PRICING

Pricing is the process of determining what a company will receive in exchange for its products.
Pricing factors are manufacturing cost, market place, competition, market condition, and quality
of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a
fundamental aspect of financial modeling and is one of the four Ps of the marketing mix. The
other three aspects are product, promotion, and place. Price is the only revenue generating
element amongst the four Ps, the rest being cost centers.
Pricing is the manual or automatic process of applying prices to purchase and sales orders, based
on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor
quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or
lines, and many others. Automated systems require more setup and maintenance but may prevent
pricing errors. The needs of the consumer can be converted into demand only if the consumer
has the willingness and capacity to buy the product. Thus pricing is very important in marketing.
Questions involved in pricing
Pricing involves asking questions like:
ow much to charge for a product or service! This question is a typical starting point for
discussions about pricing, however, a better question for a vendor to ask is " ow much
do customers value the products, services, and other intangibles that the vendor provides.
#hat are the pricing ob$ectives!
%o we use profit maximi&ation pricing!
ow to set the price!: 'cost"plus pricing, demand based or value"based pricing, rate of
return pricing, or competitor indexing(
)hould there be a single price or multiple pricing!
)hould prices change in various geographical areas, referred to as &one pricing!
)hould there be quantity discounts!
#hat prices are competitors charging!
%o you use a price skimming strategy or a penetration pricing strategy!
#hat image do you want the price to convey!
%o you use psychological pricing!
ow important are customer price sensitivity 'e.g. *sticker shock*( and elasticity issues!
+an real"time pricing be used!
,s price discrimination or yield management appropriate!
Are there legal restrictions on retail price maintenance, price collusion, or price
discrimination!
%o price points already exist for the product category!
ow flexible can we be in pricing! : The more competitive the industry, the less
flexibility we have.
o The price floor is determined by production factors like costs 'often only variable
costs are taken into account(, economies of scale, marginal cost, and degree of
operating leverage
o The price ceiling is determined by demand factors like price elasticity and price
points
Are there transfer pricing considerations!
#hat is the chance of getting involved in a price war!
ow visible should the price be! " )hould the price be neutral! 'i.e.: not an important
differentiating factor(, should it be highly visible! 'to help promote a low priced economy
product, or to reinforce the prestige image of a quality product(, or should it be hidden!
'so as to allow marketers to generate interest in the product unhindered by price
considerations(.
Are there $oint product pricing considerations!
#hat are the non"price costs of purchasing the product! 'e.g.: travel time to the store,
wait time in the store, disagreeable elements associated with the product purchase "
dentist "- pain, fishmarket "- smells(
#hat sort of payments should be accepted! 'cash, check, credit card, barter( Pricing
What a price should do
A well chosen price should do three things:
achieve the financial goals of the company 'e.g., profitability(
fit the realities of the marketplace '#ill customers buy at that price!(
support a product.s positioning and be consistent with the other variables in the marketing
mix
o price is influenced by the type of distribution channel used, the type of
promotions used, and the quality of the product
price will usually need to be relatively high if manufacturing is expensive,
distribution is exclusive, and the product is supported by extensive
advertising and promotional campaigns
a low price can be a viable substitute for product quality, effective
promotions, or an energetic selling effort by distributors
/rom the marketer.s point of view, an efficient price is a price that is very close to the maximum
that customers are prepared to pay. ,n economic terms, it is a price that shifts most of the
consumer surplus to the producer. A good pricing strategy would be the one which could balance
between the price floor 'the price below which the organi&ation ends up in losses( and the price
ceiling 'the price beyond which the organi&ation experiences a no demand situation(.
Terminology
There are numerous terms and strategies specific to pricing:
Line Pricing
Line Pricing is the use of a limited number of prices for all product offerings of a vendor. This is
a tradition started in the old five and dime stores in which everything cost either 0 or 12 cents. ,ts
underlying rationale is that these amounts are seen as suitable price points for a whole range of
products by prospective customers. ,t has the advantage of ease of administering, but the
disadvantage of inflexibility, particularly in times of inflation or unstable prices.
Loss leader
A loss leader is a product that has a price set below the operating margin. This results in a loss to
the enterprise on that particular item in the hope that it will draw customers into the store and
that some of those customers will buy other, higher margin items.
Price/uality relationship
The price/quality relationship refers to the perception by most consumers that a relatively high
price is a sign of good quality. The belief in this relationship is most important with complex
products that are hard to test, and experiential products that cannot be tested until used 'such as
most services(. The greater the uncertainty surrounding a product, the more consumers depend
on the price3quality hypothesis and the greater premium they are prepared to pay. The classic
example is the pricing of Twinkies, a snack cake which was viewed as low quality after the price
was lowered. 4xcessive reliance on the price3quality relationship by consumers may lead to an
increase in prices on all products and services, even those of low quality, which causes the
price3quality relationship to no longer apply.
5citation needed6
Premium pricing
Premium pricing 'also called prestige pricing( is the strategy of consistently pricing at, or near,
the high end of the possible price range to help attract status"conscious consumers. The high
pricing of premium product is used to enhance and reinforce a product.s luxury image. 4xamples
of companies which partake in premium pricing in the marketplace include 7olex and 8entley.
As well as brand, product attributes such as eco"labelling and provenance 'e.g. .certified organic.
and .product of Australia.( may add value for consumers
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and attract premium pricing. A
component of such premiums may reflect the increased cost of production. People will buy a
premium priced product because:
1. They believe the high price is an indication of good quality9
:. They believe it to be a sign of self worth " *They are worth it9* it authenticates the buyer.s
success and status9 it is a signal to others that the owner is a member of an exclusive
group9
;. They require flawless performance in this application " The cost of product malfunction
is too high to buy anything but the best " example : heart pacemaker.
!emand"#ased pricing
Demand-based pricing is any pricing method that uses consumer demand " based on perceived
value " as the central element. These include: price skimming, price discrimination and yield
management, price points, psychological pricing, bundle pricing, penetration pricing, price
lining, value"based pricing, geo and premium pricing. Pricing factors are manufacturing cost,
market place, competition, market condition, quality of product.
$ultidimensional pricing
Multidimensional pricing is the pricing of a product or service using multiple numbers. ,n this
practice, price no longer consists of a single monetary amount 'e.g., sticker price of a car(, but
rather consists of various dimensions 'e.g., monthly payments, number of payments, and a
downpayment(. 7esearch has shown that this practice can significantly influence consumers.
ability to understand and process price information
Pricing o#%ectives
Pricing o#%ectives or goals give direction to the whole pricing process. %etermining what your
ob$ectives are is the first step in pricing. #hen deciding on pricing ob$ectives you must consider:
1( the overall financial, marketing, and strategic ob$ectives of the company9 :( the ob$ectives of
your product or brand9 ;( consumer price elasticity and price points9 and <( the resources you
have available.
)ome of the more common pricing ob$ectives are:
maximi&e long"run profit
maximi&e short"run profit
increase sales volume 'quantity(
increase monetary sales
increase market share
obtain a target rate of return on investment '7=,(
obtain a target rate of return on sales
stabili&e market or stabili&e market price: an ob$ective to stabili&e price means that the
marketing manager attempts to keep prices stable in the marketplace and to compete on
non"price considerations. )tabili&ation of margin is basically a cost"plus approach in
which the manager attempts to maintain the same margin regardless of changes in cost.
company growth
maintain price leadership
desensiti&e customers to price
discourage new entrants into the industry
match competitors prices
encourage the exit of marginal firms from the industry
survival
avoid government investigation or intervention
obtain or maintain the loyalty and enthusiasm of distributors and other sales personnel
enhance the image of the firm, brand, or product
be perceived as >fair? by customers and potential customers
create interest and excitement about a product
discourage competitors from cutting prices
use price to make the product >visible*
help prepare for the sale of the business 'harvesting(
social, ethical, or ideological ob$ectives
&pproaches
Pricing is the most effective profit lever. Pricing can be approached at three levels.The industry,
market, and transaction level.
Pricing at the industry level focuses on the overall economics of the industry, including
supplier price changes and customer demand changes.
Pricing at the market level focuses on the competitive position of the price in comparison
to the value differential of the product to that of comparative competing products.
Pricing at the transaction level focuses on managing the implementation of discounts
away from the reference, or list price, which occur both on and off the invoice or receipt.
Pricing tactics
@icromarketing is the practice of tailoring products, brands 'microbrands(, and promotions to
meet the needs and wants of micro segments within a market. ,t is a type of market
customi&ation that deals with pricing of customer3product combinations at the store or individual
level.
Pricing mista'es
@any companies make common pricing mistakes. 8ernstein.s article *)upplier Pricing @istakes*
outlines several which include:
#eak controls on discounting
,nadequate systems for tracking competitor selling prices and market share
+ost"Ap pricing
Price increases poorly executed
#orldwide price inconsistencies
Paying sales representatives on dollar volume vs. addition of profitability measures