MARKETING MANAGEMENT - Pricing Policies and Constraints
Introduction of Pricing Policies and Constraints
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Firms do their pricing in a variety of ways as discussed in the previous lesson. Executives complain that pricing is a big headache and one is wary of committing a go/drop error in the pricing decision.
Introduction
Firms do their pricing in a variety of ways as discussed in the previous lesson. Executives complain that pricing is a big headache and one is wary of committing a go/drop error in the pricing decision. Pricing less than what the customer wants to pay and pricing more than what the customer wants to pay are both costly errors. ‘There are two fools in every market: one asks too little, one asks too much’, says a Russian Proverb. Many companies do not handle pricing well. Some common mistakes are:
1. Price is not revised often enough to capitalize on market changes
2. Price is set independently of the rest of the marketing mix rather than as an intrinsic element of market-positioning strategy
3. Price is not varied enough for different product items, market segments, distribution channels and purchase occasions
The importance of pricing for profitability was demonstrated in a 1992 study by McKinsey & Company. Examining 2,400 companies, McKinsey concluded that a 1% improvement in price created an improvement in operating profit of 11.1%. By contrast, 1% improvements in variable cost, volume and fixed cost product profit improvements of only 7.8%, 3.3% and 2.3% respectively. Effectively designing and implementing pricing strategies requires a systematic approach to setting, adapting and changing prices.
Firms do their pricing in a variety of ways as discussed in the previous lesson. Executives complain that pricing is a big headache and one is wary of committing a go/drop error in the pricing decision. Pricing less than what the customer wants to pay and pricing more than what the customer wants to pay are both costly errors. ‘There are two fools in every market: one asks too little, one asks too much’, says a Russian Proverb. Many companies do not handle pricing well. Some common mistakes are:
1. Price is not revised often enough to capitalize on market changes
2. Price is set independently of the rest of the marketing mix rather than as an intrinsic element of market-positioning strategy
3. Price is not varied enough for different product items, market segments, distribution channels and purchase occasions
The importance of pricing for profitability was demonstrated in a 1992 study by McKinsey & Company. Examining 2,400 companies, McKinsey concluded that a 1% improvement in price created an improvement in operating profit of 11.1%. By contrast, 1% improvements in variable cost, volume and fixed cost product profit improvements of only 7.8%, 3.3% and 2.3% respectively. Effectively designing and implementing pricing strategies requires a systematic approach to setting, adapting and changing prices.
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