The first thing you do when you purchase any product is compare the prices of different products with each other. However, it’s not a simple chore to set if you’re on the opposite side of the negotiation.
Price significantly impacts how clients decide whether they buy from you. If it is higher than your competitors, you risk losing out on more sales. Meanwhile, you may retain sales and maintain your brand’s reputation because consumers sometimes equate a higher price with higher quality. This equity is judging products negatively. However, even if this isn’t always the case, this is nevertheless a widespread belief among individuals.
In our previous article, “Products: The First P in The Marketing Mix“, we discussed the first P in the marketing mix, which is Product. In this article, we will explain the second P in the marketing mix, which is Price, with all its setting strategies and techniques.
Pricing Strategies
There are three pricing techniques or strategies: cost-based, competition-based, and customer-based.
1. Cost-based Pricing
Cost-based pricing is the first strategy. It occurs when you determine how much your company will pay to create that product or provide that service. Besides the cost, you add a profit margin, and you get to decide on that percentage. Depending entirely on how you want to position your product in the market, you can either add a huge percentage to make your product premium-priced or add a small percentage to make it a value product.
2. Competition-based Pricing
Competition-based pricing is the second pricing strategy. It occurs when you conduct a market analysis, checking how much each competitor is charging for similar products. Then, you can decide whether you want to have the same price, less, or more. Again, it relies on your product and the positioning you want for it in the market.
3. Customer-based Pricing
Customer-based pricing is the third type of pricing strategy. It occurs when you perform market research, ask customers directly, or speak with them in focus groups about how much they are willing to spend for your product, as the customer will ultimately be the one to make the purchase.
According to an intriguing study conducted a few years ago among marketing professionals, most businesses utilise cost-based pricing, with competition-based pricing coming in second. Of course, you can employ multiple pricing strategies for various products, and this is entirely up to you. However, you should take into consideration that both internal business considerations and external environmental influences impact pricing decisions.
Internal Business Considerations
Internal business considerations refer to the factors, aspects, and decisions a company or an organisation addresses within its operations and structure. These considerations are often within the company’s control and directly impact its performance, efficiency, and overall success. Here are some of these considerations:
1. Marketing Goals
In identifying a company’s market position and goals, pricing is essential to the marketing mix strategy. Businesses frequently set prices to maximise short-term profits, maintain market share dominance, and lead in product quality.
While profit maximisation tries to maximise financial performance, survival is a short-term goal. Setting them as low as possible to attain the lowest costs and best long-term profit is how a company gains market share leadership. Setting a premium price for your product is necessary to get greater performance standards and pay hefty research and development (R&D) expenses.
Other marketing goals companies should achieve are to avoid competition, keep the market stable, keep resellers loyal and supportive, and temporarily lower fees to excite consumers or draw in more business.
Public and non-profit organisations can set extra pricing goals, such as partial or complete cost recovery. To create a coherent and successful marketing strategy, price decisions must be linked with product design, distribution, and promotion.
Target costing is a technique that supports price-positioning tactics by concentrating on consumer needs and ensuring that prices are met. Businesses may diversify their marketing offers to generate non-price positions when determining prices. Customers, however, rarely make purchases based just on cost; they also look for goods that offer the best benefits related to the cost.
2. Financial Factors
The fixed and variable costs encountered by an organisation affect its prices. While variable costs fluctuate with the production level, fixed expenses, such as overhead, are not affected by production or sales levels.
At a certain level of output, management seeks to charge a price that covers all expenses. As fixed costs are shared across more units, each accounting for a decreasing share of the fixed cost, management must be aware of how costs change with different output levels to set appropriate prices.
3. Organisational Factors
Pricing is handled in a variety of ways by businesses. Management must choose who within the company will be in charge of pricing. In small businesses, top management frequently sets prices rather than the marketing or sales teams. However, divisional or product line managers often manage pricing in major corporations.
Salespeople may be permitted to haggle with consumers in industrial markets, provided that they stay within defined pricing ranges. However, top management establishes the pricing objectives and rules and frequently accepts the prices that lower-level management or sales representatives recommend.
Corporations often have a pricing department to set the best rates or assist others in setting them in industries where pricing is crucial, i.e. aerospace, railroads, and oil corporations. This division answers either senior management or the marketing division. All in all, sales managers, production managers, finance managers, and accountants all impact prices.
External Environmental Influences
External environmental influences refer to the factors, conditions, and events that exist outside of an organisation but significantly impact its operations, performance, and decision-making. These influences are often beyond the organisation’s control but must be taken into consideration when planning, strategising, and managing operations. Here are some of them:
1. Supply and Demand
A critical factor in pricing decisions is the link between price and demand since it establishes the maximum value for a good or service compared to its advantages. With pure, monopolistic, and oligopolistic competition having particular pricing techniques, different market types bring varied pricing issues.
Pricing decisions are heavily influenced by how consumers perceive value and cost. Effective buyer-oriented pricing requires knowing how much value customers place on the advantages they receive from the product. Additionally, it requires determining a price that corresponds to this value.
Customers will ultimately decide whether a product’s price is appropriate. Companies frequently need help to quantify the values consumers associate with their products, yet they do so to assess a product’s pricing.
The demand curve displays how many units the consumers will purchase over a specific period at various possible expenses. Demand and price typically have an inverse relationship, meaning that the greater the cost, the lower the demand. Occasionally, the demand curve can slope upward for prestigious goods because buyers believe that more expensive items are of higher quality.
Marketers also need to understand price elasticity, which is the degree to which demand will respond to changes in price. So, demand is elastic if it changes significantly with a slight fee change, whereas it is inelastic if it barely varies. So, firms must have a solid understanding of the link between supply and demand to set fair fees.
2. Competitors Prices
The expenses, prices, and potential competitive responses to the company’s pricing adjustments are additional external factors influencing the company’s pricing decisions. The business must take into account other aspects of its surrounding environment when choosing prices.
The state of the economy might significantly impact the company’s pricing strategy. Economic factors like boom, bust, inflation, and interest rates impact pricing decisions because they impact both the expenses of production and how consumers perceive the price and value of a product.
The business must also take into account how its prices may affect other parties in their environment and how retailers will respond to different prices. Companies should set prices that allow resellers to make a reasonable profit, promote their support, and aid them in successfully selling the product.
Other significant external factors that affect price decisions are the government and social considerations. A company’s short-term ambitions for sales, market share, and profit may need to be balanced by broader societal issues when determining prices.
Price Adjustment Techniques
Companies typically modify their base prices to reflect the varied consumer variations and shifting circumstances. In the following lines, we list six techniques: psychological, segmentation, discount, allowance, geographical, and international.
1. Psychological Pricing
A lot of customers evaluate quality based on price. When customers assess a product’s quality or rely on prior usage, they utilise quality judgment more than the cost. However, when consumers are unable to evaluate quality because they lack the knowledge or expertise, the price has great significance, becoming a quality signal.
Reference pricing, which refers to costs consumers hold in their minds and use while considering a particular product, is a component of psychological pricing. It may be established by taking note of current prices, recalling previous ones, or analysing the purchasing environment. So, sellers can have an impact on or use the reference prices of these customers when pricing their products.
For instance, a business might place its product next to more expensive ones to suggest that it is in the same category. Women’s clothing is frequently sold in several categories in department shops, each with a different price range because consumers believe that the clothes found in the more expensive section are of higher quality.
Companies can also affect consumers’ reference prices by quoting high manufacturer’s suggested pricing, noting that the item was previously considerably more expensive, or mentioning a competitor’s product that is being sold at a higher price.
2. Segmentation Pricing
Despite variances in costs, corporations use segmented pricing to offer a range of rates for their goods and services. A product can be priced based on various factors, including client segmentation, product form, location, and time.
Competitors should not undersell the products in the section being charged the higher price, and the market must be segmentable with varying levels of demand.
Segmenting must also be legitimate and take into account actual variations of how customers perceive value. However, it must avoid creating anger or badwill among customers.
3. Discount
Customers frequently receive discounts and reductions from businesses as a reward for behaviours like on-time bill payments, bulk purchases, and off-season shopping.
Cash discounts are available to customers who pay their invoices on time, whereas quantity discounts are offered to customers who purchase large quantities. Trade channel participants who execute particular tasks are given functional discounts, whereas customers who buy goods or services out of season are given seasonal discounts.
These price changes assist in enhancing the seller’s cash flow, lower bad debts, and preserve production stability. These reductions are typical in many businesses and necessary to keep customers happy.
4. Allowance Pricing
Another way to lower the stated price is through allowances. Trade-in allowances are discounts offered for exchanging an old item when purchasing a new one. Although they are also granted for other durable products, trade-in allowances are most frequently given in the automotive industry.
Payments or price reductions given to dealers in exchange for their participation in marketing and sales support initiatives are known as promotional allowances.
5. Geographical Pricing
A business must also choose how to value its goods for buyers in various places. The Free On Board (FOB) pricing proponents contend that it is just the price of goods or services at the frontier of the exporting country or the one provided to a non-resident. This means drawbacks include high expenses for faraway clients.
All consumers pay the same amount plus goods under uniform-delivered pricing, which is simple to operate and is available nationwide. Between uniform-delivered pricing and FOB-origin pricing is zone pricing. Zone pricing means that all customers within a defined region are charged the same price.
Basepoint pricing eliminates price rivalry by charging each customer the fees of shipping from a particular city to their location. For flexibility, some businesses establish numerous basis sites. Freight absorption pricing absorbs all or a portion of actual freight costs to attract customers, enabling the business to retain average expenses and remain competitive in increasingly competitive industries.
6. International Pricing
International businesses must also base the pricing they charge for their goods on many variables, including the economy, competition, laws, regulations, consumer preferences, and marketing goals.
Costs are a major factor in determining international prices, as travellers may discover less expensive goods in other nations with higher expenses. It may be caused by the increased selling expenses in foreign markets, such as those associated with product modification, shipping, insurance, import duties, exchange rate fluctuation, and physical distribution costs.
Conclusion
One of the critical elements of the marketing mix that influences how customers choose to purchase from a business is Price. To make sure that the company’s prices are reasonable and in line with what customers anticipate, it is critical to compare pricing tactics and techniques. There are three primary pricing techniques: cost-based, competition-based, and customer-based.
Internal business considerations include marketing objectives, monetary considerations, organisational issues, and environmental influences. Companies should set prices to achieve marketing objectives such as maximising short-term earnings, retaining market share domination, and setting the bar for product quality. Fixed and variable costs are also financial elements that impact pricing at various output levels.
To explore the third and fourth Ps in the marketing mix, read Place: The Third P in The Marketing Mix | Promotion: The Fourth P in The Marketing Mix
