Pricing is an important aspect of marketing and is usually determined by the company’s target market, cost of production, marketing mix strategy, marketing objectives and so on. Some pricing objectives include survival, profit maximization, product-quality leadership and market-share leadership. The price that a company usually sets on its product is between one that is too low to produce a profit and one that is too high to produce any demand. Costs consumer perception and competitors prices are three major factors that influence how companies price their products. Read our full blog post for more details.
Cost plus pricing can be described as adding a standard mark up to the cost of the product. This method on its own does not aid companies to set the best price as it does not consider consumer demand and competitor’s price. Despite this cost based pricing is used by many companies for the reason that it is easier to determine the cost of a product than it is to determine the demand that consumers may have on it. Demand of a product is volatile and frequently changes due to numerous factors as compared to costs which are less likely to change. Mark up pricing does not always bring forth big profits as a high mark up may make prices so high that customers will not be will to buy the product. Selling small quantities of a commodity does not gain a company a high profit no matter how high the mark up may be. Thus, some companies realizing that their businesses fixed and variable costs continue to increase with time, try to sell a greater quantity of their products to increase turnover and thus increasing profits.
Another cost based method of pricing is target profit pricing where the price of the product depends on the amount of profit the company has determined to make. The company may either decide to produce a lower number of units to a lower price. However the target profit of the company can be thwarted depending on price elasticity and competitors prices. These two factors can affect the quantity of goods that customers will buy. Since profits are directly dependent on the quantity of goods sold if the company sells less, the target profit will not be reached.
Value based pricing is the opposite of cost based pricing as it perceives the value consumers place on the product and uses the findings to guide its cost of production and perceived profit margin. Companies try to improve perceived value by ensuring they deliver their promises, extra services, money back guarantee. Companies also try to design and create a superior product that better satisfies customers while sustaining prices at a level that will give customers value for their money. In the event that a company sets a price beyond the consumers perceived value, sales will decline, on the other hand if they set a price below their perceived value sales will increase but may produce less revenue than there would be if prices were set exactly at the perceived value level.
Some companies base prices on the prices of competitors. One of such methods is termed going rate pricing. Here the company may charge the same as, less or more than its competitor without much regard for the cost incurred on producing its own product for the demand customers have on it. Usually companies look to market leaders to determine prices. This type of pricing helps companies when demand elasticity is difficult predict as it represents the collective agreement of the industry on a price that will yield a fair return.
Other companies base their prices on auctions in markets. Auctions determine the price at which some group of customers would be willing to pay for a particular product. Commodities, financial services, art and antiques prices are usually determined in such markets. With the introduction of the internet online auctions on eBay.com and others have had a great influence on the price of goods and have become one of the most influential internet innovations. More decent planning strategies at http://www.marketingplan.net/pricing-strategies/
Pricing policy of any firm at any particular time can make or break the organization depending on the level and intensity of competition and dynamics of the marketing environment. Organization must not that pricing must consider the long term goal of developing good customer relationship fairness and value for money for the customer.