Companies that offer products and services to the public commonly express the price at which they are willing to make their exchange in terms of pesos and cents.
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.
In the short term, when a pricing strategy is already defined, the important thing is to answer some important questions:
- How to set a price? What information to consider to set prices? How to keep prices at a competitive level? How to integrate price decision with product, distribution and promotion decisions? How to manage different price levels for combinations of product - brand - channel?
The first of these decisions is significant for customers because the price, understood as an economic sacrifice, allows them to make an allocation of their personal or family resources and translates their purchase decisions into a possession utility that means the possibility of enjoying what they want. they paid.
For companies, with or without profit, the price is the variable that opens the real possibility of making an exchange with their clients, laying the foundations for doing so and allowing them to express their functional activity in financial, accounting, fiscal and administrative terms. And the price is the only Marketing variable that, instead of generating costs and expenses, generates income for companies since, by definition:
Since income comes from both variables, raising or lowering prices makes sense only to the extent that the corresponding change in quantity translates into an increase in income.
It is true that price decisions are complex, but their definition is not, since the price results from dividing what the seller receives by what the buyer receives. It is a very simple operational definition of price:
A box of 6 chocolates costs $ 0.90, so the ninety cents the seller receives in exchange for the six chocolates the buyer receives are expressed as a price of $ 0.15 for each chocolate.
The sources of change in price are precisely those in the numerator and denominator of the equation. Alone each one, or combined both.
Thus, what the seller receives may change in terms of:
1. the amount to pay
2. the time it is paid
3. the place where you pay
4. the way it is paid
While what the buyer receives may change in terms of:
5. the quantity to receive
6. the quality of what was received
7. the moment it is received
8. the place where it is received
In situation 1, what the seller receives could be brought to $ 1.20, equivalent to $ 0.20 for each of the 6 chocolates that the buyer receives.
In situation 5, you could take what the buyer receives to only 5 chocolates for the same $ 0.90 that the seller receives, we will now have the price of $ 0.18 for each of the 5 chocolates.
Of course there would be a cost, perhaps unjustified, for the fact of going from a package of 6 chocolates to one containing 5. This is part of what makes the decision complex, as well as the possibility of changing both sides at the same time. of the equation. In addition, of course, there are the other six possible situations.
The example allows us to recognize that in addition to the Price Elasticity, commonly considered in this type of decision, there is an Income Elasticity that can be much more relevant to the client. In other words, sales volume may be more affected by the disposable income of customers than by the price level of products and services.
We must analyze the effect that the disbursement of money may have on the customer's willingness to buy. Going from $ 0.90 to $ 1.20 means an impact of 33% that possibly drives away so many buyers that the effect on income is negative.
Going from $ 0.15 to $ 0.18 per chocolate means an impact of 20% on the customer's outlay. Since the disbursement 'unit' remains the same, perhaps neither the quantity purchased nor the frequency of purchase will decrease, so revenue would have a greater chance of increasing, as would the seller's market share.
A product or service that is exchanged has value for the public insofar as it is capable of providing a benefit, solving a problem, satisfying a need or fulfilling a desire; therefore, the key word for a pricing strategy is value.
The client will make a comparison of the value that results for him in the transactions with different suppliers. The inverse relationship of the same equation results in an operational definition of value.
During the purchasing decision-making process, what is important for the customer is not the price itself, but the relative price that results from comparing what is obtained over what is delivered to the seller, as well as the relative prices between different products. A company has a Competitive Advantage when the value it offers to customers is greater than the value offered by its competitors.
As can be seen, there are 8 great ways to increase said value and the outlay that results from paying a price is only one of them. Fortunately, there are several ways to change it and, consequently, the value that is offered to customers.
From a short-term view, lowering the price can make sense, particularly if the company does it temporarily, as a promotional tool. But in the long term, lowering prices means lower profits more often than not and there is no company that resists it.
Managing low prices as a Sustainable Competitive Advantage is something that can be achieved by those companies that are integrally oriented to make profitable a permanent low-cost structure that supports a permanent pricing strategy.
