Pricing – A Critical Management Function

Price is all around us. We have to pay rent for out apartment, tuition fee for out education utility bill for our electricity, water and gas. All profit organizations and many non profit organizations must set prices on their products or services.

In narrowest sense, profit is the amount of money charged for a product or service.

DEFINITION

“The sum of values that consumer exchange for the benefits of having or using the product or service.”

Price is a very critical in the marketing mix that produces revenue, all other elements represent cost. It is very flexible element unlike product features and channel of distribution; price can be changed quickly.

Marketing executives are facing number of pricing problems. The most common mistake that companies do is that Pricing is too cost oriented rather than customer value oriented. They do not take in to account other elements of marketing mix. Price is not varied enough for different products, market segment and purchase occasions.

PROBLEMS


The company pricing decisions are affected by both internal company factors and external environmental factors.


INTERNAL COMPANY FACTORS


Who will set a price? One of the internal company factors is that “who will set the price within the organization”. Setting of price well be handled differently in small and large companies. It is a duty of management to decide who with in the organization should set the price. In small companies prices are often set up by top management while in large organizations pricing is handled by divisional or product line manager. In industries in which pricing is very important factor. Companies often have a pricing department to set the best prices or help other in setting them; this department represents the marketing department or top management. Others who have an influence on pricing include sales managers, production managers, finance manager and accountants.

MARKETING OBJECTIVES

If marketing objectives are not clear it will create a problem for the company. Before setting prices company must know its objectives. If the company has selected its target market and positioning carefully.

Marketing mix strategy, including price, will be fairly straight forward. The clearer a firm is about its objectives; the easier it is to set prices.

Different objectives of company are

  • Survival

  • Profit maximization

  • Leadership in market share

  • Leadership in product quality

Due to heavy competition and changing consumer wants, the basic objective in the start is survival through increasing the demand of its product to survive in Market. In marketing terms it may be called penetration. In it Company has to set low price. And when price covers variable cost and some fixed cost it means company can stay.

If company’s goal is profit maximization (which is the goal of most of the companies) then in that case company should estimate the demand of its products and cost that they are going to incur to product that product and then choose the price that can maximize its profit it means clear objectives can help in setting prices. Otherwise it creates a number of problems.

OTHER MARKETING MIX VARIABLES

Decisions made for other marketing mix variables may affect pricing decisions e.g. producers who are using agents to support and promote their products many have to build larger agent managers in to their price. The decision to position the product on high performance quality will mean that the seller must charge a higher price to cover higher cost. So price decisions must be co coordinated with product design, distribution and promotion decisions to form a consistent and effective marketing program.

EXTERNAL FACTORS
CONSUMER PERCEPTION

Consumer perception of price affects the pricing decision, because consumer will decide whether a product’s price is right. So pricing decision must be buyer oriented. Because when consumer purchase any product they give something of value to get something of value effective pricing involve to know how much value consumer places on the benefits they receive and then setting prices according to it. But it is very difficult for the company to measure the values customer will attach to its product.

E.g. calculating cost of ingredients in meat is easy but to know the value of taste relaxation, satisfaction is very difficult. Because there values vary according to different situations and for different customer so consumer perception create problem is greater than the products value they will not buy the product. If opposite case seller loses, the profit opportunities.

COMPETITOR’S COSTS PRICES AND OFFERS

Another factor affecting the company’s pricing decision is competitors costs and prices and possible competitors reactions to the company’s own pricing moves. A consumer who is purchasing a product will evaluate price and value against the prices and values of comparable products. Made by competitors company need to benchmark its costs against its competitors cost to learn whether it is operating its cost advantage or disadvantages. There is a need to learn the price and quality of each competitor’s offer. Once company is away of competitors prices and offers, it can use then as is starting point for its own pricing.

ECONOMIC CONDITION

Company pricing policy face problems due to economic condition

Economic factors such as boom or recession, inflation and interest rate affect pricing decision because they affect both the cost of producing a product and consumer perception of product’s price and value.