Price can be defined as the sum of the values that customers exchange for the benefits of having or using the product or service. It is the only marketing mix item that produces revenue; all other elements represent costs. Even so, many companies are not good at handling pricing. Pricing decisions are subject to an incredibly complex array of environmental and competitive forces.
Factors that affect pricing decisions
External factors that influence pricing decisions include the nature of the market and demand; competitors costs, prices, and offers; such as the economy, reseller needs, and government actions. The sellers pricing freedom varies with different types of markets. Ultimately, the consumer desides whether the company has set the right price. The consumer weighs the price against the perceived values of using the product -- if the price exceeds the sum of the values, consumers will not buy. Therefore, demand and consumer value perceptions set the ceiling for prices. Consumers also compare a product price to the prices of competitors product. As a result, a company must learn the price and quality of competitors offers.
Many internal factors influence the companies pricing decisions, including the firm's marketing objectives, marketing mix strategy, costs, an organization for pricing. Common pricing objectives include survival, current profit maximization, marketshare leadership, and product quality leadership. The pricing strategy is largely determined by the company's target market and positioning objectives. Pricing decisions affect and are affected by product design, distribution, and promotion decisions and must be carefully coordinated with these other marketing mix variables. Costs set the floor for the companies price -- the price must cover all of the costs of marketing and selling the product, plus a fair rate of return. Finally, in order to coordinate pricing goals and decisions, management must decide who within the organization is responsible for setting price.
Factors that affect pricing decisions
External factors that influence pricing decisions include the nature of the market and demand; competitors costs, prices, and offers; such as the economy, reseller needs, and government actions. The sellers pricing freedom varies with different types of markets. Ultimately, the consumer desides whether the company has set the right price. The consumer weighs the price against the perceived values of using the product -- if the price exceeds the sum of the values, consumers will not buy. Therefore, demand and consumer value perceptions set the ceiling for prices. Consumers also compare a product price to the prices of competitors product. As a result, a company must learn the price and quality of competitors offers.
Many internal factors influence the companies pricing decisions, including the firm's marketing objectives, marketing mix strategy, costs, an organization for pricing. Common pricing objectives include survival, current profit maximization, marketshare leadership, and product quality leadership. The pricing strategy is largely determined by the company's target market and positioning objectives. Pricing decisions affect and are affected by product design, distribution, and promotion decisions and must be carefully coordinated with these other marketing mix variables. Costs set the floor for the companies price -- the price must cover all of the costs of marketing and selling the product, plus a fair rate of return. Finally, in order to coordinate pricing goals and decisions, management must decide who within the organization is responsible for setting price.
Initiating and responding to price changes
When a firm considers initiating a price change, it must consider customers and competitors reactions. There are different implications in initiating price cuts and initiating price increases. Buyer reactions to price changes are influenced by the meaning customers see in the price change. And competitors reactions flow from a set reaction policy or a fresh analysis of each situation. There are also many factors to consider when responding to a competitors price changes. The company that faces a price change initiated by a competitor must try to understand the competitors intend as well as the likely duration and impact of the change. If a swift reaction is desirable, the firm should preplan its reactions to different possible price actions by the competitors. When facing a competitors price change, the company might sit tight, reduce its own price, raise perceived quality, improve quality and raise price, or launch a fighting brand.
Companies are not usually free to charge whatever prices they wish. Many federal, state, and even local laws governing the rules of fair play in pricing. The major public policy issues in pricing include potentially damaging pricing practices within a given level of the channel (price-fixing and predatory pricing) and across levels of the channel (retail price maintenance, discriminatory pricing, and deceptive pricing).
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