Pricing: The importance of pricing

20. November 2010 – 08:25

This lesson is about definition of price, the reasons why pricing is such an important element of the marketing mix, and the objectives of pricing.

Definition

Price is the amount of money charged for a product or service. It is the sum of values that consumers exchange for the benefit of having or using a product or service.

Prices may either be quoted using a cost-based, a market-oriented or a competition-based pricing approach.

The price is a very important element in the marketing mix for 4 reasons:

  • Quality: customers assume that more expensive products are of better quality than cheaper competitive products.
  • Image: pose value means a high price to have prestige value
  • Fair price: customers resist a very high price because they dont want to get ripped-off; on the other hand a cheap price means low quality to them
  • Price bands: different groups of buyers require different price levels. Good value for money is achieved by offering a range of products within a certain price band.

Marketers distinguish between the basic price for the core product and the premium price differential, the extra amount charged for the superior product with better features, often only differences in packaging or advertising.

Pricing objectives

  • Improve profitability
  • Set up/expand market share
  • Achieve a return on investment
  • Maintain price stability
  • Prevent competition

Profitability

  • Low prices mean small profit margins but higher sales volume
  • High prices mean high profit margin but lower turnover

Market share

Large market shares enable a firm to operate cost-effectively, allow firms to dictate the prices which weaker competitors have to follow.

Another option would be to pursue a small specialist market segment with high prices.

Return on investment

Firms want to get back a certain proportion of the money invested

Price stability

This is a popular objective mainly in the market structure of an oligopoly (e.g. Unilever, Procter & Gamble, the oil industry). A limited number of sellers dominate the market and control the prices. Price wars follow when one firm decides to lower prices, a downward spiral of prices results in the same market share but at lower prices and thus lower profit margins.

A good advice would be not using only the price but concentrate on the other elements of the marketing mix and pursue a strategy of non-price-competition.

Competition

The extent of competition depends on the market structure. Numerous competitors and easy access to the market might cause intensive price competition.

Another reason for a high degree of price competition is an early stage of the PLC where prices are used to gain a market share.

Price stability can be found I mature markets where products are established and the market is dominated by a few large firms.

Source: ARGE Commerce: Marketing & International Business. Manz Verlag. Wien 2006. P 106-108

Revision questions

  1. Explain the difference between cost-based and market-oriented pricing strategies.
  2. Suggest the most suitable pricing strategy for new products.
  3. Why might a business lose revenue if the price is not set correctly?
  4. How can price be used to differentiate a product?
  5. Describe the basic principles behind the range of different pricing strategies used by firms.
  6. How does the availability of a product affect pricing?

Marketing terms and hundreds of other business words can be found on the new Business English Posters:
http://wirtschaftsenglisch.lerntipp.at/

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