Nature and Scope of Product Pricing Decisions

Price is the stimulator that converts the procrastination of buyers into the desired choice, that suggests value that moves someone to take certain risks, that encourages them to spend the money to incur shopping and travel costs.

Pricing decisions have an impact on all phases of the Supply/Marketing channels. Suppliers, sales people, distributors, competitors and customers all are affected by the pricing system.

Price also gives a perception of quality. For example, a hotel chain, servicing the tourist package holiday market, will offer cheap prices to its customers. The customers will have a lower expectation of service quality than those offered at full premium price package. Since any offering is merely perceived as a bundle of diverse values, the opposite course, in product choice, is to agree to sacrifice service quality in favour of a lower price.

1. Price allocates recourses: In a free-market economy and to some extent in a controlled economy, the resources can be allocated and reallocated by the process of price reduction and price increase. Price is used as a weapon, to realise the goals of a planned economy, and to allocate resources towards sectors, which have priority from the planning point of view.
2. Price is essential to marketing: Price is a matter of great importance to both the buyer and the seller in the market place. In money economy without prices there can be no marketing. Price denotes the value of a product or service expressed in monetary terms. Only when a buyer and a seller agree on the price, does exchange and transfer of ownership take place.
3. Price determines the general standard of living: Price influences consumer purchase decisions. It reflects the purchasing power of money and thus reflects the general standard of living. The lower the prices in an economy, the greater will be the purchasing power in the hands of the consumer and the higher will be the standard of living.
4. Price regulates demand: Price is the strongest ‘P’ of the four “Ps” of the marketing mix. The marketing manager can regulate the demand of a product by increasing or decreasing its price. To increase demand, reduce the price and to decrease demand increase the price.

However, as an instrument to control demand, price should be used by those who are familiar with the dangers involved in using price as a mechanism to control demand, as the damage done by improper pricing can ruin the effectiveness of a well-conceived marketing programme.

5. Price is a competitive weapon: Price is an important weapon to deal with competition. Any company whether it is selling high-, medium- or low-priced products, has to decide as to whether its prices will be above, below or equal to the prices set by the competitors. This is a basic policy issue and affects the entire planning process.
6. Price is a determinant of profitability: Price influences the sales revenue of a product, which in turn determines the profitability of the firm. Price thus is the basis of generating profits for the firm. A change in the price mix of the marketing mix can be made more easily than a change in any other element of the marketing mix.

Thus, price changes are used more frequently for defensive and offensive strategies of a firm. The impact of price rise and fall is reflected instantly in the rise and fall of the profitability of a product, all other variables remaining the same.

Thus, price is a powerful marketing instrument. Every marketing plan involves a pricing decision. As such all-marketing planners should make accurate and planned pricing decisions.

Scope

Price is the stimulator that converts the procrastination of buyers into the desired choice, that suggests value that moves someone to take certain risks, that encourages them to spend the money to incur shopping and travel costs.

Pricing decisions have an impact on all phases of the supply/marketing channels. Suppliers, sales people, distributors, competitors and customers all are affected by the pricing system.

Price also gives a perception of quality. For example, a hotel chain, servicing the tourist package holiday market, will offer cheap prices to its customers. The customers will have a lower expectation of service quality than those offered at full premium price package. Since any offering is merely perceived as a bundle of diverse values, the opposite course, in product choice, is to agree to sacrifice service quality in favour of a lower price.

Price, of course, is not the only marketing tool available to the formulation of a marketing strategy. The price of money is only one of many interdependent references used to make a purchase that may favour or inhibit purchase. In fact, price often is not the decisive factor. The inherent belief that price is the main determinant of buyer choice, will lead a business to react to any sales-led crisis by discounting to distributors or final customers or both.

Unless sales responds strongly, this strategy will compound disaster, in that continued low sales at the lower price known as price war, will make an even smaller contribution to fixed overheads. But even if a sale goes up, gross margins will remain squeezed and a higher total income cannot be generated.

Worse, the extra sales may be the result of pipeline-filling by the distributors or by final customers stocking up ahead. Such increases may only be temporary, to be later compensated by a downward re-adjustment. Worse still any significant increase in sales that will come at the expense of other suppliers, and is likely to encourage retaliation by the most badly hit competitor. This, in turn, usually leads to a general price war, which quickly drives the weakest suppliers from the market and leaves even the strongest on permanently reduced margins.

In the early 1980s, People Express gained a significant market share in the air travel market through much curtailed prices. Other airlines, as a reaction, cut also their prices in order to maintain passenger loads. The final result was not an increased share of the market for People Express, but was adversely affected, falling into near bankruptcy. The condition deteriorated in 1986, it was taken over by one of its competitors.

A workable marketing strategy must take full account of the following factors, in addition to price:

(i) Perceived quality

(ii) Conforming quality

(iii) Time and place availability costs

(iv) Time expenditure costs

(v) Risk costs

(vi) Learning costs

(vii) Search effort costs

(viii) Design compromise costs.

The market strategy must be planned in terms of the way customers perceived value and react to differing stimuli affecting them.