What Is Pricing?
- Definition of price (by Kotler) – The amount of money charged for a product or service or the sum of values consumers exchange for the benefits of having or using the product or service.
- Pricing is simply the process of placing a price on a product or service.
- All companies must set prices on their products or services.
- These may come in many forms
- You pay, rent, tuition, doctor’s fee’s, tariff’s, interest, toll, premium, salary, commission, wage, income taxes, etc etc.
- Historically, buyers choice has mainly been affected by price.
- Today, however, the role of non-price factors has become increasingly important and continues to do so.
- Price is the only element in the marketing mix that represents revenue; everything else is grouped into the elements of cost.
- Even though pricing is seen by many companies as the number-one problem faced by marketing executives, it is badly handled and often is ignored and no-longer matches the current conditions that the price should reflect.
- A company sets a pricing structure, not a single price, and the structure changes as each product moves throughout its life cycle.
- A successful company should change the pricing structure based upon changing costs, consumer demand and account for variations is buyers and situations.
Factors To Consider When Setting Prices
- It is important, before setting prices, to decide on a strategy for a product
- If a organization has selected its target market and positioning carefully, then its marketing-mix strategy, including price, will be fairly straight forward.
- Pricing strategy is largely determined by past decisions on marketing positioning.
- The clearer a company is about its goals, the simpler it becomes to set price.
- Some objectives and goals.
- Survival – becomes the main objective of a company if they are troubled by too much capacity, heavy competition or sudden changes in consumer demands. To combat this, the companies usually resort to setting a low price – even setting a price below costs in order to survive.
- Current Profit Maximisation – A lot of companies want to set a price that will maximise current profits. They estimate what demand and costs will be at different prices and choose the price that will produce the maximum current profit.
- Market-Share Leadership – other companies want to obtain the dominant market share. To become the market-share-leader many companies will make their prices as low as possible.
- Product-Quality Leadership – A company might decide it wants to have the highest-quality products on the market. This however, usually entails charging a higher price to charge for the higher quality and extensive R&D.
- Other Objectives – Companies can set prices low to prevent competition from entering the market or set prices at competitors’ levels to stabilise the market. Prices can be reduced to create rapid excitement, prices can be adjusted to increase the sales of other products in a range.
- Costs set the ground for the price that a company can charge for its product.
- When setting a base price, the company takes in to consideration all costs for producing, distributing and selling the product and also gives a certain amount of flexibility for effort and risk.
- Most companies would work quite hard today to become ‘low cost’ producers in their industries.
Types of Costs
- There are two types of costs, Fixed Costs and Variable Costs.
- Fixed Costs – are costs that do not change at all with production or sales level, ie/ bills, rent, salaries, interest. They continue no matter what the production level is.
- Variable Costs – vary directly with the level of production. If we make and sell fewer of a product, then we have lower variable costs.
- Total Costs – are the sum of the fixed and variable costs for any given level of production.
People Involved With Pricing
- Management must decide who within the company should set prices.
- In small companies, the top management often sets prices.
- However, in larger companies, pricing is typically handled by divisional or product line managers.
- Others who have an influence on pricing include sales managers, production managers and accounts.
Market and Demand
- Costs set the lower limits of prices, whereas the market and demand set the upper limit.
Pricing In Different Types Of Markets
- Pure Competition – a market in which many buyers and sellers trade in a uniform commodity – no single buyer or seller has much effort on the going market price.
- Monopolistic Competition – a market in which many buyers and sellers trade over a range of prices rather than a single market price.
- Oligopolistic Competition – a market in which there are a few sellers who are highly sensitive to each other’s pricing and marketing strategies.
- Pure Monopoly – A market in which there is a single seller – it may be a government monopoly, a private, regulated monopoly or a private non-regulated monopoly.
Consumer Perceptions Of Price And Value
- What it comes down to is that the consumer will decide whether a product’s price is right.
- Therefore, when pricing, the company must consider consumer perceptions of price and how these perceptions affect consumers’ buying decisions.
- Pricing decisions, like other marketing-mix decisions, must be buyer-oriented.
- In order to be effective with buyer-oriented pricing, the company must have an understanding of the value that consumers place on the benefits they receive from the product and then setting a price that fits this value.
General Pricing Approaches
- The price the comp[any charges will be between one that is too low to produce a profit and one that is too high to produce any demand.
- There are many different methods of pricing.
- What is it? – Adding a standard mark-up to the cost of the product.
- Mark-ups vary considerably among different goods.
- They are usually smallest on staples such as bread and milk. (Same price anywhere)
- High on products such as perishables and seasonable items to cover risk of not selling etc.
Breakeven Analysis And Target Profit Pricing.
- Is when a company tries to determine the price at which it will break even or make the target profit it is seeking.
- Target pricing is used by many importers as a way of setting prices to gain a profit on investment.
- Setting price based on consumer perceptions of value rather than on the seller’s cost.
- Price is set to match the perceived value.
- Using a simple example like food. You could pay $5.50 for sushi in a supermarket, $7.00 at a food hall, $9.50 at a local restaurant, $15.00 at an upmarket Japanese restaurant and $22.00 at an international hotel.
- Even if the original product is exactly the same, the perceived value changes because of the ambiance and service of each place.
- So, comparing, cost based pricing is product driven, deciding to match the price with the cost of a product and mark-ups, value-based is the opposite. The company sets its price based on what the consumer thinks it should be.
- There are three types of competition-based pricing.
- For many individual products, the costs perceived by customers extend well beyond the price charged.
- This approach enables industrial firms to move away from price comparisons to differentiating their products on the basis of economic value to customers.
- In going-rate pricing, the company bases its price largely on competitors’ prices, with less attention paid to its own costs or demand.
- So the company would more-or-less charge the same amount for their products or services as its major competitors would.
- Competition-based pricing is also used when companies bid for jobs. Using the sealed-bid method, a company bases its prices on what it thinks it competitors will price rather than its own consideration. (ie, bidding for a contract with other companies.)
1. Special Relationship. – at this level , supplier and customer share a special relationship. There is no significant change in the flow of money between organizations, but they work together to reduce costs and time while increasing the overall quality.
2. At the Enrichment Level, deeper relationships are formed that take advantage of interactivity. This pricing strategy is effective when customers are wary of innovative approaches, which appear risky and are not yet proven.
3. Shared Risk And Reward – level ties the supplier and customer closely together in an alliance, or even joint venture, in which both the risks and rewards are shared. A high order of trust, shared ethics and corporate values are required for success.
New-Product Pricing Strategies
- Pricing an innovative product
- Many companies that invent new products set high prices to ‘skim’ revenues layer by layer from the market. (Sony is a prime example of using this)
- Only effective under certain conditions
- Rather than setting a high initial price to skim small but profitable market segments, other companies set a low initial price in order to penetrate the market quickly and deeply – to generate excitement and to attract a large number of buyers quickly.
- So basically, charging low prices to attract a higher volume.
- Microsoft uses this strategy.
Pricing An Imitative New Product
- A company that plans to develop an imitative new product faces a product-positioning problem. It must decide where to position the product on quality and price.
- So, there are different positions in which you can have a product, so, you can have a high quality product at low price and attract a large share very quickly but lose profits, so its all relative in the balance of profits and market share.
- Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features and competitors’ prices.
Optional Product/Service Pricing
- The pricing of optional or accessory products along with a main product.
- ie/ Laser Lxi Hatch manual model advertised $19 990 to pull people into the showrooms. Then fill the showrooms with option-loaded cars. A typical Laser Hatch automatic with shields, alloy wheels, bonnet protector, rear spoiler and central locking comes to $23 310. With all extras it can go as high as $27 220.
Captive Product/Service Pricing
- The pricing of products that must be used along with a main product, such as blades for a razor and film for a camera.
- Basically trapping people into having to buy your product. Nivea for men and Philishave came up with a razor, which has Nivea Gel Packs in it while you shave. If the product is to be used how advertised, then it requires constant purchasing of the extra gel packs.
- Simply, setting a price for by-products in order to make the main products price more competitive.
- Meat processing plants selling off-cuts and offel to Pet Food Companies.
- Combining several products and offering the bundle at a reduced price.
- Airlines offering passengers Car-Rental discounts and freebies with ticket purchases.
- Companies usually adjust their basic prices to account for various customer differences and changing situations.
- There are seven commonly known price-adjustment strategies.
Discount Pricing And Allowances – Reducing prices to reward customer responses such as paying early or promoting the product or service.
Segmented Pricing – Adjusting prices to allow for differences in customers, services, products or locations.
Psychological Pricing – Adjusting prices for psychological effect.
Promotional Pricing – Temporarily reducing prices to increase short-run sales.
Value Pricing – Adjusting prices to offer the right combination of quality and service at a fair price.
Geographical Pricing – Adjusting prices to account for the geographic location of customers.
International Pricing – Adjusting prices for international markets.