PRICE: is the monitory term for the exchange of goods and product
Price is the quantity of payment or compensation given by one party to another in return for goods or services.
PRICING OBJECTIVES:
Pricing objectives or goals give direction to the whole pricing process. Determining what your objectives are is the first step in pricing.
When deciding on pricing objectives you must consider:
1) Objectives of the company; objectives must be related to financial, marketing, and strategic;
2) The objectives of your product or brand;
3) Consumer price elasticity and price points; and 4) the resources you have available.
Some of the more common pricing objectives are:
- maximize long-run profit
- maximize short-run profit
- increase sales volume (quantity)
- increase monetary sales (Profit)
- increase market share
- obtain a target rate of return on investment (ROI)
- obtain a target rate of return on sales
- stabilize market or stabilize market price: an objective to stabilize price means that the marketing manager attempts to keep prices stable in the marketplace and to compete on non-price considerations. Stabilization of margin is basically a cost-plus approach in which the manager attempts to maintain the same margin regardless of changes in cost.
- company growth
- maintain price leadership
- desensitize customers to price
- discourage new entrants into the industry
- match competitors prices
- encourage the exit of marginal firms from the industry
- survival
- avoid government investigation or intervention
- obtain or maintain the loyalty and enthusiasm of distributors and other sales personnel
- enhance the image of the firm, brand, or product
- be perceived as “fair” by customers and potential customers
- create interest and excitement about a product
- discourage competitors from cutting prices
- use price to make the product “visible"
- build store traffic
- help prepare for the sale of the business (harvesting)
- social, ethical, or ideological objectives
- get competitive advantage
IMPORTANCE OF PRICE:
- Most Flexible Marketing Mix Variable – For marketers, price is the most adjustable of all marketing decisions. Unlike product and distribution decisions, which can take months or years to change, or some forms of promotion which can be time consuming to alter (e.g., television advertisement), price can be changed very rapidly. The flexibility of pricing decisions is particularly important in times when the marketer seeks to quickly stimulate demand or respond to competitor price actions.
- Setting the Right Price – Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can lead to the marketing organization losing revenue. Prices set too low may mean the company is missing out on additional profits that could be earned if the target market is willing to spend more to acquire the product. Additionally, attempts to raise an initially low priced product to a higher price may be met by customer resistance as they may feel the marketer is attempting to take advantage of their customers. Setting the right price level often takes considerable market knowledge and, especially with new products, testing of different pricing options.
- Trigger of First Impressions - Often times customers’ perception of a product is formed as soon as they learn the price, such as when a product is first seen when walking down the aisle of a store. While the final decision to make a purchase may be based on the value offered by the entire marketing offering (i.e., entire product), it is possible the customer will not evaluate a marketer’s product at all based on price alone. It is important for marketers to know if customers are more likely to dismiss a product when all they know is its price. If so, pricing may become the most important of all marketing decisions if it can be shown that customers are avoiding learning more about the product because of the price.
- Important Part of Sales Promotion – Many times price adjustments are part of sales promotions that lower price for a short term to stimulate interest in the product. However, as we noted in our discussion of promotional pricing in the Sales Promotion tutorial, marketers must guard against the temptation to adjust prices too frequently since continually increasing and decreasing price can lead customers to be conditioned to anticipate price reductions and, consequently, withhold purchase until the price reduction occurs again.
FACTORS AFFECTING PRICE
- INTERNAL FACTORS
o Marketing Objectives
o Marketing Mix Strategies
o Cost
o Organisational consideration
- EXTERNAL FACTORS
o Market & demand
o Consumers’ perceptions of price & Value
o Competitors’ Cost, Price & offers
o Other External Factors
§ Market boom, Recession & Inflation
§ Interest rate of RBI
§ Government Rules and Regulations, etc.
The External Factors are always the uncontrollable factors as it is not in the hands of Company’s management to control those.
PRICE & NON PRICE COMPETITION
NON PRICE COMPETITION is a marketing strategy "in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship"
(McConnell-Brue, 2002, p. 43.7-43.8).
The firm can also distinguish its product offering through quality of service, extensive distribution, customer focus, or any other sustainable competitive advantage other than price.
It can be contrasted with PRICE COMPETITION, which is where a company tries to distinguish its product or service from competing products on the basis of low price. It is an intense competition in which competitors cut retail prices to gain business.
Non-price competition typically involves promotional expenditures, (such as advertising, selling staff, the locations convenience, sales promotions, coupons, special orders, or free gifts), marketing research, new product development, and brand management costs.
THE BROAD APPROACHES TO PRICE
1. Competitor-oriented pricing
In terms of this approach, your pricing decisions would depend on what the competition does. Competitor-oriented pricing is the approach to follow when you are dealing with a market where prices are openly set through the process of supply and demand. For example, KFC has followed the new Pricing strategy based on the low pricing strategies already adopted by McDonlads.
2. Cost-oriented pricing
In the case of cost-orientated pricing, you would calculating your total unit cost and add on a profit margin to arrive at an export price. Consumer demand or competitor actions thus have little bearing on your decision-making. This approach is commonly used in the case of industrial goods where it is often difficult to differentiate between products in terms of their perceived value to the customer.
3. Demand-oriented pricing
Also referred to as market-orientated pricing, the demand-oriented company sets prices according to the intensity of demand for the product. Where demand is strong high prices are normally set, and where demand is weak lower prices are the norm. The unit cost is not a major determinant of pricing in this case, although it is obviously taken into consideration when the lower limit on a price is considered. Demand-oriented prices are usually applied to branded consumer goods but they may also be appropriate in respect of many industrial products.
4. Service /Usage Oriented pricing
In this Pricing approach, the company usually set their pricing based on the usage of the product or services. For example we talk about the pricing of toothpaste or soap, company has to keep the price low as the customers will going for repurchase in a shorter span of time; on the other hand if we take an example of Furniture, it is an one time investment, accordingly prices will be high.
Above mentioned approaches lead to different pricing strategies.
PRICING STRATEGIES
Premium Pricing.
Use a high price where there is a uniqueness about the product or service. This approach is used where a substantial competitive advantage exists. Such high prices are charge for luxuries
Penetration Pricing.
The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV.
Economy Pricing.
This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.
Price Skimming.
Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.
Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.
Psychological Pricing.
This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 paisa not a rupee.
Product Line Pricing.
Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be Rs. 100, wax Rs. 200, and the whole package Rs. 300.
Optional Product Pricing.
Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.
Captive Product Pricing
Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.
Product Bundle Pricing.
Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.
Promotional Pricing.
Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).
Geographical Pricing.
Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.
Value Pricing.
This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.
Setting the Price:
Step 1: Setting the Price Objective
- Survival
- Profit Oriented Goals
o Achieve targeted return
o Profit maximization
- Sales Orientation
o Market Share
o Increase Sales Volume
- Product Quality leadership
Step 2: Determining Demand
Step 3: Estimating Cost
- Variable Cost
- Total Cost
Step 4: Analyzing Competitors, Costs, Prices, Offers and Mediators Profit
Step 5: Selecting the Final Price
