The pricing decision is a critical one for most marketers, yet the amount of attention given to this key area is often much less than is given to other marketing decisions. One reason for the lack of attention is that many believe price setting is a mechanical process requiring the marketer to utilize financial tools, such as spreadsheets, to build their case for setting price levels. While financial tools are widely used to assist in setting price, marketers must consider many other factors when arriving at the price for which their product will sell.
Customer: In a situation where the product has many substitutes, customers decide the price. That is, the demand of customers are the paramount importance in setting the price of the product. In such a situation, the firm should try to deliver the value, in the form of product and/or service, at the target cost so that a reasonable profit can be earned. Similarly, under competitive condition, price is determined by market forces and an individual firm or an individual customer can not influence the price.
Competitors: When there are only few players in the market, competitors usually, react to the price changes and, therefore, pricing decisions are influenced by the possible reaction of competitors. As such management must keep watchful eye on the firm's competitors. That is, knowledge of competitors' strategy is essential for pricing decision in an oligopoly situation.
Cost: Cost is the third major factor. Its role in price setting varies widely among industries. Some industries determine price by market forces and in some industries, managers set prices a on the basis of production costs. Firms want to charge a price that covers its costs like production costs, distribution costs and costs relate with selling the product and also including a fair return for its effort.
Objectives Of Pricing Policy
Formulation of pricing policy begins with the classification of the basic objectives of the firm. Pricing objectives have to be in conformity with overall organizational objectives. In most of the situation, profit maximization is the main objective of price policy, but it is only one objective. Following may be other objectives of pricing policy in an organization:
Although its importance varies from firm to firm, pricing is one of the tools that a firm has at its disposal in its attempt to reach the stated objectives.
Price vs. Value
For most customers price by itself is not the key factor when a purchase is being considered. This is because most customers compare the entire marketing offering and do not simply make their purchase decision based solely on a product’s price. In essence when a purchase situation arises price is one of several variables customers evaluate when they mentally assess a product’s overall value.
As we discussed back in the What is Marketing? tutorial, value refers to the perception of benefits received for what someone must give up. Since price often reflects an important part of what someone gives up, a customer’s perceived value of a product will be affected by a marketer’s pricing decision. Any easy way to see this is to view value as a calculation:
For the buyer value of a product will change as perceived price paid and/or perceived benefits received change. But the price paid in a transaction is not only financial it can also involve other things that a buyer may be giving up. For example, in addition to paying money a customer may have to spend time learning to use a product, pay to have an old product removed, close down current operations while a product is installed or incur other expenses. However, for the purpose of this tutorial we will limit our discussion to how the marketer sets the financial price of a transaction.
Customer: In a situation where the product has many substitutes, customers decide the price. That is, the demand of customers are the paramount importance in setting the price of the product. In such a situation, the firm should try to deliver the value, in the form of product and/or service, at the target cost so that a reasonable profit can be earned. Similarly, under competitive condition, price is determined by market forces and an individual firm or an individual customer can not influence the price.
Competitors: When there are only few players in the market, competitors usually, react to the price changes and, therefore, pricing decisions are influenced by the possible reaction of competitors. As such management must keep watchful eye on the firm's competitors. That is, knowledge of competitors' strategy is essential for pricing decision in an oligopoly situation.
Cost: Cost is the third major factor. Its role in price setting varies widely among industries. Some industries determine price by market forces and in some industries, managers set prices a on the basis of production costs. Firms want to charge a price that covers its costs like production costs, distribution costs and costs relate with selling the product and also including a fair return for its effort.
Formulation of pricing policy begins with the classification of the basic objectives of the firm. Pricing objectives have to be in conformity with overall organizational objectives. In most of the situation, profit maximization is the main objective of price policy, but it is only one objective. Following may be other objectives of pricing policy in an organization:
- Pricing the goods based on reasonable costs.
- Increase the market share or growth rate at the expense of immediate profits.
- Avoid adverse public reaction consequent on charging high price.
- Ethical consideration not to reap high profit.
- Immediate survival of the firm.
- Charge reasonable price so as to have good relations with government and public at large.
- Maximization of prestige of the firm rather than profit, and
- To safeguard against the emergence of new producers in same line.
Although its importance varies from firm to firm, pricing is one of the tools that a firm has at its disposal in its attempt to reach the stated objectives.
Price vs. Value
For most customers price by itself is not the key factor when a purchase is being considered. This is because most customers compare the entire marketing offering and do not simply make their purchase decision based solely on a product’s price. In essence when a purchase situation arises price is one of several variables customers evaluate when they mentally assess a product’s overall value.
As we discussed back in the What is Marketing? tutorial, value refers to the perception of benefits received for what someone must give up. Since price often reflects an important part of what someone gives up, a customer’s perceived value of a product will be affected by a marketer’s pricing decision. Any easy way to see this is to view value as a calculation:
No comments:
Post a Comment