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Pricing Objectives? 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: • How 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 - How much do customers value the products, services, and other intangibles that the vendor provides. • What are the pricing objectives? • Do we use profit maximization pricing? • How to set the price?: (cost-plus pricing, demand based or value-based pricing, rate of return pricing, or competitor indexing) • Should there be a single price or multiple pricing? • Should prices change in various geographical areas, referred to as zone pricing? • Should there be quantity discounts? • What prices are competitors charging? • Do you use a price skimming strategy or a penetration pricing strategy? • What image do you want the price to convey? • Do you use psychological pricing? • How important are customer price sensitivity (e.g. "sticker shock") and elasticity issues? • Can real-time pricing be used? • Is price discrimination or yield management appropriate? • Are there legal restrictions on retail price maintenance, price collusion, or price discrimination? • Do price points already exist for the product category? • How 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? • What is the chance of getting involved in a price war? • How visible should the price be? - Should 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 joint product pricing considerations? • What 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) • What 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 (Will 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 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 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 beyond which the organization 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 5 or 10 cents. Its underlying rationale is that these amounts are seen as suitable price points for a whole range of products by prospective customers. It 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/quality 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 price/quality 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. Excessive reliance on the price/quality relationship by consumers may lead to an increase in prices on all products and services, even those of low quality, which causes the price/quality relationship to no longer apply.[citation needed] 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. Examples of companies which partake in premium pricing in the marketplace include Rolex and Bentley. 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[1] 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 quality; 2. They believe it to be a sign of self worth - "They are worth it;" it authenticates the buyer's success and status; it is a signal to others that the owner is a member of an exclusive group; 3. They require flawless performance in this application - The cost of product malfunction is too high to buy anything but the best - example : heart pacemaker. Demand-based 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. Multidimensional pricing Multidimensional pricing is the pricing of a product or service using multiple numbers. In 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). Research has shown that this practice can significantly influence consumers' ability to understand and process price information Pricing objectives Pricing objectives or goals give direction to the whole pricing process. Determining what your objectives are is the first step in pricing. When deciding on pricing objectives you must consider: 1) the overall financial, marketing, and strategic objectives of the company; 2) the objectives of your product or brand; 3) consumer price elasticity and price points; and 4) the resources you have available. Some of the more common pricing objectives are: • maximize long-run profit • maximize short-run profit • increase sales volume (quantity) • increase monetary sales • increase market share • obtain a target rate of return on investment (ROI) • obtain a target rate of return on sales • stabilize market or stabilize market price: an objective to stabilize price means that the marketing manager attempts to keep prices stable in the marketplace and to compete on non-price considerations. Stabilization of margin is basically a cost-plus approach in which the manager attempts to maintain the same margin regardless of changes in cost. • company
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