Price is the amount of money organisations, groups and individuals ask for in a business exchange before giving away a product. Depending on the agreement reached between the party that has to give the product and the party that has to part with the money, the price is paid before or after the product is given; or partly before and partly after. (Payments in kind also represent price).
Price is one of the four traditional marketing mix variables that include product, place and promotion.
The kind and level of price set is driven by organisational and marketing objectives. Some of the most common objectives are:
1. Recovering expenses (cost coverage)
2. Maximising profit
3. Maximising sales (and in the process increasing market share)
4. Maximising revenue
5. Matching or beating competition
6. Preventing collapse of business
7. To be leader in quality
A business may actually pursue more than one objective in its pricing approach.
In setting the price that is in line with objectives such as the above, there will be at least four major influences, including:
· Costs, such as those concerning labour, promotion and distribution.
· Customers, who, for example, may not be able, or simply willing, to pay above a certain price.
· The competition. Will our price be so high as to give other suppliers a big advantage? Will it be so low as to ignite a price war? These, of course, are just two possible scenarios regarding competition.
· Distributor needs. The manufacturer’s price must leave room for other members of the distribution channel, such as wholesalers and retailers, to place decent markups on their costs.
Common Pricing Strategies
There is an endless list of pricing strategies employed by marketers. Here, we only cover some of the most popular.
Strategies like skimming, penetration and introductory pricing are used when a new product is brought to the market.
Skimming pricing. A skimming pricing approach involves charging a price that, generally, only the higher-income group can pay. Skimming is a profit-maximisation policy.
New products with new features and no competition are good candidates for a skimming policy. However, as new suppliers enter the market, prices are bound to fall because businesses need to maintain or increase sales revenue. Reducing prices that way not only helps keep away competitors but also creates new buyers among lower-income groups.
Penetration pricing. This strategy suits a price-sensitive market, or one in which there is likely to be strong competition at the heels of a newly-launched product. A low price is fixed for a new offering and offered to every customer.
Penetration pricing can help grow market share. If the market is really big, the supplier can additionally benefit from economies of scale as unit costs drop. For instance, it may be possible to effect a reduction in price.
Penetration pricing is also called stay-out pricing.
Introductory pricing. Introductory prices are probably more useful in a market with established suppliers.
Introductory prices are lower than those of older players. The aim is to induce ‘trying’ of a new product.
Unlike in the case of penetration pricing, the new supplier raises the price as soon as it has created interest and a significant number of customers.
Some older suppliers sometimes lower the prices of their competing brands to avoid losing market share to the new entrant.
Competition-driven pricing. The traditional ones involve:
· Pricing at the existing average market level.
· Pricing above the market level. This is also called premium or prestige pricing), and
· Pricing below the market level.
One will note that strategies like penetration pricing and introductory pricing (discussed above) do qualify, too, to be called competition-driven pricing.
Psychological pricing. Psychological pricing is often odd-even pricing. Instead of pegging the price of an item at, say, $300, the seller may choose a figure of $299. One possible effect on the customer is that the price will be associated with the ‘lower budget’ of $200 instead of the ‘more-financially-draining’ $300.
Geographic pricing. This takes place when the price of a product varies from one location to another as the supplier takes into account changes in costs caused by transporting over different distances.
Differential pricing. In differential pricing, the same product, quantity and quality are offered to different customers groups at different prices. It is a discriminatory type of pricing and works well when the targeted markets are heterogeneous (possess different characteristics).
An example of differential or discriminatory pricing is when a public transporter charges off-peak customers less than peak clients. Differential pricing does not involve cost differences.
Differential pricing may not always be legal. Additional conditions are likely to include the evidence that it is not so easy for a ‘business chancer’ to buy at the lower price and sell at the higher.
Product line pricing. A product line is a set of products with the same general characteristics. In product line pricing, each variation of the product is given its own price. Because prices range from lowest (for the most basic variety) to highest (for the most sophisticated), customers are given chance to purchase the product variation their pocket can afford.
The possibility of fixing a price which results in one product losing sales to another must be avoided.
In some cases, two or more product varieties are bundled together as one offering to ensure sales of each. The price given is lower than the total of their individual prices.
Captive product pricing. In captive product pricing, an item is offered at a low price while spares and other supplies carry a high price. The spares and supplies are usually not interchangeable with those of a competing product – which may be much cheaper.
Value-added pricing. This involves increasing the benefits to the customer without raising the price. Higher efficiency levels are one way of aiding value-added pricing.
Promotional pricing. A promotional price is one given occasionally for such purposes as reversing sales decline, strengthening brand loyalty, encouraging early purchase and diverting customer attention from a new product.
Discounted pricing. A discount is a reduction in the normal price (list price). They are given to encourage volume purchases. Three examples are:
· Cash discounts, given when there has been prompt payment.
· Quantity discounts, given when large volumes are purchased.
· Seasonal discounts, for buying an item or service at off-season times.
Pricing products accurately can be difficult and involving. Marketers have to read the marketing environment accurately, considering all relevant information and not losing sight of the central aspirations of the organisation.
Rupert Chimfwembe 6 January, 2016.
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