PRICING STRATEGY
Pricing Defined
Price is the amount of money charged for a product or a service. More broadly price is the
sum of all the values that customers give up to gain the benefits of having or using a product
or service. Traditionally, price has been the major factor affecting buyer choice. Although in
recent years, non-price factors have gained increasing importance.
From a marketing viewpoint, Price is the money or other considerations including other
goods and services, exchanged for the ownership or use of a product. In most marketing
situations, the price is apparent to both buyer and seller. However, price does not always
take the form of money paid. In fact, barter, the trading of product, is the oldest form of
exchange.
For most products, money is exchanged. However, the amount paid is not always the same
as the list, or quoted, price because of discounts, allowances, and extra fees. While
discounts, allowance and rebates make the effective price lower, other marketing tactics
raise the real price.
In 21st century pricing tactics is to use "special fee" and "surcharges". This practice is driven
by consumers zeal for low prices combined with the ease of making price comparisons on
the internet. Buyers are more willing to pay extra fees than a higher list price, so sellers use
add on charges as a way of having the consumer pay more without raising the list price.
Price is what you pay for what you get
The price paid for goods and services goes by many names. You pay tuition for your
education, rent for apartment, interest on a bank credit card, and a premium for car
insurance. Your or physician charges you a fee, and airlines charge a fare.
Nature and Importance of Price
Price is significant in our economy, in the consumer's mind, and in an individual firm. Let's
consider each situation:
In the Economy
A product's price influence wages, rent, interest, and profits. Price isa basic regulator of the
economic system because it influences the allocation of the factors of production: labor,
land, capital and entrepreneurship. High wages attract labor, high interest rates attract
capital, and so on. As an allocator of resources, price determines what Will be produced
(supply) and who will get the goods and services produced (demand).
In the Consumer's Mind
At the retail level, a small segment of shoppers is interested primarily in low prices, and
another segment of about the same size is indifferent regarding price in making purchases.
The majority of consumers are somewhat sensitive to price but are also concerned with
other factors, such as brand image, store location, service quality, and value.
Another consideration is that some consumers' perceptions of product quality vary directly
with price. Typically, the higher the price, the better the quality is perceived to be.
In the individual Firm
A product's price is a major determinant of the market demand for it. Price affects a firm's
competitive position and its market share. As a result, price has a considerable bearing on a
company’s revenue and profit.
Some businesses use higher prices to convey an image of superior quality. This methods
makes sense only to consumers who consider quality important. To be highly effective is
signaling superior quality, the high price should be combined with other conspicuous
elements of the marketing mix, such as a compelling advertising message and appealing
package design.
PRICE DETERMINANTS
Beyond customer value perceptions, cost and competitor strategies, the company must
consider several additional internal and external factors.
INTERNAL FACTORS
Internal factors affecting pricing include the company's overall marketing strategy, objectives,
and marketing mix, as well as other organizational considerations.
1. Marketing Strategy — Price is only one element of the company's broader marketing
strategy. Thus, therefore setting price, the company must settle on its overall marketing
strategy for the product or service. If the company has chosen its target market and
positioning vigilantly, then its marketing mix strategy, including price, will be reasonably
uncomplicated.
2. Objectives — Pricing may play an essential function in helping to achieve company
objectives at many levels. A firm can set prices to draw new customers or profitably keep
existing ones. It can set prices low to avoid competition from entering the market or set
prices at competitors' levels to steady the market. It can price to continue the loyalty and
support of resellers or shun government intervention. Prices can be reduced momentarily to
generate excitement for a brand, or one product may be priced to assist the sales of other
products in the company’s line.
3. Marketing mix — Price choices must be harmonized with product design, distribution, and
promotion decisions to structure a reliable and valuable integrated marketing program.
Decisions prepared for other marketing mix variables may influence pricing decisions. For
instance, a decision to position the product on high-performance quality will indicate that
the seller must charge a higher price to cover higher cost. Producers whose resellers are
anticipated to support and endorse their products may have to build larger reseller margins
into their prices.
4. Other organizational considerations — Management must fix on who within the
organizations should set prices. Companies handle pricing in a variety of ways. In small
companies, prices are often fixed by top management rather than by the marketing or sales
departments. In large companies, pricing is typically handled by divisional or product line
managers. In industrial markets, salespeople may be permitted to bargain with customers
within definite price ranges. Even so, top management sets the pricing objectives and
policies, and it often approves the prices planned by lower-level management or
salespeople. In industries in which pricing is a key factor (like airlines, aerospace, steel,
railroads, oil companies), companies usually have pricing departments report to the
marketing department or top management. Others who have influence on pricing consist of
sales managers, production managers, finance managers, and accountants.
EXTERNAL FACTORS
External factors include the nature of the market and demand and other environmental
factors.
1. Nature of the market—Both consumers and industrial buyers weigh the price of a product
or service against the benefits of possessing it. Accordingly, prior to setting prices, the
marketer must know the relationship between price and demand for the company's product,
The sellers pricing freedom varies with different type of markets. There are four types of
markets each presenting a different pricing challenge.
A. Pure competition — the market consists of many buyers and sellers trading in a
uniform commodity, like wheat, copper, or financial securities. NO distinct buyer or
seller has much effect on the going market price. In a purely competitive market,
marketing research, product development, pricing, advertising, and sales promotion
play tiny or no role. As a result, sellers in these markets do not spend much time on
marketing strategy.
B. Monopolistic competition — the market consists of many buyers and sellers who
trade over a range of prices rather than a single market price. A range of prices arises
because sellers can set apart their offers to buyers, Sellers endeavor to develop
differentiated offers for different customer segments. In addition to price, freely use
branding, advertising, and personal selling can also set their offers apart.
C. Oligopolistic competition — the market consists of not many sellers who are
extremely responsive to each other's pricing and marketing strategies. As there are
hardly any sellers, each seller is watchful and sensitive to competitors' pricing
strategies and moves
D. Pure Monopoly – the market has only one seller. The seller may be a government
monopoly (phil. Postal Service), a private regulated monopoly (a power company) or
a private non regulated monopoly.
2. Demand — Buyers are less price conscious when the product they are buying is inimitable
or when it is high in quality. prestige. or exclusiveness or substitute products are hard to find
or when they cannot easily compare the quality or substitutes. It could also be that the total
expenditure for a product is low relative to their income or when the cost is shared by
another party. If demand is elastic rather than inelastic, sellers will reflect on lowering prices.
A lower price will create more total revenue. This practice is sensible as long as the added
costs of producing and selling more do not go beyond the additional revenue.
3. Economy — Economic conditions can have a strong impact on the firm's pricing strategies.
Economic factors like a boom or recession, inflation, and interest rate affect pricing decisions
because they affect consumer spending, consumer perceptions of the product's price and
value and the company's costs of producing and selling a product. The most obvious
response to the new economic realities is to cut prices and offer deep discounts which a
thousand of companies have done. Lower prices make products more seasonably priced and
help encourage short-term sales.
4. Other environmental factors — Aside from the market and the economy, the company
must think about some other factors in its external environment when setting prices. It
should distinguish what impact its prices will have on other elements in its environment. The
company must set prices that offer resellers a reasonable profit, push their support. and
assist them to sell the product well. The government is another vital external pressure on
pricing decisions. Lastly, social concerns may require to be taken into consideration. In setting
prices, a company's short-term sales. Market share, and profit goals may need to be
tempered by larger societal concern.
