Pricing

Pricing is one of the four aspects of marketing. The other three parts of the marketing mix are product management, promotion, and distribution. It is also a key variable in microeconomic price allocation theory.

Pricing involves asking questions like:

• How much to charge for a product or service?
• What are the pricing objectives?
• Do we use profit maximization pricing?
• How to set the price?: (cost-plus pricing, demand based pricing, rate of return pricing, or competitor indexing)
• Should there be a single price or multiple pricing?
• Should prices change in various geographical areas, referred to as zone pricing?
• Should there be quantity discounts?
• What prices are competitors charging?
• Do you use a price skimming strategy or a penetration pricing strategy?
• What image do you want the price to convey?
• Do you use psychological pricing?
• How important are customer price sensitivity and elasticity issues?
• Can real-time pricing be used?
• Is price discrimination or yield management appropriate?
• Are there legal restrictions on retail price maintenance, price collusion, or price discrimination?
• Do price points already exist for the product category?
• How flexible can we be in pricing? : The more competitive the industry, the less flexibility we have.
  • The price floor is determined by production factors like costs, economies of scale, marginal cost, and degree of operating leverage
  • The price ceiling is determined by demand factors like price elasticity and price points
• Are there transfer pricing considerations?
• What is the chance of getting involved in a price war?
• How visible should the price be? - Should the price be neutral? (ie.: not an important differentiating factor), should it be highly visible? (to help promote a low priced economy product, or to reinforce the prestige image of a quality product), or should it be hidden? (so as to allow marketers to generate interest in the product unhindered by price considerations).
• Are there joint product pricing considerations?
• What are the non-price costs of purchasing the product? (eg.: travel time to the store, wait time in the store, dissagreeable elements associated with the product purchase - dentist -> pain, fishmarket -> smells)
• What sort of payments should be accepted? (cash, cheque, credit card, barter)

A well chosen price should do three things:

• achieve the financial goals of the firm (eg.: profitability)
• fit the realities of the marketplace (will customers buy at that price?)
• support a products positioning and be consistent with the other variables in the marketing mix
  • price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product
    • price will usually need to be relatively high if manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns
    • a low price can be a viable substitute for product quality, effective promotions, or an energetic selling effort by distributors

From the marketers point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumers surplus to the producer.

The effective price is the price the company receives after accounting for discounts, promotions, and other incentives.

Price lining in the use of a limited number of prices for all you product offerings. This is a tradition started in the old "five and dime" stores in which everything cost either 5 or 10 cents. Its underlying rationale is that these amounts are seen as suitible price points for a whole range of products by perspective customers. It has the advantage of ease of administering, but the disadvantage of inflexibility, particularly in times of inflation or unstable prices.

A loss leader is a product that has a price set so low that it acts as a promotional device and draws customers into the store.

Promotional pricing refers to an instance where pricing is the key element of the marketing mix.

The price/quantity relationship refers to the perception by most consumers that a relatively high price is a sign of good quality. The belief in this relationship is most important with complex product that are hard to test, and experiential products that cannot be tested until used (such as most services). The greater the uncertainty surounding a product, the more consumers depend on the price/quantity hypothesis and the more of a premium they are prepared to pay.

Premium pricing (also called prestige pricing) is the strategy of pricing at, or near, the high end of the possible price range. People will buy a premium priced product because:

• 1) They believe the high price is an indication of good quality;
• 2) they beleive it to be a sign of self worth - "They are worth it" - It authenticates their success and status - It is a signal to others that they are a member of an exclusive group; and
• 3) They require flawless performance in this application - The cost of product malfunction is too high to buy anything but the best - example : heart pacemaker

Demand based pricing refers to any of the pricing methods that use consumer demand as the central element. These include : price skimming, price discimination and yield managment, price points, psychological pricing, bundle pricing, penetration pricing, price lining, and premium pricing.

See also:

• marketing,
• marketing management,
• microeconomics,
• price,
• sales promotion,
• production, costs, and pricing
• road pricing

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