PRICING STRATEGIES
Price is the quantity of payment
or compensation given by one party to another in return for goods or services.
In modern economies, prices are
generally expressed in units of some form of currency.
A business
can use a variety of pricing strategies when selling a product or service.
The price can be set to maximize profitability for each unit sold or from the
market overall. It can be used to defend an existing market from new entrants,
to increase market share within a market or to enter a new market.
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Factors affecting pricing
decision
Factors affecting pricing divided
into two groups:
(A)
Internal Factors and
(B)
External Factors.
(A) Internal Factors:
1. Organisational Factors:
Pricing decisions occur
on two levels in the organisation. Over-all price strategy is dealt with by top
executives. They determine the basic ranges that the product falls into in
terms of market segments. The actual mechanics of pricing are dealt with at
lower levels in the firm and focus on individual product strategies. Usually,
some combination of production and marketing specialists are involved in
choosing the price.
2. Marketing Mix:
Marketing experts view
price as only one of the many important elements of the marketing mix. A shift
in any one of the elements has an immediate effect on the other
three—Production, Promotion and Distribution. In some industries, a firm may
use price reduction as a marketing technique.
Other firms may raise prices as a
deliberate strategy to build a high-prestige product line. In either case, the
effort will not succeed unless the price change is combined with a total
marketing strategy that supports it. A firm that raises its prices may add a
more impressive looking package and may begin a new advertising campaign.
3. Product Differentiation:
The price of the
product also depends upon the characteristics of the product. In order to attract
the customers, different characteristics are added to the product, such as
quality, size, colour, attractive package, alternative uses etc. Generally,
customers pay more prices for the product which is of the new style, fashion,
better package etc.
4. Cost of the Product:
Cost and price of a
product are closely related. The most important factor is the cost of
production. In deciding to market a product, a firm may try to decide what
prices are realistic, considering current demand and competition in the market.
The product ultimately goes to the public and their capacity to pay will fix
the cost, otherwise product would be flapped in the market.
5. Objectives of the Firm:
A firm may have various
objectives and pricing contributes its share in achieving such goals. Firms may
pursue a variety of value-oriented objectives, such as maximizing sales
revenue, maximizing market share, maximizing customer volume, minimizing
customer volume, maintaining an image, maintaining stable price etc. Pricing
policy should be established only after proper considerations of the objectives
of the firm.
(B) External Factors:
1. Demand:
The market demand for a
product or service obviously has a big impact on pricing. Since demand is
affected by factors like, number and size of competitors, the prospective
buyers, their capacity and willingness to pay, their preference etc. are taken
into account while fixing the price.
A firm can determine the expected price in
a few test-markets by trying different prices in different markets and
comparing the results with a controlled market in which price is not altered.
If the demand of the product is inelastic, high prices may be fixed. On the
other hand, if demand is elastic, the firm should not fix high prices, rather
it should fix lower prices than that of the competitors.
2. Competition:
Competitive
conditions affect the pricing decisions. Competition is a crucial factor in
price determination. A firm can fix the price equal to or lower than that of
the competitors, provided the quality of product, in no case, be lower than
that of the competitors.
3. Suppliers:
Suppliers of
raw materials and other goods can have a significant effect on the price of a
product. If the price of cotton goes up, the increase is passed on by suppliers
to manufacturers. Manufacturers, in turn, pass it on to consumers.
Sometimes, however, when a
manufacturer appears to be making large profits on a particular product,
suppliers will attempt to make profits by charging more for their supplies. In
other words, the price of a finished product is intimately linked up with the
price of the raw materials. Scarcity or abundance of the raw materials also
determines pricing.
4. Economic Conditions:
The
inflationary or deflationary tendency affects pricing. In recession period, the
prices are reduced to a sizeable extent to maintain the level of turnover. On
the other hand, the prices are increased in boom period to cover the increasing
cost of production and distribution. To meet the changes in demand, price etc.
Several pricing
decisions are available:
(a) Prices can be boosted to
protect profits against rising cost,
(b) Price protection systems can
be developed to link the price on delivery to current costs,
(c) Emphasis can be shifted from
sales volume to profit margin and cost reduction etc.
5. Buyers:
The various
consumers and businesses that buy a company’s products or services may have an
influence in the pricing decision. Their nature and behaviour for the purchase
of a particular product, brand or service etc. affect pricing when their number
is large.
6. Government:
Price
discretion is also affected by the price-control by the government through
enactment of legislation, when it is thought proper to arrest the inflationary
trend in prices of certain products. The prices cannot be fixed higher, as
government keeps a close watch on pricing in the private sector. The marketers
obviously can exercise substantial control over the internal factors, while
they have little, if any, control over the external ones.
Pricing Objectives:
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1. Profits-related Objectives:
Profit has remained a dominant
objective of business activities.
Company’s pricing policies and
strategies are Aimed at following profits-related objectives:
i. Maximum Current Profit:
One of the
objectives of pricing is to maximize current profits. This objective is aimed
at making as much money as possible. Company tries to set its price in a way
that more current profits can be earned. However, company cannot set its price
beyond the limit. But, it concentrates on maximum profits.
ii. Target Return on Investment:
Most companies want to earn reasonable
rate of return on investment.
Target return may be:
(1) fixed percentage of sales,
(2) Return on investment, or
(3) A fixed rupee amount.
Company sets its
pricing policies and strategies in a way that sales revenue ultimately yields
average return on total investment. For example, company decides to earn 20%
return on total investment of 3 crore rupees. It must set price of product in a
way that it can earn 60 lakh rupees.
2. Sales-related Objectives:
The main sales-related objectives
of pricing may include:
i. Sales Growth:
Company’s objective
is to increase sales volume. It sets its price in such a way that more and more
sales can be achieved. It is assumed that sales growth has direct positive
impact on the profits. So, pricing decisions are taken in way that sales volume
can be raised. Setting price, altering in price, and modifying pricing policies
are targeted to improve sales.
ii. Target Market Share:
A company aims its
pricing policies at achieving or maintaining the target market share. Pricing
decisions are taken in such a manner that enables the company to achieve
targeted market share. Market share is a specific volume of sales determined in
light of total sales in an industry. For example, company may try to achieve
25% market shares in the relevant industry.
iii. Increase in Market Share:
Sometimes, price
and pricing are taken as the tool to increase its market share. When company
assumes that its market share is below than expected, it can raise it by
appropriate pricing; pricing is aimed at improving market share.
3. Competition-related Objectives:
Competition is a
powerful factor affecting marketing performance. Every company tries to react
to the competitors by appropriate business strategies.
With reference to price, following
competition-related objectives may be priorized:
i. To Face Competition:
Pricing is
primarily concerns with facing competition. Today’s market is characterized by
the severe competition. Company sets and modifies its pricing policies so as to
respond the competitors strongly. Many companies use price as a powerful means
to react to level and intensity of competition.
ii. To Keep Competitors Away:
To prevent the
entry of competitors can be one of the main objectives of pricing. The phase
‘prevention is better than cure’ is equally applicable here. If competitors are
kept away, no need to fight with them. To achieve the objective, a company
keeps its price as low as possible to minimize profit attractiveness of
products. In some cases, a company reacts offensively to prevent entry of
competitors by selling product even at a loss.
iii. To Achieve Quality Leadership by Pricing:
Pricing is also
aimed at achieving the quality leadership. The quality leadership is the image
in mind of buyers that high price is related to high quality product. In order
to create a positive image that company’s product is standard or superior than
offered by the close competitors; the company designs its pricing policies
accordingly.
iv. To Remove Competitors from the Market:
The pricing
policies and practices are directed to remove the competitors away from the
market. This can be done by forgoing the current profits – by keeping price as
low as possible – in order to maximize the future profits by charging a high
price after removing competitors from the market. Price competition can remove
weak competitors.
4. Customer-related Objectives:
Customers are in centre of every
marketing decision.
Company wants to achieve following
objectives by the suitable pricing policies and practices:
i. To Win Confidence of Customers:
Customers are the
target to serve. Company sets and practices its pricing policies to win the
confidence of the target market. Company, by appropriate pricing policies, can
establish, maintain or even strengthen the confidence of customers that price
charged for the product is reasonable one. Customers are made feel that they
are not being cheated.
ii. To Satisfy Customers:
To satisfy
customers is the prime objective of the entire range of marketing efforts. And,
pricing is no exception. Company sets, adjusts, and readjusts its pricing to
satisfy its target customers. In short, a company should design pricing in such
a way that results into maximum consumer satisfaction.
5. Other Objectives:
Over and above the
objectives discussed so far, there are certain objectives that company wants to
achieve by pricing.
They are as under:
i. Market Penetration:
This objective
concerns with entering the deep into the market to attract maximum number of
customers. This objective calls for charging the lowest possible price to win
price-sensitive buyers.
ii. Promoting a New Product:
To promote a new
product successfully, the company sets low price for its products in the
initial stage to encourage for trial and repeat buying. The sound pricing can
help the company introduce a new product successfully.
iii. Maintaining Image and Reputation in the Market:
Company’s effective
pricing policies have positive impact on its image and reputation in the
market. Company, by charging reasonable price, stabilizing price, or keeping
fixed price can create a good image and reputation in the mind of the target
customers.
iv. To Skim the Cream from the Market:
This objective
concerns with skimming maximum profit in initial stage of product life cycle.
Because a product is new, offering new and superior advantages, the company can
charge relatively high price. Some segments will buy product even at a premium
price.
v. Price Stability:
Company with stable
price is ranked high in the market. Company formulates pricing policies and
strategies to eliminate seasonal and cyclical fluctuations. Stability in price
has a good impression on the buyers. Frequent changes in pricing affect
adversely the prestige of company.
vi. Survival and Growth:
Finally, pricing is
aimed at survival and growth of company’s business activities and operations.
It is a fundamental pricing objective. Pricing policies are set in a way that
company’s existence is not threatened.
Pricing policy
Pricing is an
important aspect of Marketing. So it needs to be done carefully. That is why
organizations formulate pricing policies and strategies to fix the price of
their products. Pricing affect the sales as well as the profit of the company.
It is an important task. It is a factor which determines the acceptance of the
product in the market thereby it determines the future of the product in the
market.
Price is an important element in the
marketing mix;
A price policy is the standing answer
of the firm to recurring problem of pricing. It provides guidelines to the
marketing manager to evolve appropriate pricing decisions, it competition is
mainly on price basis, and then each company generally prices its products at
the same level as its competitors. If there is non-price competition, each
marketer chooses from among the three alternatives
1.
Price in line (Pricing at the market): The sale
at current market price is desirable under free competition and when a traditional
or customary price level exists. It is preferable when product differentiation
through branding is minimum, buyers and sellers are well informed, and we have
a free market economy.
2.
Market-plus (Pricing above the market): The sale
above the market prices under free competition is profitable only when your
product is distinctive, unique and it has prestige or status in the market.
Customer is inclined to put a greater value on the product if the package is
very good or the brand is well-known. Otherwise, it will be killing price
policy.
3.
Market-minus (Pricing below the market): The
sale below the market price, particularly at the retail level, is profitable
only to large chain stores, self-service stores and discount houses. These
large retailers can sell well-known nationally advertised brands 10 to 30 per
cent below the suggested retail prices, list prices or fixed rescale prices by
the manufactures.
One price policy
A pricing
strategy in which the same price is offered to every customer who purchases the
product under the same conditions. A one price policy may also mean that prices
are set and cannot be negotiated by customers.
A one price policy is the opposite of
a differential pricing approach, in which prices may vary based on location,
promotional offers, method of payment, or other factors.
Variable pricing
Variable pricing is
a pricing strategy where a business offers varying price points at different
locations or points-of-sale. This is a common approach used by retailers when
the costs of offering certain goods and services and the level of market demand
justify it. The objective is to optimize overall profit by offering the best
prices at each point-of-sale.
Explain the New product pricing
Price skimming
One of the most commonly discussed
strategies is the skimming strategy. This strategy refers to a firm’s desire to
skim the market by selling at a premium price. This strategy delivers results
in the following
a. When the target market associates quality of the product with
its price, and high price is perceived to mean high quality of the product.
b. When the customer is aware and willing to buy the product at a
higher price just to be am opinion leader
c. When the product is perceived as enhancing the customer’s
status in society.
d.
When competition is non-existent or the threat from potential competition exists
in the industry because of low entry and exit barriers.
e.
When the product represents significant technological breakthroughs and is
perceived as a ‘high technology’ product.
In
adopting the skimming strategy the firm’s objective is to achieve an early
break-even point and to maximize profits in a shorter time span or seek profits
from a niche.
Penetration
pricing
As opposed to the skimming strategy, the objective
of penetration price strategy is to gain a foothold in a highly competitive
market. The objective of this strategy is to attain market share or market
penetration. Here, the firm prices its product lower than the others in
competition. This strategy delivers results in the following situations:
a.
When the size of the market is large and it is a growing market.
b.
When customer loyalty is not high; customers have been buying the existing
brands more because of habit rather than for a specific preference for it.
c.
When the market is characterized by intensive competition.
d.
When the firm uses it as an entry strategy
e.
Where price-quality association is weak.
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