The four elements of marketing mix are popularly known as 4P’s i.e Price, Place, People and Promotion. Pricing as one of these marketing mix is an important strategy and its effect affects other marketing mix elements. While it is believed that there is no single approach to determine the best pricing, the following could be considered in developing the pricing for a particular product.
Marketing Strategy: At the start of developing a product, the strategy on how to market the product must have been formulated. This will include among other things, the selection of the target market, the product positioning etc. It will surely assist in determining the quality of the products and the expected price at which it will be introduced into the market.
Marketing mix decision – Because of the relationship between the four elements of the marketing mix, pricing cannot be determined in isolation, hence a formidable marketing mix decision that will take care of all the elements should be taking. For instance it is desirable to know the appropriate price for a particular segment of the market (people), at a particular geographical area (place) and the promotion strategy to introduce the price to the people.
Demand factor: It is necessary to know the relationship between price and demand for the product. What is the rate of changes in demand to the price increase or decrease?. This is usually known as price elasticity of demand. A small decrease in price could double the demand whereas a small decrease in price may also reduce the demand of such product to zero level. Also we have some products that are not very sensitive to price changes, hence increase of price for such product within a specific range may not have significant influence on the demand. This is usually true of some luxury products or products that have maintain its stability in the market.
Environment: Pricing must take into account the competitive and legal environment in which the company operates. For example, where there is a stiff competition, setting a price too low may signal price war which may not be healthy for the business, on the other hand if the price is too high, it may give advantage to your competitors to take over the market or attract other competitors to share the profits. From a legal point of view, in a country where there is price control, it may be difficult for a company to set price of a product higher above certain level. Pricing it too low may be seen as predatory or dumping price. Offering different price for different consumers may also violate laws against price discrimination. Also collusion by competitors to fix prices at an agreed level is also illegal in some countries.
Cost: Before a company could introduce a product into the market, it must have the knowledge of the cost involved in the production of the product in order to determine its profit. The unit cost is the minimum price such firm can charge at no profit. In order to make profit, a higher price will have to be charged. Pricing policy should consider the fixed cost and the variable cost of a product. More will be discussed on this in the future edition.
Method of Pricing.
There are several pricing methods that could be adopted in order to achieve the company objective. The methods include;
- Cost-plus – Pricing at production cost plus a determined profit margin.
- Value-based : Set the price at the effective value of the product to the customer. A product with a minimal cost but highly valued by customer could attract high price.
- Target return pricing: A company may want to achieve a level of return on its investment, hence the price of the product could be set to achieve the target.
- Psychological pricing: The price could be based on what is perceived to be the worth of the product considering its popularity, quality, or acceptable pricing points for such product.
Objectives of Pricing Policy
A company must identify its pricing objective in order to determine the pricing of its product:
These objectives could be:
- Quantity maximization; The objective is to increase the units sold or to increase the number of customers in the market. The unit profit margin may be low but hope to achieve profitability with high volume sales.
- Profit Margin Maximization: This is aim at maximizing the profit margin per product. A considerable low quantity that would make the company profitable could be introduced into the market. Such product is not usually price sensitive hence it is positive to increase price without a significant reduction in demand.
- Quality leadership: If the objective of a company is to position the product as a leader in the market, pricing could be used to achieve the objective by attaching high price to the product to signal high quality for the product. The company must follow this with the appropriate advertisement that gives the impression that the high price is a function of the quality of the product.
- Survival: In a situation where the market is declining, the objective might be to be able to recover cost and also remain in the market. Hence the price will be set to achieve this objective which will take priority over profitability.
- Stability – A company may not be interested in price increase beyond the present level but to maintain a stable profit level and market share.
When introducing a new product into the market, the usual objective of the company is to maximize profit margin or to take good portion of the market share by selling high volume of the product.
These objectives are achievable by either of these strategies;
Skimming pricing; This is an act of setting high price and selling to customers that are less sensitive to price. The strategy is usually used to achieve profit margin maximization objective. The strategy is appropriate where:
- Customers are not highly price sensitive.
- Large cost saving is not expected at high volume. i.e the cost does not vary significantly with high volume production.
- The company does not have capacity to finance high volume production.
Penetration pricing: This help to achieve the quantity maximization objective. It is achievable by setting low price to drive high volume sale. It is appropriate where:
- Customers are price sensitive and quantity is expected to increase significantly with a price reduction.
- Large cost saving are expected as production volume increases.
- The company have resources to increase production
- The product gain mass appeal quickly from the customers
Company usually gives price discount to stimulate sales and also to help in product distribution to the end user. Several types of discount could be offered. Some of them are outline below;
- Quantity discount- This is offered to customers who purchase in large quantity. A limit is usually set before you can be entitled to such discount.
- Seasonal discount: This is based on the time of purchase and always design to reduce seasonal variation in sales. For instance, an ice cream factory may which to give discount to customer during cold or raining season to stimulate sales
- Trade discount: This may be offered to customers that are loyal to the company but may not be able to buy in large volume but still perform their important retail function.
- Cash discount: This is offered to customer to encourage them to pay their debt early and usually within a specified period.