After reading this article you will learn about:- 1. Meaning of Pricing 2. Factors Influencing Pricing 3. Objectives 4. Economic Theories 5. Strategies 6. Methods.
Meaning of Pricing:
One basic element of the marketing mix is pricing. A “Price” for a product or service refers to the amount of money needed to acquire that product or service.
In a competitive business environment, Marketing Managers strive to establish pricing policies for goods or services to meet certain objectives, such as:
(i) To enable the firm to earn a fair percentage of profit.
(ii) To meet or stay ahead of competition.
(iii) To maintain or increase the firm’s share of the market and
(iv) To stabilize its prices.
Price is the exchange value of a product.
Pricing is the most important decision-making process, because this is the factor which brings revenue and profits to the concern. Mistake in pricing decision may adversely affect the firm, its growth, profits and future.
Factors Influencing Pricing:
(A) Internal Factors:
(i) Corporate and marketing objectives of the firm.
(ii) Basic characteristics of the product.
(iii) Stage of the product on the product life-cycle.
(iv) Elasticity of demand of the product.
(v) Aspects related to the marketing mix of the firm.
(vi) Image sought by the firm through pricing.
(vii) Costs of manufacturing and marketing.
(B) External Factors:
(i) Buyer behaviour regarding the particular product.
(ii) Market characteristics.
(iii) Extent of bargaining power of customers.
(iv) Competitors’ pricing policy.
(v) Government controls/regulations/pressures on pricing
(vi) Social considerations.
Objectives of Pricing:
A business firm have certain objectives.
These may be:
(i) Profit maximisation in the short run.
(ii) Profit maximisation in the long run.
(iii) A minimum return.
(iv) Target sales volume.
(v) Target market share.
(vi) Finding new market or deeper penetration.
(vii) Keeping competitor out/parity with competition.
(viii) Target profit.
(ix) Charging the price affordable by weaker section.
Economic Theories for Pricing:
Economic theory assumes that a firm will set prices that will maximize profits. To achieve this goal, prices will be set where the quantity of a product demanded at a certain price is equal to the quantity that suppliers are willing to supply at that price.
This demand and supply relationship is shown by Demand and Supply curves. The “Demand Curve” shows the amount of a product demanded at different prices. The “Supply Curve” shows the quantity of goods offered for sale at various prices.
The point at which the quantity demanded is equal to the quantity supplied is called the “Equilibrium Price”. It is shown in the diagram by the point “P”.
Demand is described as elastic or inelastic. When buyers will buy more of certain goods at low prices than at high prices, the demand is said to be “Elastic”. For other goods, demand is inelastic, means increase or decrease in prices will bring about relatively little or no change in demand.
Strategies of Pricing:
A number of pricing policies may be adopted to sell the product.
When introducing a new product following two policies may be used:
(a) Skim the Cream Pricing:
This strategy sets prices at the highest level at which goods can be sold. This policy is used when a concern has a unique product that is promoted extensively when it is first introduced. This pricing policy may be extended indefinitely or lowered sometimes later to capture sales from another market segment.
(b) Penetration Pricing:
Low prices are fixed to capture large market immediately. This strategy is effective when products are sensitive to price changes or when the product faces strong competition after it is introduced.
In addition to the above policies, the other available policies are:
(c) Odd Pricing or Psychological Pricing:
This is the practice of pricing goods at odd- ending prices, such as 11.98 or 40.95 rather than the even-ending prices of Rs.12.00 or 41.00. Retailers may use psychological pricing because they believe that consumers may find the lowered price more appealing. They believe consumers may feel the price of Rs.11.98 is closer to Rs.11 than to Rs.12.
(d) One Price System or Variable Price System:
In a one price system, the same price is charged from every customer, who buys the same product. Under a variable pricing system, prices charged for the same quantities may vary among different customers as a result of bargaining between buyer and seller.
(e) Price Lining:
A price-lining policy commonly found in retailing consists of selecting a limited number of prices at which products will be sold, such as Rs.9.95, Rs.12.95 and Rs.18.95. Then all related products are marketed at these prices. For example, one style of pen may be sold for Rs.5, another for Rs.7 and another for Rs.9 and so on.
(f) Leader Pricing:
A policy of leader pricing results in advertising one or a few products at a price below cost to attract customers. The expectation is that customers will buy not only the below cost item but also others. Below cost items are called “Loss Leaders”.
If a loss leader is going to attract an increased number of shoppers, it should be a product that is purchased frequently, is used by most people, has a regular price that is well known and does not represent a large cost to the buyer.
(g) Follow the Market Pricing:
This policy determines prices being set that follow average or usual prices of other firms in the same line of business.
Methods of Pricing:
There are several methods of pricing, each of them is suitable for achieving a particular pricing objective.
Some of the commonly used pricing methods are described here under:
1. Cost Based Pricing:
(a) Cost plus pricing,
(b) Full cost pricing
(c) Rate of return pricing.
(d) Marginal cost pricing
2. Demand Based Pricing:
(a) What the market can bear,
(b) Skimming pricing
(c) Penetration pricing.
3. Competition Based Pricing:
(a) Premium pricing.
(b) Discount pricing.
(c) Parity pricing (when the competition is stable).
4. Product-Line Based Pricing:
In this method pricing is done for entire product line, thereafter each product of the product line is priced considering influence of price of one product on the other.
5. Tender Pricing:
This is also a competition oriented method of pricing, in which items are purchased by the customer through competitive bidding. In this type of pricing firm finds a price that is consistent with costs, profits and company objectives and should also be low enough to get the business.
6. Rebate and Discounts (Differentiated Pricing):
(a) Discounts to specific class of customers.
(b) Discounts related to total quantity purchased.
(c) Standard trade-discount.
(d) Discount related to specific type of channels.
(e) Festival rebates.
(f) Off-season rebates.
(g) Rebate for cash down purchase.
(h) Special rebates for enhancing sales.