Pricing may be one of the most important issues for the marketers. It also considers all the other elements of the marketing mix, because it clarify the offer for the consumer of the product they want to pay for. It signals to the customer what would be the expected product quality and performance.
Pricing models
There is number of pricing models developed by the economists over the decades. One of them called "supply and demand". This model assumes that as price raise, more suppliers want to enter the market. But because the price is higher the demand deplete due to customers considering it not worth the money. Consequently, the price fall and there is more demand, but less supplier considers to the production worthwhile so the supply deplete. Eventually, a balance is reached, where the quantity supplied meet the demand and the price is fixed.
This model has however number of drawbacks as it assumes that customer knows the product very well as spent time on product research. It also assumes that the producers supply exactly the same product, which we know it is not true. It also may be wrong where it assumes that price is the main driver for customer purchasing decisions and people will buy more products if it is cheaper. However, as the result of this model we recognise that customer is the king and become the fundamental influence for many companies take the approach.
"Elasticity demand" concept states, that different product categories will show different degree of sensitivity to price range. It suggests, that the demand can be either elastic or inelastic in respond to the price fluctuations. This model, however, does not have a basis of a product as necessity or luxury. If a necessity was described as something that people cannot live without, than the demand would be entirely inelastic. But the true is that in reality, such product does not exist.
"Economic choice" model looks at the concept of resources. It considers that there will never be enough resources in the world to consider everybody needs. Therefore, when a resource is chosen to make one product, it cannot be based for another.
From the manufacturers point of view, following this methodology, that with the available resources manufacturers must make economic choices of which products supply would be fulfilled. And, from the customers point of view, a choice is made what product or service will better fulfil their need, as there might not be enough money to purchase all products.This theory has been considered as a low value, because it does not take into account the customers decision making process.
Value for money?
Customers will often look at the promise the supplier make and compare it with the price to determine whether the product has the value for money. Therefore, our marketing teams need to determine what customers consider as value for money.
Accountants would use the method of cost-based pricing to determine the price of the product. This model is fairly simple to use and generally will meet the business profit goals. This works by determination of the manufacturing costs, including overheads costs, research and development costs and adding on a fixed % profit in order to set the price.
Often companies will work out the unit production cost including the allowance for overheads costs within the costs, which allows the companies to draw the line at which point the production become unprofitable. Although this price method seems quite straightforward, it does not count for considerations on how customers will react to the price fluctuations. This may result in dropped sale and further losses.
Most retailers also would use the mark-up price calculation. Typically, they will buy a product and add a fixed mark-up in order for it to arrive at the shelve price. Sometimes, the mark-up would be as much as 100% or even more, and sometimes, it will be close to zero. This can be used when the retailer believes that stocking zero profit item will stimulate the sale of other products.
Mark-up however is different than margin, Mark up is calculated based on the price the retailers pay for the product and margins are calculated based on the price they sell for. In this scenario, the retailer is generally in close contact with the customer, they also have a way of unsold stock. What is also becoming increasingly popular is the contractual arrangements with the manufacturers, that unsold stock can be returned to manufacturers for credit.
Another type of pricing is customary pricing methods. These, provide customer with the price, they have always been offered. These pricing set up is customer-focused. However this methods are not practical for every firm.
The most market-focused method of pricing is demand pricing. Here, evaluation of the price is based on the predicted demand for the product. This could be done by asking customer what they are expecting to pay for the product and looking at each price level chosen. Number of customers who would buy an item for the price will be the decision-making factor. This set up would be very helpful when determining the price for new developed product. With demand pricing the next step would be to determine the production costs at the quantities of customers who would purchase the items. Given the costs of production it is than possible to determine the more accurate price and quantities which will maximise the profits.
Product-line pricing is also a popular method of determining the price. Often the sales of one product, will be directly linked to sales of another. This will enable to sell one item in a lower price in order to make a greater profit on another one.
Skimming is a practice of starting with a higher price for a product at the beginning of its life-cycle, than reducing it gradually as the sales reduce as well. This will actually depend on the manufacture and its unique technology which cannot quickly be copied by the competition. Skimming of often used in consumer electronics. Technological lead is generally established by the producers over its competitors at the beginning. This model, however, requires closer monitoring of competitors and the customers behaviour.
Prestige pricing will depend and rely on the psychological factors. The customer will link the price with the product quality and purchase it for that reason. This is very common for the service market.
Competitor-based pricing include the influence of competitors price in the market. This is especially important for marketers, because they will need to understand whether the product made by the competitor satisfy the same customer needs.
Penetration pricing will be used when a firm would like to "overtake" a market quickly. For this strategy to be successful, the marketers would need to do an extensive research on the competitors pricing.
Predatory pricing method would be used to bankrupt the competitors. This type of pricing would be charged below the production costs for that reason. However in the international markets, this type of practice is illegal. To use this pricing method, the company need to have a large cash reserve in order to survive the price war for a longer period of time. Once the market has been established, the prices will raise. This practice was commonly used by the Communists and it is now illegal under the trade regulations.
How to set prices?
No product is born with potential competitors. This is because they is always another way, which customers can fulfil their needs. Here, market segmentation is imperative to ensure each market segment will have set the correct price for a product.
Lets look at some stages of price determination:
Determine pricing goals - these will be linked to the business strategic objectives, we could look at firms trying to increase market share or maximise their profits.
Evaluate target market willingness to purchase - here we are looking at the circumstances of the purchasers, what are their income, environment and status.
Establish the demand - here we need a careful consideration of whether the price increase will significantly affect the demand, and vice versa, how the demand will settle once the price will drop.
Evaluate costs and profits - the comparison of the cost of producing the item against the price and account for the profits needed.
Evaluate competitors prices - this will involve information on the prices currently being charged by the competitors. Sometimes to secure uniqueness, the price may be little higher than competitors price.
Establish pricing policy
Development of the pricing method - here we provide a tool for setting prices in the future, these can be either mark-up rice or cost-plus price
Value for money is a subjective concept. Each individual will have a different opinion on what determines value in a product. This simply means, that different market segments will have different perception on what they are prepared to pay.
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