Price is the sum or amount of money at which a thing is valued, or the value which a seller sets on his goods in the market; that for which something is bought or sold, or offered for sale; equivalent in money or other means of exchange; current value or rate paid or demanded in the market or in barter; cost.
Pricing is the method adopted by a firm to set its selling price.
One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features, channel decisions, and promotion.
Pricing can be difficult to get right. We do not know exactly how much the other party is prepared to pay, but we need customers in order to sustain and grow our businesses. So how do we ensure money is not left on the table, yet we still make the sale.
Too many businesses have been lost because they priced themselves out of the marketplace. On the other hand, too many businesses and sales staff leave “money on the table”. One strategy does not fit all, so adopting a pricing strategy is a learning curve when studying the needs and behaviours of customers and clients.
1. Cost-plus pricing: This is the simplest pricing method. The firm calculates the cost of producing the product and adds a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price. After all, customers are not too bothered on what it cost to make the product, they are interested in what value they derive from the product.
The term cost-plus pricing is widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. An advantage of this approach is that the business will know that its costs are being covered. The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively.
2. Price Skimming: Skimming involves setting a high price before other competitors come into the market. This is often used for the launch of a new product which faces little or no competition usually due to some technological features. Such products are often bought by “early adopters” who are prepared to pay a higher price to have the latest or best product in the market. Good examples of price skimming include innovative electronic products, such as the Apple iPad and Sony PlayStation 3.
There are some other problems and challenges with this approach. Price skimming as a strategy cannot last for a long time, as competitors soon launch rival products which put pressure on the price (e.g. the launch of rival products to the iPhone or iPad).
Distribution (place) can also be a challenge for an innovative new product. It may be necessary to give retailers higher margins to convince them to stock the product, reducing the improved margins that can be delivered by price skimming.
A final problem is that by price skimming, a firm may slow down the volume or growth of demand for the product. This can give competitors more time to develop alternative products ready for the time when market demand (measured in volume) is strongest.
3. Premium Pricing: Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favourable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation, are more reliable or desirable, or represent exceptional quality and distinction.
For example, as consumer, you are standing in front of the shelves and you are given the choice of Products A, B and C at prices all relatively the same. Then there is product D. Product D is priced a little bit higher.
4. Penetration Pricing: Penetration pricing is when you set a relatively low initial entry price, hoping people will switch from a higher priced vendor. Companies working on how to gain market share tend to use penetration pricing. Penetration pricing has been a popular pricing model for internet companies, reasoning if they build the audience, they will figure out how to make money later. So long as customers place some value on the service, then the company should build their customer base quickly.
There are obvious problems with acquiring customers on a low-price basis. The customers you have are price-sensitive and will likely become non-customers the minute someone else lowers their price, or you increase your price.
You are still vulnerable to competitors who offer something better, who are more efficient, or have more venture capital to blow through. Even if you set a low price, they can still undercut you.
5. Geographical Pricing: Geographical pricing sees variations in price in different parts of the world. For example rarity value, or where transportation costs increase price. In some countries there is more tax on certain types.
- Ability to pay: This is the ability of a consumer to pay for a particular product or service. It is an important factor that organization must put into consideration before setting the price of a product or service.
- Competition: If there is a strong competition in a market, customers are faced with a wide choice of who to buy from. They may buy from the cheapest provider or perhaps from the one which offers the best customer service. But customers will certainly be mindful of what is a reasonable or normal price in the market. Most firms in a competitive market do not have sufficient power to be able to set prices above their competitors.
- Profit maximization: Maximising profits is said to be the objective of all firms. Management of an organization should also not forget that they need to make profit from selling a product which is the main reason while the organization is set up.