Nature and Scope of the Pricing Function
Pricing is establishing and communicating the value of products and services to prospective customers. It is one of the nine functions of marketing. Pricing is important because one of the main goals of a business is to make money, and profits relate directly to the pricing marketing function.
Why is Price an Important Marketing Tool?
Price is an important marketing tool because it's valuble to the producer and consumer. The producer has to charge a price high enough to make a profit while a consumer judges products based off the prices. Low and high prices can be good or bad depending on the situation because a lot depends on the customer satisfaction and value of the product or service. Price adjustabliity is one of the easiest marketing decisions for a business to adjust. It is as simple as adding a new price on the shelf.
How the Elasticity of Demand Relates to Pricing Decisions
Pricing decisions are often based off scarcity, supply and demand, and economic utiltiy. Also elasticity plays a large role in pricing decisions. Elasticity of demand describes the relationship between changes in a product's price and the demand for that product. It is based on the number of alternatives for a product and willingness of customers to not purchase the products because of the price. Eggs are purchased regardless of the price because of lack of alternatives, so this is an example of inelastic demand where a price decrease will decrease total revenue. Elastic demand is where a price decrease will increase total revenue. An example is ice cream where high prices would decrease the amount of sales, and lower prices would increase the amount of sales because this type of product has many alternatives. Both methods have to have a reasonable price for the consumer, or the product of service will not be purchased.
Legal Considerations for Pricing and How the Government is Involved
Government is involved is pricing to create fair competition among businesses. Regulating competition is done to help buisnesses compete like when AT&T was broken up to help Sprint to compete. The government is involved also to promote new products and services to give consumers more choices. Patents are granted for twenty years to an inventor to give the person the chance to make a profit off an idea. Another method of protecting a product is a copyright. The government also regulates prices in many ways. Price fixing is where manufacturers and wholesalers of competing companies can't establish prices. Price discrimination is where the same price must be given to all customers. Price advertising is where prices and terms of credit must be accurate in advertising. Bait-and-switch is when businesses lure customers with low prices of an unavailble product. Unit pricing is where products must have a measurement such as a volume (ounce) to let customers compare prices. Taxation is when more taxes are given on harmful products. Examples would include high taxes on tobacco, liquor, foreign products, and expensive automobiles and jewelry to discourage consumers. Taxes are reduced on products the government encourages consumers to purchase like ethonol-based gasoline.
Pricing Objectives
The three pricing objectives are maximizing profits, increasing sales, and maintaining a particular company image. Maximizing profits is done by charging the highest price possible that customers still purchase, and this is done with a small target market and unique product. Increasing sales is done with companies with a large target market and inventory by charging low prices and selling the highest possible volume of products. Some companies build an image based off price. Examples include low pricing, high pricing, and "meet or beat" pricing.
How Businesses Establish a Price Range for a Product
Determining a price range includes many factors. The maximum price is the highest price a company can charge based off the customer satisfaction, demand, and alternatives, and it is found by marketing research. Minimum price is the lowest price that a company can charge based off the costs of the seller, and this should still result with a profit. The breakeven point is the quantity of a product that must be sold for total revenues to match total costs at a specific price. The information used is the fixed, variable, and total costs, the product price, and total revenue. The breakeven point is calculated with the breakeven point equaling the total fixed costs divided by the price minus the variable costs per unit. The price range can be sold at anywhere between the maximum and minimum price at the correct price based on the market conditions.
How to Determine the Selling Price
The price charged for a product or service is known as the selling price, which involves three components. The largest part of the selling price for most products is the product cost, and the difference between the cost of the product and the selling price is known as the gross margin. The second component is the operating expenses which are all costs associated with actual business operations. The third component is net profit which is the difference between the selling price and all costs and operating expenses associated with the product sold. Also, retailers use a markup that is used to set prices and it is an amount added to the costs of a product to determine the selling price. It is often a percentage vesus a dollar amount. A markdown is a reduction from the original selling price, and it can be a percentage or dollar amount.
Pricing Strategies and Tools
The product life cycle can use a skimming price is a very high price designed to emphasize the quality of uniqueness of a product, while a penetration price is a very low price designed to increase the quantity sold of a product by emphasizing the value, and companies also based prices off consumer purchase classifications. Non-price competition de-emphasizes price by developing a unique offering that meets an important customer need. Price flexibility involves a one-price policy which means that all customers pay the same price, and there is a flexible pricing policy which allows customers to negotiate the price within a price range. Price lines are distinct categories or prices based on differences in product quality and features. Geographic pricing includes FOB pricing or free on board pricing which identifies the location from which the buyer pays the transportation costs and takes title to the products purchased, and there is zone pricing where different product or transportation costs are set for specific areas or zones of the seller's market. Discounts and allowances are reductions in a price given to the customer in exchange for performing certain marketing activities or accepting something other than what would normally be expected in the exchange. Common examples would include quantity discounts, seasonal discounts, cash discounts, trade discounts, trade-in allowance, advertising allowance, coupons, and rebates. Also added value examples would include buying two items and getting the third free, and incentives to get free tickets from frequent flyer programs.
Why is Extending Credit Important to the Marketing and Pricing Function?
Credit is an important, optional part of the price, marketing mix element. Credit makes it possible for more people to purchase products and services that are more expensive. Consumer credit or retail credit is credit extended by a retail business to the final consumer. Trade credit is offered by one business to another business. Developing credit procedures includes developing credit policies, approving credit customers, and developing effective collection procedures.