Marketing & Pricing
Price: Monetary and Nonmonetary Prices
Price is the assignment of monetary value to a product or service that consumers will pay. Price is important to a firm because it is important in determining profit. There are two forms of price monetary and nonmonetary. Monetary price involves the exchange of money for products and services. Nonmonetary price involves the exchange of something of equal value for a product or service.
Pricing Objectives: Profit, Market Share, Competitive Effect, Customer Satisfaction, and Image Enhancement
Profit pricing objectives involve determining the price of a product or service which maximizes profit without compromising the consumer demand. An example of a profit objective would be to price goods that have short lifecycles high and then to lower the price over time as the cycle comes to a close. This maximizes profit. Market share profit objectives involve pricing goods and services which will gain the largest number of consumers in the market. An example of this pricing can be seen in cable companies that compete with satellite services for the same customers. Often price is not the determining factor but instead, service and packages will help sell market share. Competitive effect pricing objectives involve pricing schemes that are intended to undermine a competitor’s marketing effort. Fast food retailers will use this strategy by offering similar meal deals with close pricing. Customer satisfaction pricing objectives are less focused on price and more on a commitment to quality. This strategy is focused on providing the highest quality of product without compromising quality. An example of this strategy can be seen in the Japanese car manufacturers who are committed to making quality vehicles even when their prices are higher than other manufacturers. Image enhancement pricing is an objective, based on the price creating the appeal due to status. A person who buys a Rolex is buying it to have the prestige of owning the Rolex.
Demand Curves, Demand Shifts, Estimating Demand, Estimating Elasticity
The demand curve for normal products slopes downward and to the right. In contrast to the normal product, prestige products often increase in demand when the price is increased. The demand curve then is backward bending or downward and to the left. Demand shifts are changes in the demand for a product. The product can be measured using the demand curve on the graph. These shifts are important to marketers because they can be used to determine price increases or decreases. Shifts in demand also show the elasticity of a product which can be used to estimate the actual demand of the product.
Break-Even Analysis, Marginal Analysis, Comparative Advantages
The break-even point is the level of sales at which revenue equals expenses and net income is zero. Marketers refer to this as a break-even analysis. It is often an important part of a marketing planning process. It helps marketers predict how their decisions will affect sales, costs, and profit. It is important to remember that by altering one factor in the breakeven analysis other factors can be changed which can cause an undesired effect. The advantage of using this method is that it is relatively easy to estimate an average cost and this provides marketers with a clear goal.
Marketers use another form of analysis called marginal analysis. In this market research the relationship of “marginal cost (the increase in total costs from producing one additional unit of a product) to marginal revenue (the increase in total income or revenue that results from selling one additional unit of a product).” (Solomon, Marshall, & Stuart, 2011) Essentially, this means finding the point where marginal cost equals marginal revenue and not exceeding this point. This method is more complicated than break-even analysis because there are many factors which can impact the cost of production which cannot be estimated.
Using these forms of analysis, firms can determine their comparative advantages or their ability to perform activities more efficiently than competing firms. By realizing comparative advantage, firms can concentrate on the improvement of specific activities to make themselves more competitive.
Recession, Consumers’ Perceptions Of Prices, Inflation Influence Pricing Strategies
Consumer perception of prices during a recession is extremely sensitive. Consumers begin looking for deals. It may appear that prices are rising but in reality, prices begin going down in many cases. Competition becomes stiff in the recession and companies will begin price cutting in order to maintain sales. Pricing strategies are impacted by several factors:
Government regulations- Regulations can raise or lower prices depending on the type of regulation. Healthcare is a good example as the new health care laws will make healthcare more affordable to many people.
Consumer trends- Trends among consumers such as green markets impacts pricing because today many consumers are willing to pay more for green products.
Global environment- The global environment impacts pricing strategies in a variety of ways. Mainly globalization has increased the presence of firms in other countries which has the impact of lowering the cost for consumers with some services. Furniture is mainly imported from China where labor is abundant. This fact has made furniture very inexpensive.
Skimming Pricing, Penetration Pricing, Trial Pricing
Skimming is a good strategy when a firm has little competition or a competitive advantage. Penetration pricing is good when there are many competitors in the market and the company needs to gain market share. A trial pricing is good when a firm is unsure of what the price of a product should be and needs to learn more about the price.
Two-Part Pricing, Payment Pricing, Price Bundling, Captive Pricing, And Distribution-Based Pricing Tactics
Two-part pricing- is a good tactic when it appears that the pricing scheme will save the customer money, e.g., a cell phone is high priced but the monthly rate plan is very low or vice versa.
Payment pricing- this is a good tactic for high priced goods such as cars which can provide the customer with low monthly terms but they end up paying more in the long run.
Price bundling- Price bundling is good when the firm is selling many different products that are related. For instance, if you buy a computer and the company offers a saving by purchasing several units of software that would otherwise be very expensive individually.
Captive pricing- This is a good strategy when two products only work together. For example, a cell phone might be inexpensive but the chargers, cases, and earphones will be very expensive.
Distribution-based- is a good strategy when firms must ship products to customers. They can choose to set one charge or charge for the shipping. This can be used to entice customers such as “free shipping.”
Role of Trade or Functional Discounts, Quantity Discounts, Cash Discounts, and Seasonal Discounts
Marketers use these forms of discounts in order to gain benefits in other areas of profit. The use of seasonal discounts helps to move off-season product lines. In the same way, offering discounts on early payments can help firms improve cash flow.
Psychological Aspects Of Pricing: Quality Inferences, Odd-Even Pricing, Internal Reference Price, Price Lining, and Prestige Pricing
Price-quality is the association of quality with price. For many consumers, the higher the price the more quality the product. In the same respect, low cost is often associated with poor quality.
Odd–even pricing is a strategy that relies on pricing goods using even or odd numbers. An even number pricing is better used when quoting prices but goods sold might be better priced as an odd number to give the appearance the good is less $2.99 rather than $3. Internal reference price refers to the price that consumers feel is the appropriate amount to pay for a product. This is often created through average cost thinking such as a burger costing around $3.50. Price lining is the pricing of products in a specific line with different prices for different types of the same product. A computer that has low memory and no office software will be cheaper than a computer that has high memory and tons of software. Prestige pricing is the pricing of products in order to support the idea that they are highly desired and increase one’s social image. These products like a Rolex are priced high to accomplish this tactic.
Bait and Switch Tactics, Price-Fixing, Predatory Pricing, Loss-Leader Pricing
Unethical marketers use bait- and switch tactics such as offering one product very inexpensively knowing that there is only a limited supply or having aggressive salespeople who attempt to coerce the consumer into purchasing other more expensive products. This practice is similar to loss-leader pricing when a product is marketed at a very low price in order to get consumers in the store. This is sometimes considered unfair and has resulted in unfair sales acts which are laws that prevent these practices. For instance, price-fixing is when companies conspire to maintain certain prices. This is illegal as it reduces the competitiveness of the free market system.
Solomon, M.; Marshall, G.; Stuart, E. Marketing: Real People,Real Choices. Textbook. 7th edition. Pearson Prentice Hall. 2011. ISBN 978–0–13–217684–2