A critical part of pricing many managers forget

By Moira McCormick on December 10, 2015

Pricing is one of the four major elements of the marketing mix. Your pricing strategy naturally involves evaluating the price you will charge for your product or service, and how this price fits in with your overall marketing plan, but are you covering all the bases? This article looks at some of the critical elements that can be forgotten by a pricing manager.

 

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1. Develop a coherent marketing strategy

Perform marketing analysis, target market selection, segmentation, and product positioning before the product is developed. There is usually a trade off between product quality and price, so price is an important variable in positioning.

 

2. Make marketing mix decisions

Define the product, distribution, and your promotional tactics. There will be inevitable trade offs between marketing mix elements so price will probably depend on other product, distribution, and promotion decisions.


3. Estimate the demand curve

Understand the critical relationship between price and quantity demanded. It is important to understand the impact of pricing on sales by estimating the demand curve for the product. Experiments can be performed for existing products at prices above and below the current price in order to determine the price elasticity of demand. Inelastic demand indicates that price increases might be feasible.

 

4. Understand environmental factors

Evaluate likely competitor actions and understand legal constraints, etc. You must consider the implications of your pricing strategy on the pricing decisions of competitors – for example, setting the price too low may risk a price war that could harm both sides; setting the price too high may attract a large number of competitors who want to share in the profits. Legally, you are not always free to price your products at any level you choose as there may be price controls that prohibit pricing a product too high. Pricing it too low could be considered predatory pricing or "dumping" in the case of international trade. Offering a different price for different consumers may violate laws against price discrimination and collusion with competitors to fix prices at an agreed level is illegal in many countries. Remember also that world events (political/natural disasters) affect consumer's take up of products and services. For example, the travel and hospitality industries are adversely affected by local political upheavals or recent terrorist activity.


5. Set pricing objectives

For example, profit maximization, revenue maximization, or price stabilization. Some common pricing objectives include the following:

  • Current profit maximization - seeks to maximize current profit, taking into account revenue and costs. It may not be the best objective if it results in lower long-term profits.
  • Current revenue maximization - seeks to maximize current revenue with no regard to profit margins. The underlying objective is to maximize long-term profits by increasing market share and lowering costs.
  • Maximize quantity - seeks to maximize the number of units sold or the number of customers served in order to decrease long-term predicted costs.
  • Maximize profit margin - attempts to maximize the unit profit margin, recognizing that quantities will be low.
  • Quality leadership - use price to signal high quality in an attempt to position the product as the quality leader.
  • Status quo – you may seek price stabilization in order to avoid price wars and maintain a moderate but stable level of profit.

 

6. Customer Visits

Don't just leave it to your sales force. Unexpected information about your product or company always comes out when talking face to face – so get involved and visit customers with your salesforce to get a true perspective of how your prices are perceived in the market place.

 

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Sources

  • http://pricingsociety.com/.
  • Entrepreneur.com: How to Formulate a Premium Pricing Strategy.
  • http://www.ehow.com/info_7861891_pricing-strategy-important-success-business.html by Devra Gartenstein.
  • Net MBA: Pricing Strategy.
  • Harvard Business Review article 'Pricing Policies for New Products' by Joel Dean.
  • Pricing with Confidence: 10 ways to stop leaving money on the table, by Reed K. Holden and Mark Burton, 2014.
  • Pricing Strategy: Tactics and Strategies for Pricing with Confidence, by Warren D. Hamilton, 2014.
  • Pricing for Profit: how to develop a powerful pricing strategy for your business, by Peter Hill, 2013.

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