Some ethical issues are extremely easy to comprehend: don’t nick or steal, treat others with dignity and respect, and always put the toilet seat down for your lady friends. However, when it comes to comprehending the world of market and marketing strategies, the concept of what is right and wrong is a bit muddled.
How do you feel when you go to the supermarket to buy groceries, only to come home and realise that 1 kg of apples was just $2 at Aldi’s and you just spent $4 for ½ kilo at your daily supermarket. That’s when you wonder if pricing is random or does it have any base?
Well pricing is a bit more complicated than you think. It is indeed an integral part of marketing strategy for a business and requires significant amount of investment in research and planning.
Is it legal or ethical?
There is a general agreement that marketing strategies must not breach on values such as honesty, transparency and autonomy (Hollensen 2015). Pricing concerns the establishment of a balance of control between producers and consumers. In a free market producers have a slight upper hand because they have complete control of how they produce and what approaches they use for producing. This can tempt producers to adopt unethical practices like using cheap and harmful materials, misleading consumers about benefits and so on. For this there are laws are in place that regulate pricing strategies such as, it is illegal to price a product extremely low in order to drive competitors out of the market, but simultaneously it’s hard to prove that the price producers decide are for those exact reasons. As a result pricing ethics and legality sit in a grey area constantly floating between right and wrong. The following 6 steps (Iacobucci 2013; Kotler & Keller 2012) will help give a better understanding of how and what a company takes into consideration while deciding the price of their products.
6 Steps to Setting a Price Strategy for your Business:
STEP 1: Pricing objective: It’s vital to select pricing objective as to where you want to position your offering. The five major objectives that you can practise are survival, maximum current profit, market share, market skimming or product –quality leadership.
For instance let’s take Aldi’s pricing objective which is ‘To provide our customers with the products they buy regularly and ensure that those products are of the highest possible quality at guaranteed low prices.’ (ALDI 2016). Here Aldi’s pricing objective is cost leadership.
Source: The New Daily 2015, Woolworths, Aldi and Coles: who wins the price war?, <http://thenewdaily.com.au/news/2015/06/03/cheapest-supermarket-2015/>.
STEP 2: Determine the demand: Price you set must match the demand level within that area. In some instances, the price can inversely affect the demand in the market. Jiang et al. (2016) through a study analysed the relationship between demand and price of alcohol. They found that when the alcohol prices increase, it has the potential to reduce the alcohol demand.
Source: Sleepy One 2012, Economics Individual Study – De Beers Diamonds <http://sleepyoneart.blogspot.com.au/2012/04/economics-individual-study-de-beers.html>
STEP 3: Estimate costs: You don’t want to price your product too low which could force you to shut down your company. Hence it’s essential you charge a price that covers your cost of production, distribution, selling the product and obviously a decent return for the efforts and risks taken in the whole process. A self-explanatory example of cost estimation is given below:
Source: Hayden, D 2010, Cost vs Profit, <http://www.themanagersoffice.com/cost-vs-profit/2010/08/17/>.
STEP 4: Analyze your competitor: A sound research and knowledge about your competitors price, cost, reactions from consumers will help in your decision in setting out the price for your product.
Source: Roy, N 2015, 3 Cost Efficient Steps to Analyzing Your Competition, <http://www.nickjroy.com/3-cost-efficient-steps-to-analyzing-your-competition/>.
STEP 5: Selecting a pricing method: Once you have planned out your objective, determined the demand, estimated the costs, and analysed your competitor market you will need to undertake a systematic approach to setting out the price. The method you consider could include one or more methods from the following:
- Mark-up pricing: Adding a standard mark up to the product costs.
- Target-return pricing: Deciding what rate of return you want from your investment.
- Perceived-value pricing: Base your price on the customer’s perceived value
- Value-pricing: Charge a fairly low price for a high quality offering
- Going-rate pricing: Base your price on your competitor’s prices (Kotler & Keller 2012; Porter 2008).
STEP 5: Set your price: When setting the its important to consider the impact of other marketing activities, company’s pricing policy and the impact pricing has on other stakeholders like distributors, dealers, etc.
The question is, next time when you head out shopping, would you buy a product based on its price or its actual worth?
Student ID: 213335502
ALDI 2016, Customer Information, <https://www.aldi.com.au/en/about-aldi/customer-information/>.
Hollensen, S 2015, Marketing management: A relationship approach, Pearson Education.
Hayden, D 2010, Cost vs Profit, <http://www.themanagersoffice.com/cost-vs-profit/2010/08/17/>.
Iacobucci, D 2013, MM4, Mason, Ohio : South-Western ; Andover : Cengage Learning [distributor], ,Student edition with package.
Jiang, H, Livingston, M, Room, R & Callinan, S 2016, ‘Price elasticity of on-and off-premises demand for alcoholic drinks: a Tobit analysis’, Drug and Alcohol Dependence.
Kotler, P & Keller, KL 2012, Marketing management, Upper Saddle River, N.J. : Prentice Hall, c2012.14th ed.
Porter, ME 2008, Competitive strategy: Techniques for analyzing industries and competitors, Simon and Schuster.
Roy, N 2015, 3 Cost Efficient Steps to Analyzing Your Competition, <http://www.nickjroy.com/3-cost-efficient-steps-to-analyzing-your-competition/>.
Sleepy One 2012, Economics Individual Study – De Beers Diamonds <http://sleepyoneart.blogspot.com.au/2012/04/economics-individual-study-de-beers.html>.
The New Daily 2015, Woolworths, Aldi and Coles: who wins the price war?, <http://thenewdaily.com.au/news/2015/06/03/cheapest-supermarket-2015/>.