Pricing: The importance of pricing

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/

Pricing methods, strategies and tactics

Subject Outline

1. How important is price?

Pricing is part of the marketing mix, and it is fundamental to a firm’s revenues and gross profit margin. Pricing is affected by various factors:

  • Customer sensitivity to price

A company has to find the psychologically right price range between a price set too low and a price set too high. The price depends on the features and the quality of a product; it depends on the income and desire of customers as well.

  • Level of competitive activity

In a competitive market customers have more choice. Brands differentiate the products. The price for branded goods can be set higher to reinforce the brand’s value. The same comes true for the market structure of monopoly. Monopolist businesses are able to charge higher prices.

  • Availability of the product

Shortage forces prices up and removes barriers to price (e.g. art world)

2. Price determines business revenue

Sales revenue equals price multiplied by numbers of products or services sold. If the price is not right businesses could lose customers and earn less revenue. Firms lose revenues when the price is too low.

3. How do businesses decide what price to charge

Pricing means finding a balance between being competitive and being profitable.

There are two basic decisions: pricing a new product and managing pricing throughout the product life cycle. Proper pricing requires market research, competitive research, analysis of sales patterns, and costs of sales staff.

4. Pricing methods

  • Cost-plus-approach

The price is set in dividing the total costs by the number of units, and then adding a mark-up

  • Contribution pricing

Variable costs + contribution

  • Competitive pricing

Prices are set in relation to competitors’ prices – either pricing at the prevailing market price or pricing at a discount to the market leader.

  • Price discrimination

Pricing by market segments – e.g. rail travel, business travelers, peak times

5. Flexibility is the best method

Flexibility means using a combination of the different methods. Pricing depends on the product and on the market as well.

6. Pricing strategies

  • Strategies for new products

Skimming and penetration are useful strategies – skimming for innovative products, penetration for similar products to gain a high market share.

  • Strategies for existing products
    • Price leaders (strong brands)
    • Price takers (at the market level)
    • Predatory pricing (undercutting)

7. Pricing tactics

  • Loss leader – encourages customers to buy other products or complimentary products
  • Psychological pricing –  19,99 instead of  20,00.
  • Special offer pricing
  • Discounting – early payment, quantity purchase, seasonal, travel business

8. Pricing an evaluation

The downward pressure on prices has never been so great as today. There has been an economic crisis, a slowdown in consumer spending and a vastly increasing power of purchasers. Furthermore the Internet makes it easier to compare prices, and the low labor costs in China have also driven down the prices.

Source: Marcousé, Ian: Business Studies, Hodder & Stoughton, 2003.

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