Table of Contents:-
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- Meaning of Product Pricing
- Definition of Product Pricing
- Objectives of Product Pricing
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Meaning of Product Pricing
In the business world, product pricing is an important factor that deserves detailed attention. Determining the right price for a product is a multifaceted task that demands a strategic approach. Striking the perfect balance between profitability and customer satisfaction is of great importance. It ensures that the set price remains competitive and fair.
Price is the marketing mix element that produces revenue, while the remaining elements incur costs. Price is a highly adaptable component that can be changed quickly, unlike product features and channel commitments. To the manufacturer, price represents the quantity of money (or goods and services in a barter trade) received by the firm or seller. To a customer, it represents sacrifice and hence his perception towards the value of the product. Conceptually, it is:
Price = Quantity of money received by the seller /Quantity of goods and services rendered received by the buyer.
In this equation, both the numerator and the denominator are important for price decisions. The price of a product or service is determined by the seller based on its perceived value to the buyer, expressed in terms of money.
Pricing is the art of translating into quantitative terms (rupees and paisa) the value of the product or a unit of service to customers at a point in time.
Definition of Product Pricing
According to Prof. K.C. Kite, “Pricing is a managerial task that involves establishing pricing objectives identifying the factors governing the price, ascertaining their relevance and significance, determining the product value in monetary terms and formulation of price policies and the strategies, implementing them and controlling them for the best results”.
Thus, pricing is the function of determining the product service or idea value in monetary terms by the marketing manager before it is offered to the target consumers for sale. Precisely, pricing is the process of setting objectives, determining the available flexibility, developing strategies, setting prices and engaging in implementation and control. Pricing serves as a powerful marketing instrument for a company. Every marketing plan involves a pricing decision. Hence, marketers must make planned and accurate pricing decisions.
Objectives of Product Pricing
A firm may select its pricing objectives from any of the following options as follows:
1) Price Stability
As far as possible, the prices should not fluctuate too often. A stable price policy can win the confidence of the consumers. It will also contribute to enhancing the positive reputation and goodwill of the organization. For this purpose, the concern should consider long-run and short-term elements.
2) Capturing the Market
One of the objectives of pricing decisions may be capturing the market. When a company, particularly a large one, at the time of introducing the product in the market, fixes comparatively lower prices for its products, keeping in view the competitive position to grab a large share in the market.
3) To Maximise the Profits
The primary objective of the pricing decision is to maximise profits for the company. Therefore, pricing policy should be determined in such a way that allows the company to earn the highest possible profits.Â
4) Competitive Situation
One of the objectives of the price decision is to face the competitive situation in the market Prices of the commodities should be fixed keeping in mind the competitive situation. Sometimes, the management likes to fix a relatively low price for its product to deter potential competitors.
5) Ability to Pay
Price decisions are sometimes taken according to the ability of customers to pay, ie, more prices can be charged to persons having the capacity to pay. Capacity to pay is determined based on the purchasing power of the consumers for which the product is made
6) Margin of Profit to Middlemen
Pricing of the product should be made keeping in view that middlemen get a fair return on the sale of the company’s product. Otherwise, they will lose interest in selling the company’s products.
7) Achieving a Target Return
This is a common objective of well-established and reputed firms in the market (either for the company’s name, its brand or the quality of the product) to reach a certain rate of return on investment. The prices of the product are carefully calculated to ensure a satisfactory return on investment. Different target returns may be fixed for different products but such returns should be related to a single overall rate of return target.
8) Resource Mobilisation
Under this objective, the company strategically sets the prices of its products to ensure the accumulation of adequate resources for future expansion.
9) Product-quality leadership
Companies that produce high-quality products relative to the competition often try to position themselves as unrivalled leaders in terms of product quality. They charge a higher price, yet effectively convince the customer that it is justified because of the superior product experience, reliability, or other quality-related benefits. Price-sensitive customers need to be convinced that the higher price is worth it in the long term. The main point is that employing price as a strategic tool is better than simply letting costs determine price. If your product is superior to the competition, you’ll be more profitable if you convey that to the market and set a higher price point.
10) Long-run Welfare of the Firm
The primary objective of certain businesses is to establish a fixed price for their product which is in the best interest of the firm in the long run keeping the market conditions and economic situations in mind.
11) Survival
Companies facing new and intense competition, overcapacity, or changing consumer behaviour may pursue a survival strategy. Survival is a short-run objective to make it through tough times. As long as the price exceeds variable and fixed costs, the company can carry on in the long run, the company must adapt and find ways to add value.