Importance Of Pricing Strategies

The fixing of the price level for a good or service is a vital component of the marketing mix. Price can have a great impact on the consumer demand for the product. Price will largely determine the degree of value added, by the business, to bought-in components .

 Pricing levels greatly influence the revenue and profit made by a business. Price is an indicator of the marketing objectives of the business and it can help establish the image and identity of a product. Hence, getting the pricing decision wrong means much hard work in market research and product development can be put at risk.

 If a product has a lot of competitors in its market, the price it charges will be very important. The business must constantly monitor what its competitors are charging for their products to make sure its prices remain competitive.

A business can adopt pricing strategies for several reasons:

To try to break into a new market. To try to increase its market share. To try to increase its profits. To make sure all its costs are covered and a particular profit is earned.

The Pricing Decision

There are many determinants of the pricing decision for a product. Here are the main ones: 1. Costs of production:- If the business is to make a profit on the sale of a product then, at least in the long term, the price must cover all of the costs of producing it and of bringing it to the market.

2. Competitive conditions in the market :If the firm is a monopolist , it is likely to have more freedom in price setting than if it is one of many firms making the same type of product. Hence it is quite clear that more the competition there is the more likely it is that prices will be fixed similar to those fixed by other rival firms.

3. Competitors prices:Related to the previous point ,it may be difficult to set price very different from that of the Market leader unless true product differentiation can be established. ( recall the relevant concepts related to product differentiation!)

4. Business & marketing objectives:If the aim is to become market leader through mass marketing, then this will require a different price level to that set by a business aiming at select niche marketing.

Hint:Niche marketing :- It is the business strategy of devising and selling products specifically for a small unexploited part of a market . Although lacking benefits such as economies of scale, small producers are often able to survive by adopting this strategy even though the rest of the market is dominated by much larger firms.

5.Price elasticity of demand :- Recall its significance !!! 6. Whether it is a new or an existing product:If new, a decision will have to be made as to whether a skimming or a penetration strategy is to be adopted.

Pricing Methods
The business objective being sought will affect which of the pricing strategies the business decides to use. The following are some pricing strategies that a business could use for its products. Cost-plus pricing Penetration pricing Price skimming Competitive pricing Promotional pricing Psychological pricing

Cost-plus pricing
It involves estimating how many of the product will be produced,then calculating the total cost of producing this output and finally adding a percentage mark-up for profit. For example,if the total cost of making 1000 chocolate bars is $1000 and you want to make a 50% profit on each bar,then the following calculation need to be used. $1000/1000+50% = $1.50 is the selling price per bar.(1+0.50=$1.50)

The calculation to find 50% of $1000/1000 is as follows: $1000/1000 X 50/100 = 1 X 50/100 = 0.50 Total cost/Output X % Mark-up = Selling price. Advantages : The method is easy to apply. Finding out the design of the product when the selling price is predetermined i.e. product tailoring. By working back from this price,the product and the permissible cost is decided upon. This means that market realities are taken into account as this approach considers the viewpoint of the buyer in terms of what he wants and what he will pay.

 Disadvantages: You could lose sales if the selling price is a lot higher than your competitors price. Provides incentive for inefficiency. Includes sunk costs rather than just using incremental costs. Uses normal or standard output level to allocate fixed costs.

Penetration pricing
When the price is set lower than the competitors prices in order to be able to enter a new market. For example ,a company launches a new chocolate bar at a price several paise below the prices of similar chocolate bars that are already in the market. Advantage: It ensures that sales are made and new product enters the market. Disadvantage: The product is sold at a low price and therefore the sales revenue may be low.

Price skimming
This is where a high price is set for a new product in the market. The product is usually a new invention or a new development of an old product. For example, a new computer games system is invented then it will be sold at a very high price than the existing computer games because of its better graphics and its new. Hence ,consumers will be willing to pay the high price. Thus, it helps the business to earn high profits which will make the research and development costs worthwhile.

Price skimming
Advantage: Skimming can help to establish the product as being of good quality.

Disadvantage: It may put off some potential customers because of the high price.

Competitive pricing
This is when the product is priced in line with or just below competitors prices to try to capture more of the market. For example,a company wants to sell a brand of washing powder then it needs to sell it at a similar price to all the other brands available otherwise consumers will buy their competitors brands.

Competitive pricing
Advantage: Sales are likely to be high as your price is at a realistic level and the product is not under -or over-priced.

Disadvantage: In order to decide what this price should be,you would have to research what price your competitors are charging and this costs time and money.

Promotional pricing
This is when a product is sold at a very low price for a short period of time. Thus it would be used when you want to price the product at a low price for a set amount of time. For example ,at the end of summer, a shop might have a lot of summer clothes left unsold. Then it might have a sale offering Buy one ,get one free. Thus it will clear the endof-season stock.

Promotional pricing
Advantages: It is useful for getting rid of unwanted stock that will not sell otherwise. It can help to renew interest in a business if sales are falling. Disadvantage: The sales revenue will be lower because the price of each item will be low.

Psychological pricing
This has two aspects. Firstly, it is very common for manufacturers and retailers to set prices just below key price levels in order to make the price appear much lower than it is. Therefore ,$99 is used instead of $101 and $ 1.99 and not $2.01. Misleading by offering a price just below a whole number. For example,99cents which is just below $1.

Psychological pricing
Super markets may charge low prices for products purchased on a regular basis and this will give customers the impression of being given good value for money. Similarly, price can be so high that they exceed consumer perceptions of the quality and image of the good and sales will be damaged as a result.

More on pricing : Loss leaders

This is a common tactic used by retailers. It involves the setting of very low prices for some products - possibly even below variable costs-in the expectation that consumers will buy other goods too. The firms hope that the profits earned by these other goods will exceed the loss made on the low-priced ones.

 Often, the purpose of loss leaders is to encourage the purchase of closely related complementary goods.

Competition-based pricing: Price leadership

It exists in markets where there is one dominant firm and other firm simply charge a price based upon that set by the market leader. Some markets have a number of firms of same size, but prices are still similar in order to avoid a price war. An example of this would be the large petrol companies.

Destroyer Pricing
Sometimes, firms will note the price of competitors products and then deliberately undercut them in order to try to force them out of the market.

Conclusion
It would therefore be important for the business to apply different methods to its portfolio of products , depending on costs of production and competitive conditions within the market. Price levels can have such a powerful influence on consumer purchasing behaviour that marketing managers should ensure that market research is used to test the impact of different price levels on potential demand of fast-moving consumer goods.