What is Pricing & Types of Pricing

Meaning of Pricing

Pricing is a value which are buyers passes on to the seller in lieu of the product or service provided. Price is the crucial element of marketing mix because customer is very sensitive to this element.

Little variation in the price may shift your customer to competitor’s product for example, if the price of Pepsi is changed from rupees 8 to  rupees 8.50 then the customer will start demanding Coke which is still available at rupees 8

It is therefore important that the pricing decisions are taken with care and caution. Price must match the utility offered by the product or service. The customer is always ready to pay a price equal to utilities he gets from the product.

Pricing is normally expressed in monetary terms. It  is the worth of a product or service in monetary terms. It is the monetary sacrifice which a buyer makes when he buys something.

Price may be called by different names for example, price for education is tuition fees, price for using road is toll, price for job is salary, price for apartment is rent, etc.

Price mix refers to important decisions related to fixing of price of a commodity. These decisions can be related to price of competitors, decisions related to demand, decisions related to fixing cost, etc.

Assigning a monetary value to a product or service or fixing the price of a product or service is not an easy job. various factors lie evaluated.

The factors kept in mind while fixing the price of a commodity or service:

1. Pricing objectives

What is the objective of firm is very important factor which helps in deciding the price.

Apart from profit maximization the pricing objectives of a firm may include:

  • Obtaining market share leadership. If firm wants to capture big share in the market then it has to keep its price low so that more number of people are attracted to purchase the products.
  • Surviving in a competitive market. To survive in a competitive market the firms have to reduce their price by offering discounts.
  • Attaining product quality leadership. In this case generally high prices are charged to cover the cost and high cost of research and development.

2. Product cost

The second important factor which is kept in mind while fixing the price is the cost of product or service. The price of the product must be able to cover the total cost of product.

Total cost means fixed cost and variable cost. Fixed cost are fixed irrespective of production level for example, rent of factory, cost of machinery, salary of permanent staff etc.

The variable costs vary with production, example cost of raw materials, wages of labor etc. The price is fixed after calculating the total cost.

In case of High competition and to capture big share if firms has to fix low price then at least the price must cover variable cost and fixed cost can be ignored for sometime.

3. Extent of competition in the market

The third important factor which is kept in mind while setting up the price is the  level of competition firm has to face. When a firm does not face any competition then it can enjoy complete freedom in fixing the price.

But when the competition is more than price is fixed keeping in mind the price of competitor’s product for example, Pepsi company cannot fix the price of its drink without considering the price of Coke and other cold drinks available in the market.

4. Government and legal regulations

To protect the interest of general public, the government has all the right to control the prices of various products and services by including the products in the category of essential commodities.

The common commodities in essential commodities are Drugs, some food items, LPG etc. With government intervention there can be a check on monopolist  as they cannot charge unfairly high price for essential commodities.

5. Marketing methods used

The price of the product also get affected by various techniques of methods of marketing used to promote the products.

If company is using intensive advertising to promote the sale of product then it will charge high price. Other marketing methods which affect price of a product are type of packing, distribution system, salesmen employed, customer support services, etc.

6. Customer’s demand and utility

The last but not the least factor which is kept in mind while fixing the price is the demand of product or service when demand of the product is inelastic i.e., no or  very less substitutes  are available then company can fix a high price.

Whereas when demand is elastic i.e.,more substitutes are available then price has to be brought down.

On the other hand, if a product is highly demanded then price can be high but at the time of low demand price has to be brought down.

If product is offering higher utility one can easily charge high price as customer is ready to pay high price if he gets high value from the product. Whereas if utility is low, you cannot charge high price.

Types of Pricing

1. Premium Pricing

2. Penetration Pricing

3. Economy Pricing

4. Price Skimming

5. Psychological Pricing

6. Product Line Pricing

7. Pricing Variations

1. Premium Pricing

A ‘premium strategy’ uses a high price, but gives good product or service in exchange. it is fair to customers, and more importantly, customers see it as fair.

This could include food bought from marks and Spencer, or designer clothes etc. We should remember that customers for consumer goods are often amateurs.

2. Penetration Pricing

Penetration pricing is the name given to a strategy that  deliberately starts offering ‘super value’. This  done to gain a foothold in the market. Using price  as a major weapon.

It  could be because other products are already well established in the markets may be at height prices.

 Alternatively, penetration pricing could be used as an attempted to gain a major share of a new market. It  can also deter competitors who see no profit in the market.

As time goes on and the product is established, prices can be raised near market levels. Alternatively, the suppliers cost could come down as volume increases.

3. Economy Pricing

Economy pricing is a deliberate Strategy of low pricing. It could be that you are offering a ‘no frills’ product/ service with a price reflecting this. However, before such a product is launched is important to decide the position it will have in the marketplace.

4. Price Skimming

Customers won’t pay it they don’t think they are getting value. However, there are times when high prices and large margins are appropriate. It is certainly easier to reduce prices than to sales them.

A policy of price skimming is often used for products at the introductory stage. Here the price is initially pitched high, which gives a  good early cash flow to offset high development costs.

5. Psychological Pricing

Psychological pricing is  designed to get  customers respond on an emotional rather than rational basis. It  is not frequently seen in  consumer market, having less applicability in industrial markets.

6. Product Line Pricing

Product line pricing is a strategy which involves all product offered. There may be a range of normal price points in a market. A supplier might decide to a product suitable for all price levels, offering opportunities for a range of purchases.

7. Pricing Variations

Another differential pricing strategy is variations in the pricing structure. It  is usually observed in the travel agencies. For example, if we book an air ticket 2 months before, the price will be less.

If we book the ticket as we thought it would be before, the price may increases slightly. If we want to buy tatkal tickets, the price may increases more.

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