Pricing, Factors Affecting Pricing6th February 2020
Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business’s marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the market place, competition, market condition, brand, and quality of product.
Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix, the other three aspects being product, promotion, and place. Price is the only revenue generating element amongst the four Ps, the rest being cost centers. However, the other Ps of marketing will contribute to decreasing price elasticity and so enable price increases to drive greater revenue and profits.
Pricing can be a 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 pricing 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 the most important concept in the field of marketing, it is used as a tactical decision in response to changing competitive, market and organizational situations.
Objectives of Pricing
The objectives of pricing should consider:
- The financial goals of the company (i.e. profitability)
- The fit with marketplace realities (will customers buy at that price?)
- The extent to which the price supports a product’s market positioning and be consistent with the other variables in the marketing mix
- The consistency of prices across categories and products (consistency indicates reliability and supports customer confidence and customer satisfaction)
- To meet or prevent competition
Price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product. Where manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns, then prices are likely to be higher. Price can act as a substitute for product quality, effective promotions, or an energetic selling effort by distributors in certain markets.
From 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. In economic terms, it is a price that shifts most of the consumer economic surplus to the producer. A good pricing strategy would be the one which could balance between the price floor (the price below which the organization ends up in losses) and the price ceiling (the price by which the organization experiences a no-demand situation).
Factors Affecting Pricing
Price is the only element of marketing mix that helps in generating income.
Therefore, a marketer should adopt a well-planned approach for pricing decisions.
The marketer should know the factors that influence the pricing decisions before setting the price of a product.
(i) Organizational Objectives
Affect the pricing decisions to a great extent. The marketers should set the prices as per the organizational goals. For instance, an organization has set a goal to produce quality products, thus, the prices will be set according to the quality of products. Similarly, if the organization has a goal to increase sales by 18% every year, then the reasonable prices have to be set to increase the demand of the product.
Influence the price setting decisions of an organization. The organization may sell products at prices less than that of the competitors even if it is incurring high costs. By following this strategy, the organization can increase sales volumes in the short run but cannot survive in the long run.Thus, the marketers analyze the costs before setting the prices to minimize losses. Costs include cost of raw materials, selling and distribution overheads, cost of advertisement and sales promotion and office and administration overheads.
(iii) Legal and Regulatory Issues
Persuade marketers to change price decisions. The legal and regulatory laws set prices on various products, such as insurance and dairy items. These laws may lead to the fixing, freezing, or controlling of prices at minimum or maximum levels.
(iv) Product Characteristics
Include the nature of the product, substitutes of the product, stage of life-cycle of the product, and product diversification.
Affects prices significantly. The organization matches the prices with the competitors and adjusts the prices more or less than the competitors. The organization also assesses that how the competitors respond to changes in the prices.
(vi) Pricing Objectives
Help an organization in determining price decisions. For instance, an organization has a pricing objective to increase the market share through low pricing. Therefore, it needs to set the prices less than the competitor prices to gain the market share. Giving rebates and discounts on products is also a price objective that influences the customer’s decisions to buy a product.
(vii) Price Elasticity of Demand
Refers to change in demand of a product due to change in price.
There are three situations that arise under it:
- Products that have inelastic demand will be highly priced
- Products that have more than elastic demand will be priced low
- Products that have elastic demand will be reasonably priced.
(viii) Competitor’s pricing Policies
Influence the pricing policies of the organizations. The price of a product should be determined in such a way that it should easily face price competition.
(ix) Distribution Channels
Implies a pathway through which the final products of manufacturers reach the end users. If the distribution channel is large, price of the product will be high and if the distribution channel is short, the price of the product will be low. Thus, these are the major factors that influence the pricing decisions.