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MARKETING MANAGEMENT - Pricing Objectives and Approaches

General pricing approaches - Pricing Objectives and Approaches

   Posted On :  18.06.2018 10:32 pm

The price the firm charges will be somewhere between on that is too low to produce a profit and one that is too high to produce any demand.

General pricing approaches

The price the firm charges will be somewhere between on that is too low to produce a profit and one that is too high to produce any demand. Product costs set a floor to the price and consumer perceptions of the product’s value set the ceiling. The firm must consider competitors’ prices and other external and internal factors to find the best price between these two extremes. Firms set prices by selecting a general pricing approach that includes one or more of these three sets of factors. Let us examine the following approaches:
 
(1)               Cost-based approach
 
(2)               Buyer-based approach, and
 
(3)               Competition-based approach
 

Cost-based approach


The simplest pricing method is cost-plus or markup pricing - adding a standard markup to the cost of the product. Markups vary greatly among different goods. Some common markups (on price, not cost) in supermarkets are 9% on baby foods, 14% on tobacco products, 27% on dried foods and vegetables and 50% on greeting cards.
 
Markups are generally higher on seasonal items (to cover the risk of not selling) and on specialty items, slower moving items, items with high storage and handling costs and items with inelastic demand. It must be noted that any pricing method that ignores current demand and competition is not likely to lead to the best price. Hence markup pricing only works if that price actually brings in the expected level of sales.
 

Advantages

 
 
(1)               It covers all the costs
 
(2)               It is designed to provide the target rate of margin
 
(3)               It is generally a rational and widely accepted method
 
(4)               It is an easy to comprehend and simple method

 
 

Disadvantages

 
1.      The cost calculations are based on a predetermined level of activity. If the actual level of activity varies from this estimated level, the costs may vary, rendering this method unrealistic.
 
2.      If the costs of the firm are higher than its competitors, this method would render the firm passive in relation to price.
 
3.      Another drawback is that sometimes the opportunity to charge a high price is foregone.
 
4.      It ignores the price elasticity of demand.
 
5.      The cost-based pricing would not be helpful for some of the objectives or tasks like market penetration, fighting competition and so on.
 
6.      It imparts an in-built inflexibility to pricing decisions.
 
7.      Another cost-based pricing approach is break even pricing, or a variation called target profit pricing. The firm tries to determine the price at which it will break even or make the target profit it is seeking.
 

Buyer-based approach

 
 
An increasing number of firms are basing their prices on the product’s perceived value. Perceived-value pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. The company uses the non-price variables in the marketing mix to build up perceived value in buyers’ minds. Price is set to match the perceived value. A company using perceived-value pricing must find out what value buyers assign to different competitive offers.
 
Sometimes consumers are asked how much they would pay for each benefit added to the offer. If the seller charges more than the buyers’ perceived value, the firm’s sales will suffer. Many firms overprice their products, and their products sell poorly. Other firms under-priced products sell very well, but they produce less revenue than they would if prices were raised to the perceived-value level.

 

Competition-based pricing

 
 
Many firms follow the dominant competitors, particularly the price leader, in setting the price. The main advantages of this method are:
 
1.      It is a very simple method
 
2.      It follows the main market trend
 
3.      It has relevance to the competitive standing of the firm
 
4.      Holding to the going price will prevent harmful price wars
 
 
The major disadvantages and limitations of following competitors are:
 
1.      If the competitors’ price decisions are unrealistic, the follower will also be going wrong on the price
 
2.      The cost factors of the follower may not be similar to that of the competitors’
 
3.      The pricing objective of the firm could be different from that of the competitors’
 
4.      Sometimes the competitor may initiate price change for wrong reasons
 
Competition-based pricing approach may take the form of going-rate pricing or sealed-bid pricing. In going-rate pricing, the firm bases its price largely on competitors’ prices, with less attention paid to its own cost or to demand. In oligopolistic industries that sell commodities, firms normally charge the same price. It is a popular pricing method.
 
When demand elasticity is hard to measure, firms feel the going price represents the collective wisdom of the industry concerning the price that will yield a fair return. Competition-based pricing is also used when firms bid for jobs. Using sealed-bid pricing, a firm bases its price on how it thinks competitors will price rather than on its own costs or on the demand.

The firm wants to win a contract and winning the contract requires pricing lower than other firms. Yet, the firm cannot set its price below a certain level. It cannot price below cost without hurting its position. In contrast, the higher the firm sets its price above its costs, the less its chance of getting the contract. 

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