Marketing - Pricing

Pricing is an integral part of the branding process, it is also the only element of the marketing mix that produces revenue, and others’ produce cost. Price is perhaps the easiest element of the mix to adjust – it communicates to the market the company’s intended value positioning – a well designed and marketed product can command a price premium in fact that is what the good brands do. The art of pricing and knowing how sensitive the customers are to price requires a systematic approach. The price/value relationship is not linear but based on different factors.

In order to judge price sensitivity and influence it through marketing efforts we have to instigate these five factors.
• Product Category Factors: Price sensitivity tends to be lower in products that do not cost too much – three things have to be considered – the absolute dollar cost, how often the product is used one tends to be less price sensitive for one time only products and what component of your cost is the product, one is more sensitive the greater the proportion.
• Who Pay: The question of ‘who pays’ is an important one. Is it the end user of the product that is paying or where the person paying is the decision maker but not the end-user for e.g. the mother who buys chocolate for her child is he decision maker but not the end user.
• Competitive Factors: There are several other things that influence price sensitivity – such as the availability of substitute products, the perception of the buyer and whether he perceives added quality in the product or if it is replaceable for him/her. The availability of information about substitute products and whether they are comparable plays an important role of course the presence of switching costs and difficulty in switching.
• Reference Pricing: Consumers have in their minds a reference price –this is their benchmark price. Although consumers could have fairly extensive knowledge of the range of prices involved few can recall exact prices and thus employ reference prices. This can be in form of an internal reference price i.e. pricing information from memory or an external frame of reference such as the posted regular price. The reference price may be a function of what seems like a fair price, the price being paid in the market, a competitor’s price for similar item, the price last paid an upper bound price the max one will pay and the lower bound price the least one would pay, expected future price and the usual discounted price.
• Price Quality Relationships: When there is missing information from which customers can judge the quality of a product, price is often used as an indicator of quality.

In setting pricing policy a company follows the following procedure.
It estimates the demand curve, the probable quantities it will sell at each possible price.
It estimates how its costs vary at different levels of outputs & levels of accumulated production experience and for differentiated marketing offers.
It examines the competitors’ costs, prices and offers and then selects the final price.

In selecting the objective the company can pursue five objectives through pricing:
[1] survival (short-run objective to combat over capacity, intense competition or changing tastes)
[2] maximum current profit (the price that will produce maximum current profit and cash flow)
[3] Maximum market share (they set the lowest price s a market penetration strategy in order to win a large market share)
[4] maximum market skimming (companies might start with a high price but which they gradually bring down in order collect revenues from all pockets of the market
[5] product-quality leadership ( a company might aim to be the provider of affordable luxury and their prices are tied to this perceived quality, taste and status – with prices that are high but not out of the reach of the consumer.

Once the value of a product to a consumer is understood – pricing decisions become easier. This judgement can also be based on the understanding of the buyers cost structure and through direct and indirect surveys and questionnaires about the value of the product to the consumers. In cost structure studies the true economic value of a product is assessed. Simply put TEV is the cost of an alternative to which is added the value of the performance differential between alternatives. To assess this, the competitive alternatives, their prices and performance and the buyers’ cost have to be understood. TEV usually sets the upper bound to what a customer will pay.

To assess value surveys can be conducted – direct price response surveys in which the customers are asked how much they will be willing to pay for a product etc or through a preference-based inference also called conjoint measurement. Here the questions posed to respondents replicate the realistic scenario of a customer facing an array of competitive alternatives with different features and prices and having to choose among them.

The value attached to products varies among people who have different priorities, and interests. It can be a matter of taste, the availability of substitutes, the availability of good deals from competitors. How important the difference in quality is to the person using the product, how much they would use it and of course the ability to pay – all these factors are different for different people and so value can vary.

This is the reason that prices have to be customized and there are four ways to do so
Product Line Sorting – a choice to add on features by paying extra. A basic stripped down model and a fully loaded one. In controlled availability – different prices available for certain groups, for example old customers can be send money-off coupons.
Price can based on buyer characteristics – different prices for different buyers as is in the case of children paying less for tickets – or discounts for large buyers.
Price can also be based on transaction characteristics – price tied to how much one buys or the time they buy as is in the case of airline tickets.
The most effective route to pricing is through offering added value – a superior product backed by strong marketing that boosts perceived value.

There are various pricing methods that a company can select to reach a final price. In mark-up pricing, a percentage is added to the costs as a mark-up.
The company can go for ‘target-return pricing, here the firm determines a target rate of return that they want to achieve and tat is built into the pricing.
Another method is ‘perceived-value’ pricing, in which the price is based on what the customers perception of the value is, of course buyers differ in the perceptions and the importance they set certain attributes, there maybe value buyers and others may be price buyers. In value pricing companies win customers by charging fairly low prices for good quality offerings. An important type of value pricing is Every Day Low Pricing.
In going-rate pricing the firm bases its prices largely on competitors prices – it charges more or less the same as the rest of the major players in the market.
Another pricing method that is becoming popular these days is auction-type pricing. There are three major types of auction; English auctions [ascending bids] in which there is one seller and many buyers, the seller puts up an item and bids are offered until the highest is reached.
In Dutch auction [descending bid] there is one seller and many buyers or one buyer and many sellers, a high price is announced and slowly decreased until a price is accepted and in the case of one buyer, potential sellers compete to get the sale by offering the lowest prices.
The last kind is the sealed bid auction in which suppliers submit one bid