Factors that affect pricing decisions
External factors that influence pricing decisions include the nature of the market and demand; competitors costs, prices, and offers; such as the economy, reseller needs, and government actions. The sellers pricing freedom varies with different types of markets. Ultimately, the consumer desides whether the company has set the right price. The consumer weighs the price against the perceived values of using the product -- if the price exceeds the sum of the values, consumers will not buy. Therefore, demand and consumer value perceptions set the ceiling for prices. Consumers also compare a product price to the prices of competitors product. As a result, a company must learn the price and quality of competitors offers.
Many internal factors influence the companies pricing decisions, including the firm's marketing objectives, marketing mix strategy, costs, an organization for pricing. Common pricing objectives include survival, current profit maximization, marketshare leadership, and product quality leadership. The pricing strategy is largely determined by the company's target market and positioning objectives. Pricing decisions affect and are affected by product design, distribution, and promotion decisions and must be carefully coordinated with these other marketing mix variables. Costs set the floor for the companies price -- the price must cover all of the costs of marketing and selling the product, plus a fair rate of return. Finally, in order to coordinate pricing goals and decisions, management must decide who within the organization is responsible for setting price.
Approaches to setting price
A company can select one or combination of three general pricing approaches:
- the cost-based approach (cost-plus pricing, break-even analysis, and target profit pricing);
- the value-based approach; and the competition-based approach. Cost-based pricing sets prices based on the sellers cost structure, whereas value-based pricing relies on consumer perceptions of value to dry pricing decisions.
- Competition-based pricing involves setting prices based on what competitors are charging or are expected to charge.
Pricing is a dynamic process. Companies design a pricing structure that covers all their products. They change this structure overtime and adjust to account for different customers and situations. Pricing strategies usually change as a product passes through its lifecycle. The company can decide on one of several price quality strategies for introducing an imitative product, including premium pricing, economy pricing, good-value pricing, or overcharging. In pricing innovative new products, it can allow a skimming policy by initially setting high prices to "skim" the maximum amount of revenue from various segments of the market. Or it can use penetration pricing by setting a low initial price to penetrate the market deeply and win a large market share.
When the product is part of a product mix, the firm searches for a set of prices that will maximize the profits from the total mix. In product line pricing, the company decides on price steps for the entire set of products it offers. In addition, the company must set prices for optional products (optional or accessory products included with the main product), captive products (products are required for use of the main product),by-products (waste or residual products produced when making the main product), and product bundles (combinations of products and reduced price).
Companies apply a variety of price-adjustment strategies to account for differences in consumer segments in situations. One is discount and allowance pricing, whereby the company establishes cash, quantity, functional, or seasonal discounts, or varying types of allowances. A second strategy is segmented pricing, whereby the company sells a product at two or more prices to accommodate different customers, product forms, locations, or times. Sometimes companies consider more than economics and their pricing decisions, using psychological pricing to better communicate a products intended position. In promotional pricing, a company offers discounts or temporarily sells a product below list price as a special event, sometimes even selling below cost as a loss leader. Another approach is geographical pricing, whereby the company decides how to price to near and distant customers. Finally, international pricing means that the company adjusts its price to meet conditions and expectations in different world markets.
Initiating and responding to price changes
When a firm considers initiating a price change, it must consider customers and competitors reactions. There are different implications in initiating price cuts and initiating price increases. Buyer reactions to price changes are influenced by the meaning customers see in the price change. And competitors reactions flow from a set reaction policy or a fresh analysis of each situation. There are also many factors to consider when responding to a competitors price changes. The company that faces a price change initiated by a competitor must try to understand the competitors intend as well as the likely duration and impact of the change. If a swift reaction is desirable, the firm should preplan its reactions to different possible price actions by the competitors. When facing a competitors price change, the company might sit tight, reduce its own price, raise perceived quality, improve quality and raise price, or launch a fighting brand.
Companies are not usually free to charge whatever prices they wish. Many federal, state, and even local laws governing the rules of fair play in pricing. The major public policy issues in pricing include potentially damaging pricing practices within a given level of the channel (price-fixing and predatory pricing) and across levels of the channel (retail price maintenance, discriminatory pricing, and deceptive pricing).
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