Future challenges of energy pricing

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One challenging issue in energy policy is pricing energy utilities. Price is a key variable of energy demand and supply in Mekong river countries. Selling energy utilities is dependent on marketing activities of energy. Marketing is a discipline of four coequal elements: the product, its promotion, its distribution and its pricings.

Marketing consists of 4 ps. Pricing is the company´s attempt to capture some of the value in the profits it earns. If effective product development, promotion and distribution sow the seeds of energy business, effective pricing is the harvest.

It is quite interesting and puzzling why many energy companies fail to price effectively even when they otherwise employ very effective marketing strategies. Price is of primary importance to energy companies. Energy companies must cover costs, to maintain cash flow and to achieve a target rate of return.

On the other hand, they must think how customers response to the prices of energy utilities. If prices are too high, demand for energy utilities will be weak. If prices are too low, demand for energy utilities is too strong and some customers are left without energy utilities. In real life markets are not in the equilibrium as conventional micro economic theories assume.

The customers´ goal is to obtain the most value for their money. For commodities, that often means buying the cheapest offering. For differentiated energy product, that may mean paying a little more for the perceived superiority of a particular brand.

A few pennies´ differences in price may be of great importance to a energy company selling millions of units, while being of little consequence to a customer who buys just one unit. Yet that will not stop potential customers from rejecting any price that is a few pennies more than they are willing to pay. It is important to understand that customers are not concerned with the seller´s need to cover production costs, to improve cash flow or to meet a target rate of return. Their concern is to get their money´s worth.

In the Mekong River countries one key future challenge will be intelligent pricing of energy utilities. Intelligent pricing strategy of energy utilities depends on production costs, price sensitivity and energy market competition. These three factors determine an energy product´s pricing environment. Energy companies can adopt product-driven focus or customer-driven focus in their pricing decisions.

Intelligent pricing begins starts with a better understanding of the economic underpinnings of cost and value of energy utilities. There should be more analytical research in this field because the success of energy sector investments depends critically on price intelligence of energy products and services.