Factors that affect pricing

Module 7 -  Pricing product

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Read pp 252 - 264 in your text

.There are a large number of factors that may be taken into account when setting prices.  To first determine the range of prices, commonsense tells us that the minimum price is the cost of the product, because below this no profit can be made; and the maximum price is the level at which no customers will buy the product.  This is illustrated in Fig. 12.8, p 430 of your text.

The minimum price is actually determined by the total cost of producing the product and modified by factors internal to the organisation.  For example, if the company requires a minimum profit level, this must be built into the minimum price so that it is higher than costs.  Similarly, the minimum price may be lower than costs if the product is new and the company wants to encourage customer trial, or if demand has fallen and they wish to keep running their factory at capacity (although neither of these would be viable long-term).

The maximum price is similarly modified by the value customers place on the product, and the availability and price of competitor products.

Let's take a closer look at some of the key influences on price.

Marketing mix strategy - there must be consistency between the different elements of the marketing mix to maximise the marketing effort.  Imagine a high quality product sold at a low price.  Perhaps the company is not covering costs, and they may influence customers to perceive the product as having a lower quality than it does.  A low quality product offered at a high price will not sell, or only to unwitting first-time buyers.

Competitors - in considering competitor pricing, we should not only look at how customers evaluate our product against a similar one from a competitor, but also at the impact our pricing may have on that competitor.  For example, are they likely to raise or lower their price, increase or modify their advertising, add to their product features, or even take us into a price war?

Consumer perceptions - the customers not only exchange money for the product or service they are purchasing, but there are also some non-monetary costs, such as the time and effort required to find and purchase the product and make it ready for use.  For example, a department store that offers a full range of products may save a customer shopping time, and an electrical goods store that offers to deliver and install a washing machine at a specified time convenient for the customer, saves both time and effort for that customer.  Thus, the benefits a customer seeks may include a number provided by the augmented product, particularly the service elements

Price wars - so how do we understand price wars and who wins them?  Price wars occur when companies take large and often progressive price cuts to win market share.  Competitors respond in a similar way (see the airline industry example on pages 442-3 of your text).  The most common reason for taking the first step in a price war is to gain long-term market share, but if competitors respond aggressively, this may not be achieved.  The end result is often lower profit levels all round, with one or more competitors forced to leave the industry (like Compass 1 & 2). Who wins in a price war?

It could be argued that the remaining companies have "won" the price war, but it may be at too high a price in terms of profit levels.  So, do customers win price wars?  If they get a better, cheaper product or service in the longer term, they probably do.  But if they lose money on their transactions (as ticket holders may do when an airline folds), or if they end up with less product choice and higher prices, they probably don't.

Special pricing tactics and approaches - there are some special pricing tactics that are of great interest in particular industries.  Flexible pricing is where different customers are charged different prices based on negotiating a price for an individual product or service.  In some countries and some industries many prices are individually negotiated.  In Australia, the most frequent use of flexible pricing may be for negotiated trade-in values for cars and negotiated fees for professional services such as consulting.

go-fishAnother special pricing approach is the use of auctions for a variety of products.  It is a very popular form of pricing in the real estate market, and is also gaining popularity through websites that have been set up as auction houses'.

Check out these two sites relating to auction services.




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