The word Price comes from the Latin pretium, which is the monetary value assigned to something. All the products and services offered in the market have a price, which is the money that the customer must pay to complete the operation.
Example: if the price of a pair of pants is 50 dollars, the person who wishes to buy it must pay that figure to take the product.
Factors that influence the price determination
A company's decisions about pricing are influenced by both internal and external environmental factors. Internal factors include marketing objectives, costs, and organization. External factors are market and demand, competition, and other environmental factors.
Internal factors influencing pricing decisions.
Marketing objectives
Before setting the price, the company must make a decision about the strategy for its product. If you have already chosen your target market and your positioning, then the strategy of your marketing mix, including the price, will not present major complications.
On the other hand, the company could have other objectives, and the clearer they are, the easier it will be to set the price. Common goals include survival, maximizing income and market share, as well as leadership with a quality product.
Survival
It is the main objective of a company if it is in trouble due to excess capacity, a lot of competition or changes in the wishes of consumers. For a plant to continue operating, a company must set a low price in the hope that demand will increase. In cases like this, profits are less important than survival.
Example: The kodak company found it difficult to adapt to the competition that had launched to the market digital cameras that had the advantage of taking more photos and better quality of the photos as opposed to the traditional ones that were per roll and that could be taken in a limited quantity. of pictures.
Maximizing current profits
Many companies want to set a price that maximizes their current income. They estimate demand and costs based on different prices and choose the one that will produce maximum profits, cash flow or higher return on investment. In any case, the company seeks immediate financial results, rather than long-term performance.
Example: the company Arca Continental estimates consumer demand and, based on these results, they set prices on their different products that maximize their profits.
Market share
Other companies want to dominate their market segment. They think that the company that has the largest stake in the long run will have the lowest costs and the highest profits. To be a leader in the market segment, its prices are as low as possible. A variant of this objective is to try to reach a specific segment of the market.
Example: Let's say that CNT wants to increase participation from 10 to 15 percent in a year, for which it will look for the most suitable price and marketing program to achieve its objective.
Leadership for product quality
A company decides that its product will be the highest quality on the market. In general this implies a high price to cover the costs of a high quality product and those of research and development.
Example: The Nike brand decides to be a leader in the market, that's why it invests in quality, research and development to be a leader in quality.
Other objectives
A company could use price to achieve other specific goals. You can put low prices so that the competition does not penetrate the market or put them at the same level of the competition so that the market stabilizes. The function of pricing may be to retain the loyalty and support of resellers or to impede government intervention. They can also be temporarily reduced to spark interest in a product or attract more customers to a retail store. Or a certain price is put on a product to increase sales of other products in the company's line. Therefore, pricing can play an important role in achieving a company's goals in many ways.
Example: Avon company sets low prices to attract more customers.
Marketing Mix Strategy
Price is just one of the tools in the marketing mix that the company uses to achieve its goals in this regard. Pricing decisions should be coordinated with decisions about product design, distribution, and promotion in order to form an effective marketing program. Decisions made for other variables in the mix could influence decisions about price. For example, producers who use many resellers to supposedly support and promote their products may have to integrate higher margins for them. The decision to develop a high quality position will mean that the seller will have to set a higher price to cover the costs.
Therefore, the logo market must take into account the total marketing mix when setting prices. If the product is positioned according to other factors, then decisions about quality, promotion and distribution will greatly influence the price. If price is the key positioning factor, then price will influence decisions regarding the other elements in the mix. In developing the marketing program, the company will almost always take all decisions into consideration simultaneously.
Costs
Costs determine the minimum price that the company can impose on its product. The company wants to set a price that covers both production and distribution costs, that makes the product sell and that the return on investment is in accordance with its efforts and the risks it ran. The costs of a company can be a very important element for its pricing strategy.
The costs are of two forms, fixed and variable. Fixed costs are those that do not vary with the level of production or sales, so that regardless of what you produce, you will have to pay the rent, heating, interest and salaries of your executives; they are independent of production.
Variable costs are a direct function of production levels. Total costs are the sum of the fixed and the variables at any production level. Administrators aim to set a price that at least covers production costs.
The company must closely monitor its costs. If the production and sale of your product costs you more than the competition, you will have to put a higher price or limit your profits, which will put you at a disadvantage compared to the competition.
Example: the price of Snob's jam will be varied to cover both production and distribution costs.
Organizational considerations
Administrators must decide who will set prices in the organization. Companies handle them in different ways. In small companies, higher-level executives do it, more than sales or marketing. In large companies, it is typical for divisional or product line managers to handle this.
In industrial markets, sellers may be authorized to trade with customers of a certain rank. Even in this case, top executives determine pricing objectives and policies, and often approve of those proposed by lower-level managers and vendors.
External factors to consider in pricing
External factors to consider in pricing include the nature of the market and demand, competition, and other environmental elements.
The market and demand
The market and the demand determine the upper limit. Both the consumer and industrial buyers compare the price of a product or service with the benefits of owning it. Therefore, before determining prices, the marketer must understand the relationship between the price and the demand for his product.
Example: The Arca Continental company to determine the price of its product, analyzes the market to determine the price of how much its product will cost in the market.
Determination of prices in different types of market
There are four types of market and each presents a different challenge for pricing:
Consumer perceptions of value and price
The consumer is the one who decides if the price of a product is correct when consumers buy a product, exchange something of value (the price), to obtain something of value (the benefits of owning the product or using it). Effective pricing involves understanding how much value customers place on the benefits they receive from the product. If customers perceive that the price is greater than the value of the product, they will not buy the product. If consumers perceive that the price is lower than the price of the product, they buy it, but the seller loses opportunities to obtain profit.
Example: AVON company brings a new product to the market that is a perfume and its price is higher than any CY ZONE perfume, but the perfume is not of good quality, therefore customers will not buy that product as much.
Competition-based pricing
Competition-based pricing is a method used to determine price based on competition knowledge, without largely considering its costs and demand. Thus, companies can charge the same as their direct competition or a little more, but trying to keep the amount of the difference constant.
Example: The movistar company sets its prices based on its direct competition, which is clear without considering its costs and consumer demand.
Other external factors
When determining its prices, the company must also consider other factors in its external environment.
1.- The economic conditions
They can have a powerful impact on the company's pricing strategies.
Economic factors, recession or inflation and interest rates, affect pricing decisions, because it affects both the costs of manufacturing a product, and consumer perceptions about the price and value of the product.
2.- The government
It is another important external influence on pricing decisions. Marketers need to know the laws that affect pricing and ensure that their pricing policies are defensible.
And finally, it is necessary to take into account social concerns. In determining your prices, it may be necessary to adjust the company's short-term sales, market share, and profit goals to certain broader societal considerations.
3.- Social concerns
You should consider what impact your prices will have on the other parts of your environment.
How will resellers respond to different prices?
You must determine prices that will make resellers a fair profit, that encourage their support and help them sell the product effectively.
Example: A company that manufactures toquilla straw hats the price that will sell the hat will depend on the cost of the raw material including labor and manufacturing indirect costs.
Competition
They are those sets of companies that offer the same products and market the same as a certain company.
But competition is not limited to the case of companies that compete directly with ours (with the same products).
Companies that offer products that can replace ours are also considered competition. Evaluate the positioning of the products to know the place that the product occupies in the market according to the marketing style.
All measures and actions that prevent our product from reaching the market must also be considered as competition. It must be borne in mind that our competitors do not always resort to ethically acceptable methods, many times they take advantage of certain legal loopholes to employ ethically questionable methods.
In addition there are other companies that come to be competition with different products or that are simply substitutes for ours, that is, they can change in quality or price but for the user it fulfills the same functions while satisfying their needs. A company is surrounded by a lot of competition and potential competitors.
Pure competition
It consists of many sellers and buyers who trade in goods such as wheat, copper, or financial securities. The seller cannot charge more because the buyers acquire what they need at that price, nor is it convenient for them to charge less, because they sell everything they want at that price. If prices and profits increase, the market is easily penetrated by other sellers. In a purely competitive market, market research, product development, pricing, advertising, and sales promotion have virtually no reason to exist, so sellers in these markets don't spend too much time on marketing strategy.
Monopolistic competition
Monopolistic competition or competition between monopolies is a type of competition in which there is a significant number of producers acting in the market without there being dominant control by any of these in particular.
This is very frequent within the product markets that are normally found in supermarkets, where there are products of different brands, but with particular characteristics and within each product group, the characteristics make them different from each other, but sufficiently similar to compete with other producers and with each other.
Oligopolistic competition
It is made up of a few vendors who are very sensitive to the pricing and marketing strategies of the others. The product can be uniform (steel, aluminum) or non-uniform (cars, computers). There are few sellers because it is difficult for new ones to enter the market. Each seller is aware of the strategies and measures taken by the competitors.
If in a company it accelerates it reduces its prices by 10 percent, the buyers will quickly change suppliers, and the other steel sellers will have to respond by also lowering their prices or improving their services. An oligopolist is never sure what he will earn by reducing a price is permanent. On the other hand, if you increase your prices, your competitors may not, so you will have to eliminate the increase or risk losing your customers.
Pure monopoly
It consists of only one vendor, which can be the government (the postal service), a regulated monopoly (a powerful company), or an unregulated monopoly. Pricing is very different in each case. The objectives that the government monopoly pursues when setting the price are very varied; the price may be less than the cost because the product is important to buyers who cannot afford the full cost.
Under a regulated monopoly, the government allows the company to set rates that give rise to fair benefits, that is, the company maintains and expands operations as needed. Unregulated monopolies can freely set the price.
Balance analysis and pricing for target profits
Pricing by target profit: consists of setting the price in order to obtain a certain target profit. The breakeven point: it is a financial tool that allows determining the moment in which the sales will cover the Costs, expressed in values, percentages or units. The break-even point analysis helps the entrepreneur to watch that expenses are not exceeded and sales do not fall according to established parameters.
Equilibrium Analysis and Target Profit Fixing Another cost-oriented pricing method is equilibrium pricing or a variant called target profit pricing.
The company tries to determine the price at which it will go out on hand or get the profits you are looking for. General Motors uses this method, since it sets the price of its cars to obtain a 15 to 20 percent return on its investment.
This pricing method is also used by utilities, as they are required to make fair profits on their investment. Target pricing uses the concept of an equilibrium diagram, which shows the total cost and total profits that can be expected with different sales volumes.
A balance diagram of the toaster manufacturer that we referred to above is shown. Fixed costs are $ 300,000, regardless of sales volume. Variable costs are added to fixed costs to calculate total costs, which increase as volume increases. The total profit curve starts at zero and increases with each unit sold.
The slope of the total profit curve reflects the price of $ 20 per unit. The total profit and total cost curve intersect at 30,000 units. This is the equilibrium volume. With a price of $ 20, the company must sell at least 30,000 units to go out by hand, that is, so that the total profits cover the total costs. The equilibrium volume is calculated with the following formula:
If the company wants to make a profit, it must sell more than 30,000 units, at $ 20 each. Suppose the roaster maker invested $ 1,000,000 in the business, and wants to set a price to make a profit of 20 percent, or $ 200,000. In this case, you must sell at least 50,000 units at $ 20 each. If the company charges a higher price, it won't have to sell as many roasters to achieve its target performance. However, the market is unlikely to buy even this lower volume at the highest price. Much depends on the price elasticity and the prices of the competition. The manufacturer should consider the different prices and estimate the equilibrium volumes, the probable demand and the profits of each.
This is done in Table 10.1. The table shows that, as the price increases, the equilibrium volume decreases (column 2). However, as the price increases, the demand for roasters also falls (column 3). At a price of $ 14, since the manufacturer only gets $ 4 per roaster ($ 14 minus $ 10 variable costs), you will need to sell a very high volume to get it on hand. Although the low price attracts many buyers, demand is still below breakeven, and the manufacturer loses money.
At the other extreme, priced at $ 22, the maker gets $ 12 per roaster and only needs to sell 25,000 units to go out on hand. However, at this high price, consumers will buy too few roasters, and profits will be negative. The table shows that a price of $ 18 produces the highest profits. Note that none of the prices produces the manufacturer's target profit, that is, $ 200,000. To achieve this target performance, the manufacturer will have to find ways to lower fixed or variable costs, thereby reducing equilibrium volume.
Analysis of the price-demand relationship
Every price the company could charge will lead to a different level of demand. The relationship between the price charged and the resulting level of demand is shown on the demand curve. The higher the price, the lower the demand. Consumers with limited budgets will likely buy less of something if the price is too high. The monopoly demand curve shows total market demand.
Graphic
Price elasticity of demand
A measure of the sensitivity to price demand. Marketers also need to know the price elasticity. If the demand does not change with a small variation in the price, we say that it is inelastic. If the demand changes a lot, we affirm that it is elastic.
What determines the elasticity of demand according to prices?
Buyers are less sensitive to the wreck when the product they are buying is unique or when it has a high level of quality, prestige or exclusivity. They are also less price sensitive when substitute products are hard to find or cannot easily buy the quality of substitutes. They are also less price sensitive when the total cost of a product is low relative to your income or when another party shares the cost. A lower price produces more total revenue.
How to calculate
EPD is a measure of the sensitivity (or response) of the quantity demanded of a good or service to changes in its price. The formula for the EPD coefficient is:
Formula
The formula usually returns a negative result due to the inverse nature of the relationship between the price and the quantity demanded, as described by the law of demand. For example, if the price increases by 5% and the quantity demanded decreases by 5%, then the elasticity with respect to the initial price and quantity is equal to −5% / 5% = −1.
As the difference between the two prices or quantities increases, the precision of the EPD given by the formula above decreases for a combination of two reasons. First, the EPD for a good is not necessarily constant; As explained later, EPD can vary at different points on the demand curve due to the nature of its percentage. Elasticity is not the same as the slope of the demand curve, which depends on the units used for price and quantity.
Second, the percentage changes are not symmetric; instead, the percentage variation between any two values depends on which of them is chosen as the initial value and which as the final value. For example, if the quantity demanded increases from 10 to 15 units, the percentage change is 50%.
But if the quantity demanded decreases from 15 to 10 units, the percentage change is -33.3%.
Strategy for pricing new products
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. It is during the introduction of the product to the market that 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:
- First 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 its price Economy strategy: medium quality products at prices Accessible. Companies that launch an innovative product, face the challenge of setting prices for the first time, there are two strategies to turn to:
Skimming pricing
It consists of placing a new product at a relatively high price to achieve higher income layer by layer of the segments willing to pay a very high price, it is very likely that the company sells less but would obtain a higher profit margin. In addition, the companies that address this type of strategy are because their segment is a Premium segment and that is why these people are willing to pay a large amount of money for the benefits that the product will provide them, Skimming of the top layers will only make sense under certain conditions:
- the quality and image of the product must support its highest price and the number of people who want that product at that price must be sufficient. The costs of producing a smaller volume should not be so high that they cancel the advantage of charging more. Competitors must not easily enter the market to undermine the high price. Therefore, it is necessary to create an obstacle to competition in order to maintain our prices since in the presence of competition, prices will decrease.
Example:
If the price of a brand of soft drinks goes up, keeping everything else including the price of the rest of the brands, constant.
Where this type of demand is reflected, they are usually in the categories of consumer goods, basic products, and items with consistent quality.
A product with elastic demand may or may not react favorably to a skimming strategy. For example. A case in which such a strategy would not work for carbonated drinks added with taurine and caffeine.
Pricing to penetrate the market
Setting a low price concept of market penetration means that when a new product goes on the market it comes out with a very low price, with the aim of attracting many customers and, in the same way, gaining a greater market share.
Terms:
- The market must be very price sensitive so that a low price produces more market growth. In other words, it attracts more people to buy the product because it is attractive to the price. The costs of production and distribution should decrease as the volume of sales increases. The low price should help to exclude competitors and use the Penetration strategy must maintain its low price position. These are the two strategies of how a new product can be introduced to the market according to one of the marketing mix variables which is price.
Example:
Discount stores like Wal-Mart use price penetration in two ways. First, they offer new products through their stores at much lower prices than other stores, hoping that you will buy more than one product once you enter the store. They are willing to lose money on the new product as a way to get more customers. Furthermore, they use penetration prices in new geographic markets due to the better established undervaluation of their competitors. Once they have a loyal customer base, they can gradually begin to increase prices.
Product mix pricing strategy
If your product is part of a product mix, the strategies should be to modify, as the products in the product mix have related demands and costs, but face varying degrees of competition.
Market strategy of product mixes
Small businesses typically start with a limited product mix in width, length and depth, and with a high level of consistency. However, over time, the company may want to differentiate its products or produce new ones to enter new markets. The company can also sell its existing products in new markets by finding new uses for existing items.
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 one, the evaluations made by customers of different characteristics and the prices of the competitors.
The pricing of a product line includes:
- The perception of a price depends on the price range. The extreme prices are the final prices. The order of presentation of the prices When a client finds a lower price than the reference one, his perception takes it as a lower price.
Price for product line
- Sacrifice price
Sacrifice one product to sell another.
- Price alignment
Different prices for each line but the same within the line.
- Set price
I charge where the price is less than if it is purchased separately.
- Price in two parts
One for service and one for use.
Optional product pricing
Used in products that are optional from other main products, such as some additional accessory, this strategy has its main core in deciding which articles will be part of the main and which will be effectively optional.
Captive Product Pricing
There are products which are vital to the operation of the main product, such as printer cartridges, are relatively low cost, or affordable, while print cartridges carry a premium.
By-product pricing
It is an interesting strategy for companies that raise their costs by storing their leftovers or manufacturing waste. 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 for product package
They combine several products and offer the package at reduced prices. For example, hotels sell special-price packages that include lodging, meals, and entertainment. This helps promote products that consumers might not otherwise buy, but the combined price should be low enough to entice them to purchase the package.
These are the five ways most used by companies to maximize profit with the range of products they can have.
Public policy and pricing
Definition
It is the set of norms, criteria, guidelines and actions that are established to regulate and set the amount of income from the sale of goods and / or services produced by the public sector through its agencies and entities. The maximum and minimum price and rate caps established by the Public Sector for individuals, for the aforementioned goods and / or services it produces, are also considered in this policy.
Price competition is a central element of free market economies. By setting their prices, companies are generally not free to collect what they want. Many state and even local laws set the precepts for fair competition in pricing. Furthermore, companies must consider broader social issues when setting their prices.
Companies cannot set the prices that they consider, so there are a series of laws that regulate these "problematic" prices that can produce unfair competition. In addition, the company has to take into account the different social issues that are related to that product.
As types of public policy regarding pricing are:
- Pricing within channel levels Pricing collusion Predatory pricing Pricing between channel levels
o Robinsin Law (USA) o Discriminatory pricing o Retail sales maintenance o Misleading pricing.
Example
- The basic basket the government stipulated that the pound of onion is $ 0.50 cents therefore the price cannot exceed in the market. The barrel of oil is at $ 88.00 dollars is an international value must be adapted to the market type because Ecuador does not put that price.
Bibliography
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