Is Your Price Right? Probably Not

PRICING OBJECTIVES?

What are your pricing objectives?

Don’t automatically say “profit” and then spend most of the time discounting.  If you say “volume”, ask yourself why?

The simple fact is that most companies do not really understand Pricing and most don’t have good pricing objectives.

Most companies rely on costs as their main pricing concern – not value to the buyer – and thus sacrifice good price

In pricing objectives we start the pricing task by asking the question:

“Which pricing strategy best reflects the long term and short term goals of the company?”

Among the objectives most often used in marketing we can find the following:

1. Profit Maximisation

A distinction is usually made between short term and long term profitability.

R.O.S. Return on Sales.

R.O.I. Return on Investment, These measure give business an indication of the success of their pricing and profit strategies and also allow businesses to target their strategies at predetermined return rates.

2. Market Share (Volume)

This measure affects pricing strategy because typically, companies wishing to gain high market share will concentrate on volume sales and will keep prices low.

Companies that are not concerned with market share will tend to be more concerned with higher profit margins.

3. Survival

In some extreme cases where a business’ survival is at stake pricing strategies usually reflect a lowering of price and a concentration on quick sales to generate cash or higher market shares.  A lot depends on the reason that survival has become an objective such as a take-over bid, inability to service debt, losses, public value of company shares or severe competitor activities.

4.   Social Responsibility

Sometimes the pricing objectives need to take into account what society sees as fair.

5.    Status Quo

For whatever reason, a company may decide that it need not change any aspect of its pricing strategy and wishes to remain “as is”.

Pricing strategies would reflect this objective without necessarily remaining static.  Even a status quo objective may require pricing changes.

Price and Demand

If we are to accept the economists’ view of Supply and Demand then a drop in price brings with it an increase in volume.

The logic is that as price is reduced more consumers have the money to buy and so volume, as measured in unit sales, increases.

Similarly as prices are increased less consumers can afford the product and unit sales decrease.

Unfortunately, this is not always true as some products and even product categories do not behave in this way.

Consumers do not only respond to purchase decisions based on affordability, and other issues such as consciousness of the product, prestige of product and target group’s perception of product positioning also affect the price-volume equation.

Price communicates many things to consumers such as image, status, quality and rarity.

Occasionally products experience an increase in volume due to increases in price.

Some marketers see a benefit in being the highest-priced product.

So marketers need to consider not only what consumers can afford to buy but also what consumers want to buy and what they consider value to be.

Demand Shifts

Marketers are well aware that demand can be influenced by other factors such as the market mix elements other than price and the state of the economy to name a few.

Elasticity

Elasticity refers to how price-sensitive consumers are for the product or product category.

For example, a change of $1,000 in price for a small Toyota is likely to have a much greater influence on sales than a similar change for Rolls Royce.

This is due to the fact that a price change is relative to its initial base.

Even apart from the factor of relativity some products are still more sensitive to price changes than others.  This can be partly explained by:

– number of competitors,

– state of the economy,

– brand image and position,

– history of product,

– consumer risk.

Factors Affecting Demand

Competition: The more competitors the easier it is to switch preferences for consumers and the more likely it is that demand is elastic.

Product Category: The more unique is the product category the more likely that demand is inelastic.

Example: Coffee can be substituted by tea but petrol is petrol!

Relative Price Ticket: When consumers relate the expenditure to their disposable or discretionary income the relativity affects the decision.  The result is that low-ticket items are probably less elastic than high ticket items.

Example: Cars are more elastic than chocolate bars or milk.

Factors Affecting Price

When marketers make qualitative judgements about prices they should subjectively review a number of key factor issues.

1.    Product Line:

If the product is part of a product line for the company then the price needs to be kept relative to others in the produce line

2. Type of Market:

Pure Monopoly: eg Police,.

Monopolistic Competition: Beer where small local brands compete against international brands (Fosters) on non-price factors and price factors.

Pure Competition:

3. Competition:

Regardless of the market type, there always exists the possibility of specific price changes for specific products that alter the conception of price strategy for some time frame due to competitive influences.

4.    Product Life Cycle:

When a product is new it may present opportunities to boost prices.  At maturity marketers need to be conscious of the number of competitors and the variety of models and features for pricing decisions.

They would also need to establish the price objectives if the product is in decline as recovery of the last of the costs becomes imperative.

5. Costs:

Marketers need to be aware that all costs are relevant including loss leaders, advertising, promotion etc.

Marketing is itself a cost item and must be recovered through pricing.  Some products have higher than normal marketing costs.

6. Demand

This varies from product to product and also among various product categories.  The market is obviously smaller for luxury ocean cruisers than for blue jeans.

The number of potential buyers has a large influence on price setting.

7.    Consumers

Value – The only thing that matters to a buyer/consumer.  What it cost you is of no concern to them.  If it represents value for them (against the entire payment elements they will need to make) they will buy – if not they wont.  So this is the prime Pricing consideration – or should be!

Whether an item is a gift or personal, or whether the buyer is the user, how the product or service is purchased and how intensely the buyer is involved in the decision process all affect the pricing decision.

8. The Economy:

For luxury or non-essential products and for high-ticket items this factor is particularly relevant in pricing.

Generally, consumers may put off buying decisions of expensive luxury items when economic indicators such as unemployment, inflation, high interest and trade deficits are unfavourable.

Types of Pricing

1. (Cream) Skimming – Taking higher profits/margins when there is little competition

2.   Penetration (usually low)

3. Above, At or Below Pricing –  Some marketers establish themselves through association of either another competitor, another product type or another product in the product line.   Pricing is then simply a matter of establishing the other influence and setting prices typically above, at, or below, this influence.

4. Cost Based Pricing   If market forces aren’t seen as sufficiently important to concern the marketer when establishing prices, then a critical element of the pricing decision is to cover costs.   This method allows the company the luxury of setting prices without reference to outside influences such as competitors and demand elasticity.

1. Cost Plus –  Production and marketing costs are calculated and a margin added to make up the end price.

2.   Standard Mark-up – This method involves establishing and applying a standard percentage to all items in a particular category.

3. Fixed Fee   Under this method a fixed fee is paid rather than a percentage as in the mark-up methods.   Usually the seller is reimbursed for all out goings and returns and receives a flat fee in dollars that is unrelated to the product cost or price.

Other Pricing Considerations

The task of finally setting the price involves thought about several other factors.

Flexibility –  Should we establish one price for all buyers or should there be allowances and adjustments for various reasons?

Adjustments –  There is rarely a one price strategy used today.  Marketers need to take into account myriad forms of adjustments.   These include discounts and allowances:

These   include:

Trade   or functional

–           Seasonal

Quantity purchases

Early payment

Promotional allowances

–  Trade Ins

Demand Backward Pricing

In this method the marketer estimates the price by firstly evaluating the end sale price and then by deducting the various component costs such as commissions, shipping, warehousing, retail and wholesaler’s margins etc. and thereby being able to calculate the ex-manufacturer’s price.

Competition Based Pricing

Competition-based strategies concentrate on what competitors do rather than the internal mechanics of pricing decisions.

1.         Follow the Leader

2.   Normal (or Customary)

MAANZ has a number of specialist articles on Pricing as well as short eCourses (MXpress) on the subject.  http://www.marketing.org.au  or contact info@marketing.org.au

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