Home » marketing concepts » Pricing
In the narrowest sense, price is the amount of money charged for a product or service. More broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.
PRICE – The amt of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.
“One can define price as that which people have to forego in order to acquire a product or service.” What does a buyer think? To a buyer, price is the value placed on what is exchanged. Something of value – usually purchasing power – is exchanged for satisfaction ...view middle of the document...
Is Setting prices easy ?. It involves making a number of guesses about the future. You would want to Know how , an organization should proceed as follows:
1. Identify the target market segment for the product or service, and decide what share of it is desired and how quickly.
2. Establish the price range that would be acceptable to occupants of this segment. If this looks unpromising, it is still possible that consumers might be educated to accept higher price levels, though this may take time.
3. Examine the prices (and costs if possible) of potential or actual competitors.
4. Examine the range of possible prices within different combinations of the marketing mix (e.g. different levels of product quality or distribution methods).
5. Determine whether the product can be sold profitably at each price based upon anticipated sales levels (i.e. by calculating break-even point) and if so, whether these profits will meet strategic objectives for profitability.
6. If only a modest profit is expected it may be below the threshold figure demanded by an organization for all its activities. In these circumstances, it may be necessary to modify product specifications downwards until costs are reduced sufficiently to produce the desired profit.
An organization goes through the following steps in setting its pricing policy
Now let us discuss the process in detail
1) Selecting the pricing Objective – You would agree that the foremost step is identifying pricing objectives. The company first decides where it wants to position its marketing offering. The clearer a firm’s objectives, the easier it is to set price. What are pricing objectives ? A company can pursue any of five major objectives through pricing: survival, maximum current profit, maximum market share, maximum market skimming, or product-quality leadership.
Companies pursue survival, as their major objective if they are plagued with overcapacity intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business. Survival is a short-run objective: in the long run, the firm must learn how to add value or face extinction.
What happens when companies wants to maximize profit ? Many companies try to set a price that will maximize current profits. They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow or rate of return on investment. This strategy assumes that the firm has knowledge of its demand and cost functions; in reality these are difficult to estimate.
Some companies want to maximize their market share. They believe that a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive. The following conditions favor setting a low price. The market is highly price sensitive, and a low price stimulates market growth. Production and...