Price is one of the 4 P’s of marketing (Product, Price, Placement, and Promotion). Price is ‘a value that will purchase a finite quantity, weight or any other measure of a good/service’. It is a business variable via which an organization can exercise a particular degree of control.
Among the 4 P’s, price is the only element that directly affects the revenue, which in turn affects the profit. So, the right prices will decide on how the consumers perceive a product/service, and how it will affect the demand and sales.
Internal factors are dealt by the hierarchy in the company. Like, the overall price strategy is dealt with by the top executives whereas the actual mechanics of pricing are taken care of by the lower levels. Then, a complete marketing mix is created where not only the price, but also elements like production, promotion and distribution are taken into consideration. Close attention is paid to the product characteristics, as the price also depends on factors like quality, size etc. depending on the nature of the product. Later on, the cost of production is determined, after studying the market and competition.
External factors are determined by the condition of the market. Demand plays a major role in fixing the prices; factors like competition, buyers, preferences etc. are studied before deciding the prices. The prices of the raw materials have a huge impact on the final price of the product. If the prices of the raw materials go up, it’s obvious that the cost of production will be high and thus the selling price of the product will be high too. The current economic conditions are to be noted too. In times or recession, it’d be unwise not to cut down on the prices. To an extent, the government also affects the prices, through enactment of legislation.
Let’s get thorough with two very important terms: Elastic demand and inelastic demand.
‘Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price.’
Elastic demand is when the sales are directly proportional to the product prices. Inelastic demand is when the sales are always high irrespective of prices.
Pricing Strategies: Following are a few pricing strategies, which can help create a perfect marketing mix.
1) Premium pricing: This is used while launching a new product, with a unique selling point, with a slightly higher price than the competitors, to generate maximum profit in the early stages of the product life cycle.
2) Penetration pricing: This is used while entering an already established market, selling the product at a lower price than that of the competitors, attempting to create awareness via word of mouth.
3) Economy pricing: This is used to attract the price sensitive population, keeping prices at the minimum with a very basic marketing approach.
4) Price skimming: This is used to gain a competitive advantage over others by rolling out the products earlier than others.
5) Psychological pricing: This is the most commonly used strategy, aiming to gain a psychological edge to sell products. For example, $ 99 is less as compared to $ 100.
Syncing the pricing with the product life cycle (theory), or in other words, changing prices with time is very essential to gain maximum profit over the course of product life.
Samsung is one of the most popular brand for electronics, worldwide. It’s ‘galaxy’ series for mobile phones is quite in sync with the product life cycle theory.
During the introduction and growth stages, the prices are kept high, and high profile consumers are targeted. But as the maturity and decline stages approach, the sale decreases and this is when Samsung reduces the prices to about 40%, which again shoots the sales. They then introduce a certain combo offer or introduce another product, keeping this cycle intact.
In short, the prices can’t be kept stagnant. As the saying goes, change is the only constant.
BusinessDictionary.com. (2016). What is a price? definition and meaning. [online] Available at: http://www.businessdictionary.com/definition/price.html [Accessed 2 May 2016].
The Importance of Price to Marketers. (2015). Boundless. [online] Available at: https://www.boundless.com/marketing/textbooks/boundless-marketing-textbook/pricing-8/introduction-to-price-57/the-importance-of-price-to-marketers-289-1052/ [Accessed 2 May 2016].
YourArticleLibrary.com: The Next Generation Library. (2015). Pricing Decisions: Internal and External Factors (With Diagram). [online] Available at: http://www.yourarticlelibrary.com/marketing/pricing/pricing-decisions-internal-and-external-factors-with-diagram/50888/ [Accessed 2 May 2016].
Smallbusiness.chron.com. (2016). Different Types of Pricing Strategy. [online] Available at: http://smallbusiness.chron.com/different-types-pricing-strategy-4688.html [Accessed 2 May 2016].
Bright Hub. (2016). Product Life Cycle Stages: Pricing Levels & Strategies. [online] Available at: http://www.brighthub.com/office/entrepreneurs/articles/86538.aspx [Accessed 2 May 2016].