Pricing in Marketing Context| LGMW01/07
Pricing in Marketing Context – Marketing Management
Typically considered in isolation from the other elements of the marketing mix, pricing is still one of the most important elements of marketing; if done right, pricing is responsible for the cash inflow for the organisation by way of sales transactions. Pricing is also related to product positioning – the higher the price of a product or a service, the more luxurious it is considered, in general scenarios.
Pricing is the determination of the economic value that a company will receive in exchange for the goods and services that it produces and sells. According to the Economic Times, price is the value that is put to a product or service and is the result of a complex set of calculations, research and understanding and risk taking ability. A pricing strategy takes into account segments, ability to pay, market conditions, competitor actions, trade margins and input costs, amongst others. It is targeted at the defined customers and against competitors. Pricing encompasses not just a monetary value attached to a product or service; it also carries the firm’s desired profitability and costs incurred.
The firm spends a great deal of time to determine the right price at which their products or services must be sold. While determining the pricing strategy, several factors must be taken into consideration, such as the goal of the business – to increase profitability, increase and protect the market share, defend the firm from competition or to enter into a new market. Further, it must undertake a thorough analysis of its target market, to understand what drives the consumers .
Pricing strategy begins with an analysis of the market – the optimal price for a given product or service. Firms work to determine the total cost incurred to produce one unit of a product or service, and then conduct market research which would include focus groups and comparative price analyses to determine the point where the pricing strategy commands an equilibrium â€“ the company’s willingness to supply the product at a particular price is equal to the market’s willingness to purchase at that price. The following sequence of steps might be followed by firms to develop an effective pricing strategy.
- Developing a marketing strategy through market analysis, including segmentation, targeting and positioning (MKA4)
- Marketing mix decisions to define the product, distribution strategies and promotion/marketing communications
- Demand curve estimation to understand the price elasticity for the firm’s product or service
- Cost calculation to determine the fixed, variable, direct and indirect costs that are associated with the product or service
- Evaluating the impact of environmental factors on pricing such as competitors actions, legal and tax regulations and so on
- Setting pricing objectives for the firm such as current profit maximization, revenue maximisation, volume maximisation, maximising profit margin, quality leadership, cost leadership, partial recovery of costs, market survival and maintaining or challenging the status quo
- Determine pricing by selecting the pricing method, pricing structure, and defining the discounts and offers
For new product releases or to gain entry into a new market segment, the business objective is to either maximise profits or maximise market share.
- Skim pricing refers to skimming the topmost level or the ‘cream’ of the market by setting a high price and selling the product to consumers who are less price sensitive. Skimming is a method to maximise profitability. A higher price is charged for a certain period – till maximum amount is recovered before the segment attracts competition. Skimming works best when the demand is relatively inelastic, there are no larger cost savings with larger volumes and the firm cannot work with low profit margins due to the lack of capacity, both financial and physical, to produce large volumes. When Nike forayed into the Australian market, they adopted the skimming strategy to increase their market share. Apple phones in Australia are charged a higher rate when launched, and the prices are eventually reduced
- Penetration pricing method aims to maximise the market share or volume of products sold, by setting artificially lower price to products. It works best when demand for the product is highly elastic, there is an inverse proportional relationship between costs and volumes, the product has the ability to quickly gain mass appeal and competition is high. Prices will be raised once the launch or promotion period is over. Schweppes had priced its products in the mid to lower price range in order to boost its sales volumes. New housing loans from banks in Sydney follow a similar strategy
- Premium pricing strategy involves selling products and services at constant higher process. This strategy works well in segments where a strong competitive advantage exists for the company. Porsche cars command a premium price, and as do Gillette blades, in their respective categories
- Economy pricing refers to the no-frills pricing strategy where profit margins are wafer thin and overhead costs like marketing and advertising costs are low. The products that are so pried appeal to the mass market and this command a high market share. Tide detergents are a great example for economy pricing strategy
To achieve pricing objectives, firms may opt from among several pricing methods.
- Cost-plus pricing involves setting the price at the cost of production plus a certain profit margin
- Target return pricing is adopted to set the price such that a target return on investment is achieved
- Value-based pricing is based on the value that consumers associate with a product or service
Pricing is the only one of the 4 Ps of marketing (MKA8) that generates direct revenue; the rest are cost centres. By identifying the pricing objectives and analysing the target market, the right pricing method can be selected and employed. Moreover, the firm’s pricing strategy must be flexible to accommodate the changes in technology, market conditions and the product’s stage in the product life cycle.
Other articles under blog series of “Marketing Management”
- Marketing environment
- Consumer behavior
- Organisational buyer behavior
- Market segmentation, targeting and positioning
- Branding and product development
- Marketing plan
- Customer relationship management (CRM)
- Consumer buying process
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