“When selling a good, price is the single most important factor”

University Degree Business and Administrative studies

“When selling a good, price is the single most important factor”

Price is one part of marketing mix. It used to deciding what price should the firm charge on each product to cover its fixed and variable costs. Before introducing a good into the market, a firm must consider about price of its product. In deciding upon a price a business must find out something about the quantities that they are likely to be able to sell at different prices. This information may be found though market research, or by experimenting – trying out different prices to see now customers react. Imagine that a business has obtained the following information about the qualities that customers will be willing to buy at different prices.

The factors that should be considered before deciding the price of product are shown below:

What are our objectives as a business? Is it aiming for a large market share (mass production/market penetration) or a niche market (market skimming)
What about the rest of the marketing mix? Price is not the only element of the marketing function. The pricing method chosen must be compatible with the decisions made concerning the product itself, promotion.
What market segment(s) is the product aimed at? Clearly, if mass production aimed at socio-economic groups C and D is the target, a relatively low, competitive price must be chosen.
How much does it cost to produce the product? Although the product may not be priced using a cost plus method there is little point in selling it unless price covers costs and a profit can be made.
What price is being charged by our competitors?
How much does it cost us to produce the product?
What are the expectations and perceptions of consumers? A premium brand such as Nike can charge premium prices because consumers expect prices to be high.
Price, must be considered alongside the other Ps. (i.e. think of the whole marketing mix)
Are there any legal restrictions on the price we can choose? This will not usually be the case, but there could be a minimum price laid down by government.
Where is the product in its lifecycle? Newly introduced products may command a premium price during the growth stage, may have to price more in line with growing competition during the mature stage, and may be priced lower as an extension strategy during the decline stage.

Pricing Strategy

There are basically two types of strategy.

Market Orientated Pricing Strategy.
Product Orientated or Cost – based pricing strategy.

1) Market Orientated Pricing Strategy

The main strategies are as follow:

A) Market Penetration

This means setting a relatively low price with the aim of gaining a large market shares. The project margin on each unit sold will be small, but the volume of sales will be large. The product may be aimed at more than one market segment, or even at the market as a whole.

B) Market Skimming

This means setting a ...

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Pricing Strategy

There are basically two types of strategy.

Market Orientated Pricing Strategy.
Product Orientated or Cost – based pricing strategy.

1) Market Orientated Pricing Strategy

The main strategies are as follow:

A) Market Penetration

B) Market Skimming

This means setting a high price, but only aiming for a limited market share (or targeting one particular market segment – this could be a niche market). Volume of sales is small, but the profit margin on each unit sold is high. New products are often priced in this way.

C) Predatory Pricing (Destroyer Pricing)

This is the most aggressive pricing policy. Prices are deliberately set well below those of major competitors with the aim of increasing market share and possibly forcing other businesses out of the market.

D) Discounts/Sales

This is a temporary pricing policy. Goods/Services are sold at reduced prices for a limited period of time. This is usually done to increase stock turnover. (i.e. sell stock that they have had for some time to make way for new stock – especially important for clothes retailers). It can also be used to increasing cash flow at quite time of the year.

E) Price Discrimination

This means charging different prices to different customers for the save product (e.g. Telephone calls are priced at different prices for flights at peak times of the day. Airtimes charge higher prices for flight at peak times of the year. Students and retired people may pay lower prices than others.

F) Psychological Pricing

This means changing a price that appeal to customers (e.g. a price of 199 baht sound like a better deal than 200 baht and $5.99 feels cheaper than $600. Supermarket regularly uses this method of pricing to attract customers.

G) Perceived Pricing (Customer Value)

Some businesses will charge the price that they believe that customers expect to pay. This is a premium brand (e.g. Nike) can charge a premium price. Many consumers equate price with quality – the higher the price, the higher the quality.

H) Loss- Leader

This involves selling some products at a loss in order to build a brand loyalty or encourage customers to buy other product in the store. Supermarket often has loss-leader located in different parts of the store.

I) Competitive Pricing

This simply means setting a price close to or slightly below of competitors. It is sometimes called going-rate pricing and is simple relative safe.

2) Product Orientated Pricing Policies

This involved some form of cost-plus pricing (i.e. calculating the average cost of producing the product, adding on a profit margin, and arriving at a selling price.

A more sophisticated approach is to use the contribution method. Each product will be priced in such a way as to cover its variable costs of production, but the price will also contribute towards the fixed costs. This means that each product from the marketing mix will be making a different contribution towards the fixed costs of the business. When a product is first introduced it will often be priced quite high and its contribution towards fixed costs will be large. (This, in past, is to help reclaim the costs of developing and launching the product). During the saturation and decline stages of its life cycle most products will contribute little towards the fixed cost and will command lower price.

What makes the price increase and decrease?

If demand of cell phones has increased, the price of cell phone will increase too. Because lots of consumers willing to buy them and the demand is more supply. Then a firm tries produce more with a higher price. Also the retailers will have an opportunity to increase the price in order to gain more profits.

If there are lots of competitions in the market and there are many producers, the price of goods will decrease because the supply is more than demand. The competition of good will increase and makes the price decrease because the retailers lowering prices to attract business: a situation in which companies attempt to win customers away from their competitors by lowering the prices of their goods or services.

Price Elasticity of Demand

If a business raises or lowers than price of its product, how much will demand (sales) change? i.e. how responsible is demand (sales) to a price change? This can be calculated using the following formula:

Price Elasticity of Demand = % change in quality demanded

% change in price

A value of elasticity of more than 1 means that demand is Elastic. If price is changed there will be a large in demanded (sales) e.g. if the value of elasticity is 1.14, it tells us that a 1% change in price will cause a 1.4% change in demand. This will tend to be the case in competitive markets where are many brands. A business that lowers its price will gain extra revenue, but the business that raises its price will lose revenue.

If the value of elasticity is less than 1, demand is inelastic. If price is changed there will be a smaller change in demand (sales). If the value of elasticity is 0.57% it tells us that a 1% change in price causes only a 0.87 change in demand (sales). This will tend to be case in less competitive markets where customers have less choice of brands. A business that lowers its price will lose revenue, but the business that raises its price will gain extra revenue.