Setting Price strategy

PRICING STRATEGIES
Price is not just a number on a tag. It comes in many forms and performs
many functions. Rent, tuition, fares, fees, rates, tolls, retainers, wages, and
commissions are all the price you pay for some good or service. Price also
has many components. If you buy a new car, the sticker price may be
adjusted by rebates and dealer incentives. Some firms allow for payment
through multiple forms, such as $150 plus 25,000 frequent flier miles for a
flight.
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. Businesses may benefit from lowering or raising prices, depending
on the needs and behaviors of customers and clients in the particular
market. Finding the right pricing strategy is an important element in running
a successful business.

SETTING THE PRICE

A firm must set a price for the first time when it develops a new product,
when it introduces its regular product into a new distribution channel or
geographical area, and when it enters bids on new contract work. The firm
must decide where to position its product on quality and price.

I. Development of Pricing Objectives

The price-setting process involves six steps that provide a logical way to
analyze the effectiveness of price in the marketing mix and the contributions
of price to the organizations objectives.
A. Goal setting: Pricing objectives are goals that describe what an
organization wants to achieve through pricing efforts.
Developing pricing objectives is an important task because pricing
objectives form the basis for decisions about other stages of pricing.
Pricing objectives must be consistent with organizational and
marketing objectives.
Pricing objectives influence decisions in many functional areas,
including finance, accounting, and production.
A marketer can use both short- and long-term pricing objectives and
can employ one or more multiple pricing objectives.
B.
Survival
One of the most fundamental pricing objectives is survival.
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Setting Price strategy

Most organizations will tolerate short-run losses, internal upheaval, and
other difficulties if these conditions are necessary for survival.
Because price is a flexible variable, it is sometimes used to keep a
company afloat by increasing sales volume to levels that match the
organizations expenses
C.
Profit
The objective of profit maximization is rarely operational because it is
difficult to measure its achievement.
Specific profit objectives may be stated in terms of actual dollar
amounts or in terms of a percentage of sales revenues.
D.

Return on Investment
Pricing to attain a specified return on the companys investment is also
a profit-related pricing objective.
Most pricing objectives based on ROI are achieved by trial and error
because not all cost and revenue data needed to project the return on
investment are available when setting prices.

E.

Market Share
Many firms establish pricing objectives to maintain or increase market
share, a products sales in relation to total industry sales, in part
because they recognize that high relative market share often
translates into higher profits.
Maintaining or increasing market share need not depend on growth or
industry sales.
1. An organizations sales volume may increase while its market share
within the industry decreases, if the overall market is growing.
2. An organizations market share can increase even when sales for
the industry are flat or decreasing.

F.
Cash Flow
Some organizations set prices to recover cash as quickly as possible.
Financial managers are interested in quickly recovering capital that has
been spent to develop products.
A possible disadvantage of this pricing objective is high prices, which
might enable competitors with lower prices to gain a large share of the
market.
G.
Status Quo
In some cases, an organization may be in a favorable position and may set
an objective of status quo.
Status quo objectives can focus on several dimensions, including
maintaining a certain market share, meeting competitors prices,
achieving price stability, or maintaining a favorable public image.
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Setting Price strategy

A status quo pricing objective can reduce a firms risks by helping
stabilize demand for its products.
The use of status quo pricing objectives sometimes minimizes price as
a competitive tool, which can lead to a climate of non-price
competition within an industry.
H.

Product Quality
An objective of product quality leadership in the market normally
results in charging a high price to cover the high product quality and,
perhaps, the high cost of research and development.

II.

Assessment of the Target Markets Evaluation of

Price

The importance of price depends on the type of product, the type of

target market, and the purchase situation.
Value combines a products price and quality attributes, which are used
by customers to differentiate competing brands.
Understanding the importance of a product to customers, as well as
their expectations of quality and value, helps a marketer correctly
assess the target markets evaluation of price.

III.

Evaluation of Competitors Prices

Marketers are generally in a better position to establish prices when

they know the competitions prices; discovering competitors prices
may be a regular function of marketing research.
Competitors prices are often closely guarded secrets and may be
difficult to uncover.
Marketers in an industry in which price competition prevails need
competitive price information to ensure their organizations prices are
the same, or lower than, their competitors prices.
An organization may set its prices slightly above the competition to
give its products an exclusive image, or it may use price as a
competitive tool and price its products below those of competitors.

IV.

Selection of a Basis for Pricing

The three major dimensions on which prices can be based are cost, demand,
and competition. An organization usually considers multiple dimensions. The
selection of the bases to be used is affected by the type of product, the
market structure of the industry, the brands market share position relative
to competing brands, and customer characteristics.
A.

Cost-Based Pricing
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Setting Price strategy

When using cost-based pricing, an organization determines price by adding a
dollar amount or a percentage to the cost of the product. It does not always
take into account supply and demand. Cost-based pricing is straightforward
and easy to implement.
1.
Cost-Plus Pricing
Cost-plus pricing is a method whereby the sellers costs are determined, and
then a specified dollar amount or percentage of the cost is added to the
sellers cost to establish the price.
This is appropriate when production costs are difficult to predict.
One pitfall for the buyer is the seller may increase costs to establish a
larger profit base.
For industries in which cost-plus pricing is common and sellers have
similar costs, price competition may not be especially intense.
2.
Markup Pricing
Through markup pricing, which is common among retailers, a products price
is derived by adding a predetermined percentage of the cost, called
markup, to the cost of the product.
Markups can be stated as a percentage of the cost or as a percentage
of the selling price.
Markups usually reflect expectations about operating costs, risks, and
stock turnovers.
To the extent retailers use similar markups for the same product
category, price competition is reduced.
B.
Demand-Based Pricing
With demand-based pricing, customers pay a higher price when demand for
the product is strong and a lower price when demand is weak.
To use demand-based pricing, a marketer must be able to estimate the
amounts of a product consumers will demand at different prices;
effectiveness depends on the marketers ability to estimate demand
accurately.
Compared with cost-based pricing, demand-based pricing places a firm
in a better position to reach higher profit levels, assuming buyers value
the product at levels sufficiently above the products cost.
C.
Competition-Based Pricing
Competition-based pricing is pricing primarily influenced by competitors
prices.
The importance of this method increases when competing products are
relatively homogeneous and the organization is serving markets in
which price is a key purchase consideration.

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Setting Price strategy

This pricing technique can help attain the pricing objective of
increasing sales or market share, although it may necessitate frequent
price adjustments.

V.

Selection of a Pricing Strategy

A pricing strategy is an approach or a course of action designed to achieve

pricing and marketing objectives. Generally, pricing strategies help
marketers solve the practical problems of establishing prices.
A.
Differential Pricing
1.
An important issue in pricing is whether to use a single price or multiple
prices for the same product.
Using a single price has several benefits, including that it is simple,
easily understood by employees and customers, and it reduces the
chance of an adversarial relationship developing between marketer
and customer.
A single price also creates some challenges: if a single price is too
high, some customers may not be able to afford the product; if it is too
low, the firm loses revenue from customers who would have paid more
had the price been higher.
2.
Differential pricing means charging different prices to different
buyers for the same quality and quantity of product. The market must
consist of multiple segments with different price sensitivities, and the pricing
method should be used in a way that avoids confusing or antagonizing
customers.
a)

Negotiated Pricing
Negotiated pricing occurs when the final price is established through
bargaining between the seller and customer.
Even when there is a predetermined stated price or a price list,
negotiated pricing may still be used to establish the final sales price.
b)
Secondary-Market Pricing
Secondary-market pricing means setting one price for the primary target
market and a different price for another market.
Often the price charged in the secondary market is lower.
However, when the costs of serving a secondary market are higher
than normal, secondary-market customers may have to pay a higher
price.
c)
Periodic Discounting
Periodic discounting is the temporary reduction of prices on a
patterned or systematic basis.
Seasonal changes, model year changes, or holidays may be reasons for
the systematic price reductions.
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Setting Price strategy

A major problem with periodic discounting is, if the discounts follow a
pattern, customers may wait to make purchases until they can get the
sale price.
d)
Random Discounting
Random discounting is temporarily reducing prices on an unsystematic
basis.
This is done to attract new customers and reduce predictability of price
reductions by current customers.
e)
Retailers often employ tensile pricing, which is using a broad
statement about a price reduction as opposed to detailing specific price
amounts.
B.
New-Product Pricing
Setting the base price for a new product is a necessary part of formulating a
marketing strategy and is one of the most fundamental decisions in the
marketing mix.
1.
Price Skimming
Price skimming is charging the highest possible price buyers who most desire
the product will pay.
In the introductory phase of the product life cycle, price skimming can
generate much-needed initial cash flows to help offset sizable
development costs.
It protects the marketer from problems which arise when the price is
set too low to cover costs.
It can help keep demand consistent with a firms production
capabilities, which are generally low when a product is in the
introduction phase.
2.
Penetration Pricing
Penetration pricing is setting the price lower than competing brands to
penetrate a market and quickly gain a significant market share.
Penetration pricing puts the marketer in a less flexible position because
it is more difficult to raise a penetration price than to lower or discount
a skimming price.
It can be especially beneficial when a marketer suspects that
competitors could enter the market easily.
C.
Product-Line Pricing
Product-line pricing is establishing and adjusting prices of multiple products
within a product line. A marketers goal here is to maximize profits for an
entire product line rather than to focus on the profitability of an individual
product.
1.
Captive Pricing

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Setting Price strategy

Captive pricing involves pricing the basic product in a product line low, but
pricing related items that are required to operate or enhance it at a higher
level.
2.
Premium Pricing
Premium pricing is often used when a product line contains several versions
of the same product of different quality. It entails giving higher quality or
more versatile products the highest prices.
3.
Bait Pricing
Bait pricing occurs when a marketer prices an item in the product line
low with the intention of selling a higher-priced item in the line.
The lower-priced item will attract customers into the store and the
marketer hopes that once in the store, the customer will purchase the
higher-priced item.
4.
Price Lining
With price lining, the organization sets a limited number of prices for
selected groups or lines of merchandise.
The basic assumption in price lining is demand is inelastic for various
groups or sets of products. When prices are attractive, customers will
continue to purchase without responding to slight changes in price.
D.
Psychological Pricing
Psychological pricing attempts to influence a customers perception of price
to make the products price more attractive.
1.
Reference Pricing
Reference pricing is pricing a product at a moderate level and
positioning it next to a more expensive model or brand.
Reference pricing is based on the isolation effect, which says that an
alternative is less attractive when it appears by itself compared to
when it appears with other alternatives.
2.
Bundle Pricing
Bundle pricing is the packaging together of two or more usually
complementary products to be sold for a single price.
The customer often values the convenience of purchasing a
combination of bundled products.

3.
Multiple-Unit Pricing
Multiple-unit pricing occurs when two or more of the same product are
packaged together and sold for a single price.
A company uses multiple-unit pricing to attract new customers to its
brand and, in some instances, to increase consumption of its brands.
Discount stores are warehouse clubs are major users of multiple-unit
pricing.
4.
Everyday Low Prices (EDLP)
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Setting Price strategy

An everyday low price involves setting a low price for products on a
consistent basis, rather than setting high prices and frequently discounting
them.
Generally, prices are set far enough below competitors prices to make
customers confident they are receiving a fair price.
A major problem with EDLP is customers have mixed responses to it:
customers seem to have been trained to seek and to expect deeply
discounted prices.
5.
Odd-Even Pricing
Odd-even pricing involves ending a price with certain numbers than
influence the buyers perceptions of the price or the product.
Odd-even pricing assumes more of a product will be sold at $99.95
than at $100 because it registers in customers brains as more of a
bargain.
Women are more likely to respond to odd-even pricing than men are.
However, research has produced conflicting evidence on the efficacy of
the pricing approach.
Even prices are often used to give a product an upscale or exclusive
image.
6.
Customary Pricing
With customary pricing, certain goods are priced primarily on the basis of
tradition.
7.
Prestige Pricing
With prestige pricing, prices are set at an artificially high level to convey a
prestigious or quality image.
E.
Professional Pricing
Professional pricing is used by people with great skill or experience in a
particular field or activity.
Professional prices do not relate directly to the time and effort
expended. Professionals charge a standard fee regardless of the
problems involved in performing the job.
The concept of professional pricing includes the idea professionals
have an ethical responsibility not to overcharge customers.
F.
Promotional Pricing
Price, as an ingredient in the marketing mix, is often coordinated with
promotion. The two variables sometimes are so interrelated the pricing policy
is promotion-oriented.
1.
Price Leaders
Products priced below the usual markup, near cost, or below cost are price
leaders; management hopes sales of regularly priced merchandise will more
than offset the reduced revenues from the price leaders.
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Setting Price strategy

2.
Special-Event Pricing
With special-event pricing, advertised sales or price cutting is used to
increase sales volume and is linked to a holiday, season, or special event.
3.
Comparison Discounting
Comparison discounting is the pricing of a product at a specific level
and simultaneously comparing it to a higher price.
The Federal Trade Commission has established guidelines for
comparison pricing in order to dissuade deceptive pricing practices.

VI.

Determination of a Specific Price

A pricing strategy will yield a certain price; however, this price may
need refinement to make it consistent with pricing practices in a
particular market or industry.
Pricing strategies should help in setting a final price. Marketers must
establish pricing objectives; have knowledge about target market
customers; and determine demand, price elasticity, costs, and
competitive factors.
When government controls are not a factor, pricing remains a flexible
and convenient way to adjust the marketing mix.

Conclusion
As with many aspects of product management, understanding your
competitors, your real customer needs, your position in the market and your
company's strategy are the fundamentals on which your price should be
built. You should not underestimate the importance of optimizing pricing and
accept that the pricing cycle with regular pricing reviews and adjustments
are an important part of your role.

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