The importance of pricing:
Setting the right pricing is a process that depends on may factors. Companies have to play strategically, when setting the price for their products. When determining marketing pricing, they have to put the perceived value of the customers about the product in terms of money. Therefore, pricing should be flexible. Customers value product differently with time.
That is due to the fact, that product rate differently in customers’ minds through their product life-cycle. There are four stages in the product life cycle.
- In the introduction phase, the company sets a price that positions the product. The price can be either too low, to attract customers and increase awareness, or to high to position it as a luxury product. We’ll explain these tactics in details further.
- In the growth phase, the company most commonly maintains the primary pricing, in order to create brand presence and market share.
- In the maturity phase, competitors often start to copy the product. Due to the increased number of substitutes on the market, the price of the product goes lower than before, or is a subject of promotions and lower cost initiatives.
- In the decline phase, since the market is saturated, the firm has options, to lower the costs of the product and offer it for prices lower than those of the competition, or to add new features and differentiate it.
Where pricing stands in the four P’s
Product – it’s imperative that you have a clear grasp of exactly what your product is and what makes it unique before you can successfully market it.
Promotion – Promotion includes elements like: advertising, public relations, social media marketing, email marketing, search engine marketing, video marketing and more
Place – evaluate what the ideal locations are to convert potential clients into actual clients.
Price – Price is the only element of the fours P’s that brings revenue to the firm. Price determinations impact profit margins, supply, demand and marketing strategy.
Factors affecting prices:
The factors affecting the pricing strategy can be either internal, or external. By internal, we’ll refer to those that depend on the company by itself. External are the factors, the company doesn’t regulate. Here’s a quick overview on them.
- Costs. Companies manage the resources they engage for a certain product by themselves. The lower the costs, the greater the profit.
- Product. What kind of product is the company selling? Is it a good the mass market cannot go without (food, water), or is it a differentiated product for only one market segment (like software product for businesses)?
- Marketing mix. What’s the current position of the company? Is it a well-established brand name, like Dropbox, or an “unknown” startup? Consumer react differently to prices depending on the brand.
- Company vision. What’s the vision of the company? Is it to achieve a quick profit and maximize it, until it burins? Or, is it to maintain a sustainable competitive advantage? The latter takes time, patience, a lot of effort and money.
- Competition. Competitors are a significant determinant doe pricing, since they impact the same products, but the same customers, as well. Also, the types of market competition are crucial. Are you entering a market where one company “rules them all”, or a healthy competition?
- Suppliers. Especially in manufacturing, suppliers are crucial. Are they an exclusive supplier for some luxury goods you need? Or are there many alternative choices? Do you get lower prices when purchasing a great amount of goods, or do you pay each of them by their single price?
- Customers. They are indirectly connected to all the previous factors. Customers react differently if they have other substitutes that satisfy the same need as that product, if it is good of a choice, or a necessity, and especially if they are loyally attached to some brand.
- Government. Taxes, pricing standards and market barriers are in the domain of governments, which shapes pricing strategy, as well.
Types of pricing:
Promotional pricing: The company sets some percentage of some product at sale. Those product are low quality, therefore the purpose is for the buyers to enter and buy some of the products that aren’t on sale. Customers, on the other hand, feel like they spared money buying a product on sale, which inspires them to purchase some of those that have the standard price.
Price skimming: Sets low prices at the introduction phase of the product life cycle, so that customers will gain awareness of the product. Afterwards, the prices become standard.
Bundled pricing: It’s the pricing where two, or more product are set as a package, so the customer pays one price for them. Most common practice is to put one “favorite’ product that promotes the other one. The second product may have problems with sales, or maybe it’s new, so this is a part of its promotion.
Premium pricing: When the product differentiates from the other products on the market, then it has a premium pricing. Customers perceive the product as a luxury good and its price represents quality and status.
Economy pricing: The company sells its product for a low price, or lower than the one competitors implement. To have lower prices, the company has to achieve low costs, through low cost resources, lower wages and similar.
Penetration pricing: That’s the tactic where the company maintains costs and profit at the same level, therefore achieving no revenue. This strategy is used when the company wants to create awareness of the product, especially on markets with high competition. It is maintainable on the short term, but it generates no benefits on the long term.
Psychological pricing: This pricing gets to consumers’ psychology. It sets the prices on odd prices, like 99. Therefore, customers get the perception that prices are lower and more precise. It is emotional, rather than rational.
Flexible pricing: Sets the same product, at different prices, depending on their size, for example. The rationale behind it is that more resources are spent for the bigger product. Therefore, anyone can afford it. Think of children toys, for example. A bigger Barbie doll is more expensive than a tiny one.
Captive pricing: This pricing model sells the basic product for a lower price, and complementary products for higher prices. Imagine, for example, the razors and blades. One cannot function without the other.
Geographical pricing: This pricing model sets different prices for different geographical locations. It Is especially practical in international companies. Multinational companies have to know country’s income standard, transportation costs etc.
Elasticity as a pricing measure:
Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Businesses evaluate price elasticity of demand for various products to help predict the impact of a pricing on product sales. Typically, businesses charge higher prices if demand for the product is price inelastic. The overriding factor in determining elastcity is the willingness and ability of consumers to postpone immediate consumption decisions concerning the good and to search for substitutes after a price change.
Elasticity factors and changes:
Substitute goods: The more the substitutes available, the higher the elasticity, as people can easily switch from one good to another if an even minor price change is made.
Percentage of income: The higher the percentage of the consumer’s income that the product’s price represents, the higher the elasticity, as people can afford the change in prices.
Necessity: The more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price.
Duration: The longer a price change holds, the higher the elasticity is likely to be, as more and more consumers find they have the time and inclination to search for substitutes.
Brand loyalty: An attachment to a certain brand can override sensitivity to price changes, leading to inelasticity.