Price : Price is amount of money charged forproduct or service, It is the sum of all valuesthat consumers exchange for the benefit ofhaving or using the product or service.
Today’s New Pricing Environment:In Earlier times prices were set bynegotiating between buyers and sellers. TheNew Trend in pricing is Fixed Price policies-setting one price for all buyers. Somecompanies are now reversing Fixed pricingtrend, they are using Dynamic Pricing.
Dynamic Pricing : Charging different pricesdepending on individual costumers andsituations.Prices can be changed according to thedemand or cost, changing prices forspecific items on day-by-day or even hour-by-hour basis.
Pricing: The evaluation of something interms of its price, usually based on marketdemand and competition.Factors in consideration when settingprice: (i) Internal Factors (ii) External Factors
(a) Marketing Objectives: General Objectives include survival, current profit maximization, market share leadership and product quality leadership. Specific Objectives that a company can set prices low to prevent competition from entering the market or set prices at competitors level to stabilize the market.
(b) Marketing Mix Strategy Price decision must be coordinated with product design, distribution, and promotion decision to form consistent and effective marketing program. The best strategy is not to charge the lowest price, but rather to differentiate the marketing offer to make it worth a higher price.
(c) Costs Costs set the floor for the price that the company can charge. Price charged should cover all the cost of production, distribution, and selling the product and delivers a fair rate of return for its efforts and risks.
Types of costs: Fixed cost is the cost that do not vary with production or sales level. Variable cost is the cost that vary directly with the level of production. Total Cost is the sum of the fixed and variables costs for any given level of production.
Cost at different level of production: The cost at different level of production vary with the level of production as the level increases the cost will decrease but as the resources are insufficient, there can be a chance of increase of cost as production increases.
Cost as a function of production experience: The cost of production decreases as the experience in production increases, the workers gain experience and they find short cuts to do their work as a result there is a decrease in the production cost .
(d) Organizational Consideration: In small companies prices are often set by top management rather then by the marketing or sales departments. In large companies pricing is typically handled by divisional or product line managers. In industries where pricing is a key factor companies often have a pricing department to set the best prices or help others in setting them.
External Factors effecting pricing decisions:(i) Nature of the market and Demand(ii) Competition(iii) Environmental Elements
(i) The Market and Demand: Costs set the lower limit of prices, the market and demand set the upper limit. The Marketer must understand the relationship between price and demand for its product.
Pricing in different types of Markets :The sellers pricing freedom varies withdifferent types of markets. (a) Pure Competition (b) Monopolistic Competition (c) Oligopolistic Competition (d) Pure Monopoly
(a) Pure Competition The market consists of many buyers and sellers trading in a uniform commodity. Single Buyer and Seller have no effect on the going market price. Sellers cannot price more or less then the market price.
(b) Monopolistic Competition : Market consists of many buyers and sellers who trade over a range of prices rather then a single market price. Buyers see differences in sellers products and will pay different prices for that.
In addition to price they freely use branding, advertising and personal selling to set their offers apart. (c) Oligopolistic Competition: The market consist of few sellers who are highly sensitive to each others marketing and pricing strategies.
There are few sellers because it is difficult for new sellers to enter the market. Each seller is alert to competitors strategies and then moves on. (d) Pure Monopoly : The market consists of one seller .
The seller may be a government monopoly (Pakistan railways, postal services ), a private regulated monopoly (A power company). They do not always charge the full price for a number of reasons (1) A desire not to attract competition
(2) A desire to penetrate the market fasterwith a low price.(3) A fear of government regulation.
Consumer Perceptions of Price and value: At last, consumer will decide whether a product price is right or not. When consumer buy a product, they exchange something of value (the price) to get something of value (the benefits of having or using the product).
Analyzing the price –Demand relationship: The relationship between the price charged and the resulting demand is explained by the demand curve. (i) Inelastic Demand (ii) Elastic Demand
Price Elasticity of Demand: A measure of the sensitivity of demand to changes in the price. Price elasticity of demand= % change in quantity demanded % Change in price
When the demand is elastic rather then inelastic, sellers will consider lowering there prices which will produce more total revenue. Marketers need to work harder then ever to differentiate their offering when a dozen of competitors are selling virtually same products at a comparable or low price.
General Pricing approaches : (i) Cost-based Pricing: (a) Cost plus pricing (b) Break even analysis (ii) Value based Pricing (a) Value Pricing (b) Value added Marketing (iii) Competition Based Pricing
(i) Cost-based-Pricing (a) Cost plus pricing: Adding a standard markup to the cost of product. Cost plus pricing set the prices for the customer to realize that the price charged is just above the production cost.
(b) Break even analysis and Target profit pricing Setting price to break even on the costs of making and marketing a product; or setting price to make a desired profit. The manufacturer should consider different prices and estimate break even volumes, probable demand, and profit for each product.
(ii) Value based pricing Setting price based on buyers perceptions of value rather than on the seller’s cost. Marketer cannot design a product and a marketing program and then set the price.
Cost Based pricingProduct cost Price Value Customer
Value Based PricingCustomer Value Price Cost Product
(i) Value pricing Offering just the right combination of quality and good service at a fair price. EDLP ( Every day low pricing) involves charging a constant, everyday low price with few or no temporary discounts.
(ii) Value Added Marketing The challenge is to build the company’s pricing power– its power to escape price competition and to justify higher prices and margins without losing market share. Many companies attach value added services to differentiate their offers and thus support higher margins.
(iii) Competition Based Pricing Setting prices based on the prices that competitors charge for similar products. It “Is the on going rate pricing” in which a firm bases its prices largely on competitors prices, with less attention paid to its own cost or to demand.
The Price is changed as the market leader changes its price. Going rate pricing is quite popular, when demand elasticity is hard to measure, firms feel that the going price represents the collective wisdom of the industry concerning of the price that will yield a fair return.