1. Before you read the text discuss the following questions:

1. How can a food retailer meet consumer requirements?

2. Why is price setting a challenging task?

3. What is the role of product differentiation as a marketing strategy?

4. How can you characterize Russian food industry from the marketing standpoint?

2. Read the text and take notes of key ideas. Summarize the text by filling in the table:

Price setting aspects
external
internal

What is the Role of Marketing Capability to be a Price Maker?¹²

In the Italian food market large retailers are assuming increasing power along the supply chains, due especially to the growing market share of private labels and the creation of buying groups. Moreover, closeness to the consumer allows retailers to obtain a large amount of information, and to reach a position of advantage with respect to other agents of the supply chain. Indeed, retailers can adapt more easily to changes in consumer behaviour.

These issues translate into strong retailer bargaining power, leading to difficulties for industrial firms to decide and fix a determined price of their products. In particular, small and medium sized enterprises (SMEs) are facing the biggest problems in price setting, as their market power is low, making it hard to survive alongside large firms and to put their food products on the shelves of retailers at a profitable price.

Given this situation, it is easy to figure out that the Italian food industry is characterised by growing vertical competition along the chains, and horizontal competition between large firms and SMEs, which actually constitute the majority of the sector.

Nevertheless, on the demand side, consumer preferences are evolving more and more towards products characterised by high quality and health attributes, as well as towards those linked to specific geographic areas. Thus, SMEs have the opportunity to focus their strategy on differentiation by enhancing marketing activities to be closer to consumer requirements and develop a better ability to set the price. Indeed, by setting the price themselves SMEs are able to communicate the value of their products to consumers, thus influencing consumer purchasing behaviour.

The ability and the possibility to be a price maker depend on a series of aspects both external and internal to the company. External aspects influencing price setting are the type of competition, the kind of distribution channel, and the width of the geographical sales market. Internal aspects affecting the price setting made by food SMEs include market research activities, product differentiation, marketing strategy, production of PDO-PGI, and firm size.

The type of competition greatly affects the pricing power of a firm, depending on the number of firms operating in a particular sector, the firm size, product differentiation, and so on. Indeed, the Italian food sector is characterised by imperfect competition, with the presence of both large and small firms. The coexistence of these firms is possible insofar as they differentiate their products. In relation to price, firms tend to choose between two strategies: price competition and non-price competition. In the first case the quantities produced cause firms to contain their prices in line with competitors' market prices, in the second case the firm enjoys greater price flexibility as the peculiar qualitative attributes added to the products justify a higher price.

The kind of distribution channel is also an important aspect affecting price setting. Indeed, the concentration of distribution sector is increasing, large retailers are growing and are assuming greater market power within the supply chains, generating a vertical competition with the industrial sector.

With regard to the internal aspects, the most appropriate strategy and the right level of differentiation can only be found through an analysis of the market in which the firm operates. Therefore, the firm has to enhance its market research activity to get information on consumer preferences and the situation of the marketplace, and make a close study of the environment which could affect the tastes of the final users. Moreover, firms need to investigate the skills of their suppliers and the requirements of their retailers in order to maintain a good qualitative level throughout the supply chain, and should observe competitor strategies and prices, all the while keeping informed about competing strategies, especially those related to product positioning.

Once the market is analysed, SMEs can decide which level of product differentiation they want to apply. Through differentiation, SMEs should be able to carve a niche in the market, peculiar to their product, beside large firms, offering a product with specific features for which the consumer is willing to pay a premium price. This premium price justifies the fact that some characteristics are not offered by other competitors, and also guarantees the superior quality and value of the product. Indeed, price is a way of communication with the consumer, who often evaluates whether to buy a product or not by comparing its price with that of substitutes. In the mind of the consumer, price is translated into product quality and value.

Nevertheless, it is not enough to differentiate products. If SMEs want to succeed and survive beside large firms, consumers must be able to recognize the peculiar attributes of the products and be loyal to these specific features.

To meet consumer requirements more closely, marketing strategy has the important role of acting as the go-between between a firm's internal organization and its market. Therefore, the activities related to marketing strategy help SMEs to plan in advance, helping them formulate clear objectives, choose the most appropriate distribution channel, and organize the sales force in the best way possible. Marketing also has the function of 'communicating' with the market and ensuring that the peculiar attributes of the products are recognizable by consumers.

In relation to traditional food products, another aspect influencing the price setting is represented by the production of PDO/PGI products, namely those products characterized by a certification concerning the origin of raw materials and the production process, which must be connected to a specific geographic area. Even though this aspect represents a differentiation tool through which consumers can recognize particular quality products, the fact is that the firms producing PDO/PGI products are also members of a consortium for the protection and promotion of the brand, and often the marketing activities are carried out by the consortium, including the pricing.

Finally, firm size can affect the price setting, especially in the case of firms characterized by micro, small and medium dimensions. The economic literature reveals that SMEs lack appropriate tools for responding to increased market competition, and for dealing with competitors in national and international markets. SMEs are weak in capability and bargaining power, and lack other resources that large enterprises normally have.

Furthermore, previous studies argue that SMEs often face shortage of time and resources, especially financial, and this makes the realisation of a market-oriented behaviour more difficult. Lack of time can result in poorly organised marketing activities. Moreover, limited financial resources reduce the possibility of investing in marketing activities. These issues translate into a low capacity to plan marketing activities in advance, to implement them regularly, and to set prices. Nevertheless, in this sense, an appropriate activity is needed to become more a price maker than a taker, and to reach better market power.