One of the most difficult areas of marketing decision making, pricing, deals with the methods of setting profitable and justifiable prices.
Pricing Basis, Objectives
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
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
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
1. Developing a product line – e.g. developing ‘economy’ versions of the
2. Controlling the availability of lower prices – e.g. select availability
in certain stores
prices based on observable buyer characteristics – e.g. new vs.
4. Varying prices based on observable characteristics of the transaction – e.g.
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:
Tags : MARKETING MANAGEMENT - Introduction to Marketing Mix
Last 30 days 771 views