipovania a kreovania jednotlivých cien. Tie v strategickom marketingu podnikov kreatívneho priemyslu, napriek ich špecifikám (nulová cena či vstupné voľné, dobrovoľné, na základe cenníka), zohrávajú dôležitú úlohu. Je potrebné pripomenúť, že inak sa ceny kreujú v neziskovom sektore a inak v ziskových sektoroch produkujúcich v kreatívnom priemysle. Znamená to, že z hľadiska marketingového mixu jednotlivých nástrojov je potrebné zohľadňovať funkcie cien.

   Recenzované/Reviewed

   10. September 2021 / 15. September 2021