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UNIT:- 4 Product Pricing

Price is also the marketing variable that can be changed most quickly, perhaps in response to a competitor price change. Put simply, price is the amount of money or goods for which a thing is bought or sold. The price of a product may be seen as a financial expression of the value of that product. For a consumer, price is the monetary expression of the value to be enjoyed/benefits of purchasing a product, as compared with other available items. The concept of value can therefore be expressed as: (Perceived) VALUE = (perceived) BENEFITS - (perceived) COSTS A customer’s motivation to purchase a product comes firstly from a need and a want example; ● Need: “I need to eat.” ● want: “I would like to go out for a meal tonight.” The second motivation comes from a perception of the value of a product in satisfying that need/want (e.g. “I really fancy a McDonalds”).

The Role of Pricing in the Marketing of Consumer ProductsMany marketing campaigns stress that their products offer the best quality at the lowest price. In a rational economy, quality and price should be in direct proportion; the higher an item’s quality, the more it should cost. Marketing obscures this relationship by introducing intangible elements, such as status, desire and branding, into the equation.

Targeted MarketingThe price of merchandise depends as much on how and to whom it is being marketed as on its inherent value. Cheap goods are promoted to the market at low prices to encourage mass buying; other goods, sometimes no better in quality, are sold at higher prices as luxury items to people who can afford them. Grocery stores emphasize a basic, no-frills nature to lure price-conscious consumers, whereas spas and hotels promote themselves as places of luxury and indulgence.

CompetitionIncreased competition causes prices to drop, because most consumers, when presented with two similarly priced products from competing companies, will purchase the less expensive one.

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As competition increases, marketing attempts to convey the image of the product as superior in quality but less expensive than its rivals. In the world of marketing, public perception counts for more than the veracity of marketing statements. In a field with little competition, a manufacturer is less compelled to lower prices or to market its merchandise as low-priced, because consumers do not have much choice about where to buy it.

Product vs. ExperienceProducts that are sold in particular environments can display greatly increased prices. For example, the actual amount of coffee purchased in a high-end coffee shop is miniscule, but a single cup can cost more than a pound of coffee at the grocery store. In this example, the consumer is paying not for coffee but for the experience of being in the coffee shop, relaxing with friends or being seen with his new laptop. The more expensive an item is, the more its price is influenced by the customer’s perceived experience of buying it.

Pricing and DemandWhen demand increases for an item, its price rises as the competition to acquire it increases. This is an ideal situation for a marketer; when there are many eager buyers, the marketer spends less money on advertising because people are already seeking the product. Price will rise with demand, until the item’s price becomes prohibitive to a large enough proportion of the buying public; at that point, it is no longer advantageous for the seller to raise the price any higher.

Factors Affecting Pricing Product: Internal Factors and External Factors

The pricing decisions for a product are affected by internal and external factors.A. Internal Factors:1. Cost:While fixing the prices of a product, the firm should consider the cost involved in producing the product. This cost includes both the variable and fixed costs. Thus, while fixing the prices, the firm must be able to recover both the variable and fixed costs.2. The predetermined objectives:

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While fixing the prices of the product, the marketer should con sider the objectives of the firm. For instance, if the objective of a firm is to increase return on investment, then it may charge a higher price, and if the objective is to capture a large market share, then it may charge a lower price.3. Image of the firm:The price of the product may also be determined on the basis of the image of the firm in the market. For instance, HUL and Procter & Gamble can demand a higher price for their brands, as they enjoy goodwill in the market.4. Product life cycle:The stage at which the product is in its product life cycle also affects its price. For instance, during the introductory stage the firm may charge lower price to attract the custom ers, and during the growth stage, a firm may increase the price.5. Credit period offered:The pricing of the product is also affected by the credit period offered by the company. Longer the credit period, higher may be the price, and shorter the credit period, lower may be the price of the product.6. Promotional activity:The promotional activity undertaken by the firm also determines the price. If the firm incurs heavy advertising and sales promotion costs, then the pricing of the product shall be kept high in order to recover the cost.B. External Factors:1. Competition:While fixing the price of the product, the firm needs to study the degree of competi tion in the market. If there is high competition, the prices may be kept low to effectively face the competition, and if competition is low, the prices may be kept high.2. Consumers:The marketer should consider various consumer factors while fixing the prices. The consumer factors that must be considered includes the price sensitivity of the buyer, purchasing power, and so on.3. Government control:Government rules and regulation must be considered while fixing the prices. In certain products, government may announce administered prices, and therefore the mar keter has to consider such regulation while fixing the prices. 4. Economic conditions:The marketer may also have to consider the economic condition prevail ing in the market while fixing the prices. At the time of recession, the consumer may have less money to spend, so the marketer may reduce the prices in order to influence the buying decision of the consumers.

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5. Channel intermediaries:The marketer must consider a number of channel intermediaries and their expectations. The longer the chain of intermediaries, the higher would be the prices of the goods.

Methods of Price Determination

Price Determination ,Pricing Policy, Pricing StrategiesPrice Determination

Determination of the prices depends internal and external factors. Pricing goals represents internal policy. Also,  price policy should be aligned on several other factors.

 

Demand is the key determinant for market oriented company. Demand is the starting point for all activities. Simply, the average customer will be demanding different product quantities, depending on price. Law of the market says that demand and price are counter proportional ( price increase leads to demand decrease and vice versa ).

Competition has a significant influence to price determination of market oriented companies. Prices need to be 

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adjusted in order to address the competition. Every company should research market and competition, prior to launch of the new product. Survey should include direct competitors but also the substitutes. Based on market survey and the strength of the company the prices can be the same, lower or higher.

Costs – While demand and competition are external factor, the costs are internal. The costs must be embedded in every stage of price determination process. There are several methods of cost embedding into price:1.) Costs Plus – company calculates the costs and increase price for the specific profit.2.) Markup – price based on cost increased for amount of specific markup percentage.3.) Target Return Method – calculated required markup, in order to achieve return on investment.4.) Profit Maximizing is the price where the marginal profit equals marginal cost.5.) Breakeven Analysis – is the number of units sold that generates profit that can cover cost. This point does not have profit nor lost.

Life Cycle pricing approach analysis the current phase of product life in market.1.) Entering phase usually requires higher sales prices in order to payback initial development costs. Also customers are willing to pay more for a new product.2.) Growth phase is bringing the market stabilization. Prices are more or less stabile.3.) Saturation phase leads to price decline, due to competition entrance and loss of consumer's interest4.) Declining phase is the last part of product life cycle. Prices are still going down.

Sales Channels have the different shopping occasion. Consequently the pricing is adjusted to sales channel. For example, the same products is cheaper in hypermarket than on petrol station.vernment is usually do not interfere into price determination. Exceptionally it may limit maximal prices for a certain products. Still, government is influencing pricing, since the taxes & custom duties are the part of the price.

Pricing StrategiesThere are many ways to price a product. Let's have a look at some of them and try to understand the best policy/strategy in various situations.

Premium Pricing.

Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights.

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Penetration Pricing.

The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV.

Economy Pricing.

This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming.Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply.Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.

Psychological Pricing.

This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar.

Product Line Pricing.

Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

Optional Product Pricing.

Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

Captive Product Pricing

Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing.

Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

Promotional Pricing.

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Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing.

Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.

Value Pricing.This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.----------------------------------------------------------------------------------------------------------