.png)
Introduction
Pricing is the value exchanged for a product or service during trade. In the marketing mix, pricing is crucial as it determines market positioning, competitive position, organizational goals, profit margin, etc. Pricing requires comprehensive knowledge of the market to make it relevant and attractive. Organizations use different pricing strategies to position themselves in a distinct way in the market. In general, the pricing of a service is more sophisticated than that of a product because of the nature of the service.
Importance of Pricing
Pricing is important as it determines profit and organizational goals directly. Price acts as a spokesperson that communicates with the buyers and helps buyers take their buying decisions. Research by Statista shows that 82% of consumers agree that price affects their buying decisions while remaining prioritize quality over price. An adeptly taken pricing strategy can communicate value and differentiate a brand. A study by McKinsey & Company shows that a 1% increase in price can lead to an 8.7% increase in operating profit. Nowadays, businesses that are using cutting-edge pricing approaches generally generate a 5 to 10% uptick in profit and a 20% or more increase in customer's satisfaction levels.
Factors that Effect Pricing
Internal factors
Businesses always face some internal circumstances while they decide prices. These factors vary for each business depending on their current scenario.
Marketing objectives: It means deciding on price considering the goal of the organization. Some organizations can thrive to survive in the market because they hold a negligible part of the market share. On the other hand, leading organizations try to increase their profit margin and market share which requires distinct strategies. Markets are always dominated by some brands because of their product quality. Brands pricing is different because their objective is not cost leadership but rather ensuring the best quality.
Cost: Cost refers to the amount needed in the Production of a product or service. It includes fixed costs, variable costs, and total costs. Production costs is the base of setting price for the organizations which uses cost-plus pricing strategies.
Organizational considerations: Organizational fame and brand value are important factors that influence pricing. Most of the brands prioritize best quality at a high price although nowadays, brands are launching low-priced additions of their premium products. Besides brand value, who is setting the price can also affect pricing partially. In small organizations, CEO or top management set price, while in large organizations and franchises, regional management determines price, leading to variability.
External factors
Businesses have to operate generally in a competitive environment. Thus they are affected by the business environment.
Nature of market and demand: The nature of the market depends on the nature of competition. competitive market, oligopoly market, and monopoly market are the common forms of market. Businesses make pricing decisions considering the market on which they are based. The nature of the demand and price elasticity of the demand help businesses set optimum prices for products and services.
Competitors: Competitors make business strategy developers think twice before setting prices. Since the market is competitive, competitors' prices and positioning is a major factor in deciding the price.
Economic conditions and government regulations are also parts of the external factors.
Pricing Approaches
General pricing approaches
In general, businesses used to use general pricing approaches that includes cost-plus pricing approach and value based pricing approach.
Cost-based pricing approach: It is the most common way that every business use. This approach has two ways including cost-plus and break-even pricing. In cost-plus strategy, total cost is calculated and added to a standard markup to set the price. In terms of break-even analysis, the point where cost and revenue is equal is determined and a target profit is added to that point to set the price.
Value-based approach: The cost incurred by the businesses is not core in this method rather how much consumers value a product or service is used to determine price in this approach. Determining exact value to customers is always difficult and for services, it is more difficult.
Cutting-edge pricing approaches
If we want to define cutting-edge approaches of pricing, we'll learn an innovative and advanced way of setting prices. These approaches use real-time data, technologies, and data analytics to optimize pricing.
Dynamic pricing: Dynamic pricing means setting prices considering real-time demand and supply, competitor prices, and market conditions. Airlines and e-commerce businesses frequently use this strategy.
Algorithmic pricing: When the pricing method uses machine learning and artificial intelligence to analyze vast amounts of data and set an optimal price, it's called an algorithmic process. This is the most advanced process of pricing nowadays.
Psychological pricing: Psychological pricing strategies are used to position customers in a way so that they feel they are winning in the trade. We often see that prices are just below the round figure (e.g.,. 999 Taka instead of 1000 Taka). Though the difference is only one take, it makes customers feel that they are getting a product at a low price.
Personalize pricing: If the price is set based on individual customer data, such as purchase behavior and buying history, it'll be called personalize pricing.
Freemium pricing: when basic version of products and services are offered for free to an extent, it is called freemium model but after that extent, subscription based pricing strategy is introduced.
Promotional and Wining Pricing
Promotional pricing is a short-term initiative for sales growth taken by businesses for various purposes, like increasing customer base, increasing sales, remaining competitive, and clearing inventory. Promotional pricing is challenging but if it can be duly done, it brings profitability. Normally, we see that businesses are offering flat discounts on their items. These types of campaigns help in drawing crowds and mass selling, but cause the inventory to deplete soon. Proper management of promotional pricing is necessary to get the best out of it. people generally respond quickly to promotional pricing for the time constraint because most of the offers come with a time limit. Other than this, organizations use various dynamic techniques to boost their sales. The following are examples of dynamic approaches,
Volume discount: Volume discount means giving discounts on large volume purchasing that can influence the buying decision of a buyer by encouraging to buy large volume. Such as, we see businesses selling half kilogram of a vegetable for Taka 50 and one kilogram for Taka 80. It helps businesses to increase their sales volume and customers to buy product or services at a cheaper rate.
Loyalty program: Sometimes, businesses offer loyalty cards to regular customers to incentivize them for their loyalty. A loyalty program is mainly used to increase customer retention and lifetime value. This type of initiative by the businesses reflects how the business is treating its customer base.
Price Discrimination
Price discrimination occurs when a company sells the same product or service at different prices on the basis of customer segment. A company uses this strategy to maximize its revenue by charging customers based on their willingness or ability to pay. The four major types of price discrimination are customer, place, time, and area.
Customer discrimination: Customer discrimination involves charging different prices to different groups of people. For example, student discounts. Companies offer discounted rates to students as students have limited budgets to spend. Many software companies like Microsoft and Adobe provide special pricing to students. This strategy makes their product more affordable as well as it helps build brand loyalty from a young age.
Place Discrimination: Place discrimination involves varying prices based on the location where the product and services are being provided. For instance, rural vs urban pricing. Utility services providing companies charge different rates in rural and urban areas.
Time discrimination: Time discrimination refers to charging different prices at different times. For example, seasonal pricing. Hotels and airlines often use this type of pricing. Prices for flights and accommodations are significantly higher during peak tourist seasons due to higher demand. Conversely, lower during off-seasons due to lower demands.
Area Discrimination: Area discrimination involves varying prices based on different sectors or industries. For example, small industry vs large industry. In some regions, small industries might receive low prices on raw materials and utilities compared to larger industries. It refers to the government's support to encourage the growth of smaller industries.
Price Changes
When a firm adjusts the price of its products or services in response to various internal and external factors such as a firm's strategic goals, market conditions, and cost structure, is considered a price change. A firm may increase or decrease prices based on these factors. A firm must understand when and how it should implement price changes to maintain competitiveness and profitability.
Buyer reactions to price changes
A firm must estimate properly how buyers will react to price changes. There is a high chance for buyers to switch to competitors if there is an increase in price. On the other hand price cuts might attract more customers but it may devalue the brand. The firm must consider the power of buyers, brand loyalty of buyers, and brand value of the firm before setting the price.
Competitor reactions to price changes
since most of the businesses operate in a highly competitive market, they have to consider competitors’ positioning and reaction to price changes. Competitor reactions to price change depend on,
Number of firms: If the market size is small and there are few competitors, any price change is likely to prompt a reaction as each firms closely monitors each other.
Product similarity: Price is a primary condition for homogenous products. A change by one firm can make other firms respond immediately
Buyers’ reach: If buyers have easy access to market, they are likely to response quickly to price change which force competitors to follow suit.
Benefits of Price Changes
Revenue and profit margins: Higher prices can increase revenue per unit sold which can improve the firm’s profitability. This is true for a brand with higher brand value. Lower prices can attract more customers which will increase overall sales volume and market share
Demand management: When demand exceeds supply, a price increase can help the firm manage demand by ensuring proper allocation of resources. On the other hand, when supply exceeds demand, price decreases can help the firm clear excess inventory and improve capacity by stimulating demand.
Competitive position: There is a common perception that higher price means better quality. It can attract customers who perceive this value. If the market is price sensitive, price decrease helps attracting budget conscious customers which give the firm a competitive advantage.
Market penetration: A price increase signals premium positioning and exclusivity whereas as price decrease facilitates new entrance into the market.
Drawbacks of Price Changes
Impact on sales volume: Some customers will switch to alternatives if there is a price increase, which may reduce sales volume. Reduced prices can significantly impact profit margins.
Competitive Response: If there is a price increase, competitors might grab the opportunity to attract price-sensitive customers by maintaining lower prices. On the other hand, price reduction can lead to increased competitive rivalry.
Customer Reaction: Price increases can cause dissatisfaction among customers if they think that the prices are too high which may reduce brand loyalty. Conversely, a price decrease can affect customers who perceive that a lower price means lower quality.
Conclusion
In conclusion, mastering pricing strategies is crucial for any business whether it’s a merchandising business or service providing business. By adopting cutting-edge approaches such as dynamic pricing, algorithmic pricing and psychological pricing, businesses can develop winning strategies that not only attract customers but also maximize profit. Since pricing is one of the most sensitive decisions of the business, the business should continuously monitor market trends and adopt innovative technologies to optimize pricing.
Comentários