Everything you need to know about the importance of pricing. Pricing decisions can have very significant consequences for the organization
It is one of the first considerations for many customers and it determines the profit margin on products.
Pricing is one of the significant elements of the marketing mix, if late, it has come to occupy the centre stage in marketing wars.
Pricing is an important decision making aspect after the product is manufactured. Price determines the future of the product, acceptability of the product to the customers and return and profitability from the product. It is a tool of competition.
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The importance of pricing can be studied under the following heads:-
1. Most Flexible Marketing Mix Variable 2. Setting the Right Price 3. Trigger of First Impression 4. Important Part of Sales Promotion 5. Influences Demand Level 6. Determine the Profitability 7. Means of Comparison.
Importance of Pricing: Most Flexible Marketing Mix Variable, Setting the Right Price, Determine the Profitability and a Few Others
Importance of Pricing – 4 Factors: Flexible Elements of Marketing Mix, Right Level Pricing, Price Creates First Impression and Vital Element of Sales Promotion
Pricing decisions can have very significant consequences for the organization. It is one of the first considerations for many customers and it determines the profit margin on products.
Pricing is important due to the following factors:
Factor # 1. Flexible Element of Marketing Mix:
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Price is the most adjustable aspect of the marketing mix. Prices can be changed rapidly, as compared to other elements like product, place or promotion. Changes in product design or distribution system would take a long time to be implemented.
Bringing about changes in advertisements or promotional activities is also a time consuming task. But price is very flexible and can be changed according to the needs of the situation. Therefore it is a very important component of marketing mix.
Factor # 2. Right Level Pricing:
The wrong price decision can bring about the downfall of a company. It is extremely significant to fix prices at the right level after sufficient market research and evaluation of factors like competitors’ strategies, market conditions, cost of production, etc.
Low prices may attract customers in the initial stages, but it would be very hard for the company to raise prices on a future date. Similarly, a very high price will ensure more profit margins, but lesser sales. So in order to maintain balance between profitability and volume of sales, it is important to fix the right price.
Factor # 3. Price Creates First Impression:
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Often price is the first factor a customer notices about a product. While the customer may base his final buying decision on the overall benefits offered by the product, he is likely to compare the price with the perceived value of the product to evaluate it. After learning about the price, the customers try to learn more about the product qualities.
If a product is priced too high, then the customer may lose interest in knowing more. But if he thinks that a product is affordable, then he would try to get more information about it. Therefore price is a critical factor that influences a buyer’s decision.
Factor # 4. Vital Element of Sales Promotion:
Being the most flexible component of marketing mix, price is the most important part of the sales promotion. In order to encourage more sales, the marketing manager may reduce the price. In case of goods whose demand is price sensitive, even a small reduction in price will lead to higher sales volume. However prices should not be fluctuated too frequently to stimulate sales.
Importance of Pricing – Inflation in the Economy, Mature Products and Markets, Customers Value Perception, Inter-Firm Rivalry and a Few Others
Pricing is one of the significant elements of the marketing mix, if late, it has come to occupy the centre stage in marketing wars.
The reasons for this are as follows:
1. Firm Now Finds Itself in a Dilemma:
In case it passes the increase in input costs to the customer in the form of a price increase, and there are equally attractive alternatives at lower prices available to him, the firm may lose the customer. And if it doesn’t increase the price, it incurs a loss. The challenge of price management is also higher when the firm realises that there are other firms in the industry that operate at a more efficient level in an inflationary economy.
It turns in the cast of inflationary economy. Inflation affects pricing in two ways:
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(i) It lowers the purchasing power of the customer and hence a search for low priced substitutes.
(ii) It increases a firm’s cost because of the inputs costing more, thus forcing the price of the product upwards.
3. Mature Products and Markets:
At the time of entering the maturity stage the products, and the markets are mature, the only way to differentiate the various offers is on the basis of augmented service or price cuts.
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4. Customer’s Value Perception:
The customer’s perception of the product’s current and potential value is another factor contributing to the importance of pricing decisions. To a customer, price always represents the product’s value. Many time, the customer’s perception of the product value may not necessarily be in line with its price.
There are instances in which the product is overpriced when its value perception is lower than the price tag on it, and vice-versa. For a marketer, it is important that products are priced at the right level.
5. Inter-Firm Rivalry:
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As the entry and exit barriers in the industry are lowered the intensity in inter-firm rivalry increases. With an increase in this rivalry, marketers find that a firm’s cost of operation also increases, as it now has to spend more money to lure customers and middlemen. It has also invest money in new product development.
6. Product Differentiation Getting Blunted:
The differentiation among firms on the basis of the product is going to get blunted when technologies get standardised. More products and brands will transcend to a commodity situation. This is an unhealthy sign as commodities are always subject to price fluctuations and price wars. For, at this stage, the only way to differentiate between brands is the price.
Importance of Pricing
Traditionally, price has operated as the major determinant of buyer choice. Although recently there has been a shift in buyer behaviour with non-price factors also playing a role in the consumer decision process, price still remains the major factor that influences the buyer’s decision. Price is the only element of the marketing mix that generates revenues while all other elements lead to costs.
Similarly, price is also the most flexible element of the marketing mix, as in, it can be changed quickly, unlike other elements such as – product features, promotional campaigns or channel relationships.
Organisations are known to handle price in different ways. In small organisations, prices are often set by the top management, whereas in large organisations, it is seen that pricing is handled by Product Line Managers for those lines of products that they are responsible for. However, irrespective of the size of the organisation, the general pricing objectives and policies are laid down by the top management.
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Price is an important element of the marketing mix for the following reasons:
i. Price is the most important factor for a consumer when it comes to making a purchase decision. Rarely will it be otherwise. As such, the right kind of pricing strategy can help achieve organisational goals.
ii. Price can be easily changed and is flexible thereby helping the organisation to respond quickly to marketplace changes.
iii. Price can also be used as a differentiating factor to set aside the said product from other products in the same category.
iv. Price is also often used to target a particular segment of customers.
v. And, last but not the least; price is the only element of the marketing mix that fetches revenue for the organisation.
Importance of Pricing – Economy, Determinant of Profit, Beating Competition, Demand Regulator, Crucial Decision Input, Important Part of Sales Promotion and a Few Others
We, the consumers take price for granted. It is something, the seller tells us, we pay that and forget it, but price is a very important factor.
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The following points highlight the importance of pricing:
i. The economy – The entire economy depends on the price. It is the price which decides trade and the economy depends on the trading activity in the country. Price of a product influences profit, rent, interest, wages which are the prices paid to the factors of production-entrepreneurship, land, capital and labour respectively. Thus price acts as a regulator of economy, because it influences the allocation of the factors of production.
ii. Determinant of profit – Profit is the basic objective of any commercial undertaking and the profit directly depends on the price.
iii. Beating competition – Price is a very important weapon which a seller can use to overcome competition. A seller, by fixing a reasonable price and by offering value for money can overcome competition.
iv. Demand regulator – It is a simple law in Economics that price and demand are inversely proportional. Thereby a seller can either increase the demand or decrease the demand for his products by setting a low or a high price.
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v. Crucial decision input – Price as a factor constitutes a very important decision. A company has to price appropriately because several factors depend on the price such as the demand, the profit, the market share, the competition etc. Factors such as product place and promotion are causes of expenditure but price is the only factor that brings in revenue to the seller.
vi. Important Part of Sales Promotion – Many times price adjustments form a part of sales promotion that a lower price in the short term stimulates interest in the product.
vii. Trigger of First Impressions – Often, customers’ first perception of a product is formed as soon as they learn the price
viii. Most Flexible Marketing Mix Variable – For marketers price is the most adjustable of all marketing decisions. Unlike product and distribution decisions, which can take months or years to change, or some forms of promotion which can be time consuming to alter (e.g., television advertisement), price can be changed very rapidly. The flexibility of pricing decisions is particularly important in times when the marketer seeks to quickly stimulate demand or respond to competitor price actions.
ix. Perception of quality – Several customers develop a perception about the quality of the product based on its price. To such customers, high price is better quality and vice-versa. Therefore the right price must be fixed for the product depending on the customer perception desired.
x. Legal aspects – A wrong price may attract legal complications. Therefore a seller has to consider these factors also while fixing price.
Pricing is an important decision making aspect after the product is manufactured. Price determines the future of the product, acceptability of the product to the customers and return and profitability from the product. It is a tool of competition.
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1. Helps in Determining Return:
The primary motive of all firms is to earn profit. Firms aim at maximising profit. When the product is manufactured the manufacturer determines the price of the product. Price includes the return or profits that the manufacturer or marketer intends to earn. Price is fixed by the marketer by adding a certain percentage of profit on cost.
2. Determines Demand, Sales Volume and Market Share:
Price is the most flexible tool in the marketing mix. A marketer can regulate the demand for a product by increasing or decreasing the price. Price is an important factor influencing consumer buying behaviour. Most of the time consumer put importance on price of the product rather than on value, at the time of purchase. Thus a change in price influences the demand, sales volume and market share.
Companies regularly revise their pricing strategies to counter the competition. A market leader who dominates the market designs the pricing strategy to prevent new competitors entering into the market. While a price follower sets their price in accordance to the competitor’s price and market leader’s price. A marketer’s pricing strategy mostly depends upon competitor’s pricing policy.
Price often builds an image of the product. Consumers often believe that high priced products are of high value and benefit than low priced product. Marketers also use price to position their products superior in the minds of the consumer.
Price is an important tool of sales promotion. Companies often resort to short term price reduction like offering discounts to increase sales during a short time period.
Importance of Pricing – Cost-Based Pricing, Competition-Based Pricing, Demand-Based Pricing and Value-Based Pricing
The relationship between price and demand is well known. For items or services of normal use, the higher the price, lower the demand and vice-versa.
This usually occurs because:
i. Customers have limited budgets or funds availability, which reduces the purchases when the prices rise.
ii. The utility or the value for money perception declines as the prices go up. Therefore, some of the customers might find the tradeoff between the two to be unfavourable and opt out of the service purchase.
iii. Alternative solutions start to look more attractive. When the prices go up, customers start to look for alternative suppliers or other ways of obtaining the same solution by substitution. Thus, if the train travel prices go up significantly, the customers may explore the idea of bus travel.
iv. In the case of services, customers start to look at self-service option more seriously and may even adopt it. Thus, in the case of services which are not technically very complicated, customers think of carrying out the service themselves. Thus, if the school bus prices go up inordinately, the parents may decide to drop and pick-up the children from the school themselves.
Not all the products or services get affected by this phenomenon in equal measure. The susceptibility of each product or service to this demand reduction phenomenon is generally called the price elasticity of demand. The change in the volume demand brought about by change in the prices is called the price elasticity of demand.
Thus, services which are highly susceptible to the price changes are termed as elastic. Where the demand for services does not drop because of the nature of demand or the type of service, service providers can take advantage of the inelasticity.
In the case of services, each of the pricing strategies represents a marketing solution to the service provider.
1. Cost-Based Pricing:
In the case of goods, the prices are often based on the cost of production. For example, the price of petrol or diesel in India is based on the cost of oil in the international markets. Similarly, in the case of services, the cost-based pricing serves as the basic or starting point for the services. Cost-based prices are calculated based on certain accumulation of the accounting data.
The usual components of costs are:
i. Variable cost – Consisting of direct materials and direct labour and consumables. These are directly attributable to each unit of product or service.
ii. Fixed costs – Employee costs, marketing costs of advertising, and sales promotion and distribution costs. These are not directly attributable to the product or service but have to be incurred nonetheless.
iii. Financial costs and profits – Consisting of depreciation, interest, and return on investment.
The situations under which service prices are based on costs are:
i. When the service is introduced for the first time and there are no other references for price fixing. For example, when mobile telephony was first introduced in India, the initial prices were based on the service operator’s costs, expected number of connections, and the anticipated return on investment. Thus the cost was the main basis of pricing.
ii. When the number of competitors in market is limited to one or two. Cost- based pricing allows the competitors to make adequate returns and makes them hopeful of achieving the target returns. This situation of ‘live and let live’ continues until either fresh competition enters the market place or the marketers realize that the current pricing policy is not enabling them to grow and achieve larger returns in the end. The cost-based pricing system continued in the mobile telephone circles when only two operators were present in each circle.
iii. In the case of unusual work, or work whose content is difficult to pre-estimate, the service provider and the client may come to a mutual agreement on the basis of the cost of the effort made by the service provider.
In the case of supervision of civil or engineering construction work, the engineering consultants and the client agree to a site supervision fee based on the man-hours of the personnel required for supervision in lieu of a lump sum fee. They may agree to different daily rates for the engineer, supervisor, draughtsman, quantity surveyor, etc. This practice is common in the Indian consulting business.
However, there are quite a few limitations of this cost-based pricing.
These include:
i. Estimation of variable cost of a service is difficult. For example, in the case of the service provided to a hotel room occupant or the cost of flying a passenger, the variable cost is difficult to measure. Without reference to the variable cost, the total cost estimation may be even more difficult.
ii. The utility of services incurring the same costs may not be the same for the customer. For example, changing of the zipper of a trouser and changing of the zipper on a cloth handbag may involve the same amount of effort on the part of the mender.
However, if charges are Rs. 25 in the case of trouser, the customer would happily pay this, while in the case of handbag, the customer may think this to be excessive, because the original cost of the trouser was about Rs. 750 while that of the handbag was only Rs. 100. Thus the service provider may be able to charge even Rs. 40 in the case of a trouser but not more than Rs. 15 for a handbag.
iii. While the service provider may be aware of the cost structure, the customers may not be aware of it; hence, the customers may be averse to paying the price. For example, in a city there may be an expensive movie theatre very near the railway station.
While it costs Rs. 5 to park a car at the railway station, it may cost Rs. 25 to park the car in the basement of the movie theatre. To the customer, it does not make sense to pay five times the amount for the same service, while for the parking lot franchisee, this is the minimum that he can charge in order to pay the rental to the cinema hall.
iv. Since, most of the service offers are usually not totally comparable, the utility and cost comparison based on cost-based prices is confusing to the customers.
While cost-based pricing may be the easiest to implement, the pricing in this manner is not always practicable to implement.
2. Competition-Based Pricing:
Competition-based pricing is another way in which the prices are set by the service providers. An example of this in the Indian context is the air-travel prices between metropolitan cities. When Indian Airlines was the sole service provider, the prices were quite high and were based on the cost of operations.
Competition between Jet airways, Sahara, and Indian Airlines has forced all of them to reduce the prices of two-way airfares by as much as 40%. Thus, competition leads to tremendous benefit for customers. When the American domestic air travel was deregulated, the prices were no longer based on cost but became dependent on the level of competition and led to severe price wars.
In the process, the volume of air travel went up enormously and the customers benefited with lower fares. The service provider also benefited from higher volumes.
Similarly, when mobile telephony was introduced in India, due to lack of competition the customers during 1997-98 paid as much as Rs. 12.50 per minute for outgoing and Rs. 6 per minute for incoming calls.
The continued competition, including the newest form of competition from the WLL (Wireless in Local Loop) telephony, has reduced the rates drastically. By 2003, the rates have been reduced up to Rs. 0.40 per minute for the local outgoing and STD calls within the circle, while incoming calls have become completely free.
Going rate pricing is another form of competitive pricing. When there are a large number of service providers, or when a new entrant comes into the market, usually the price cannot be fixed by the new entrant or any single provider. For example, there are a large number of Internet cafes in Indian cities.
The competition is intense and there are very few factors to differentiate the service. Therefore, the rates for the access fell to as low as Rs. 10 per hour. The same uniform rates are applicable wherever you go. In order to be able to charge a rate that is higher than the going rate, it would be necessary to offer higher speed access, better surroundings with restaurant facilities, or newer computers to create the differentiation in the service. Improved benefit would be necessary to justify higher prices.
3. Demand-Based Pricing:
In economics, the demand curve shows the relationship between the price and the quantity demanded. We are familiar with the general axiom that higher prices reduce the quantity demanded and vice versa.
Due to the perishable nature of services, whenever the demand exceeds the supply, due to lack of inventory, it cannot be met. Similarly, when the demand falls below the available capacity, the capacity is wasted and fails to generate adequate revenue. Some of the pricing strategies try to take care of this concern.
Telephone networks, Internet servers, etc. are quite busy during the office working time. Business callers tend to call typically during the working hours. Therefore, the network capacity, while sufficient for the daytime load, remains idle during the evening and night. To increase usage during non-peak hours, Bharat Sanchar Nigam Ltd introduced three different rates for inter-town Subscriber Trunk Dialling.
Thus, there was a full daytime rate (7 am to 7 pm), an evening rate (7 pm to 11 pm) at half to one-third of daytime rate, and a night calling rate (11 pm to 7 am) at one-fourth of the daytime calling rate.
Similarly, a number of business hotels offer very attractive low rates during the weekends. At business hotels, rooms remain vacant from Friday night until Monday mornings. The hotels try to offer rooms at special low rates, introducing special tariffs for couples, families, etc. during the weekends. As out-of-town customers are unlikely to make use of such tariff, it is mainly aimed at local residents.
ii. Quantity Differential Pricing:
In line with the principle that the loyal high volume customers should enjoy greater pricing advantage, a number of service providers have quantity differential prices.
For local commuter services, Indian Railway offers a monthly pass that allows unlimited travel on local trains. The price of the monthly offer is equivalent to about eight to ten return journeys between points of origin and destination. Similar tariff is offered on long-distance trains up to a distance of about 200 kilometres.
iii. Place Differential Pricing:
During a show of event, the demand to be close to the actors or actresses on the stage, the singers on dais, or the tennis or cricket players on the grounds is quite high. The customers feel they are more intimately involved in the action. Consequently, the organizers try to make use of this demand factor to secure hefty premium. Thus, the front row seats for a Lata Mangeshkar concert could be as high as Rs. 5,000 while tickets for the back rows could be as low as Rs. 100 per person.
iv. Seasonal Differential Pricing:
The beach resorts and other hotels in Goa experience a slump during the monsoon season from June until the end of September. Therefore, to make best use of the capacity, a number of hotels offer very low off-season rates to attract different type of clientele. This clientele includes honeymooners and other people whose idea of holiday is inactivity or who want to make a pilgrimage to Goa.
The common factor in all these types of pricing is to shift the demand from peak to off-peak periods. We will deal with this topic in depth under supply and demand balancing. In addition, this pricing strategy is based on marginal cost. Marginal cost is the additional cost of serving the additional customer. Marginal cost is the direct material and labour cost. As long as this cost is covered, any additional revenue generated contributes towards overheads and profits.
4. Value-Based Pricing:
Value is defined as perceived benefits for the total cost of acquisition.
Thus, the value-based pricing can be divided into the following depending on:
i. Higher value perception due to lower price for the service
ii. Higher value due to higher perceived benefit, which may accrue due to high quality of the service or other value perceptions.
To a number of customers, if the same service is offered at a lower price, the value perception of the service goes up. Thus, using a coupon published in a health magazine, the customer may avail a discount for the first month’s fee in a gymnasium.
Similarly, a number of credit card companies offer waiver of the joining or first year’s fees in order to attract the customer.
The prices of the services are set at a price just below the rounded sum. Thus a large sized pizza may be priced at Rs. 199 instead of Rs. 200. Psychologically, the customers feel that they have paid much less than Rs. 200.
This is the type of pricing used to build large volumes. Take nose or ear piercing as the latest fashion. In order to get larger number of customers to do a trial, the initial introductory offer is based on low price. Once the service becomes well known, the prices are set back to the normal level. It is necessary to make customers aware of this deadline date after which discounted prices will not be available; otherwise the customers may be disappointed.
The typical word used by many marketers is ‘giving more for less’. The Pizza Hut chain may separately offer medium-sized pizza for Rs. 149, garlic bread for Rs. 50, and a 500 ml Pepsi for Rs. 13. However, in order to get customers to buy all, the three may be offered as a combined meal for Rs. 189. This bundled price lets the customers focus on the benefit of a total meal, instead of making them nervous about spending well over Rs. 200 for a full meal.
The recent ‘Dhirubhai Ambani Pioneer Offer’ made by Reliance Infocom is a similar bundled offer. The offer includes a mobile phone, free SMS service, free incoming calls, 24-hour high speed internet access, 400 minutes of talk time per month, STD service at local calling rate within the state/circle, and calling other Reliance phones at local rate irrespective of the location.
The customers are not able to price the individual components of this offer, and thus it does not let customers dwell on the price but lets them concentrate on the benefits of such offers.
To some customers, part of the value perception is being different from others. Those who want to make a statement about their status, wealth, leadership, innovativeness, etc. are usually prepared to pay for it. Thus, the customers would be prepared to pay high fee for a new health club or dance class started by a celebrity, or to have a personal trainer and pay for it, etc.
This type of demand usually does not obey the law of price and demand. Usually, in this case, the higher the price, the higher the demand. However, the total size of such a market is usually limited. The moment the service becomes commonplace, the attraction no longer remains.
A number of software packages, including Microsoft Office and Microsoft Windows XP, etc., offer different prices in different segments of the market.
(1) For the office users segment, the price is the highest as the companies would consider the utility of the product rather than the price when making a decision about purchase. In addition, the companies may consider purchase of multiple licences or a server version of the software, or even the professional version.
(2) For individual users, the price is lower than the corporate segment price. It is usually sold as a personal version rather than professional version.
(3) Students obviously are an important class of customers but are unable to pay the full cost of such software. However, they are the future users and decision makers, and must be groomed into using this software from the first opportunity. Therefore, they are offered a student version of the software at very attractive prices.
In this type of pricing, the basic or fundamental services are priced at quite a low level. However, if the client needs higher level or additional services, he has to pay premium prices.
The home cable industry is likely to undergo a number of changes in the near future. The pay channels want to charge a fee from the operators while the government wants to ensure the availability of these channels at low cost to the consumers. Due to the recent ordinance (of 2003) restricting the cable operators/channel partners from overcharging, the pricing may undergo a fundamental change.
Amongst the competing cable connection suppliers, the dominant supplier may agree to exhibit the free channels package at very low prices. The cable operator may even lose some money on the base offer. This would attract the buyers and would secure excellent market share for the customers.
However, the prized channels such as Star Gold, Zee Cinema, etc. may be offered at prices that are very profitable. Thus, on the whole, the operator may benefit from larger market share and recover the loss on basic service from the specially demanded services.
The number of Indian students who join, and travel to, Universities in North America (USA and Canada) and Great Britain during June to September each year is quite high. All the competing airlines offering services on this route including British Airways, KLM, Lufthansa, Alitalia, Delta, etc. want to attract passengers in order to fill their seats on transatlantic routes, while keeping in mind that the student travel market is price sensitive.
Airlines offer block bookings to agents who undertake to fill the quota of seats on each of the flights from Mumbai-Delhi-Chennai during this period. The agents would typically place the bids for block bookings, and successful travel agents will be given the exclusive right to book seats in this period.
The agents in turn try to sell this at the best possible price. They would use tactics such as non-confirmation to entice the buyers to pay extra for confirmed booking. Due to the bidding, the airline itself has very less control on the matter. However, the airline would have almost 100% seat occupancy on the day of travel.
A number of software training institutes such as NUT, Aptech, Boston Software, etc. offer a two or three-year student programme. Once the students have enrolled, they are very likely to complete the programme due to parental pressure. In addition, students pay a substantial portion of the fees up front, with the balance being paid over the period of the training. Thus, it is important to attract the students in the first instance to promote the sales.
The students are offered the lure of a guaranteed job at the end of the education; otherwise the institute offers to refund a part of the fee. This is a type of belated or postponed discounting. In any case, any student who fails to find a job elsewhere is usually offered the job of an instructor at the same institute! As we have seen above, the pricing in the case of services is quite complex, and naturally it is dependent upon the overall marketing strategy.
Importance of Pricing – Most Flexible Marketing Mix Variable, Setting the Right Price, Trigger of First Impression, Influences Demand Level and a Few Others
When marketers talk about what they do as part of their responsibilities for marketing products, the tasks associated with setting price are often not at the top of the list. Marketers are much more likely to discuss their activities related to promotion, product development, market research and other tasks that are viewed as the more interesting and exciting parts of the job.
Yet pricing decisions can have important consequences for the marketing organization and the attention given by the marketer to pricing is just as important as the attention given to more recognizable marketing activities.
Some reasons for which pricing is important include:
Importance # 1. Most Flexible Marketing Mix Variable:
For marketers price is the most adjustable of all marketing decisions. Unlike product and distribution decisions, which can take months or years to change, or some forms of promotion which can be time consuming to alter (e.g., television advertisement), price can be changed very rapidly.
The flexibility of pricing decisions is particularly important in times when the marketer seeks to quickly stimulate demand or respond to competitor price actions. For instance, a marketer can agree to a field salesperson’s request to lower price for a potential prospect during a phone conversation. Likewise a marketer in charge of online operations can raise prices on hot selling products with the click of a few website buttons.
Importance # 2. Setting the Right Price:
Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can lead to the marketing organization losing revenue. Prices set too low may mean the company is missing out on additional profits that could be earned if the target market is willing to spend more to acquire the product.
Additionally, attempts to raise an initially low priced product to a higher price may be met by customer resistance as they may feel the marketer is attempting to take advantage of their customers. Prices set too high can also impact revenue as it prevents interested customers from purchasing the product. Setting the right price level often takes considerable market knowledge and, especially with new products, testing of different pricing options.
Importance # 3. Trigger of First Impressions:
Often times customers’ perception of a product is formed as soon as they learn the price, such as when a product is first seen when walking down the aisle of a store. While the final decision to make a purchase may be based on the value offered by the entire marketing offering (i.e., entire product), it is possible the customer will not evaluate a marketer’s product at all based on price alone.
It is important for marketers to know if customers are more likely to dismiss a product when all they know is its price. If so, pricing may become the most important of all marketing decisions if it can be shown that customers are avoiding learning more about the product because of the price.
Importance # 4. Important Part of Sales Promotion:
Many times price adjustments are part of sales promotions that lower price for a short term to stimulate interest in the product. Marketers must guard against the temptation to adjust prices too frequently since continually increasing and decreasing price can lead customers to be conditioned to anticipate price reductions and, consequently, withhold purchase until the price reduction occurs again.
Importance # 5. Influences Demand Level:
The chosen price directly influences demand level and determines the level of activity. A price set too high or too low can endanger the product’s development.
Importance # 6. Determines the Profitability:
The selling price directly determines the profitability of the operation, not only by the profit margin allowed, but also through quantities sold by fixing the conditions under which fixed costs can be recovered over the appropriate time horizon. Thus, a small price difference may have a major impact on profitability.
Importance # 7. Means of Comparison:
More than any other marketing variable, the price is an easy means of comparison between competing products or brands especially when there is hardly any brand differentiation. The slightest change in price is quickly perceived by the market, and because it is so visible it can suddenly overturn the balance of forces.
Importance of Pricing – Costly, Expensive, Cheap and Bargain
Proper pricing is very important for the business and the reason behind this is very simple. All the customers are looking for ‘value for money’ if not a ‘bargain’. So if the customer finds that he/she is required to pay more than what he/she is getting in return, the customer will not buy it, or if purchased under duress, (no alternate available at that time/emergency purchase) will not purchase it next time.
There is also a possibility of bad-mouthing the product. The manufacturer must ensure that the product is being sold in the market at the suggested price and the MOP (Market Operating Price) is not higher than MRP (Maximum Retail Price) due to shortage of the product. If the product is being sold at a higher price than MRP, it will lose its market position in the long run like what has happened to Amul Spray.
How do we decide the proper price? Price determination methods are common with very little variations in them. A manufacturer can determine the price and may decide to sell the products at lower than or higher than the price determined as a marketing strategy based on factors affecting pricing decisions. Let us first look at the method of determining the price.
One must understand the correct meaning of the words costly/expensive, cheap and bargain. Most of the time, most people use these words alternatively without understanding that they are making a mistake in using these words wrongly.
Let us look at the correct meanings of these words:
1. Costly:
When the customer pays a high price for a product and is unhappy and not satisfied about the price paid for the product, it is costly.
2. Expensive:
When the customer pays a high price for a product and is happy and completely satisfied about the price paid for the product, it is expensive.
3. Cheap:
When a customer pays a very low price for a product and feels that the price paid is just enough and would not like to pay more than the price paid, the product is a cheap product.
4. Bargain:
When a customer pays a very low price for a product and feels that the price paid is less than the actual price of the product, it is a bargain product.