This article will focus on how marketing professionals develop pricing strategies for their organizations. There will be a review of the guidelines that these individuals process in order to determine the optimal pricing structure for each product or service. The different types of potential pricing strategies (i.e. entrepreneurial, penetration, premium) will be explored. The concept on international countertrade as it relates to pricing will also be introduced.
Keywords Entrepreneurial Pricing; International Countertrade; International Markets; Penetration Pricing; Predatory Pricing; Premium Pricing; Price Skimming; Pricing; Pricing Strategies
Marketing: Pricing Strategies
Pricing is one of the four aspects (product management, pricing, promotion and place) in the marketing mix, and directly effects how a product is positioned in the market. It should take into consideration fixed and variable costs, competition, organizational objectives, proposed positioning strategies, target groups and their willingness to pay the price. When an appropriate price is selected, it should (1) assist the organization in reaching its financial goals, (2) be a realistic price for the target market, and (3) be cohesive with other marketing mix components as well as with product positioning. Many organizations have utilized various factors when determining the pricing strategies for their products and services. However, there are some general guidelines that all share. For example, the marketing representatives may go through a series of steps such as:
- Create a marketing strategy: This entails conducting a market analysis, product segmentation, targeting and positioning.
The team will have to determine the mix of each aspect of the marketing mix formula. The first step will be to develop a marketing strategy for the product or service. At this point, a decision is made as to who the target market will be and how the product will be positioned. Another factor will be based upon the response to "is pricing going to be a key point of the positioning?" For example, if the product is going to be sold on eBay, the company may consider researching how other companies have set up a pricing structure for the same or similar items.
2. Determine the proper marketing mix: Involves product definition, distribution and promotion.
There will be trade offs between the variables in the marketing mix. Pricing will be based on other decisions that have been made in the areas of distribution and promotion. For example, is the expectation to sell a small number of luxury items at high prices so that the product becomes a rare, unique commodity?
3. Be aware of the demand curve: Determine how price affects the quantity demanded.
There tends to be a relationship between price and quantity demanded. Therefore, the marketing team will attempt to estimate the demand curve for the product or service since pricing impacts sales. The first step will be to conduct market research to find out if price will have an effect on the demand for the product. If the product already exists, the marketers may want to survey whether or not the market will accept prices above and below the current price. The results will give the marketing team an idea of the price elasticity of demand for the product.
4. Determine cost of product: Calculate a products’ associated fixed and variable costs.
Once it has been determined that the product will be launched, the marketing team will need to understand all of the costs involved. Therefore, they will need to calculate the fixed and variable costs associated with the product or service, which is referred to as the total unit cost. The unit cost of the product determines how much is needed in order to break even. Any price set higher than this could help set the profit margin.
5. Understand environmental factors: Evaluate potential responses from competitors and understand legal constraints.
The marketing team should find out if there are any legal restraints on pricing. For example, offering different prices to different consumers can lead to cases of price discrimination. There may be legislation that dictates how high the price can go. Also, there are laws that prevent predatory pricing, especially in the international trade market.
6. Set pricing objectives
There are a variety of ways to set the pricing objectives. Some of the most popular objectives include:
- Profit Maximization — By taking into consideration revenue and costs, this objective seeks to maximize current profits.
- Revenue Maximization — This objective does not take profit margins into consideration when attempting to maximize current revenue.
- Maximize Quantity — The reduction of long-term costs can be achieved by maximizing product or service sales.
- Maximize Profit Margin — In a situation where quanitity of sales will be low, unit profit margins can be increased to foster greater returns.
- Differentiation (Quality Leadership) — This objective looks at the difference in price when determining the target market. While some companies may seek to be the low-cost leader, others will highlight quality as the justification for higher prices. For example, a consumer would expect to pay a high price for a Prada handbag.
- Survival — This objective is successful when there is a crisis in the marketplace. For example, the market may be experiencing a price war, market decline or market saturation. Therefore, the company may be forced to temporarily set a lower price that will cover costs and allow the business to continue to operate in order to survive. In this type of situation, survival is more important than profits.
- Partial Cost Recovery — An organization may seek only partial cost recovery if it has other sources of income.
Some of the most classical pricing strategies are:
- Price Skimming: When the product is introduced, the organization will set a high price in order to attract customers who are not sensitive to price. However, the prices will eventually fall due to an increase in supply, especially from competitors. This strategy is most appropriate when (1) customers are not sensitive to price, (2) there is no expectation of large cost savings at high volumes, and (3) the organization cannot produce high volumes of its product at low profit margins.
- Penetration Pricing: When the product is introduced, the price is set low in order to gain market share. Once market share has been obtained, the prices are increased. This strategy tends to be used by companies attempting to enter a new market or desiring to build a small market share. A penetration strategy may also be used when a company wants to promote complimentary products. The main product is set at a low price in order to get customers to buy the accessories, which are sold at higher prices.
- Economy Pricing: This strategy is considered the "no frills" approach. The cost of marketing and manufacturing are kept low. An example is store brand products or generic drugs.
- Premium Pricing: When the product is unique and the company has a competitive advantage, a high price can be set.
- ine pricing: Using the information acquired through the steps above, define a pricing method, pricing structure and discounts.
Once the prices have been set, the marketing team may employ one or more of the following pricing methods in order to achieve their goals.
- Cost-plus pricing — The price arrived at by adding the production costs and a selected profit margin.
- Target return pricing — Price set so as to recognize a certain return on investment.
- Value-based pricing — A price is set based on the notion that a customer will pay in accordance to the perceived value to the customer versus the cost of an alternative product. Caminal and Vives (1996) research showed that "a higher current market share can be interpreted by future consumers...
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