In the narrowest sense, price is simply the amount of money charged for any product or a service. In a broad sense, price is the sum of all the values that consumer give up to gain the advantage of having or using any product or service. Price has been one of the major factors that affects buyer choice. In recent decades, non-price factors have achieved increasing importance. However, price still remains the major important elements which determine a company’s market share and profitability. Price is the only component in the marketing mix which produces revenue and all other components represent costs. Price is also considered as one of the most flexible marketing mix elements. Unlike product features and channel commitments, prices could be changed quickly. At the same time, pricing is the common problem faced by many marketing executives and many companies. They are not able to handle pricing well. Some of the managers view pricing as a big headache, preferring instead to focus on other components of the marketing mix. However, smart managers view pricing as a key strategic tool for capturing and creating customer value. Prices have direct impact on a company’s bottom line. A small percentage improvement in price could create a large percentage increase in profitability. More importantly, as part of a firm’s overall value proposition, price plays a significant role in creating customer value and building customer relationships.
The price that the firm charges will fall somewhere between one that is very high to produce any demand and one that is very low to produce a profit. Consumer perceptions of the product’s value set the ceiling for prices. If consumers perceive that the product’s price is greater than its value, they do not buy the product. Product costs mark the floor for prices. If the firm prices the product below its costs, the firm’s profits will definitely suffer. While setting its price between these two extremes, the firm must consider various internal and external factors, including competitors’ strategies and prices, the overall marketing strategy and mix, and the nature of the market and demand.
At the end, the buyers will decide whether a product’s price is right. Pricing decisions must start with customer value like other marketing mix decision. When customers buy any product, they exchange something of value (the price) for receiving something of value (the benefits of having or using the product or services). Effective, customer-oriented pricing involves understanding how much value customer place on the benefits they receive from the product and setting a price which captures this value.
Customer value-based pricing uses customers’ perceptions of value, not the seller’s cost, as the key to pricing. Value-based pricing means that the marketer cannot design a product as well as marketing program and then set the price. Price is considered along with all other marketing mix variables before any marketing program is set.
Although costs are essential consideration in setting prices, cost-based pricing is usually product driven. The firm designs what it considers being a good product adds up the costs while making the product, and marks a price which covers costs plus target profit. Marketing must then convince customers that the value of the products at that price justifies its purchase. If the price turns out to be very high, the firm must settle for lower markups or lower sales, both resulting in disappointing profits.
Value-based pricing reverses this process. The firm first assesses consumer needs and value perceptions. It then sets its target price based on consumer perceptions of value. The targeted value and price drive decisions about what costs could be incurred and the resulting product design. As a result, pricing starts with analyzing customer needs and value perceptions, and the price is set to match that perceived value. It’s essential to remember that “good value” is not the same as “low price.” For example, a Steinway piano—any Steinway piano—costs a lot. But to those customers who own one, a Steinway generates great value. A Steinway grand piano typically runs anywhere from $40,000 to $165,000. The most popular model sells for around $72,000. But if we ask anyone who owns a Steinway grand piano, and they’ll tell us that, when it comes to Steinway, a price is nothing; the Steinway experience is everything.
We now examine two types of value-based pricing i.e. good-value pricing and value-added pricing.
Recent economic events have caused a fundamental shift in customer attitudes toward price and quality. In response, many firms have changed their pricing approaches in order to bring them in line with changing economic situations and consumer price perceptions. Many marketers have adopted good-value pricing strategies offering the right combination of good quality and good service at a fair price. In several cases, this has involved introducing less-expensive versions of established, brand-name products. To meet tougher economic conditions and more frugal customer spending habits, fast-food restaurants such as Taco Bell and McDonald’s offer value meals and dollar menu items. Every car company now offers small, inexpensive models of car that is better suited to the strapped consumer’s budget.
Value-based pricing doesn’t mean simply charging what consumers want to pay or marking low prices to meet competition. Instead, many firms adopt value-added pricing strategies. They attach value-added features and services to differentiate their offers and that supports higher prices rather than cutting prices to match competitors.
Competition-based pricing refers to setting prices on the basis of competitors’ strategies, costs, prices, and offerings of the market. Customers will base their judgments of a product’s value on the prices charged by the competitors for similar products. In assessing competitors’ pricing strategies, the firms should ask various questions. First, how does the company’s market is offering the services compared with competitors’ offerings in terms of customer value? If customers perceive that the firm’s product or service provides greater value, the firm may charge a higher price. If customers view less value relative to competing products, the firm must either charge a lower price or change customer perceptions in order to justify a higher price. Other is, how strong are current competitors, and what are their current pricing strategies? If the firm faces a host of smaller competitors charging high prices relative to the value they deliver, it may charge lower prices to drive weaker competitors from the market. If the market is dominated by larger, low-price competitors, the firm may decide to target unserved market niches with value-added products at higher prices.
Kotler, P., & Armstrong, G. (2013).Principles of Marketing.Chennai: Pearson India Education Services Pvt Ltd.