Q3 DU SOL PRINCIPLE OF MARKETING

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Definition: Pricing is the method of determining the value a producer will get in the exchange of goods and services. Simply, pricing method is used to set the price of producer’s offerings relevant to both the producer and the customer.

 

Every business operates with the primary objective of earning profits, and the same can be realized through the Pricing methods adopted by the firms.

While setting the price of a product or service the following points have to be kept in mind:

  • Nature of the product/service.
  • The price of similar product/service in the market.
  • Target audience i.e. for whom the product is manufactured (high, medium or lower class)
  • The cost of production viz. Labor cost, raw material cost, machinery cost, inventory cost, transit cost, etc.
  • External factors such as Economy, Government policies, Legal issues, etc.

While some business people may consider pricing to just be one of the 4 Ps of marketing, pricing professionals understand just how intertwined successful pricing is with firm profitability. Any firm that is going to optimize its profitability will ultimately have to tackle some very fundamental (and very consequential) pricing questions.

Price Positioning

One of the high-level pricing decisions that should be made sooner rather than later is determining the price positioning of an offering. There are three options: skim, neutral, and penetrate. A price skimming position means that the price is higher than what customers would generally expect given the benefits offered in comparison to alternatives. A price penetration position means that the price is lower than what customers would generally expect given the benefits offered in comparison to alternatives. Finally, the price neutral position means that the price is about what the customer would expect given the benefits offered in comparison to alternatives.

Price Variance Policy

Another important pricing concern is how to manage discounts and rebates, which can be treacherous indeed. This area of pricing can be difficult and confusing to navigate without a proper price variance policy. A price variance policy defines which customers get a discount, how deep that discount is, and the precise criteria that must be fulfilled to receive that discount.

Anticompetitive Pricing Behavior

A third area of pricing concern involves anticompetitive pricing behavior. There are a few types of anticompetitive pricing behavior, such as predatory pricing. It seems to me that the type that comes up most often in the news is price-fixing. The basic case of price-fixing is one in which two rivals agree on a set price for their product or service. The damage to consumers occurs because prices would be expected to be lower (i.e., competitive) if this agreement did not artificially keep prices high.

Managing Pricing Concerns

These are just a few of the pricing concerns that occupy the minds of executives. These are not always simple problems, and they frequently defy simple solutions. The stakes are frequently high, and failure is rarely forgiving.

While managing pricing concerns is not always an easy job, take heart in knowing that plenty of other bright, capable executives wrestle with these concerns every day as well. You are not alone.

And even more importantly, take heart in knowing that there are trained, experienced pricing professionals out there waiting to help, should you need it.

1. Price-quality relationship:

Customers use price as an indicator of quality, particularly for products where objective measurement of quality is not possible, such as drinks and perfumes. Price strongly influences quality perceptions of such products.

2. Product line pricing:

A company extends its product line rather than reduce price of its existing brand, when a competitor launches a low price brand that threatens to eat into its market share. It launches a low price fighter brand to compete with low price competitor brands.

3. Explicability:

The company should be able to justify the price it is charging, especially if it is on the higher side. Consumer product companies have to send cues to the customers about the high quality and the superiority of the product.

4. Competition:

A company should be able to anticipate reactions of competitors to its pricing policies and moves. Competitors can negate the advantages that a company might be hoping to make with its pricing policies. A company reduces its price to gain market share.

5. Negotiating margins:

A customer may expect its supplier to reduce price, and in such situations the price that the customer pays is different from the list price. Such discounts are pervasive in business markets, and take the form of order-size discounts, competitive discounts, fast payment discounts, annual volume bonus and promotions allowance.

6. Effect on distributors and retailers:

When products are sold through intermediaries like retailers, the list price to customers must reflect the margins required by them Sometimes list prices will be high because middlemen want higher margins.

7. Political factors:

Where price is out of line with manufacturing costs, political pressure may act to force down prices. Exploitation of a monopoly position may bring short term profits but incurs backlash of a public enquiry into pricing policies. It may also invite customer wrath and cause switching upon the introduction of suitable alternatives.

8. Earning very high profits:

It is never wise to earn extraordinarily profits, even if current circumstances allow the company to charge high prices. The pioneer companies are able to charge high prices, due to lack of alternatives available to the customers.

9. Charging very low prices:

It may not help a company’s cause if it charges low prices when its major competitors are charging much higher prices. Customers come to believe that adequate quality can be provided only at the prices being charged by the major companies.


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