Define of Pricing
Pricing is a Process of fixing the value that a producer receives in exchange for service and goods. Price is the amount of money expected and given in exchange for a good or service. Earlier price used to be the major deter mint of buyers choice. Still it is the case with large segment of buyers across the globe but in the last few decades non price factor have become quite important but price still remains an important factors in determining sales and profitability.
Generally, the amount to be paid for any goods or service is called price. Price is one of the important factors of marketing mix. This is also the main source of income of any business organization. So, profit or loss of business organization depends on the price of products. Price also expresses the quality of products/goods. Generally, high quality goods have high price and low quality goods have low price. Customers select goods on the basis of the price according to their buying capacity. Without certain price no exchanges of any goods or services can be done. Generally, price is measured in currency.
Different writers and experts have defined price.
Some important ones are as follows:
- According to Prof. William J. Stanton, “Price is the amount of money and/or other items with utility needed to acquire a product.
- According to Prof. Philip Kotler, “Price is the only element in the marketing mix that produces revenue, the other elements produce cost.”
- According to David J. Schwartz, “Price is the exchanged value of the product or service expressed in terms of money.”
Meaning of Pricing
Pricing means the process of selecting the pricing objectives, determining the possible range of prices, developing price strategies, setting the final price, and implementing and controlling pricing decision. The determination of price is very important and crucial decision. It affects all parties involved in the production, distribution, and consumption of goods. Price affects the volume of production and the amount of profit. It is a source of income to distributors.
Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the market place, competition, market condition, brand, and quality of product.
How Pricing is Done?
Pricing is done in a variety of ways. In small companies prices are often set by the owner or boss. In large companies pricing is handle by division and product line managers but top management sets general pricing objectives and policies and often approves the prices proposed by lower levels of management through understanding of consumer pricing psychology is required if the company wants effective designing and implementing pricing strategies and a systematic approach to setting, adapting and changing prices.
Setting the price
A firm must set a price when it develops a new product. when it introduces its regular product into a new distribution channel or new geographical area. Firm important decision where its product on quality and price. The firm has to consider many factor in setting its pricing policy here we will discuss a six step procedure to set the price of product or service.
Step 1 Selecting the pricing objective
Five major objectives through pricing
- Survival - Survival of company is the major objective if there is intense competition or changing consumer wants it could be short run objective but in the long run the firm must learn how to add value or face extinction.
- Maximum Market Skimming - Companies introducing a new technology favour setting high prices to maximize market skimming where prices start high and are slowly lowered overtime. Example of sony, when sony introduced high definition television (HDTV) it was at high price. So that it could skim the maximum amount of revenue from the various segments.
- Maximum Current profit - Company estimate the demand and cost associate with alternative prices and choose the price that produces maximum current profit. Cash flow or rate of return on investment.
- Product quality leadership - Affordable luxuries
- Maximum market share - They believe that a higher sales volume will lead to lower unit costs and higher long run profit. They set lowest price, assuming the market is price sensitive. Market penetration pricing will help to grow the market.
Step 2 Determine demand
Demand of a commodity desire to buy a commodity backed with purchasing power and the willingness to spend. Each price will lead to different level of demand which could be shown in demand curve.
Demand curve is graphs that shows the relationship between the price of good or service and the quality demanded and price are inversely related higher the purchase, lower the demand for prestigious goods, demand and price are directly related curve slopes upward.
- Estimating demand curves
- Different methods available to estimate demand curve
Statistical analysis of part prices, quantities sold and other factors can reveal their relationship Price experiments can be conducted. Systematically varied the prices of several products sold in a discount store and observed the results. Surveys can explore how many units consumers would buy at different proposed prices.
Step 3 Estimating Cost
Demand sets a ceiling on the price the company can change for its product. costs set the floor. The company wants to charge a price that covers its of producing, distributing and selling the product including a fair return for its effort and risk.
Two Types of costs –
- Fixed cost are costs that do not vary with production or sales revenue. For example rent, heat, interest, salaries and so on regardless of output
- Variable cost vary directly with the level of production for example raw material cost etc.
Step 4 Analyzing competitors cost, price and offers
The firm can decide whether it can charge more the same or less than the competitor.
Step 5 Selecting a pricing method
After considering the three C’s
- Customer demand schedule
- Cost functions
- Competitors prices
Now the company is ready to select a price. We will examine six pricing method in different methods such as markup pricing, target return pricing, perceived value pricing, value pricing so on.
Step 6 Selecting the final Price
With the help of pricing method company must select its final price. In selecting that price the company must consider additional factors including of other marketing activities company pricing policies gain and risk sharing pricing and impact of price on other parties.
Pricing Method
Product price may be calculated on the following basis
Cost based pricing
Price of goods of services based on cost.
- Mark up pricing
- Target return pricing
Markup pricing
Most elementary pricing method add a standard markup to the product cost. It used by the construction companies submit job bids by estimating the total project cost and adding a standard markup for profit. Lawyers and accountants normally price by adding a standard markup on their time and costs. It is popular because this costs plus pricing are fair to both buyer and sellers, seller can determine costs much more easily than they can estimate demand where all firms in the industry use this pricing method prices tend to be similar due to price competition is therefore minimized.
Suppose a toaster manufacturer has the following cost and sales expectations
- Variable cost per unit = Rs. 10
- Fixed cost = Rs. 3,00,000
- Expected unit sales = Rs. 50,000
The manufacturer unit cost is given by unit cost = (variable cost + fixed cost) ÷ unit sales
=(10 +3,00,000) ÷ 50,000
= Rs. 16
No assuming manufacturer wants to earn a 20% mark up on sales
Markup price = Unit cost ÷ 1 – desired return on sales
= 16 ÷ 1 – 0.2
=Rs. 20
Target Return
It is also known as ROI pricing. The firm determine the price that would yield its target rate of return on investment. What firm expect from the investment the firm determines the prices that would yield its target rate of ROI suppose manufacturer wants has invested 10,00,000 in business and wants to set price to earn 20% ROI Rs. 2,00,000 by selling 50,000 units.
The target return price is given by the following formula
Target return price = Unit cost + (Desired return × Invested capital) ÷ Unit sales
= 16 + (0.2 × 10,00,000) ÷ 50,000
= Rs.20.
So, Target rate of return on investment what the firm expects from the investments.
Competitor based pricing
Going rate pricing
In this pricing method, the firm base its price largely on competitors’ prices. It is also known as parity pricing; firm might charge the same, more or less than major competitors. firm bases its price largely on competitor price for example petrol and LPG. Rates prevailing in the market sets a price in line with the prices of the competitors depending on the value of the product and services that are homogenous and do not vary in design. The smaller firms follow the leader changing their prices when the market leader price change rather than when their own demand or costs change. Going rate pricing is popular when cost is difficult to measure and competitive response is uncertain.
Competitive bidding
It also known as tender pricing or auction type pricing. This pricing is becoming more popular especially with the growth of the internet most exotic art material and antiques, agricultural produce including plantation crops such as tea, coffee and spices and mineral and metals are sold in auction. Tender pricing or sealed bid pricing. Proposal and price submitted by a vendor or service provider to a soliciting firm. Company, organization or government agency needs goods or services on a large scale. Advantage of auction type pricing they are dispose off excess inventories or used goods. There are three types of auctions
- English auction – It is works in concept of ascending bids is one seller many buyers’. The seller puts up an items and bidders raise the offer price until the top price is reached.
- Dutch actions – It is works in concept of descending bids is one seller many buyers or one buyer many sellers. An auctioneer announces a high price for a product and then slowly decrease the price until a bidder accepts the price.
- Sealed bid price – It is works in concept of only one bid and cannot know the other’s bid. Would be suppliers or contractor can submit only one bid and cannot know the other bids. Most government department, large corporation, and institution use this method to procure supplies and support services.
Demand based pricing
Fluctuation in customer demand and adjust prices. It is also known as customer-based pricing. Perceived value pricing value which customers are willing to pay for a particular product or service based on their perception about the product. what customer perceives about the product.
- Product performance
- Quality
- Warranty
- Customer support etc.
Charge price according to perceived value of the product.
- Price skimming – Setting a high price before other competitors come into the market. That faces little or no competition who are prepared to pay a higher price. Sold at $600 in the us market.
- Penetrating pricing – by undercutting its value upon initial offering and setting prices low. Once your brand has captured consumer attention it will retain the customer even if prices rise.
- Value based pricing – price based on a customer perceived value like Taj Hotel they are charge high price from customer the best hotels and resorts in the world.
Value pricing
In this method of pricing, company win loyal customers by charging a fairly low price for high quality offering. For example, globally are Walmart, in India, D mart, Big bazaar, Bata and FMCG companies has followed the same strategy in India with regards to shampoos and detergents. Forcing competitors to sharply drop its prices in the last few years. Price drops helps the companies to register significant volume gains.
Value pricing is not matter of simply setting lower prices it is a matter of reengineering the company operation to become a low-cost producer without sacrificing quality and lowing prices significantly to attract a large number of value conscious customers.
- Value pricing type of is everyday low pricing which takes place at the retail level.
- A retailer who holds to an everyday low pricing policy charges a constant low price with little or no price promotion and special sales.
FAQ's
Why is pricing important in business strategy?
Pricing directly affects a company's revenue and profitability. It also positions your brand in the market, influences customer perception, and determines competitiveness. A good pricing strategy ensures sustainable growth and long-term success.
What is a demand curve, and why is it important in pricing?
A demand curve shows the relationship between price and quantity demanded. It helps businesses understand how pricing changes will affect sales volume and revenue
Who is responsible for setting prices in a company?
- Small businesses: The owner or top executive usually sets the prices.
- Large businesses: Product managers or marketing teams set prices, while top management defines pricing objectives and approves major pricing decisions.
