Pricing is the
process of determining what a company will receive in exchange for its product.
Pricing factors are manufacturing cost, market place, competition, market
condition, brand, and quality of product. Pricing is also a key variable in
micro economic price allocation theory. Pricing is a fundamental aspect of
financial modelling and is one of the four Ps of the marketing mix. (The other
three aspects are product, promotion, and place.) Price is the only revenue
generating element amongst the four Ps, the rest being cost centres. However,
the other Ps of marketing will contribute to decreasing price elasticity and so
enable price increases to drive greater revenue and profits.
Determining Specific
Prices and Policies
The last step in
pricing strategy is selecting specific prices and formulating policies to help
manage the pricing strategy. Pricing methods are first examined, followed by a
discussion of pricing policy.
Determining Specific
Prices
It is necessary to
either assign a specific price to each product item or to provide a method for
computing price for a particular buyer-seller transaction. Many methods and
techniques are available for calculating price.
Price determination
is normally based on cost, demand, competition, or a combination of these
factors. Cost-oriented methods use the cost of producing and marketing the
product as the basis for determining price. Demand-oriented pricing methods
consider estimated market response to alternative prices. The most profitable
combination of price and market response level is selected.
Competition-oriented methods use competitors’ prices as a reference point in
setting prices. The price selected may be above, below, or equal to
competitors’ prices. Typically, one method (cost, demand, or competition) provides
the primary basis for pricing, although the other factors are also considered.
Pricing decisions are
always affected by competitors’ prices and their potential actions. Pricing
methods that use competitors’ prices in calculating actual prices include
setting prices equal to or at some specified increment above or below the
competition’s prices. In industries such as air travel, one of the firms may be
viewed by others as the price leader. When the leader changes its prices, other
firms follow with similar prices. American Airlines has attempted to perform
such a leadership role in the United States, although its pricing changes are
not always adopted by competing airlines. Another form of competition-oriented
pricing is competitive bidding where firms submit sealed bids to the purchaser.
This method is used in the purchase of various industrial products and
supplies.
Reverse auction
pricing is an interesting competitive form of Internet pricing. Buyers benefit
through savings and suppliers expand their market coverage. This method of
determining price involves sellers bidding for organizational buyers’
purchases.
Many times, supplier
performance is rated, and these ratings are presented by the site as a benefit
to current and prospective buyers. Free markets.com conducts online auctions of
industrial parts, raw materials, commodities, and services. Suppliers bid lower
prices in real time until the auction is closed to fill the purchase orders of
large buying organizations.
The sharing of
information benefits both buyers and sellers, although the buyer controls the
process. The underlying logic is that prices continue to fall due to declining
bids until a stable market price is reached.
While considering
competitive price levels is a necessary part of setting prices effectively, it
is important to avoid any form of collusion or cooperation with competitors in
setting prices. In most parts of the world such practices are illegal and
offenders face severe punishments if these practices are detected by regulatory
authorities.
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