Pricing

Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the marketplace, competition, market condition, brand, and quality of product.

Pricing is a fundamental aspect of product management and is one of the four Ps of the marketing mix, the other three aspects being product, promotion, and place. Price is the only revenue generating element amongst the four Ps, the rest being cost centers. However, the other Ps of marketing will contribute to decreasing price elasticity and so enable price increases to drive greater revenue and profits.

Pricing can be a manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. An automated pricing system requires more setup and maintenance but may prevent pricing errors. The needs of the consumer can be converted into demand only if the consumer has the willingness and capacity to buy the product. Thus, pricing is the most important concept in the field of marketing, it is used as a tactical decision in response to changing competitive, market and organizational situations.

the financial goals of the company (i.e. profitability)

the fit with marketplace realities (will customers buy at that price?)

the extent to which the price supports a product's and be consistent with the other variables in the marketing mix

market positioning

the consistency of prices across categories and products (consistency indicates reliability and supports customer confidence and customer satisfaction)

To meet or prevent competition

The objectives of pricing should consider:

Price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product. Where manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns, then prices are likely to be higher. Price can act as a substitute for product quality, effective promotions, or an energetic selling effort by distributors in certain markets.

From the marketer's 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 consumer economic surplus to the producer. A good pricing strategy would be the one that could balance between the price floor (the price below which the organization ends up in losses) and the price ceiling (the price by which the organization experiences a no-demand situation).

They believe the high price is an indication of good quality

They believe it to be a sign of self-worth - "They are worth it;" it authenticates the buyer's success and status; it is a signal to others that the owner is a member of an exclusive group

They require flawless performance in this application - The cost of product malfunction is too high to buy anything but the best - for example, a heart pacemaker.

Reference price effect: Buyer's price sensitivity for a given product increases the higher the product's price relative to perceived alternatives. Perceived alternatives can vary by buyer segment, by occasion, and other factors.

Difficult comparison effect Buyers are less sensitive to the price of a known / more reputable product when they have difficulty comparing it to potential alternatives.

Switching costs effect: The higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives.
High switching costs: Organizations that produce that have scarcely any substitutes and require huge exertion to ace their utilization appreciate huge exchanging costs. Some firms has additionally fused membership deals, which add greater consistency to its plan of action and further secure their clients. Similarly as with numerous innovation organizations, vulnerability remains in regards to its new item improvement cycle and reception of new items.

Low switching costs: Organizations that offer items or administrations that are exceptionally simple to imitate at equivalent costs by contenders regularly have low exchanging costs. For example, clothing company have restricted exchanging costs among customers, who can discover garments bargains effectively and can rapidly think about costs by strolling starting with one store then onto the next. The ascent of Internet retailers and quick transportation has made it significantly simpler for customers to search for attire at their homes over numerous online stages.

Price-quality effect: Buyers are less sensitive to price the more that higher prices signal higher quality. Products for which this effect is particularly relevant include: image products, exclusive products, and products with minimal cues for quality.

Expenditure effect: Buyers are more price sensitive when the expense accounts for a large percentage of buyers’ available income or budget.

End-benefit effect: The effect refers to the relationship a given purchase has to a larger overall benefit, and is divided into two parts:
Derived demand: The more sensitive buyers are to the price of the end benefit, the more sensitive they will be to the prices of those products that contribute to that benefit.

Price proportion cost: The price proportion cost refers to the percent of the total cost of the end benefit accounted for by a given component that helps to produce the end benefit (e.g., think CPU and PCs). The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the component's price.

Shared-cost effect: The smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be.

Fairness effect: Buyers are more sensitive to the price of a product when the price is outside the range they perceive as "fair" or "reasonable" given the purchase context.

Framing effect: Buyers are more price sensitive when they perceive the price as a loss rather than a forgone gain, and they have greater price sensitivity when the price is paid separately rather than as part of a bundle.

Pricing at the industry level focuses on the overall economics of the industry, including supplier price changes and customer demand changes.

Pricing at the market level focuses on the competitive position of the price in comparison to the value differential of the product to that of comparative competing products.

Pricing at the transaction level focuses on managing the implementation of discounts away from the reference, or list price, which occur both on and off the invoice or receipt.

Pricing is the most effective profit lever.^[67] Pricing can be approached at three levels: the industry, market, and transaction level.

A "price waterfall" analysis helps businesses and sales personnel to understand the differences which arise between the reference or list price, the invoiced sale price and the actual price paid by a customer taking account of contract, sales and payment discounts.^[68]

Weak controls on (price override)

discounting

Inadequate systems for tracking competitors' selling prices and market share ()

Competitive intelligence

Cost-plus pricing

Price increases poorly executed

Worldwide price inconsistencies

Paying sales representatives on sales volume vs. addition of measures

revenue

Many companies make common pricing mistakes. Jerry Bernstein's article Use Suppliers' Pricing Mistakes ^[69] outlines several sales errors, which include:

Contrary to common misconception, price is not the most important factor for consumers, when deciding to buy a product.^[70]

Priceless: The Myth of Fair Value (and How to Take Advantage of It), Hill and Wang, 2010.

William Poundstone

. Published in Industrial Marketing Management.

Engineering New Product Success: the New Product Pricing Process at Emerson Electric. A case study by Jerry Bernstein and David Macias

Redpoint Ventures