Pricing strategy and pricing

Throughout most of history, price has operated as the primary determinant of the buyer's decision. However, in more recent decades, non-price factors have taken on a relatively greater importance in the behavior of the buyer's decision.

Price is the only element of mercantile combination that generates profits, the other elements generate costs. In addition, the price is one of the most flexible elements of the mercantile combination, since it can be modified in the short term, unlike the product and the pipeline components.

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Objectives of the work

Be able to define the internal and external factors (to the company) that affect the decision to set a price. Know the pricing strategies used by the companies. Advantages and disadvantages of each Appropriate application contexts.

Internal and external factors for pricing

Internal factors:

Marketing objectives

Before setting prices, the company must decide what strategy to follow with the product. The main marketing objectives are:

Survival Maximization of current profits Leadership in market share Leadership in product quality.

Marketing Mix Strategy

Pricing is just one tool in the marketing mix that a company uses to achieve its marketing goals. Pricing decisions must be coordinated with product design, distribution and promotional decisions to form a consistent and effective marketing program.

Costs

Costs set the lower limit for the price the company can charge for its product. The company wants to charge a price that covers all of its costs of producing, distributing and selling the product and also generates a fair return for its efforts and risk. Many companies try to adjust their price very close to cost, trying to compensate with their sales volume, although it is an analysis of each case if such application is favorable.

Organizational considerations

Management must decide which part of the organization will set prices. In small companies, it is common for senior management to manage prices. In larger companies, it is common for this responsibility to lie with division or product line managers. There are companies, however, in which this competence is attributed to an entire department.

External factors

Nature of the market and demand

If costs set the lower limit of the price to be set, the market and demand set the upper limit. The market in this case can be of various types, although the deeper analysis of each one will deviate us from the main objective of the work, it is convenient to name the main characteristics of each one.

Pure competition market: The market consists of many buyers and many sellers, so that no seller or buyer has a significant effect on both price and volume of production. No seller can sell above the established price since they would not have demand for their product, and sellers do not charge less, because they can sell all their production at the current price Monopoly competition market: many buyers and sellers who trade within a price range and not with only 1 market price. This interval appears because those who sell can differentiate their product. Oligopolistic competition market: it consists of a few sellers very sensitive to the price strategies applied by their competitors. Pure monopoly market: it consists of only 1 seller,They are particular cases in which the seller may be the government or a service company (energy, telephone company, etc.). Prices are handled differently in each case. It is not an analysis of this work to know strictly how this type of market establishes prices since different regulations and price discriminations appear.

Demand on its part plays a very important role, there is an index called Elasticity of demand, and shows the change that demand undergoes when its price changes. It is said that the demand is elastic when it suffers a great variation when the price varies and it is said that it is inelastic or rigid when it does not vary too much when the price varies, the latter case can be better understood if the product to which it is Analyze your demand is a remedy and hence the most important, no matter how much I varied the price there will still be demand since it is an indispensable necessary good.

Competition

Other external factors

The current situation of the economy (recession for example), inflation rates and interest rates, influence the price to be determined. Government is another important external influence and so are different social issues.

General strategies for setting prices

Cost-based pricing

Pricing of cost plus margin: It is one of the simplest methods, it consists of adding a standard markup to the cost of the product. Pricing for target profits: it consists of setting a price in order to obtain a certain profit that is established as goal or objective.

Value-based pricing

This strategy bases its price on the perception that customers have about the product and not on its cost. This implies that the company cannot design a product and a marketing program and then establish the price, but the price is considered together with the other variables of the marketing mix before establishing the marketing program.

The following scheme shows the difference of the 2 mentioned methods in terms of pricing

Cost-based pricing

Value-based pricing

Competition-based pricing

Consumers base their judgments about the value of a product on the products that different competitors charge for similar products

Pricing of current rate: it consists of fixing the price following the current values of the other competitors, without being based on costs or demand. It is a popular strategy when the elasticity of demand is difficult to measure. Price Wars Averted Pricing by Sealed Bid: Used when companies bid to obtain contracts, and base their prices on the price their competitors are expected to set for the bid.

New product pricing strategies

The strategies with which the prices of the products are established vary according to the phase of the life cycle that the product is going through. During the introduction of the product to the market is when the most difficult process occurs.

A company introducing a new copycat product must decide how it will position its product against the competition in terms of quality and price. There are four strategies for this:

Prime strategy: introduce a high-quality product at a high price Good-value strategy: introduce a high-quality product at an affordable price Overcharge strategy: products with a quality that does not justify their price Economy strategy: medium-quality products at prices accessible.

The companies that launch an innovative product, face the challenge of setting prices for the first time, there are two strategies to turn to:

Strategy to capture the highest level of the market: this strategy makes sense under a certain environment, to begin with, the quality and image of the product must sustain its highest price, the costs of producing a smaller volume should not be such that they significantly affect the Benefits Lastly, competitors should not be able to easily enter the market. This strategy sets the highest price in order to obtain maximum income, in each layer of demand that is willing to pay the price, then by exhausting the sale in said lower layer to a lower one, lowering the price. market: a low price is set, in order to attract as many buyers as possible and thus achieve a significant market share. Having, therefore, a high volume of sales, the costs, therefore,They will be lower, which may allow lowering the price even more.

Product Mixing Pricing Strategies

If a product is part of a product mix, the strategy needs to be changed, as the products in the product mix have related demands and costs, but face varying degrees of competition.

Pricing of product lines: some companies, by not developing an individual product, but a product line, fix the increases between model and model, based on the difference between the cost of each, the evaluations made by customers of different Features and prices of competitors.Optional product pricing: used in products that are optional from other main ones, such as some additional accessory, this strategy has its main core in deciding which items will be part of the main and which will be indeed optional Captive product pricing: there are products which are vital to the operation of the main product, such as printer cartridges, photo rolls, etc. It's very common,that the main product, for example the printer, has a relatively low cost, or is accessible, while the print cartridges come with a surcharge. By-product pricing: it is an interesting strategy for companies that raise their costs for storage of your manufacturing debris or debris. Here, the company can sell its by-products at a price that at least covers the cost of storing this "waste" and thus lower the cost of its main product. A clear example is in zoos, which began to trade animal waste to the fertilizer industry. Pricing of collective products: many companies offer collective products, which are something like "packages" of their products,at a lower price than if the buyer were to purchase them individually. This strategy not only increases the company's profits, but also encourages consumers to purchase products that, perhaps individually, they would not have purchased.

Price adjustment strategies

Companies usually adjust their prices to account for various differences between customers.

Setting discount and add-on prices: He bases his theory on "rewarding" customers for certain responses, such as paying for the product in advance, buying in bulk or out of season.
- Cash discount: price reduction for buyers who pay the product within a certain date. Quantity discount: price reduction for buyers who buy the product in large quantities. Functional discount: this discount is offered to resellers who make sales, storage and accounting functions Seasonal discount: price reduction for buyers who purchase products in the off-season. A clear example is accommodation services in hotels on low-season dates. Complements: those of the promotional type are price reductions for those who participate in advertising and sales support programs, while those of the exchange rate are price reductions that are They give those who deliver an old item in return by purchasing a new one.
Segmented pricing: Segmented pricing takes many forms, depending on differences between customers, places, and products. It does not base its price differences on the cost of different versions of the product. In order to carry out this strategy, the market must be segmentable, and the members of the segments that pay the service at a lower price must not be able to resell the product to other superior segments. Of course, the costs of segmentation should not be such that they should not exceed the benefits proposed by the segmentation
- By customer segment: Different customers pay different prices for the same product, for example, tickets to a football stadium do not have the same price for an adult over 12 years old as a child under 12 years old. versions of the product, have different prices, not based on the differences between their costs. By place: here the company charges different prices in different places, even if the cost of the product is the same, for example, different locations in the theater. By time: depending on the moment in which the product is purchased, for example Telefónica charges the telephone pulse according to the moment in which the call is made.
Psychological pricing: price says something about the product. For example, many consumers use price to judge quality. In using psychological pricing, sellers take into account the psychological aspects of pricing, not just the economic, implying that pricing suggests something else about the product. If consumers do not judge the quality of a product because they lack the necessary information, price becomes a strong indicator of its quality. A variant of this strategy is the reference prices, a basic example serves to define this strategy and that is, the case of a company exhibits its products with more expensive ones in order to show that they belong to the same "class".It should be noted that there is a last psychological aspect to take into account and that is that some numbers have visual qualities that are taken into account, for example the number 8, it is round and symmetrical, it creates a calming effect, while a 7 is angular and creates a jarring effect Promotional Pricing: Companies temporarily assign prices to their products below normal and even below cost. Although this strategy takes several forms, it can be broadly defined as being used on a temporary basis to increase sales in the short term.Geographic pricing: This strategy takes place when there are clients that are very far from the places of sale or distribution of the product, so there will necessarily be an extra cost of the product for transfer services.It has some variants
- Free on board at origin: the goods are placed free on board the transport and the customer pays the actual freight to its destination Uniform delivery: the company charges the same price (including freight) to all customers without import where they are. By zones: all customers in the same area pay the same price, the more distant the area the more the customer pays. By base point: the company establishes a city as a base point and although the merchandise does not depart from that city the clients pay the freight from the same to their destination. This strategy is of interest when most of the clients are far from the real location of the company. Absorption of freight: in this case the merchant absorbs the cost in whole or in part, in order to lower the product and be able to have more market penetration.
International pricing: companies that sell their products internationally must decide what prices they will charge for them. This price will depend on many factors, namely; economic conditions of the country. Competitive situations, laws and regulations, etc. Society and therefore perceptions and preferences on some products vary from country to country, which requires different prices. In addition, an extra question is the different marketing objectives that the company may have in these countries. However, the main question that suggests the change of these prices is based on costs, for additional transfer costs, import taxes, costs associated with fluctuations in currency exchange rates, product distribution, etc.

Price changes

After having developed the appropriate pricing strategies, companies must face price changes, both increases and cuts, in both cases they must be able to anticipate the reactions of both consumers and competition.

Price cuts: this measure can be taken for various reasons, starting with an excess of stored capacity, in order to sell the stock as quickly as possible, also, if the company lost market share or wants to dominate the market applying the lowest price measure.Price increases: this measure is always rejected by consumers, so it is the company's job to always show the reason for its increase, and try to demonstrate that it is not trying to take advantage of the customer.. The typical case is the one that Argentina has lived for several months and it is given to cost inflation, due to devaluation. Companies use many variants in order to hide this increase, for example "cut" the product and not the price,perhaps offering products with less benefits but with the same price than the previous one. Consumer reactions to price changes: both increase and decrease, consumers can react in various ways, perhaps unexpectedly, to price changes. To give an example, if a product suffers a price cut, it could happen that instead of having a large increase in sales, depending on the type of product, the consumer might think that the company makes this cut because of its low quality. Or because in a few months a model with better features will be on sale. Giving a contrary example, if a product would raise its price, the consumer might think that there is a lot of demand for it, so they should hurry to buy it. Competitors' reactions to price changes:Like competitors, it is based on the interpretations that competitors may have about this change in price. If a company cuts the price of its product, the competition could interpret it as wanting to obtain a greater market share, or which requires doing so because their sales are well below normal or to remove companies from the market. The reactions of the competitors depend a lot on the type of market, if it faces many competitors who behave in similar ways or there are a few, who tend to behave differently when faced with price changes.the competition could interpret it as wanting to obtain greater market share, or that it requires doing so because its sales are well below normal or to remove companies from the market. The reactions of the competitors depend a lot on the type of market, if it faces many competitors who behave in similar ways or there are a few, who tend to behave differently when faced with price changes.The competition could interpret it as wanting to obtain greater market share, or that it requires doing so because its sales are well below normal or to remove companies from the market. The reactions of the competitors depend a lot on the type of market, if it faces many competitors who behave in similar ways or there are a few, who tend to behave differently when faced with price changes.which tend to behave differently in the face of price changes.which tend to behave differently in the face of price changes.

How to respond to price changes

Taking the problem in reverse, the company must then be able to solve the basic questions of why did the company change its price? From them, see how this change affects the sales of the company itself. Furthermore, the company must analyze how consumers react to this change, the life cycle that their own product goes through, the importance of the product within the company's product mix, etc.

The diagram details a logical flow to be solved by the companies:

Conclusions of the work

The correct pricing strategy that a company establishes for its products should be taken as a very important tool (although not the only one) to achieve the desired results.

The strategy to follow should not be taken lightly, since the future of the company will depend on this.

The correct choice of a strategy must be based on the following vital information for it to be successful