- 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
- price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product
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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
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a low price can be a viable substitute for product quality, effective promotions, or an energetic selling effort by distributors
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.
What a price should do?
A well chosen price should do three things:
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They believe the high price is an indication of good quality;
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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;
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They require flawless performance in this application – The cost of product malfunction is too high to buy anything but the best – example : heart pacemaker.
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:
Effective price
The effective price is the price the company receives after accounting for discounts, promotions, and other incentives.
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.
Promotional pricing
Promotional pricing refers to an instance where pricing is the key element of the marketing mix.
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/quantity 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.
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-labeling 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:
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 down payment). Research has shown that this practice can significantly influence consumers’ ability to understand and process price information.