Pricing

Objectives of pricing

The objectives of pricing should consider:

• the financial goals of the company (ie profitability)
• the fit with marketplace realities
• the extent to which the price is a product of market positioning and the other variables in the marketing mix

Price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product. Where manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and campaigns . Price can act as a substitute for product quality, effective promotions, or an energetic selling effort by distributors in certain markets.

From the marketer’s point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumer economic surplus to the producer. A good pricing strategy would be the one that could not be compared to the price ceiling and the price ceiling (the price by which the organization experiences a no-demand situation).

Pricing strategies

Marketers develop an overall pricing strategy that is consistent with the organization’s mission and values. This pricing strategy is part of the company’s overall long-term strategic plan. The strategy is designed to provide guidance to price-setters and ensures that pricing is consistent with other elements of the marketing plan. While the pricing approach is still in place, the pricing approach is typically 3-5 years, but in some industries may be a longer period of 7-10 years.

Broadly, there are six approaches to pricing strategy in the literature:

Operations-oriented pricing : where the objective is to optimize productive capacity, to achieve operational efficiencies or to match supply and demand. In some cases, prices may be set to de-market. ^[1]

Revenue-oriented pricing: (Also Known As profit-oriented pricing or cost-based pricing ) – Where the marketer seeks to maximize the profits (ie, the excess income over costs) or simply to cover costs and break even . ^[1]For example, dynamic pricing (also known as yield management) is a form of revenue oriented pricing.

Customer-oriented pricing : where the objective is to maximize the number of customers; encourages cross-selling opportunities or recognizing different levels in the customer’s ability to pay. ^[1]

Value-based pricing : (also known as image-based pricing ) where the company uses the market value of the price of the product. The aim of value-based pricing is to reinforce the overall positioning of the market. ^[2] [3]

Relationship-oriented pricing : where the marketer sets prices in order to build or maintain relationships with existing or potential customers. ^[4]

Socially-oriented pricing : Where the objective is to encourage or discourage specific social attitudes and behaviors. eg high tariffs on smoking. ^[5]

Pricing tactics

When decision-makers have determined the pricing approach, they turn their attention to pricing tactics. Tactical pricing decisions are shortened, designed to achieve specific short-term goals. The tactical approach to pricing may vary from time to time, depending on a range of internal considerations (eg, such as the need to clear surplus inventory) or external factors (eg a response to competitive pricing tactics). Accordingly, a number of different pricing tactics may be employed in the course of a single period or a single year. Typically line managers are given the latitude to operate in the broad strategic approach. For example, some premium brands never offer discounts because of the low prices. Instead of discounting, premium brands are more likely to offer price-bundling or give-aways.

When setting individual prices, decision-makers require a solid understanding of pricing economics, notably break-even analysis , ^[6] as well as an appreciation of the psychological aspects of consumer decision-making Including booking prices , ceiling prices and floor prices . The marketing literature identifies literally hundreds of pricing tactics. ^[7] It is difficult to do justice to the variety of tactics in widespread use. Rao and Kartono are the most widely used. ^[8] The following list is largely based on their work.

ARC / RRC Pricing

A traditional tactic used in outsourcing that uses a fixed fee for a fixed volume of services, with variations on fees for volumes above or below target thresholds. Charges for additional resources (“ARCs”) above the threshold are more likely to be subject to marginal cost of additional production plus a reasonable profit. Credits (“RRCs”) for the purpose of reducing the amount of money provided to the customer by the customer. ^[9] [10]

Complementary Pricing

Complementary pricing is a collective term used to describe `captive-market ‘pricing tactics. It relates to a method of printing, while the complementary product is a prerequisite to maximizing sales volume. shortfall sustained by the first product. ^[11]

Contingency Pricing

Contingency pricing describes the process where a fee is only a contingent on certain results. Contingency pricing is widely used in professional services and legal services. ^[12] In the United Kingdom, a contingency fee is known as a conditional fee. ^[13]

Differential pricing

Differential pricing is also known as flexible pricing , multiple pricing or price discrimination . ^[14] There are various forms of price difference including: the type of customer, ordered quantity, delivery time, payment terms, etc.

Discrete pricing

Discrete Pricing is a product of the decision making process (DMU). ^[15] This method of pricing is often used in B2B contexts where the purchasing officer may be authorized to carry out a commissioning process.

Discount pricing

Discount pricing is where the marketer or retailer offers a reduced price. Discounts in a variety of forms – eg, rebates, loyalty rebates, seasonal discounts, periodic gold random discounts etc. ^[16]

Diversionary pricing

Diversionary Pricing is a variation of loss management used extensively in services; a low price is a basic service with the intention of recouping on the extras; can also refer to the prices of some parts of the service to develop an image of low price.

Everyday low prices (EDLP)

Everyday low prices refers to the practice of maintaining a regular rate of duty in which consumers are not forced to wait for discounting or specials. This method is used by supermarkets. ^[17]

Exit fees

Exit Fees refer to a price for customers who leave the service process. The objective of exit is to deter premature exit. ^[18] Exit fees are often round in financial services, telecommunication services and aged care facilities. Regulatory authorities, around the globe, have often expressed their views on the subject of competition, and have expressed the view that ^[19]

Experience curve pricing

Experience curve pricing is a product or service with a low rate in order to obtain volume and with the expectation that the cost of production will decrease with the acquisition of manufacturing experience. Ce qui est approach Often used in the pricing of high technology products and services, is based on the insight That manufacturers learn to trim output costs over time in a phenomenon Known As experience effects . ^[16]

Geographic pricing

See also Big Mac Index

Geographic pricing is one of different geographic markets for a single product. ^[16] For example, publishers often make text-books available at a lower price than average rates.

Guaranteed pricing

Guaranteed pricing is a variant of contingency pricing. It refers to the practice of having an undertaking or promise that certain results or outcomes will be achieved. For instance, some business consultants to improve productivity or profitability by 10%. In the event that the result is not achieved, the client does not pay for the service. ^[20]

High-low pricing

High-low pricing refers to the practice of providing goods at a high price for a period of time, followed by a low price for a time. This practice is widely used by chain stores selling homewares. The main disadvantage of the high-low tactics is that consumers tend to become aware of the low prices and low cost cycle. ^[21] [22]

Honeymoon pricing

Honeymoon Pricing refers to the practice of using a low introductory price. The objective of honeymoon pricing is to “lock” customers into a long-term association with the vendor. This approach is Widely used in situations Where customer switching costs are high Relatively Such As in home loans and financial investsments. ^[23]

Loss leader

A loss leader is a product that has a price set below the operating margin . Loss leadering is widely used in supermarkets and retail outlets where the store is built. The low price is being promoted and is being reduced to a small loss on an individual item, with an expectation that it will be reduced to a higher rate. In service industries, loss leadering can refer to the practice of charging prices on the first order as an inducement and with anticipation of charging higher prices to subsequent orders.

Offset pricing

Offset pricing (also known as diversionary pricing ) is the service industry’s equivalent of loss leadering. A service can be expected that it can recoup any losses by cross-selling additional services. For example, a carpet steam cleaning service may be used, but charges for more rooms, furniture and curtain cleaning. The operator may also try to provide additional services such as spot-cleaning products, or stain-resistant treatments for fabrics and carpets. ^[12]

Parity pricing

Parity pricing refers to the process of pricing a product at or near a competitive price.

Price bundling

Price bundling (Also Known As product bundling OCCURS Where two or more products or services are priced as a package with a single price There are Several kinds of bundles. Pure bundles Where the goods can only be purchased this as gold package mixed bundles Where the goods The prices of the bundle are typically smaller than when sold separately. ^[24]

Peak and off-peak pricing

Peak and off-peak pricing is a form of price discrimination where the price is due to some type of seasonal factor. The objective of peak and off peak pricing is to be used for even more peaks and troughs in demand. Peak and off-peak pricing is widely used in tourism, and also in utilities. Peak pricing HAS caught the public’s imagination since the ride-sharing service provider, Uber, commenced using surge pricing and HAS Sought to patent the technologies That supporting this approach. ^[25]

Price discrimination

Price discrimination is also known as variable pricing or differential pricing .

Price lining

Price lining is the use of a limited number of prices for all products offered by a business. Price lining is a tradition started in the old five and dime stores in which everything cost 5 or 10 cents. In price lining, the price remains constant but quality of product. The Underlying rationale of this tactic Is That thesis water equivalent are seen as suitable price point for a whole ranks of products by prospective customers. It has the advantage of ease of administration, but the disadvantage of inflexibility, particularly in times of inflationor unstable prices. Price where the rack is priced at $ 10, $ 20 and $ 40.

Penetration pricing

Penetration pricing is an approach that can be considered at the time of market entry. In this approach, the price of a product is initially set low in an effort to penetrate the market quickly. Low prices and low margins also act as a deterrent, preventing potential rivals from entering the market since they would have to undercut the low margins to gain a foothold. ^[26]

Prestige pricing

Prestige pricing is also known as a premium pricing and sometimes luxury pricing or high price maintenance refers to the deliberate pursuit of a high price

Price signaling

Price signaling is where the price is used as an indicator of some other attribute. For example, some travel resorts, the kids stay for free. This type of pricing is designed to signal that the resort is a family friendly operation.

Price skimming

Price skimming , also known as skim-the-cream pricing is a tactic that might be considered at market entry. The objective is to charge back to the cost of product development early in the life cycle and before competitors of the marktet. ^[26]

Promotional pricing

Promotional pricing is a duty of payment at a lower rate than for full service. Promotional pricing is sometimes a reaction to unforeseen circumstances. or when competitive activity is making inroads into market share or profits. ^[27]

Two-part pricing

Two-part pricing is a variant of captive-market pricing used in service industries. Two parts pricing breaks the price of two parts; a fixed service fee plus a variable consumption rate. Two-part pricing tactics are widely used by utility companies such as electricity, gas and water and services where there is a quasi-membership type relationship, credit cards where an annual fee is charged and theme parks the customer pays for rides and extras. One part of the price represents a membership fee or joining fee, while the second part represents the usage component. ^[28]

Psychological pricing

Psychological pricing is a range of tactics designed to have a positive psychological impact. Price tags using the terminal digit “9” ($ 9.99, $ 19.99 or $ 199.99) can be used to signal price point and bring an item in at just under the consumer’s reservation price . Psychological pricing is widely used in a variety of retail settings. ^[29]

Premium pricing

Premium pricing (also called prestige pricing ^[30] ) is the strategy of consistently pricing at, or near, the high end of the price range. The high pricing of a premium product is used to enhance and reinforce a product’s luxury image. Examples of companies which partake in premium pricing in the marketplace include Rolex and Bentley . As well as brand, product attributes such as eco-labeling and provenance (eg ‘certified organic’ and ‘product of Australia’) may add value for consumers ^[31] and attract premium pricing. A component of such premiums may reflect the increased cost of production. People will buy a premium product:

• They believe the high price is an indication of good quality
• They believe it to be a sign of self-worth – “They are worth it;” it authenticates the buyer ‘s success and status; it is a signal to others that the owner is a member of an exclusive group
• They require flawless performance in this application – The cost of product is the best of the best – for example, a heart pacemaker.

The old association of luxury being for the kings and queens of the world is almost non-existent in today’s world. People have become wealthier, hence the mass marketing phenomenon of luxury has become a part of everyday life. ^[32] Since they have a larger source of disposable income, they need to meet their aspirational needs. This phenomenon enables premium pricing opportunities for marketers in luxury markets. ^[33]Luxurification in society can be seen in the marketplace, where it is possible to pay a premium for a service or product of the highest quality when compared with similar goods. Examples of this type of product Charging a premium price for a product also makes it more inaccessible and helps it gain an exclusive appeal. Luxury brands such as Louis Vuitton and Gucci are more than just a symbol. (Yeoman, 2011).

Prestige goods are usually sold by companies that have a monopoly on the market and a competitive advantage. They are able to pay a premium for goods, and they are able to spend more on advertising and promotion. ^[34]According to Han, Nunes and Dreze (2015) are “two groups of people” who are more likely to be “passive” and “positive”. buy on a need to reach a higher status or gain a social prestige value. ^[35]Further market research shows the role of ownership in consumer’s lives People associate high priced items with success. (Han et al., 2010). Marketers understand this concept, and price points to a premium to create the illusion of exclusivity and high quality. Consumers are likely to purchase a product at a higher price than they are in the market. (Han et al., 2010).

A price premium can also be used when purchasing eco-labeled products. Market based incentives are given in order to encourage people to practice their business in an eco-friendly way. ^[36]MSC’s fishery certification program and seafood ecolabel rewarding those who practice sustainable fishing. Pressure of environmental groups has caused the implementation of associations such as these, rather than consumers demanding it. The value of the consumer can not be reduced to a higher price than a non-eco-labeled product. This means that producers have some sort of incentive for eco-labeling. Usually more costs are incurred when practicing sustainable business, and charging is more expensive. ^[37]

Methods of setting prices

Demand-based pricing

Demand-based pricing , also known as dynamic pricing , is a pricing method that uses demand-based on perceived value as the central element. These include price skimming , price discrimination and yield management , price point , psychological pricing , bundle pricing , penetration pricing , price lining, value-based pricing , geo and premium pricing.

Pricing factors are manufacturing cost, market place, competition, market condition, quality of product.

Price modeling using econometric techniques can help measure price elasticity , and computer based modeling tools More sophisticated tools help determine price at the SKU level across a portfolio of products. Retailers will optimize the price of their private label SKUs with those of National Brands.

An example of demand-based pricing is the Uber car-ride services company’s use of an automated algorithm pour augmenter prices to “surge price” levels, Responding to Rapidly exchange of supply and demand in the market. By responding in realtime, an equilibrium between demand and supply of drivers can be approached. ^[38] [39] Customers receive notice when making an Uber reservation that prices have increased. ^[38] The company applied for a US patent on surge pricing in 2013, although they are known to be in the same position. ^[40] [41]

The practice has many causes as a result of holidays, inclement weather, natural disasters or other factors. ^[42] During New Year’s Eve 2011, Uber prices were as high as seven times normal rates, causing outrage. ^[43] During the 2014 Sydney hostage crisis , Uber implemented surge pricing, resulting in up to four times normal charges; while it defended the surge pricing at first, it later apologized and refunded the surcharges. ^[44] Uber CEO Travis Kalanick said: “… because this is so new, it’s going to take some time to accept it.^[43] [45]

Multidimensional pricing

Multidimensional pricing is the pricing of a product or service using multiple numbers. In this practice, but not limited to a single monetary amount (eg, sticker price of a car), but rather consists of various dimensions (eg, monthly payments, number of payments, and a downpayment). Research has shown that this practice can significantly influence consumers’ ability to understand and process information. ^[46]

Micromarketing

Micromarketing is the practice of tailoring products, brands ( microbrands ), and promotions to meet the needs and wants of microsegments within a market. It is a type of market that makes it possible to have a price tag for the customer.

Theoretical considerations in pricing

Price / quality relationship

The price / quality relationship refers to consumers’ perceptions of value. High price is often taken as a sign of quality, especially when the product or service is lacking. ^[48] Understanding consumers’ perceptions of the price quality relationship is most important in the field of testing and testing, and that they are not tested until used (such as most services). The greater the uncertainty surrounding the product, the more consumers depend on the price and quality of the premium they may be prepared to pay.

Consumers can have different perceptions on premium pricing, and this factor makes it important for the marketer to understand consumer behavior. According to Winemaker and Johnson’s figure on “Prestige-Seeking Consumer Behaviors”, Consumers can be categorized into four groups. These groups being; Hedonist & Perfectionist, snob, bandwagon and veblenian. ^[49] These categories rank of level of self-consciousness, to importance of price as an indicator of prestige. The Veblen Effect explains how to make these decisions based on conspicuous value. This shows they are likely to make the purchase of power, status and wealth. ^[50]Consumers that fall under the “Snob Effect” can be described as, and will buy only, those products that have been purchased. They will also avoid purchasing products made up of a general mass of people. (Vigneron & Johnson, 1999). The bandwagon effect explains that it is a social group, and that it is perceived to be a social gain. Research shows that people will often be in a position to be a member of the group. Paying a premium price for a product can act as a way of gaining acceptance, due to the pressure placed on them by their peers. The Hedonic Effect can be described as a certain group of people whose purchasing decisions are not affected by the status and exclusivity of a product at a premium, nor susceptible to the fear of being left. Consumers who have thought about this category of perceived emotional value, and gains intangible benefits such as sensory pleasure, aesthetic beauty and excitement. Consumers of this type have a higher interest on their own wellbeing. (Vigneron & Johnson, 1999). The last category on Winemaker and Johnson’s figure of “Prestige-Seeking Consumer Behaviors” is the perfectionism effect. Prestige brands are expected to show high quality, and it’s this reassurance of the highest quality that can actually enhance the value of the product. According to this effect, those that make this group value higher than the other brands. Research has indicated that consumers perceive the quality of a product to be relational to its price. Consumers often believe a high price of a product indicates a higher level of quality.

Even though it is suggested that they should be more likely to make their own judgments. ^[49] They can also use the price as an indicator of the level of quality.

Price sensitivity and consumer psychology

In Their book, The Strategy and Tactics of Pricing , Thomas Nagle and Reed Holden outline nine laws or factors That influences how a consumer perceives a Given price and how price-sensitive s / he is Likely to be with respect to different purchase decisions: ^{[ 51] [52]}

• Reference price effect : price comparison for the price relative to perceived price. Perceived alternatives can vary by buyer segment, by occasion, and other factors.
• Difficult comparison effect Buyers are less sensitive to the price of a known / more reputable product when they have difficulty comparing it to potential alternatives.
• Switching costs effect : The higher the product-specific investment a buyer must make the switch suppliers, the less price sensitive that buyer is when between alternatives.
• Price-quality effect : Buyers are less sensitive. Products for which this effect is particularly relevant include: image products, exclusive products, and products with minimal cues for quality.
• Expenditure effect : Buyers are more expensive when the expense accounts for a large percentage of buyers’ available income or budget.
• End-benefit effect : The effect refers to the relationship

  Derived demand : The more sensitive purchasers are the price of the end benefit, the more sensitive they will be to the prices of those who contribute to that benefit.

  Price proportion cost : The price proportion refers to the total cost of the end benefit accounted for by the end benefit (eg, think CPU and PCs). The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the component’s price.

• Shared-cost effect : The smaller the portion of the purchase price, the less price sensitive they will be.
• Fairness effect : Buyers are more sensitive to the price of a product when the price is outside the range.
• Framing effect : Buyers are more sensitive when they perceive the price as a loss rather than a forgone gain, and they have greater price sensitivity when the price is paid rather than as part of a bundle.

Approaches

Pricing is the most effective profit lever . ^[53] Pricing can be approached at three levels: the industry, market, and transaction level.

• Pricing at the industry level focuses on the economics of the industry, including price changes and customer demand changes.
• Pricing at the market level focuses on the competitive position of the price comparison to the comparative value of products.
• Pricing at the transaction level focuses on managing the implementation of the reference, or list price, which occurs both on and off the invoice or receipt.

A “price waterfall” analysis helps businesses and individuals to understand the differences between the reference and the price list, the invoiced price and the actual price paid by a customer taking account of the contract, sales and payment discounts. ^[54]

Pricing mistakes

Many companies make common pricing mistakes. Jerry Bernstein’s Article Use Suppliers’ Pricing Mistakes ^[55] outlines several sales errors, which include:

• Weak controls on discounting ( price override )
• Inadequate systems for tracking competitors’ selling prices and market share ( Competitive intelligence )
• Cost-plus pricing
• Price increases poorly executed
• Worldwide price inconsistencies
• Paying sales representatives on sales volume vs. addition of revenue measures