Conceptually, price is defined as the expression of the value of a product or service in monetary terms and / or other parameters such as effort, attention or time.
The product or service that is exchanged has value for the public to the extent that it is capable of providing a benefit, solving a problem, satisfying a need or fulfilling a wish; therefore, the keyword in this conceptual definition of price is value.
Analyzing the relationship between Value and Price allows us to identify the price strategy that in the long term can be successful for a company. (See the Value and Price column of November 12, 2001)
On the other hand, analyzing the relationship that exists between the Price and the Value allows making operational decisions that affect short-term results. (See the Price and Value column of September 26, 2002)
The price can be studied from two perspectives. The customer's, which uses it as a value reference. And that of the company, for whom it means a tool through which it converts its sales volume into income.
Jagmohan S. Raju and Z. John Zhang, two professors at the Wharton School state that:
Among other things, companies must clearly identify which consumers they are targeting and understand how much those consumers are willing to pay for a particular product or service. Companies must also recognize the importance of pricing as a tool to differentiate a product or service from that of competitors, since price signals its quality and exclusivity.
In addition, it is important to take into account the type of distributors that will introduce the product to the markets; If they don't make enough profit, sales will suffer. Furthermore, companies must realize that by nature the pricing strategy should be long-term, in the sense that it should pave the way for other products to enter the market.
Beyond the financial or functional decision implicit in setting prices, the company must consider factors related to consumer perception, since price is part of the product or service and, as such, expresses something about it. From the Customer's perspective, a high price denotes quality, prestige, exclusivity, security or confidence in obtaining something that will provide satisfaction, etc. A low price denotes economy, accessibility, convenience, lower quality, etc.
During the purchasing decision-making process, what is important for the customer is not the price itself, but the relative prices between different products, as well as the relative price that results from comparing what they get in exchange for what they deliver to. each seller. In short, the perception of the price that the consumer has is anchored together with the perception of the brand.
From the Company's perspective, price is both an income generator and a market share generator. Therefore, it must make both short and long-term considerations and the factors that guide the setting of prices are related to the Economic Environment and its uncertainty; Demand, which refers to the value that products and services have for buyers and which is analyzed in the light of price elasticity and income elasticity; Technology and its degree of advancement; the Direct Variable Costs of the company, current and future; the growth and development objectives of the company, such as cash flow or profitability, in the short and long term; Competition, expressed through new products and dimensioned in terms of market share;government regulation and corporate social responsibility.
Generally speaking, the price level of a product or service tends to be:
- One approach is simply a “cost-adding” strategy: you calculate the cost of producing a certain good and apply a certain profit margin to it. Another approach is to conduct research to determine how much consumers are willing to pay for your product. (for example, $ 200 for a tiny bottle of perfume) and price based on those findings.Another method is competitive pricing, in which a company estimates what the price of the product is. competition and then adjusts its prices above or below it.
Considering what has been established so far, it can be concluded that pricing decisions improve by complying with each of the following eight steps, suggested by Robert J. Dolan:
- Understand the value that potential customers assign to the company's products or services Find differences in perceived value between different market segments, associated with different prices they are willing to pay Understand potential customers' sensitivity to price, According to their income, purchasing habits, information management, available suppliers, product differentiation, etc. Establish an optimal price structure, in terms of what customers will receive in return. For example, prices by quantity, prices by 'package' of products and services, etc. Anticipate and evaluate the possible reactions of the competition, remembering that the competitive advantage through low prices is not commonly sustainable Monitor real prices at each level transaction within the market.Understand the emotional response of customers, especially in the long term. Analyze whether the income generated at each price level really outweighs the cost of serving the customer.
The decision to assign the correct price to a product or service is one of the most difficult that an administrator faces, since it is the variable over which they would like to have the most power, but it is, at the same time, the decision that faces the greatest external pressures.
