What is Pricing?
Pricing means deciding the value of the product/service that the manufacturer will get in return in exchange for a particular product/service. Pricing is the process of determining the price which is optimal for both the manufacturer and the customers. There are various factors that play a significant role in the determination of value price, like input costs, manufacturing costs, customer expectations, general price level, profit margin, prices of rival firms, external costs, etc. Pricing can also be defined as the value that customers need to give up in order to have any particular product/service with them. Pricing is one of the 4Ps of marketing; i.e., Place, Promotion, Price, and Product. Price is the only revenue-generating element. Pricing involves the activities and procedures that help in deciding the value, a company is going to charge in exchange for its product/service.
“Pricing is the amount of money charged for a product or service or the sum of the values that the consumers exchange for the benefits of having or using the product or service.” -Philip Kotler
Geeky Takeaways:
- Pricing should be aligned with the perceived value of the product or service to the customer.
- Consideration of competitors’ pricing is essential. Businesses should analyze the pricing landscape in their industry to position themselves appropriately.
- Dynamic pricing, which adjusts prices based on factors like demand, seasonality, or market conditions, allows businesses to optimize revenue
Table of Content
Objectives of Pricing
The objectives of pricing encompass a range of strategic goals that businesses aim to achieve through their pricing decisions. These objectives guide how products or services are priced and contribute to overall business success. Key objectives of pricing include:
1. Revenue Generation: Pricing can be used to maximise total revenue by finding the optimal balance between price and quantity sold. This objective is particularly relevant when a business aims to capture a larger market share.
2. Market Ruler: A business would want to rule the market and acquire a significant share in the market against its rival firms. For this, it will try to increase its revenue and customer base. In order to do the same, the company will need to agree on an optimal price for its product/service that the customers can afford.
3. Survival: Pricing decisions focus on generating revenue which helps the firm to survive in the market. Without revenue and profits, a firm can not survive for a longer period. Pricing generates revenue and revenue is used in further production in order to produce goods.
4. Profit Maximisation: One of the primary objectives of pricing is to generate maximum profit for the business. Pricing strategies are designed to ensure that the revenue generated from sales exceeds the costs incurred in producing and marketing the product or service.
5. Attraction and Retention of Customers: Having a proper and affordable pricing strategy helps the business in acquiring new customers and retention of previous customers. A more customer base means more revenue.
Importance of Pricing
Pricing is of paramount importance in the realm of business and commerce due to its multifaceted impact on various aspects of an organisation’s operations, financial health, and overall success. The significance of pricing can be outlined as follows:
1. First Impression: Price is the first thing that the customers think of while purchasing any product/service. Even if the customer makes his/her overall decision on the overall benefit from the product he/she is going to get, they are still going to compare the prices of other similar goods. If the prices are too high than what customers can afford, they are going to lose interest.
2. Right-Level Pricing: Setting up the wrong prices can even shut down the company due to the non-generation of revenue. A thorough market research is required before setting up the final prices for the product.
3. Sales Promotion: As the basic idea of more sales includes lowering the prices, a sales manager may suggest the business to cut down the prices in order to generate more sales.
4. Flexible Element: Price is the most flexible element of marketing in comparison to product, place, and promotion. Price can be changed rapidly and is affected by many factors like customer perception of value, inflation, economy, overall costs, etc.
5. Profit Generation: Pricing directly influences a company’s revenue and profit margins. Setting the right price ensures that the revenue generated from sales exceeds the costs incurred in production, distribution, and marketing, thereby contributing to profitability.
6. Competitive Edge: Pricing strategies can differentiate a business from its competitors. Appropriate pricing helps create a competitive advantage by appealing to customers through factors such as affordability, perceived value, or quality.
7. Demand Management: Effective pricing can regulate demand for products or services. Price adjustments, discounts, or promotions can stimulate demand during slow periods or manage peak demand to prevent stockouts.
Factors Affecting Pricing Decisions
The pricing of products is influenced by a multitude of factors that businesses must carefully consider to determine an appropriate and effective pricing strategy. These factors can vary across industries, markets, and individual businesses. Some of the key factors affecting product pricing include:
1. Customer’s Perception of Value: The customers’ expectation of the price of the product plays an important role in deciding the price of the product. Customers only bear the cost of a product that they can afford. If a business keeps the price of its product/service very high, it will have a very small customer base. Customer-oriented price approach is generally followed in order to cover the customers’ perception of value. In a customer-oriented price approach, the customer is considered as the ‘king’ and all the decisions relating to pricing are taken from the viewpoint of the customer.
2. Competitors: Competitors’ pricing strategies, market share, and positioning can significantly impact how a product is priced. Businesses may choose to price their products at a premium, match competitors’ prices, or use other strategies to differentiate themselves.
3. Government Law and Regulations: Pricing decisions are also affected by federal and state regulations. Some laws prevail in order to protect the customers from getting exploited at the hands of manufacturers, promotion of ethical behaviours from the end of manufacturers, etc. For example, Firms coming together and joining hands, agreeing on charging higher prices for a particular type of product, is illegal.
4. Economy: Economic environment like fluctuations in the general price level, interest rates, and unemployment level also affects the pricing strategy of firms.
5. Product Costs: The total cost that the manufacturer incurred in the production of the product affects the pricing decision. Production costs can be of several types, like fixed costs, variable costs, semi-variable costs, etc. Also, promotional costs, distribution channel costs, packing costs, etc., are considered while deciding the price.
6. Market Demand: The level of demand for the product at different price points affects pricing decisions. High demand might allow for higher prices, while low demand could require competitive pricing to attract customers.
7. Elasticity of Demand: Price elasticity measures how sensitive demand is to price changes. Inelastic demand allows for price increases without significant drops in demand, while elastic demand requires more cautious pricing adjustments.
8. Market Segmentation: Different customer segments may have varying willingness to pay. Businesses can tailor pricing strategies to target specific segments and maximize revenue from each.
9. Branding and Positioning: Premium brands can command higher prices due to their reputation and perceived quality. Pricing can be used to reinforce the brand’s image as luxury, value-oriented, or innovative.
10. Distribution Channels: The chosen distribution channels can impact pricing. Direct-to-consumer sales might allow for more flexibility in pricing compared to working through intermediaries.
Pricing Strategies
Different pricing strategies that a company can adopt to decide the price of its product/service include:
1. New-Product Pricing Strategies
The time business faces the most difficulty in setting up the pricing strategy is when they launch a new product/service. The introductory stage is tough for almost all businesses. In this scenario, businesses mostly go for either Market-Skimming Pricing or Market-Penetration Pricing. Market-Skimming Pricing is opted by those companies who have launched new products and have no competition. They charge high prices at first and later on lowers them. Market-Penetration Pricing is the opposite of market-skimming pricing. In Market-Penetration Pricing, business sets low prices at first to gain a significant market share and later on increase their prices.
2. Product Mix Pricing Strategies
When a product is a part of the product mix, the business would like to charge higher prices for the product in order to increase the overall profits of the product mix. There are various strategies coming under Product Mix Pricing Strategy, stated as:
|
Strategy |
Description |
|---|---|
| Product Line Pricing | Setting prices across an entire product line |
| Optional-product Pricing | Pricing accessary or optional products sold with the main product |
| Captive-product Pricing | Pricing products that are complementary to the main product |
| By-Product Pricing | Pricing low-value by-products to get rid of them |
| Product Bundle Pricing | Pricing bundles of products sold together |
3. Price-Adjustment Strategies
Companies keep on changing their pricing strategy to account for various customer differences and changing situations. There are various strategies coming under Price-Adjustment Strategies, such as:
|
Strategy |
Description |
|---|---|
| Discount and Allowance Pricing | Reducing prices to give rewards to customers for exceptional responses like paying early or promoting the product |
| Segmented Pricing | Adjusting prices to allow for differences in customers, products, or location |
| Psychological Pricing | Adjusting prices for psychological effect |
| Promotional Pricing | Temporarily reducing prices to increase short-run sales |
| Geographic Pricing | Adjusting prices to account for customers’ geographic location |
| Dynamic Pricing | Adjusting prices continually to meet the needs of individual customers and situations |
| International Pricing | Adjusting prices for international markets |