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MARKETING MANAGEMENT - Introduction to Marketing Mix

Pricing Basis, Objectives and Approaches - Introduction to Marketing Mix

   Posted On :  18.06.2018 02:07 am

One of the most difficult areas of marketing decision making, pricing, deals with the methods of setting profitable and justifiable prices.

Pricing Basis, Objectives and Approaches
One of the most difficult areas of marketing decision making, pricing, deals with the methods of setting profitable and justifiable prices. It is closely regulated and subject to considerable public scrutiny. In comparison to the other 3 Ps – product, place and promotion - of marketing mix, the price element is the only revenue element whereas the others are cost elements. Also, this is the element which can be easily copied. To a large extent, the combination of the 3 Ps determine the target customer’s perception of the value of the firm’s product in a given competitive context.
Conceptually, this perceived value represents the maximum price which the customer is willing to pay. This should be the primary guide to pricing the product. Once the firm has created value for customers, it is entitled to capture some of that value for itself to fund future value-creation efforts. This is the role of effective pricing.

Pricing Basis and Objective

In most situations, cost should act as a floor on pricing. In some circumstances, a firm intentionally sells at a loss for a time to establish a position in the market, but it is often difficult to increase prices later due to the customer’s use of the introductory price as a reference point. With perceived value in mind, the first question is what is the marketing objective and how does the pricing objective derive from that?
For example, the price that would maximize short-term profit is typically higher than the one which would maximize market penetration subject even to making some profit on each item. It can be described as a choice between a ‘skim’ and ‘penetration’ pricing strategy. In a skim strategy, the focus is on those consumers with high value. Starting with a high price and targeting a segment that is willing to pay this price, skimming happens. Later on, prices are reduced to reach the segments below.
In penetration pricing, the firm sets a lower price to generate lots of sales quickly. It is designed to preempt competition and gain a significant number of customers early on. The appeal of a penetration strategy increases to the extent that (1) customers are sensitive to price, (2)   economies of scale are important, (3) adequate production capacity is available, and (4) there is a threat of competition.

Since customers typically place different values on the product, the firm should consider whether it is worth trying to capitalize on these value variations by charging different customers different prices. In some cases, legal constraints and logistical practicalities can make this infeasible. However many firms owe their economic well-being to their ability to customize prices.
In many cases, for example, prices are varied depending on when the buyer is booking, for how long, for what days of week and so on. These characteristics are used as indicators of the value the customer places on the product. Price customization can be achieved by:
1. Developing a product line – e.g. developing ‘economy’ versions of the product
2. Controlling the availability of lower prices – e.g. select availability in certain stores
3. Varying prices based on observable buyer characteristics – e.g. new vs. existing customers
4. Varying prices based on observable characteristics of the transaction – e.g. purchase volume
Another pricing approach is product life cycle pricing in which different prices are charged at different stages of the product’s life cycle. Since the marketing objective and the cost structure various across the stages, the pricing approach also varies.
While product marketing mix consists of the 4 Ps, services marketing brings in additional 3 Ps into an extended marketing mix. The additional 3 Ps – People, Process and Physical evidence – are necessitated by the characteristics of the services. While products are tangible, services are intangible.
While products can be manufactured and inventoried, production and consumption take place at the same time and hence are inseparable. While products can be standardized, services cannot be – thanks to the human interaction in service delivery. The perceived quality of service depends on who provides it, when and where it is provided and also to whom it is provided. Because of this, the heterogeneity in services throws a quality challenge. Finally, the services are perishable – so managing the demand and supply is crucial.
Because of these characteristics of services, viz., intangibility, inseparability, heterogeneity and perishability, there is a need for industrializing and standardizing the services (Process), tangibilize the intangibles (through Physical evidence) and managing the service personnel (People) who are part of the service. The sub-elements of these additional 3 Ps are: 

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