CONCEPT AND IMPORTANCE OF PRICE
The price is the amount of money charged by a product or service. Nevertheless, from a marketing perspective, price is a relative variable, as each consumer can perceive it in a different manner.
Therefore, we can define price as the value represented for a particular person by the acquisition of a product or service, understanding as value the product or service themselves and their use in a particular moment or place.
Price is a very important instrument in the design of our marketing plan for the following reasons:
- Price is a short term tool. It can be used more quickly and in a more flexible way, within certain limits, than other marketing instruments. It usually has immediate effect on the sales.
- Price is a powerful competitive instrument. In a competitive market, where there are no regulations or few of them, price becomes an extremely powerful instrument, but it is also a highly dangerous tool. An extreme price competition might become a situation of “zero sum game”, in which nobody wins. Sometimes, it might be more profitable to be less price-competitive.
- Price is the only instrument that provides incomes. The other elements of the marketing mix generate costs or investments, which only in a delayed manner are translated into sales or incomes. Price is the only element that does not need a previous investment.
- Price has important psychological repercussions on the consumer. The consumer’s sensitivity to price. Price should be according to the value perceived by the consumer. If the price is too high, the consumer will not be ready to buy something that, in his/her opinion, has lower value. But if it is too low, he/she can also refuse the product as he/she considers it of a lower quality.
The price sensitivity and, consequently, the importance given to it by the consumer, are not always constant. In recession times, the consumer, as he/she sees his/her purchase capacity reduced, becomes more sensitive to price and wants to save in his/her purchases. Price, in these circumstances, becomes a powerful commercial action tool.
- Price is, in many purchasing decisions, the only information available. The consumer, sometimes, does not have any other information about the product, but its price or does not have the ability to evaluate the product technical features, composition or performances. In these cases, price becomes a valuable indicator of the product quality, its prestige and the brand image or the purchase opportunity.
KEYS TO DEFINE THE PRICE POLICY
Steps to determine the Price Policy
- Determine the product or service market value, compared with the competitors’ prices
- Determine if there are any segments with more price sensitivity and identify them
- Evaluate the product or service costs,
- Choose the most suitable strategies and methods and fix the price,
- Once the price has been fixed, review it compared with the competitors’ movements.
Methods to Fix Prices
When deciding the system to fix prices in our company, we have three major methods, based on three criteria: costs, competition and market
- Cost-based methods: they are the simplest and most culturally and socially rooted methods. From the marketing perspective, they are not always the most efficacious to achieve the company’s objectives. They involve adding a margin of profit to the product or service cost.
- Competition-based methods: the competitors’ behaviour is the reference to fix price, although costs mark the minimum price the product can be sold. The prices are fixed depending on the leadership position of the company.
In general, the companies fix a similar price to that established in the sector, except if they have some advantage or disadvantage in quality, availability, distribution or additional services. In these cases, they fix their prices above or below, respectively.
- 3. Market or demand-based methods: they have a subjective base. The value of the product a consumer perceives determines the top limit of the price. These methods try to fix the prices considering the consumer psychology and the elasticity of demand (how the demand responds to a change of the product price) of the different market segments.
Strategies and tactics to Fix Prices
Depending on the combination of the above described criteria, we can establish distinguishing strategies, competitive strategies, psychological price strategies, strategies for product lines and strategies for new products, which will result in multiple tactics to fix prices:
DISTINGUISHING STRATEGIES
Criteria considered: market and demand The same product or service is sold at different prices, depending on the consumers’ features, the volume of purchase, the season, etc.
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Fixed or variable prices: Fixed price is usual in frequently purchased products or those with low-medium price. Example: newspaper.
Variable price involves more flexibility of the amount and conditions. Price is object of a negotiation in each transaction. It is usually applicable to products or services with high price. Example: the purchase of a house |
Discounts per quantity. Not linear prices: The discount is a reduction of the unit price offered to the customer if he/she buys an amount that is higher than the usual. | |
Discount for early payment:Bonus to the purchaser for paying in cash. | |
Price with deferred payment: Totally or partially deferring the amount for the purchase, for an established period of time, with or without a surcharge for interests. It is also a way of promotion, to encourage the purchaser to buy the product. While a customer is financed, relations are created and these might generate new sales. | |
Random discounts (special offers):Decrease the price in certain places or times, without the purchaser knowing previously when it is going to happen. Aim: attracting new customers. | |
Periodical discounts (sales):They happen in already determined seasons. Aim: attracting customers with different elasticity of the demand. | |
Discounts in second market: Decreasing price not affecting all the consumers, but those who comply certain conditions. A lower price than that in the main market is fixed. It can be determined by demographical, geographical, socioeconomic, by the channel or place of sale, etc. Example: discounts for young and elder people in transport services. | |
Prices for professional services:Some professionals apply standardised prices for specific services | |
Ethical prices:Different prices depending on the social purpose of the good sold or the service offered, or the customer’s purchasing power. | |
COMPETITIVE STRATEGIES
Considered criteria: Competition
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Similar prices to those of the competitors |
“Bonused” prices:The company fixes higher prices, because it offers higher quality or additional services.. | |
“Discounted” prices:Lower or discounted prices that might involve a lower quality product or fewer additional services, or because of some advantage (massive purchase, cheaper production, etc.) allowing selling at lower prices. | |
Loss-leader:Selling for less than its production or acquisition cost. This practice is regulated and it is only allowed under certain premises such as, among others, sales, perishable products sold when they are almost to go off, in clearances of business with certain problems… | |
Tenders:The company with the lowest price has more possibilities to win the tender. | |
PSYCHOLOGICAL PRICES STRATEGIES Considered criteria: the consumer’s psychology They are based on the way the market perceives the amount of prices and on the association the consumer makes of them |
Usual price:It is the price shared by most of the competitors. It is usually difficult to change. Example: bread |
“Even” price:It is based on prices ended in even figures and is normally rounded up, (example 1000 euro) to give the impression that it is a higher quality or prestige product or service.. | |
“Uneven” price:It is based on prices ended in uneven figures (example: 19.99 or 19.95). It is linked to a lower price, which is useful for lower category products or services or in promotions. | |
High or prestige price:High price linked to a quality product or service. It is effective only if the consumer perceives the product superiority. | |
Price according to the perceived value:The components cost is not taken into account, but the value the consumer allocates to the use or satisfaction it offers. Example: the price of a salad in a restaurant. | |
Reference price:Standard price the consumers compare the real product prices with. The lowest price is an important point of reference. It can be based on previous prices or those of other brands | |
PRICE STRATEGIES FOR PRODUCT LINES
Considered criteria: Costs, Global profit and Demand We have to consider the global profit of the product line
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Loss leader:It might be effective if there is any crossed elasticity. It involves having one or two products in the line with low prices, which do not get profit, or even cause loss, if they are a lure to attract new purchasers and act as “locomotives” to pull the sales of other products with higher price and more profitable for the company. Example: it is very usual in shopping centres, they put the prices of certain products down to encourage the sales of others related with them. |
Pack price:It involves fixing a price for a pack of products, composed of some complementary products of the line, as the accessories or options, lower than the addition of the partial prices of the components. The objective is to encourage the purchase of these complements, which would not occur without this benefit. Example: full boarding hotels | |
Captive products price:It involves fixing a low price for the main product and a bit higher one for the complementary ones, when they are absolutely necessary for the use of the main one. Example: printer inks. | |
Two-part price:In the case of services: a fixed part, the quota for the subscription to the service and another variable one, depending on the use. Example: telephone rates- | |
One price:Fix one only price for each product line. Example: one price for shirts, another for trousers… | |
PRICE STRATEGIES FOR NEW PRODUCTS
Considered criteria: Market, Demand, Costs and Competition |
Skimming strategy:It involves setting a high price at first, with a high investment in communication, to attract the “cream” of the market and then put the prize down, progressively, to attract other segments of the market, more sensitive to price. The technological products usually use this strategy.
This strategy is advisable if: - It is an innovative product (protected by patent); - The demand is inelastic to price (that is, with lower prices the demand does not increase, and there is a segment of the market willing to pay high prices); - The market is segmented, that is, there are different segments with different features and needs; - The demand is sensitive to promotion. |
Penetration strategy:It involves setting low prices from the beginning of the product launch, to get the greatest penetration as quickly as possible.
It is advisable when: - The product is not new in the market and can be quickly copied; - The demand is highly sensitive to price; - It is possible that new competitors appear; - Scale economies (the initial low prices might generate a demand that will allow mass production at lower costs); - Need to recover quickly the investment. |
Mistakes to be avoided
Basing the price setting only on costs
Not reviewing prices in front of changes in the market
Fixing prices without taking into account the rest of the marketing mix
Not discriminating prices by segments and products
Considering price as the only competitive variable of the company
Considering only the variable cost and not taking into account the fixed cost
Forgetting that the prices should ensure the company profit in the long term.