Price

Definition of price
Price is not just a number on a tag. Price comes in many forms and performs
many functions.
Rent, tuition, fares, fees, rates, tolls, retainers, wages, and commissions all may
in some way be the price you pay for some goods or service.
So we can say that, the amount of money charged for a product or service, or
the sum of the values that customers exchange for the benefits of having or
using the product or service.

Definition of price
According to Philip Kotler & Gary Armstrong,
The amount of money charged for a product or service or the sum of the values
that consumers exchange for the benefit of having or using a product or
service.
According to Steven j. Skinner,
Price is the something of value that a buyer gives up in an exchange.

Four views of price

Economists view

Price is set by the forces of supply and demand

Accountants
view

Price should cover costs so that a profit can be

made

Customers view

Price has to represent good value

Marketers view

Pricing is an opportunity to gain a competitive

advantage

Price management/ factors affect in setting prices:

A firm must set a price for the first time when it develops a new product, when it
introduces its regular product into a new distribution channel or geographical
area, and when it enters bids/tender on new contract work.
The firm must consider many factors in managing or setting its pricing policy.
Now these are discussed in below..

Selecting the pricing objectives:

The Company first decides where it wants to position its market offering. The clearer a
firms objectives, the easier it is to set price.

Determining demand:
Each price will lead to a different level of demand and will therefore have a different
impact on a companys marketing objectives.

The higher the price, the lower the demand but some consumers take the higher
price to signify a better product. However, if the price is too high, the level of
demand may fall.

Estimating costs:
Demand sets a ceiling on the price the company can charge for its product.

Costs set the floor. The company wants to charge a price that covers its cost of
producing, distributing, and selling the product, including a fair return for its
effort and risk.
Yet, when companies price product to cover their full costs, profitability isnt
always the net result.

Analyzing competitors costs, prices, and offers:

Within the range of possible prices determined by the market demand and company
costs, the firm must take competitors costs, prices, and possible price reactions into
account. The firm first should consider the nearest competitors price.

Pricing method:
for pricing there are four methods are using

Cost plus pricing or markup pricing

Target returns pricing
Perceived value pricing
Competition oriented pricing

The price maker also considers some additional factors. These are

Psychological pricing
The influence of other marketing mix elements on price
Company pricing policies:
The impact of other parties

Psychological pricing:
A pricing approach that considers the psychology of prices and not simply the
economics, the price is used to say something about the product.
For example consumers usually perceived higher-priced products as having higher
quality. When the customers cannot judge the quality because they lack of information or
skill, price becomes an important quality signal.

The influence of other marketing mix elements on price:

Marketing mix elements has great impact on price of the product. Marketing elements,
such as advertising, sales force, etc. influence the firm at the time of price setting of the
product.
For example, if the advertising cost is high then the price of the product will be high. On
the other hand, if the advertising cost is low then the price of the product will be low.

Company pricing policies:

Every company has specific pricing policies. So, the price must be consistent with
company pricing policies, otherwise the company may fail in price setting of the product.
Many company set up a pricing department to develop policies and establish or approve
decisions. The aim is to ensure that salespeople quote prices that are reasonable to
customers and profitable to the company.

The impact of other parties:

Price of the product also determine on the basis impact of other parties.
A company determines the price of the product by considering the distributors, dealers,
company sales force, suppliers etc.

Objectives of price selection

According to Steven j. Skinner

A pricing objective is a general goal that describes what an organization help to achieve
through its pricing objectives. Major objectives are

Survival:
A company takes several decisions to produce more products & firm needs to survive
for huge competition. For surviving in the competition, Firm determines low price. Here
producers does not want earn more, he wants to recover the costs & want to stay in the
market for the long time.
For example, now all auto mobile companies are selling their car at low price only to
survive in the market.

Product quality leadership:

A company might aim to be the product quality leader in the market.
Many brands attempt/strive to be affordable luxuries products or services characterized
by high levels of perceived quality, taste, and status with a price just high enough not to be
out of consumers reach. They target specific generally aristocrat customer group who look
for quality product but not price sensitive.
For example, Mercedes Benz refers high priced, high quality and high prestige.

Profit maximization:
Another objective of price selection is profit maximization. When there is less
competitors that Event Company can determine high price. Example: From 1997 to 2004
Grameen Phone maximize their profit by high price because of low competitors.

Harvesting investment:
Sometimes, companies think that they will harvest the investment from the market. For
this reason they determine the high price. On the other hand, some companies want to
harvest the investment by determining low price.

Ensuring cash flow:

How amount of money are achieved from market will be informed by pricing. It helps to
bring cash flow in hand.

Increasing sales:

If the low price is determined then the sales may be increased. Generally, those of
companies are come in the market, they can increase their sales by determining low price.

Increasing market share:

Some companies want to maximize their market share; they believe that a higher sales
volume will lead to lower unit costs and higher long run profit. They set the lowest price,
assuming the market is price sensitive. From starting Banglalink set low price to maximize
its market share.

To stabilize:
A company follows stabilize price considering all matters. If the price is stabilized,
buyers will be encouraged to buy product or service.
To maintain favorable image: Another objective of price selection is maintaining the
favorable image to the company.
CHALLENGES IN PRICING DECISIONS
1. ENVIRONMENTAL PRESSURE:-Legal & political
2. SHORTAGE OF MATERIALS:-shortage of cocoa beans resulted in a shortage of
chocolate candy manufacturers.
3. CURRENCY FLUCTUATION:- import-export business, fall down of taka for dollars
4. Demand considerations: - establish a ceiling price (maximum price because when
demand > supply). But it totally depends on the customers perceptions of value
5. Cost considerations: - set a floor price (minimum possible price). So try mind
about the direct costs regarding Production, marketing, distribution.
For the new products the relevant costs are future direct costs (production,
marketing, distribution) of that products lifecycle.
o The difference between perceived value (what buyers willing to pay) &
minimum cost based prices = pricing discretion (final price setting decision
taking).
o Pricing discretion (final price setting decision) depends some more factors like
competitive factors, corporate profit and market objectives & regulatory
constraints.
6. Competitive factors: - Reduce the price ceiling (maximum price charging) where
as corporate objectives & regulation raise the minimum possible price.
o

Principally, corporate objectives force to make higher prices in order to cover fixed
costs & overhead costs (variable costs) & meet the profit goals.
7. Govt. regulations: - (pollution controls and safety standards) forces the increased
cost of production.

Again Govt. regulation of certain marketing practices (safe packaging) & legal
regulation against predatory pricing (SAMSUNG VS APPLE) all have an upward effect
(increase) on the price floor (minimum price setting)

ROLES/IMPORTANCE OF PRICE DECISIONS

Pricing a product or service is one of the most vital decisions made by management. Price
is the only marketing strategy variable that directly generates income. So to survive in the
competitive market or to be a market leader, price decision plays a vital role.
ROLES/IMPORTANCE OF PRICE DECISIONS

Economic Uncertainty
Proliferation of new products
Increased demand for services
Increased Foreign Competition
Changing legal environment
Faster technological pressure
Allocation of Resources
Production Volume
Income & Spending Behavior
Profits Determinant
Demand of Products
Innovation & Development of New Technology
Alternative Uses of Resources

Economic Uncertainty
It is known to us that generally economic uncertainty is created through inflation and
deflation. Both of these economic factors placed additional pressures on the costs of
producing goods and services.
In addition, material shortages often forced firms to reduce their product lines and to
reevaluate their efforts to develop new products. Price increase led to customer
resistance; as a result many firms rediscovered the need for new approaches to
developing pricing strategies.

Proliferation of new products

Product proliferation

Occurs when organizations market many variations of the same products. This
can be done through different color combinations, product sizes and different
product uses.

This produces diversity for the firm as it is able to capture its sizable portion of
the market.
However, it can also be considered that marketing so many new products leads
to economic resources being wasted; the consumer becomes confused and
mistakes are made in the purchase of products.
Product proliferation can sometimes also lead to cannibalization of the
existing product line of the company and should be justified by overall increase
in market share.
Product innovation has become like population explosion. One clear result is that
product line has been widened (increased) & this widening range of choice (by
buyers) has unclear the market segments & made price war

CANNIBALIZATION

In marketing strategy, cannibalization refers to a reduction in sales volume, sales

revenue, or market share of one product as a result of the introduction of a
new product by the same producer.
Cannibalization is a key consideration in product portfolio analysis.
For example, when Apple introduced the iPod, it took sales away from the
original Macintosh, but ultimately led to an expanded market for consumer
computing hardware.
Another example of cannibalization occurs when a retailer discounts a particular
product. The tendency of consumers is to buy the discounted product rather than
competing products with higher prices. When the promotion event is over and prices
return to normal, however, the effect will tend to disappear. This temporary change
in consumer behavior can be described as cannibalization, though scholars do not
normally use the phrase "cannibalization" to denote such a phenomenon.

Increased demand for services

We know, increase in demand for services built into products. These productattached services basically provide additional conveniences for the users and reduce
the effort and time needed to use the products.
It also can help to protect the product from competition by offering perceived value
of benefits corresponding with the monetary price.
Basically, these services must provide perceived economic advantages to the buyer
as well as providing a source of income to the seller.
Examples:-Product-attached services like computer assisted appliances, selfcleaning ovens all are required for the additional repair services (product attached
services). As a result this product attached services can protect the product from
competition by offering perceived value or b benefits from the buyers point of view.

Increased Foreign Competition

Due to the liberalization of foreign trade (Globalization), reduction of trade barriers,

superiority of productivity & the emergence of new industrialized nations have

increased the foreign competition & these competitors have done some incorrect
pricing policies.
For examples, Europe and Asia have sold initially with lower priced but high quality
goods. In fact VCRs sold in the USA are produced in a foreign country. As a result
proliferation of foreign made products for sale in the USA has increased the amount
of price competition faced by domestic producers.

Changing legal environment

We know that there are many regulatory organizations operated by government or

non- govt. organization to control the price of the product.
So these changes in the legal environment resulted in an instability never before
experienced by these deregulated industries.
As a result, pricing decisions have become more complex and more difficult, but
they are increasingly more important than never before.

Faster technological pressure

The revolution in industrial science has had several important impacts on pricing.
Technological progress also had reduced the average life of products (Nokia 1100
handset has been updated).
Thus a new product does not have much time to become profitable, and any pricing
mistakes made during the product introduction stage will diminish profitability.
On top of that, in our affluent and technologically advanced society, people are
engaging themselves in many mundane (ordinary) activities associated with their
basic needs like weekend trips, skiing, trips to resort, travel & other forms of
recreation. So from the consumers point of view the demand for many goods and
services is increasingly sensitive to relative prices and shifts in prices

Allocation of Resources:Market economy vs. planned economy [LUX soap100mg now tk. 25]

A market
economy is
an economy
in
which
decisions
regarding investment, production,
and distribution are
based
on supply
and
demand, and prices of goods and services are determined in a free price system
.The major defining characteristic of a market economy is that investment decisions
and the allocation of producer goods are mainly made by negotiation through
markets. This is contrasted

Planned Economy

In a planned economy, the factors of production are owned and managed by

the government. Thus the Government decides what to produce, how much to
produce and for whom to produce.

Features:

All resources are owned and managed by the government.

There is no Consumer or producer control.
The market forces are not allowed to set the price of the goods and services.
Profit in not the main objective, instead the government aims to provide goods and
services to everybody.
Government decides what to produce, how much to produce and for whom to
produce.

Advantages

Prices are kept under control and thus everybody can afford to consume goods and
services.
There is less inequality of wealth.
There is no duplication as the allocation of resources is centrally planned.
Low level of unemployment as the government aims to provide employment to
everybody.
Elimination of waste resulting from competition between firms.

Disadvantages

Consumers cannot choose and only those goods and services are produced which
are decided by the government.
Lack of profit motive may lead to firms being inefficient.
Lot of time and money is wasted in communicating instructions from the
government to the firms.

Production Volume:What is to be produced? How amount to be produced? For whom to be produced?

(BMW-produced for high income group people, DOVE soap also for high income group)

Income & Spending Behavior

Price influences what to buy & how much of each product have to buy.

Profits Determinant
Higher price leads to greater profit

Demand of Products
Supply> demand=buyers bit the price (housing market in many cities).
If price goes down, demand will rise.

Innovation & Development of New Technology

Higher margins push to invest into IDNT [DELL Core i7, iPhone 7, MERCEDEZE BENZE F800]

Alternative Uses of Resources:-

Low price leads producers to convert their resources to Alternative Uses of Resources.
Price is the only marketing strategy that directly generates income. All the other variables
in the marketing mix generate cost like advertising, product development, sales promotion,
distribution, packaging all involves expenditures.