PRICING STRATEGIES AND METHODS/PRICE DETERMINANTS
WHAT IS PRICE?
Price represents the value of a good or service. It is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller). In order words, a price is the amount of money that a buyer gives to a seller in exchange for a good or a service. When someone hands over N200.00 and receives a liter of oil, the price is straightforward observation: N200.00 per liter.
Price is commonly confused with the notion of cost as in “I paid a high cost for buying my new plasma television.” Technically, though, these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost concerns the seller’s investment (e.g., manufacturing expense) in the product being exchanged with a buyer. For marketing organizations seeking to make a profit the hope is that price will exceed cost so the organization can see financial gain from the transaction.
PRICING STRATEGIES OR METHODS
There is no “one right way” to calculate your pricing. Once you’ve considered the various factors involved and determined your objectives for your pricing strategy, you need some ways to crunch the actual numbers. Here are five ways to calculate prices.
Cost-plus pricing
Set the price at your production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin. For example, your product costs N20 per unit in raw materials and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs come to N30 per unit. Your total cost is N50 per unit. You decide that you want to operate at a 20% markup, so you add N10 (20% x N50) to the cost and come up with a price of N60 per unit. So long as you have your costs calculated correctly and have accurately predicted your sales volume, you will always be operating at a profit.
Target return pricing
Set your price to achieve a target return-on-investment (ROI). For example, let’s use the same situation as above, and assume that you have N10, 000 invested in the company. Your expected sales volume is 1,000 units in the first year. You want to recoup all your investment in the first year, so you need to make N10, 000 profit on 1,000 units, or N10 profit per unit, giving you again a price of N60 per unit.
Value-based pricing
Price your product based on the value it creates for the customer. This is usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is “pay for performance” pricing for services, in which you charge on a variable scale according to the results you achieve.
Let’s say that your product above saves the typical customer Nl, 000 a year in, say, energy costs. In that case, N60 seems like a bargain – maybe even too cheap. If your product reliably produced that kind of cost savings, you could easily charge N200, N300 or more for it, and customers would gladly pay it, since they would get their money back in a matter of months.
Price says something about the product. For example, many consumers use price to judge quality. A J4100 bottle of perfume may contain only J43 worth of scent, but some people are willing to pay the N100 because this price indicates something special.
Haggling
Haggling or bargaining is a type of negotiation in which the buyer and seller of a good or service dispute the price which will be paid and the exact nature of the transaction that will take place, and eventually come to an agreement.
PRICE DETERMINANTS
There are many factors influencing pricing decisions which Tanner & Raymond (2012) groups into four as follows: customer’s ability to pay, competitors, quality of the product, as well as product costs.
Customers ability to pay
Will the customers be able to pay for the product? Three important factors are whether the buyers perceive the product offers value, how many buyers there are, and how sensitive they are to changes in price. Will customers buy the product, given its price? Or will they believe the value is not equal to the cost and choose an alternative or decide they can do without the product or service? Equally important is how much buyers are willing to pay for the offering. Figuring out how consumers will respond to prices involves judgment as well as research.
Competitors
How competitors price and sell their products will have a tremendous effect on a firm’s pricing decisions. If you wanted to buy a certain pair of shoes, but the price was 30 percent less at one store than another, what would you do? Because companies want to establish and maintain loyal customers, they will often match their competitors’ prices. Some retailers will give you an extra discount if you find the same product for less somewhere else. Similarly, if one company offers .; free shipping, you might discover other companies will, too. With so many products sold online, consumers can compare the prices of many merchants before making a purchase decision.
Quality of the product
The quality of a product is a major factor in the determination of the price of a product as highly qualitative products are usually priced higher than low quality substitutes. For certain products, it is very essential that the buyer know what he is buying due to the standardized nature of the products. This calls for grading of the product according to quality such that different grades of the product will have different prices, for example, cocoa, cotton etc. Differences in quality among products therefore usually lead to differences in pricing.
Product Costs
The costs of the product—its inputs—including the amount spent on product development, testing, and packaging required have to be taken into account when a pricing decision is made. So do the costs related to promotion and distribution. For example, when a new offering is launched, its promotion costs can be very high because people need to be made aware that it exists.
Profit maximization
Many businesses would choose the price that maximizes their current profit. This is because they are in business in the first place to make profit.
SUMMARY
A price is the amount of money that a buyer gives to a seller in exchange for a good or a service. In general terms price is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller). Yet this view of price provides a somewhat limited explanation of what price means to participants in the transaction. In fact, price means different things to different participants in an exchange. Let us look at the views of the buyer and the seller.
There is no “one right way” to calculate your pricing. Once you’ve considered the various factors involved and determined your objectives for your pricing strategy, now you need some way to crunch the actual numbers. Here are four ways to calculate prices: Cost-plus pricing, Target return pricing, Value-based pricing, Psychological pricing, and haggling.
There are many factors influencing pricing decisions. The common ones are group into four as follows: customers, competitors, the quality of the product, product costs, as well as profit maximization.
Related Readings
Price In Nigeria
Pricing Decision In The Marketing Mix
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