The only component of marketing mix that generates returns is called price, however, only generate costs. Price can be easily altered, whereas, other product aspects like channel obligations and product attributes cannot be changed so easily. Therefore, price is the most flexible component of the marketing mix. For a manufacturer, price is that amount of money (or in case of barter trade, goods or services) which he will receive from the buyer for his product. For a customer, price is something he sacrifices for owning the product or service and therefore, it displays his perception for the product value.
It can conceptually be defined as:
Price = (Quantity of money received by the seller) / (Quantity of goods and services rendered' received by the buyer)
As per this equation, the numerator as well as the denominator is crucial while taking price decisions. A product’s price is based on the seller’s decision regarding its monetary worth to the buyer. The method used to convert the worth of a product or a unit of service into quantitative form (i.e., rupees and paisa) at a given time for customers is called ‘pricing’.
Pricing can be defined as the task of deciding the monetary value of an idea, a product or a service by the marketing manager before he sells it to his target customers. In particular, pricing is the process of formulating objectives, deciding the flexibility that is available, devising strategies, setting prices, and implementing and controlling the above elements. Pricing is one Of the strongest marketing instruments that the company possesses, Pricing decision is an important aspect of a marketing plan. Thus, maketers need to take exact and premeditated pricing decisions.
Factors Affecting Price Determination
There are numerous factors that affect marketing decisions. The pricing policies must fall in line with pricing objectives. The factors affecting price determination can be categorised as follows:
Internal Factors
Following are the internal factors influencing pricing decisions:
Marketing Objectives
Firms devise both specific as well as general objectives. Survival, market share leadership, current profit maximisation and product quality leadership are some of the general objectives of the firm. The firm may price its products lower than its competitor to prevent their entry in the market or at times, set its price equal to its competitor so that market is stabilised. This is an example of specific objective. products can be priced in order to sustain the reseller’s support and loyalty or to circumvent government intervention. Marketers can decrease the prices to increase the customer interest towards the product or attract traffic into the retail outlet. A single product, if priced appropriately, can help to increase the sales of other products in the product line of the company. Hence, pricing decisions are greatly influenced by marketing objectives at various levels.
Marketing Mix Strategies
Marketing mix strategies of an organisation are very significant in influencing the organisational pricing. One marketing mix tool that the firm uses to accomplish its objectives is ‘price’. While taking price decisions, the product design, promotion decisions and distribution plans must be aligned together to create a reliable and valuable marketing program. Pricing decisions are strongly influenced by decisions that are made for other marketing mix variables. Usually, organisations position their products on the basis Of price and after that modify other marketing mix decisions, according to the price they intend to charge. In such a scenario, price is an important product-positioning factor that classifies the market, design and competition of the product. This kind of price-positioning strategy is supported by many firms. They use the target costing technique, which is a powerful strategic tool. For example, target costing was exercised by P&G while developing and pricing its very thriving electric toothbrush named ‘Crest Spin Brush’
Costs
This is the base of the price that is charged by the firm. Firms intend to charge a price that can retrieve its production, distribution and sales cost and also provide a reasonable rate of return against risks and efforts. Costs incurred by a company play an important role while strategising pricing. Various companies like Wal-Mart, Southwest Airlines and Union Carbide strive to be the industry’s “low cost manufacturers”. When costs are low, it becomes easier for the firms to set a lower price, which ends up in increased profits and sales.
Organisational Considerations
Decisions regarding who would set prices of products and services in the organisation is very imporüant, Pricing is managed in different ways. In firms that are small in size, top management, in place of sales or marketing department, sets the prices of the products. Whereas, in bigger firms, product line managers or divisional managers handle pricing. Sales people working in industrial markets, have the authority to bargain with the customers within a specified price range. All the same, the pricing policies and objectives are finalised by the top management Who usually approves the prices that suggested by the lower management or sales force. Certain industries like steel, aerospace, oil companies, railroads, etc., have pricing as the main element. They have a separate pricing department (which directly reports to the top management or the marketing department), which finalises prices for their products or assists other departments in deciding the same. Sales managers, finance managers, production managers, accountants, etc., are the Other people who can influence pricing decisions.
External Factors
Following are the external that influence pricing:
Competitor’s Costs, Prices and Offers
An organisation’s pricing policy is strongly influenced by the costs and prices as well as discounts and offers of the current competitors. If someone is planning to purchase a Sony digital camera, he will compare the prices and value that Sony is offering with the value and prices Of similar products offered by Other brands like Nikon, Kodak, etc. The pricing strategy that the company implements also impacts the type Of competition it encounters. For example, in the case of Sony, if it pursues a high-price, high-margin strategy, competition may increase. Whereas, a low-price and a low-margin strategy might reduce competition or drive the competitors out of the market. Thus, Sony must benchmark its cost and value against that of the competitor. This benchmark can then be used while setting its own pricing.
Economic Conditions
A company’s pricing strategies are also influenced by prevailing economic conditions. Economic conditions like recession, boom, inflation, interest rates, etc., have an effect on pricing decisions, since both the cost incurred in production and what the consumer perceives about the value and price of the product, are influenced by them. The company should also analyse the impact of its price on different members present in its environment and the manner in which resellers respond to different prices. Prices must be set in such a way that resellers earn sufficient profits, get necessary support and can sell the product easily.
Government Controls and Subsidies
With the intervention of the government, the freedom of the companies to adjust prices and maintain margins is restricted. As a form of control, the government can also ask the importers to deposit cash required in advance, As per this requirement, the company needs to lash out funds as non-interest bearing deposits for the amount of time it intends to import its products. These requirements motivate the company to reduce the prices of the imported products as lower prices account for smaller deposits. The subsidies that the government provides also compel companies to strategically use sourcing in order to become price competitive.