Price is the value that the customers of a commodity provide to the sellers in exchange for the utility they derive out of a product. It is fixed by the sellers keeping in mind various factors associated with the product. These factors relate to competitiveness, substitutes available, market conditions etc.
Carrying out pricing decisions is not very time consuming but the analysis and considerations while fixing a particular price are extremely complicated. Price of a product is very critical to the success of its organisation. An overpriced good is not desirable by the customers because it might burn a hole in their pockets whereas an underpriced good may be perceived as being inferior.
There have been various scandals over the past few years related to pricing. Some of the companies have had to pay multi-million dollar fines due to consumer lawsuits.
Major supermarkets were accused of rigging the prices of their dairy products in 2002. These supermarkets colluded to mark up the price of milk and cheese. Sainsbury, ASDA, Tesco and Safeway (Now part of Morrisons) were all implicated in this and had to pay a fine of $116 million combined. (Smithers, 2007)
In 2007, an Australian skincare company named Jurlique was dragged to court for entering into agreements with its resellers on the condition that they cannot sell their cosmetics at a price lower than what was specified by Jurlique. When the issue came to light, Jurlique had to pay AUD$3.4 million as fine. (Australian Competition and Consumer Commission, 2007).
The following image outlines the law enacted by the Australian Competition and Consumer Commission:-
When approaching the determination of price, there are various factors that come into place. The cost of manufacturing a product is very important as it ensures that the company does not incur any losses. Every company needs to break even its costs at least in order to continue doing business. The mark up from cost determines the profit a firm will make. The level of profit mostly determines on the type of industry and product a company is dealing in. For example- Profit levels in shopping products like shoes, clothing etc are much higher than in convenience products like bread, toothpaste etc. Market demand, Industry standards and substitutes available are some of the other factors that have a say in determining the price of a commodity. Katharine Paine put it perfectly while explaining the importance of price when she said that if a company makes a pricing mistake, it either eats up into its reputation or its profits. (Paine, 2012)
There are different types of policies or techniques that can be followed to determine the price of a product. The objectives of an organisation decide what technique it follows. If it wishes to gain market share, it can follow the penetration price policy or economy pricing policy. If the main goal is to make maximum profits before more producers start selling similar products, then price skimming policy can be followed. If an already established firm wants to destroy its up and coming competition, it can price its goods below the cost for sometime and forfeit its profits in short run to wipe out the newer companies. This is called Predatory pricing policy.
The following article provides an insight into the different types of pricing methods:-
The marketing department needs to be extra careful while taking the pricing decisions and thus they are very critical to the success of an organisation.
- Smithers, R. (2007). Supermarkets fined £116m for price fixing.The Guardian. [online] Available at: http://www.theguardian.com/business/2007/dec/08/supermarkets.asda [Accessed 29 Apr. 2016].
- Australian Competition and Consumer Commission, (2007).Highest ever penalty for resale price maintenance against skincare, cosmetics company Jurlique: $3.4 million. [online] Available at: https://www.accc.gov.au/media-release/highest-ever-penalty-for-resale-price-maintenance-against-skincare-cosmetics-company [Accessed 29 Apr. 2016].
- Paine, K. (2012).Pricing Power – The Personal MBA. [online] Personalmba.com. Available at: https://personalmba.com/pricing-power/ [Accessed 1 May 2016].