Pricing

Price goes by various names-freight, fare, license fee, tuition fee, professional charge, rent, interest, etc. But price in an enterprise/business system is seldom so simple. By definition, price is the money that customers must pay for a product or service. In other words, price is an offer to sell for a certain amount of currency.

Here, the word, offer indicates that price is subject to change if there are found insufficient number of customers at the original price of the product. That is why prices are always on trial. If they are found to be wrong, either they must be immediately changed or the product itself must be withdrawn from the market.

Pricing of the product is something different from its price. In simple words, pricing is the art of translating into quantitative terms the value of a product to customers at a point of time. Someone has opined that, “The key to pricing is to build value into the product and price it accordingly.”

Pricing is one of the key elements of marketing mix.

The salient ingredients of pricing are:

(i) Pricing covers all marketing aspects like the item-goods or services-mode of payment, methods of distribution, currency used, etc.

(ii) Pricing may carry with it certain benefits to the customers like guarantee, free delivery, installation, free after-sale servicing and so on.

(iii) Pricing refers to different prices of a product for different customers and different prices for the same customer at different times.

Pricing – Buyers’ and Sellers’ View

In general terms price is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller).

Yet this view of price provides a somewhat limited explanation of what price means to participants in the transaction.

In fact, price means different things to different participants in an exchange:

1. Buyers’ View

For those making a purchase, such as final customers, price refers to what must be given up to obtain benefits. In most cases what is given up is financial consideration (e.g., money) in exchange for acquiring access to a good or service. But financial consideration is not always what the buyer gives up.

Sometimes in a barter situation a buyer may acquire a product by giving up their own product. For instance – two farmers may exchange cattle for crops. Also, as we will discuss below, buyers may also give up other things to acquire the benefits of a product that are not direct financial payments (e.g., time to learn to use the product).

2. Sellers’ View

To sellers in a transaction, price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit. For marketing organizations price also serves as a marketing tool and is a key element in marketing promotions. For example – most retailers highlight product pricing in their advertising campaigns.

Objectives of Pricing

1. Target Rate of Return

Firms following this objective design their pricing strategy in such a way that will yield desired return on total investment (ROI). Rate of return refers to the amount of net profits divided by investment or capital employed. This goal often leads to cost plus pricing. The price of a product or service is determined by adding the expected margin of profit to the cost of production and distribution.

2. Price Stabilization

This goal is adopted in industries having a few firms. In an oligopolistic situation where one firm is very big and all others are small, the big firm acts as the price leader and other firms follow it. All the firms try to avoid price wars. No firm is willing to cut its prices for fear of retaliation by other firms.

In order to avoid fluctuations in prices, they may even forgo maximizing profits during the period of scarce supply or prosperity. This objective is followed in case of products which are vulnerable to price wars or which are advertised at the national level. Price stability helps in planned and regular production in the long run. However, it may create rigidity in pricing.

3. Target Share of the Market

In an expanding market, market share is a better indicator of a firm’s success than the target rate of return. When the market has a potential for growth, a firm earning the target rate of return may, in fact, be decaying if its share of the market is decreasing. Therefore, maintenance or improvement in the market share is a more worthwhile objective in growing markets. Market share measures a firm’s sales vis-a-vis the sales of its competitors.

4. Facing Competition

Under conditions of intense competition, a firm may seek to meet or prevent competition. It may fix prices at a very low level (even below cost) to eliminate its competitors or to prevent the entry of new firms in the market. Some firms follow this practice while introducing a new product. This goal is not very popular and cannot be adopted on a regular basis. In the long run, a firm cannot survive if it continues to charge less than the cost of the product or service.

5. Profit Maximization

Traditionally, profit maximization is considered to be the objective of pricing. The classical economic theory suggests the fixation of prices in such a way that the marginal cost is equal to marginal revenue where profits are maximized. Even today some firms are not very conscious of social responsibilities and try to maximize profits. But in recent years there has been a change in the philosophy of business and profit maximization is not considered rational business behaviour. In practice, no firm states explicitly that profit maximization is its pricing objective due to the fear of public criticism and government regulation.

6. Improving Public Image

Another objective of pricing may be to enhance the firm’s public image. The firm may launch a premium product at a high price for this purpose. Alternatively, it may offer the new product at a low price to appeal to the common buyer. The pricing policy should be consistent with the established reputation of the firm.

In addition to the foregoing, business firms may design their pricing policy to achieve the goals of full capacity utilization, market exploration, diversification, etc.