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Pricing is the
process
A process is a series or set of activities that interact to produce a result; it may occur once-only or be recurrent or periodic.
Things called a process include:
Business and management
*Business process, activities that produce a specific se ...
whereby a business sets the
price
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...
at which it will sell its products and services, and may be part of the business's
marketing plan
A marketing plan may be part of an overall business plan. Solid marketing strategy is the foundation of a well-written marketing plan so that goals may be achieved. While a marketing plan contains a list of actions, without a sound strategic founda ...
. In setting prices, the business will take into account the price at which it could acquire the goods, the
manufacturing cost Manufacturing cost is the sum of costs of all resources consumed in the process of making a product. The manufacturing cost is classified into three categories: direct materials cost, direct labor cost and manufacturing overhead. It is a factor in ...
, the
marketplace
A marketplace or market place is a location where people regularly gather for the purchase and sale of provisions, livestock, and other goods. In different parts of the world, a marketplace may be described as a '' souk'' (from the Arabic), ' ...
, competition, market condition,
brand
A brand is a name, term, design, symbol or any other feature that distinguishes one seller's good or service from those of other sellers. Brands are used in business, marketing, and advertising for recognition and, importantly, to create an ...
, and quality of product.
Pricing is a fundamental aspect of
product management
Product management is the business process of planning, developing, launching, and managing a product or service. It includes the entire lifecycle of a product, from ideation to development to go to market. Product managers are responsible for ...
and is one of the
four Ps
The term "marketing mix" is a foundation model for businesses, historically centered around product, price, place, and promotion (also known as the "4 Ps"). The marketing mix has been defined as the "set of marketing tools that the firm uses to ...
of the
marketing mix
The term "marketing mix" is a foundation model for businesses, historically centered around product, price, place, and promotion (also known as the "4 Ps"). The marketing mix has been defined as the "set of marketing tools that the firm uses to ...
, the other three aspects being product, promotion, and
place
Place may refer to:
Geography
* Place (United States Census Bureau), defined as any concentration of population
** Census-designated place, a populated area lacking its own Municipality, municipal government
* "Place", a type of street or road ...
. Price is the only revenue generating element amongst the four Ps, the rest being
cost centers. However, the other Ps of marketing will contribute to decreasing
price elasticity
A good's price elasticity of demand (E_d, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elastici ...
and so enable price increases to drive greater revenue and profits.
Pricing can be a manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others.
An automated pricing system requires more setup and maintenance but may prevent pricing errors. The needs of the consumer can be converted into demand only if the consumer has the willingness and capacity to buy the product. Thus, pricing is the most important concept in the field of marketing, it is used as a tactical decision in response to changing competitive, market and organizational situations.
Objectives of pricing
The objectives of pricing should consider:
* the financial goals of the company (i.e. profitability)
* the fit with marketplace realities (will customers buy at that price?)
* the extent to which the price supports a product's
market positioning
Positioning refers to the place that a brand occupies in the minds of the customers and how it is distinguished from the products of the competitors and different from the concept of brand awareness. In order to position products or brands, comp ...
and be consistent with the other variables in the
marketing mix
The term "marketing mix" is a foundation model for businesses, historically centered around product, price, place, and promotion (also known as the "4 Ps"). The marketing mix has been defined as the "set of marketing tools that the firm uses to ...
* the consistency of prices across categories and products (consistency indicates reliability and supports customer confidence and customer satisfaction)
* To meet or prevent competition
Price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product. Where manufacturing is expensive, distribution is exclusive, and the product is supported by extensive
advertising
Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...
and
promotional campaigns, then prices are likely to be higher. Price can act as a substitute for product quality, effective promotions, or an energetic selling effort by distributors in certain markets.
From the marketer's point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumer
economic surplus
In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities:
* Consumer surplus, or consumers' surplus, is the monetary gain ...
to the producer. A good pricing strategy would be the one that could balance between the price floor (the price below which the organization ends up in losses) and the price ceiling (the price by which the organization experiences a no-demand situation).
Pricing strategies
Marketers develop an overall pricing strategy that is consistent with the organization's mission and values. This pricing strategy typically becomes part of the company's overall long-term
strategic plan
Strategic planning is an organization's business process, process of defining its strategy or direction, and making decision making, decisions on allocating its resources to attain strategic goals.
It may also extend to control mechanisms for gu ...
. The strategy is designed to provide broad guidance for price-setters and ensures that the pricing strategy is consistent with other elements of the marketing plan. While the actual price of goods or services may vary in response to different conditions, the broad approach to pricing (i.e., the pricing strategy) remains a constant for the planning outlook period which is typically 3–5 years, but in some industries may be a longer period of 7–10 years. The pricing strategy established the overall, long-term goals of the pricing function, without specifying an actual price-point.
Broadly, there are six approaches to pricing strategy mentioned in the marketing literature:
: Operations-oriented pricing: where the objective is to optimize productive capacity, to achieve operational efficiencies or to match supply and demand through varying prices. In some cases, prices might be set to de-market.
[Dibb, S., Simkin, L., Pride, W.C. and Ferrell, O.C.,''Marketing: Concepts and Strategies,'' Cengage, 2013, Chapter 12]
: Revenue-oriented pricing: (also known as ''profit-oriented pricing'' or ''cost-based pricing'') - where the marketer seeks to maximize the profits (i.e., the surplus income over costs) or simply to cover costs and
break even
Break-even (or break even), often abbreviated as B/E in finance, (sometimes called point of equilibrium) is the point of balance making neither a profit nor a loss. Any number below the break-even point constitutes a loss while any number above it ...
.
For example, dynamic pricing (also known as
yield management
Yield management is a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, time-limited resource (such as airline seats or hotel room reservation ...
) is a form of revenue oriented pricing.
: Customer-oriented pricing: where the objective is to maximize the number of customers; encourage cross-selling opportunities or to recognize different levels in the customer's ability to pay.
:
Value-based pricing Value-based price (also value optimized pricing and ''charging what the market will bear'') is a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer ...
: (also known as ''image-based pricing'') occurs where the company uses prices to signal market value or associates price with the desired value position in the mind of the buyer. The aim of value-based pricing is to reinforce the overall positioning strategy e.g. premium pricing posture to pursue or maintain a luxury image.
:
Relationship-oriented pricing: where the marketer sets prices in order to build or maintain relationships with existing or potential customers.
: Socially-oriented pricing: Where the objective is to encourage or discourage specific social attitudes and behaviours. e.g. high tariffs on tobacco to discourage smoking.
: Optional pricing: Where the objective is to allow consumer to have an option on their purchase. e.g. buying a car optional to have CD player
Pricing tactics
When decision-makers have determined the broad approach to pricing (i.e., the pricing strategy), they turn their attention to pricing tactics. Tactical pricing decisions are shorter term prices, designed to accomplish specific short-term goals. The tactical approach to pricing may vary from time to time, depending on a range of internal considerations (e.g. such as the need to clear surplus inventory) or external factors (e.g. a response to competitive pricing tactics). Accordingly, a number of different pricing tactics may be employed in the course of a single planning period or across a single year. Typically line managers are given the latitude necessary to vary individual prices providing that they operate within the broad strategic approach. For example, some premium brands never offer discounts because the use of low prices may tarnish the brand image. Instead of discounting, premium brands are more likely to offer customer value through price-bundling or giveaways.
When setting individual prices, decision-makers require a solid understanding of pricing economics, notably
break-even analysis
The break-even point (BEP) in economics, business—and specifically cost accounting—is the point at which total cost and total revenue are equal, i.e. "even". There is no net loss or gain, and one has "broken even", though opportunity costs ...
, as well as an appreciation of the psychological aspects of consumer decision-making including
reservation price
In economics, a reservation (or reserve) price is a limit on the price of a good or a service. On the demand side, it is the highest price that a buyer is willing to pay; on the supply side, it is the lowest price a seller is willing to acce ...
s,
ceiling prices and
floor prices. The marketing literature identifies literally hundreds of pricing tactics. It is difficult to do justice to the variety of tactics in widespread use. Rao and Kartono carried out a cross-cultural study to identify the pricing strategies and tactics that are most widely used. The following listing is largely based on their work.
ARC/RRC pricing
A traditional tactic used in outsourcing that uses a fixed fee for a fixed volume of services, with variations on fees for volumes above or below target thresholds. Charges for additional resources (“ARCs”) above the threshold are priced at rates to reflect the marginal cost of the additional production plus a reasonable profit. Credits (“RRCs”) granted for reduction in resources consumed or provided offer the enterprise customer some comfort, but the savings on credits tend not to be equivalent to the increased costs when paying for incremental resources in excess of the threshold.
Complementary pricing
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Complementary pricing is an umbrella category of "captive-market" pricing tactics. It refers to a method in which one of two or more complementary products (a deskjet printer, for example) is priced to maximize sales volume, while the complementary product (printer ink cartridges) are priced at a much higher level in order to cover any shortfall sustained by the first product.
Contingency pricing
Contingency pricing is the process where a fee is only charged contingent on certain results. Contingency pricing is widely used in professional services such as legal services and consultancy services.
[Schlissel, M.R. and Chasin, J.,]
Pricing of Services: An Interdisciplinary Review
, ''The Service Industries Journal,'' vol.11, no. 3, July, 1991 In the United Kingdom, a contingency fee is known as a conditional fee.
Differential pricing
Differential pricing, also known as ''flexible pricing'', ''multiple pricing'' or ''price discrimination'' , occurs where different prices are charged to different customers or market-segments, and may be dependent on the service provider's assessment of the customer's willingness or ability to pay. There are various forms of price difference including: the type of customer, the geographic area served, the quantity ordered, delivery time, payment terms, etc.
Discrete pricing
Discrete Pricing occurs when prices are set at a level that the price comes within the competence of the decision making unit (DMU). This method of pricing is often used in B2B contexts where the purchasing officer may be authorized to make purchases up to a predetermined level, beyond which decisions must go to a committee for authorization. With the advent of data analytics differential price is becoming popular with most companies using customer specific data to give prices to specific customer.
Discount pricing
![Sales promotion 2015 0003](https://upload.wikimedia.org/wikipedia/commons/4/48/Sales_promotion_2015_0003.JPG)
Discount pricing is where the marketer or retailer offers a reduced price. Discounts in a variety of forms - e.g. quantity rebates, loyalty rebates, seasonal discounts, periodic or random discounts etc.
[Rao, V.R. and Kartono, B., "Pricing Strategies and Objectives: A Cross-cultural Survey," in ''Handbook of Pricing Research in Marketing,''Rao, V.R. (ed), Northampton, MA, Edward Elgar, 2009, p.15] Enormous retailers can request value limits from providers and make a rebate evaluating system powerful as they purchase in mass. It is normally difficult to rival these retailers dependent on a rebate estimating technique. This type of pricing strategy is a predominant showcasing procedure to draw in shoppers by providing an additional worth or motivator, which urges customers to buy the advanced items right away.
[Xu, Yin, and Jin-Song Huang. "Effects of price discounts and bonus packs on online impulse buying." Social Behavior and Personality, vol. 42, no. 8, 2014, pp 798-820.]
Diversionary pricing
Diversionary Pricing is a variation of loss leading used extensively in services; a low price is charged on a basic service with the intention of recouping on the extras; can also refer to low prices on some parts of the service to develop an image of low price.
Everyday low prices
Everyday low price
Everyday low price (also abbreviated as EDLP) is a pricing strategy promising consumers a low price without the need to wait for sale price events or comparison shopping. EDLP saves retail stores the effort and expense needed to mark down price ...
s refers to the practice of maintaining a regular low price - in which consumers are not forced to wait for discounting or specials. This method is used by supermarkets.
Exit fees
Exit fees are fees charged to customers who depart from the service process prior to natural completion or the end of a contract. The objective of an exit fee is to deter premature exit. Exit fees are often found in financial services, telecommunications services and aged care facilities. Regulatory authorities, around the globe, have often expressed their discontent with the practice of exit fees as it has the potential to be anti-competitive and restricts consumers' abilities to switch freely, but the practice has not been proscribed.
Experience curve pricing
Experience curve pricing occurs when a manufacturer prices a product or service at a low rate in order to obtain volume and with the expectation that the cost of production will decrease with the acquisition of manufacturing experience. This approach which is often used in the pricing of high technology products and services, is based on the insight that manufacturers learn to trim production costs over time in a phenomenon known as
experience effects.
Geographic pricing
Geographic pricing occurs when different prices are charged in different geographic markets for an identical product.
For example, publishers often make text-books available at lower prices in Asian countries because average wages tend to be lower with implications for the customer's ability to pay. In other cases, geographic variations in prices may reflect the different costs of distribution and servicing certain markets.
Guaranteed pricing
Guaranteed pricing is a variant of contingency pricing. It refers to the practice of including an undertaking or promise that certain results or outcomes will be achieved. For instance, some business consultants undertake to improve productivity or profitability by 10%. In the event that the result is not achieved, the client does not pay for the service.
High-low pricing
High-low pricing refers to the practice of offering goods at a high price for a period of time, followed by offering the same goods at a low price for a predetermined time. This practice is widely used by chain stores selling homewares. The main disadvantage of the high-low tactic is that consumers tend to become aware of the price cycles and time their purchases to coincide with a low-price cycle.
Honeymoon pricing
Honeymoon Pricing refers to the practice of using a low introductory price with subsequent price increases once relationship is established. The objective of honeymoon pricing is to "lock" customers into a long-term association with the vendor. This approach is widely used in situations where customer
switching costs Switching costs or switching barriers are terms used in microeconomics, strategic management, and marketing. They may be defined as the disadvantages or expenses consumers feel they experience, along with the economic and psychological costs of swit ...
are relatively high such as in home loans and financial investments. It is also common in categories where a subscription model is used, especially if this is coupled with automatic regular payments, such as in newspaper and magazine subscriptions, cable TV, broadband and cell phone subscriptions and in utilities and insurance.
Loss leader
A
loss leader
A loss leader (also leader) is a pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services. With this sales promotion/marketing strategy, a "leader" is any popular articl ...
is a product that has a price set below the
operating margin In business, operating margin—also known as operating income margin, operating profit margin, EBIT margin and return on sales (ROS)—is the ratio of operating income ("operating profit" in the UK) to net sales, usually expressed in percent.
: ...
. Loss leading is widely used in supermarkets and budget-priced retail outlets where the store as a means of generating store traffic. The low price is widely promoted and the store is prepared to take a small loss on an individual item, with an expectation that it will recoup that loss when customers purchase other higher priced-higher margin items. In service industries, loss leading may refer to the practice of charging a reduced price on the first order as an inducement and with anticipation of charging higher prices on subsequent orders. Loss leading is often found in retail, where the loss leader is used to drive store traffic and generate sales of complementary items.
Offset pricing
Offset pricing (also known as ''diversionary pricing'') is the service industry's equivalent of loss leading. A service may price one component of the offer at a very low price with an expectation that it can recoup any losses by cross-selling additional services. For example, a carpet steam cleaning service may charge a very low basic price for the first three rooms, but charges higher prices for additional rooms, furniture and curtain cleaning. The operator may also try to cross-sell the client on additional services such as spot-cleaning products, or stain-resistant treatments for fabrics and carpets.
Parity pricing
Parity pricing refers to the process of pricing a product at or near a rival's price in order to remain competitive. Markets can be sectioned empowering the firm to segregate between the fare and homegrown market it is indicated that the defectively serious firm can differentially cost. Besides, as the quantity of homegrown firms is expanded, and if these organizations can portion the market, the differential among homegrown and unfamiliar costs is diminished. The import equality cost might be charged in the homegrown market.
[Holden, M. “The Economics of Import Parity Pricing: A Pedagogical Note” South African Journal of Economics, vol. 73:3, September, 2005]
Price bundling
Price bundling (also known as
product bundling
In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets. Industries engaged in the practice ...
) occurs where two or more products or services are priced as a package with a single price. There are several types of bundles: ''pure bundles'' where the goods can only be purchased as package or ''mixed bundles'' where the goods can be purchased individually or as a package. The prices of the bundle is typically less than when the two items are purchased separately.
Peak and off-peak pricing
Peak and off-peak pricing is a form of price discrimination where the price variation is due to some type of seasonal factor. The objective of peak and off peak pricing is to use prices to even out peaks and troughs in demand. Peak and off-peak pricing is widely used in tourism, travel and also in utilities such as electricity providers. Peak pricing has caught the public's imagination since the ride-sharing service provider, Uber, commenced using ''surge pricing'' and has sought to patent the technologies that support this approach.
Price discrimination
Price discrimination is also known as
variable pricing
Variable pricing is a pricing strategy for products. Traditional examples include auctions, stock markets, foreign exchange markets, bargaining, electricity, and discounts. More recent examples, driven in part by reduced transaction costs ...
or ''
differential pricing''.
Price lining
''Price lining'' is the use of a limited number of prices for all product offered by a business. Price lining is a tradition started in the old
five and dime
A variety store (also five and dime (historic), pound shop, or dollar store) is a retail store that sells general merchandise, such as apparel, automotive parts, dry goods, toys, hardware, home furnishings, and a selection of groceries. It us ...
stores in which everything cost either 5 or 10 cents. In price lining, the price remains constant but quality or extent of product or service adjusted to reflect changes in cost. The underlying rationale of this tactic is that these amounts are seen as suitable
price points
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...
for a whole range of products by prospective customers. It has the advantage of ease of administering, but the disadvantage of inflexibility, particularly in times of
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
or unstable prices. Price lining continues to be widely used in department stores where customers often note racks of garments or accessories priced at predetermined price points e.g. separate racks of men's ties, where each rack is priced at $10, $20 and $40.
Penetration pricing
Penetration pricing Penetration pricing is a pricing strategy where the price of a product is initially set low to rapidly reach a wide fraction of the market and initiate word of mouth. The strategy works on the expectation that customers will switch to the new brand ...
is an approach that can be considered at the time of market entry. In this approach, the price of a product is initially set low in an effort to penetrate the market quickly. Low prices and low margins also act as a deterrent, preventing potential rivals from entering the market since they would have to undercut the low margins to gain a foothold.
[Dean, J., "Pricing Policies for New Products," ''Harvard Business Review'', Vol 54, No. 6, pp 141–153.]
Prestige pricing
![Absolut Vodka DSC 4631](https://upload.wikimedia.org/wikipedia/commons/7/7a/Absolut_Vodka_DSC_4631.jpg)
Prestige pricing is also known as ''
premium pricing
Premium pricing (also called image pricing or prestige pricing) is the practice of keeping the price of one of the products or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. Premium re ...
'' and occasionally ''luxury pricing'' or ''high price maintenance'' refers to the deliberate pursuit of a high price posture to create an image of quality.
Price signaling
Price signaling is where the price is used as an indicator of some other attribute. For example, some travel resorts promote that when two adults make a booking, the kids stay for free. This type of pricing is designed to signal that the resort is a family friendly operation.
Price skimming
Price skimming
Price skimming is a price setting strategy that a firm can employ when launching a product or service for the first time. By following this price skimming method and capturing the extra profit a firm is able to recoup its sunk costs quicker as w ...
, also known as ''skim-the-cream pricing'' is a tactic that might be considered at market entry. The objective is to charge relatively high prices in order to recoup the cost of product development early in the life-cycle and before competitors enter the market.
Promotional pricing
Promotional pricing is a temporary measure that involves setting prices at levels lower than normally charged for a good or service. Promotional pricing is sometimes a reaction to unforeseen circumstances, as when a downturn in demand leaves a company with excess stocks; or when competitive activity is making inroads into market share or profits.
Two-part pricing
Two-part pricing is a variant of captive-market pricing used in service industries. Two-part pricing breaks the actual price into two parts; a fixed service fee plus a variable consumption rate. Two-part pricing tactics are widely used by utility companies such as electricity, gas and water and services where there is a quasi- membership type relationship, credit cards where an annual fee is charged and theme parks where an entrance fee is charged for admission while the customer pays for rides and extras. One part of the price represents a membership fee or joining fee, while the second part represents the usage component.
Psychological pricing
![Fan-Tankstelle von Dynamo Dresden](https://upload.wikimedia.org/wikipedia/commons/8/86/Fan-Tankstelle_von_Dynamo_Dresden.JPG)
Psychological pricing is a range of tactics designed to have a positive psychological impact. Price tags using the terminal digit "9", ($9.99, $19.99 or $199.99) can be used to signal
price point
Price points are prices at which demand for a given product is supposed to stay relatively high.
Characteristics
Introductory microeconomics depicts a demand curve as downward-sloping to the right and either linear or gently convex to the origi ...
s and bring an item in at just under the consumer's
reservation price
In economics, a reservation (or reserve) price is a limit on the price of a good or a service. On the demand side, it is the highest price that a buyer is willing to pay; on the supply side, it is the lowest price a seller is willing to acce ...
. Psychological pricing is widely used in a variety of retail settings.
Premium pricing
''
Premium pricing
Premium pricing (also called image pricing or prestige pricing) is the practice of keeping the price of one of the products or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. Premium re ...
'' (also called prestige pricing) is the strategy of consistently pricing at, or near, the high end of the possible price range to help attract status-conscious consumers. The high pricing of a premium product is used to enhance and reinforce a product's luxury image. Examples of companies that partake in premium pricing in the marketplace include
Rolex
Rolex SA () is a British-founded Swiss watch designer and manufacturer based in Geneva, Switzerland. Founded in 1905 as ''Wilsdorf and Davis'' by Hans Wilsdorf and Alfred Davis in London, the company registered ''Rolex'' as the brand name of ...
and
Bentley
Bentley Motors Limited is a British designer, manufacturer and marketer of luxury cars and SUVs. Headquartered in Crewe, England, the company was founded as Bentley Motors Limited by W. O. Bentley (1888–1971) in 1919 in Cricklewood, North ...
. As well as brand, product attributes such as eco-labelling and provenance (e.g. 'certified organic' and 'product of Australia') may add value for consumers and attract premium pricing. A component of such premiums may reflect the increased cost of production. People will buy a premium priced product because:
* They believe the high price is an indication of good quality
* They believe it to be a sign of self-worth - "They are worth it;" it authenticates the buyer's success and status; it is a signal to others that the owner is a member of an exclusive group
* They require flawless performance in this application - The cost of product malfunction is too high to buy anything but the best - for example, a heart pacemaker.
The old association of luxury only being for the kings and queens of the world is almost non-existent in today's world. People have generally become wealthier, therefore the mass marketing phenomenon of luxury has simply become a part of everyday life, and no longer reserved for the elite. Since consumers have a larger source of disposable income, they now have the power to purchase products that meet their aspirational needs. This phenomenon enables premium pricing opportunities for marketers in luxury markets. Luxurification in society can be seen when middle class members of society, are willing to pay premium prices for a service or product of the highest quality when compared with similar goods. Examples of this can be seen with items such as clothing and electronics. Charging a premium price for a product also makes it more inaccessible and helps it gain an exclusive appeal. Luxury brands such as Louis Vuitton and Gucci are more than just clothing and become more of a status symbol. (Yeoman, 2011).
Prestige goods are usually sold by companies that have a monopoly on the market and hold competitive advantage. Due to a firm having great market power they are able to charge at a premium for goods, and are able to spend a larger sum on promotion and advertising. According to Han, Nunes and Dreze (2015) figure on “signal preference and taxonomy based on wealth and need for status” two social groups known as “Parvenus” and “Poseurs” are individuals generally more self-conscious, and base purchases on a need to reach a higher status or gain a social prestige value. Further market research shows the role of possessions in consumer's lives and how people make assumptions about others solely based on their possessions. People associate high priced items with success. (Han et al., 2010). Marketers understand this concept, and price items at a premium to create the illusion of exclusivity and high quality. Consumers are likely to purchase a product at a higher price than a similar product as they crave the status, and feeling of superiority as being part of a minority that can in fact afford the said product. (Han et al., 2010).
A price premium can also be charged to consumers when purchasing eco-labelled products. Market based incentives are given in order to encourage people to practice their business in an eco-friendly way in regard to the environment. Associations such as the MSC's fishery certification program and seafood ecolabel reward those who practice sustainable fishing. Pressure from environmental groups have caused the implementation of Associations such as these, rather than consumers demanding it. The value consumer's gain from purchasing environmentally conscious products may create a premium price over non eco-labelled products. This means that producers have some sort of incentive for supplying goods worthy of eco-labelling standard. Usually more costs are incurred when practicing sustainable business, and charging at a premium is a way businesses can recover extra costs.
Methods of setting prices
Demand-based pricing
''Demand-based pricing'', also known as
dynamic pricing
Dynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing, is a pricing strategy in which businesses set flexible prices for products or services based on current market demands. Businesses are able to change prices ...
, is a pricing method that uses consumer demand - based on perceived value - as the central element. These include
price skimming
Price skimming is a price setting strategy that a firm can employ when launching a product or service for the first time. By following this price skimming method and capturing the extra profit a firm is able to recoup its sunk costs quicker as w ...
,
price discrimination
Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different markets. Price discrimination is distinguished from product different ...
and
yield management
Yield management is a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, time-limited resource (such as airline seats or hotel room reservation ...
,
price points
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...
,
psychological pricing,
bundle pricing,
penetration pricing Penetration pricing is a pricing strategy where the price of a product is initially set low to rapidly reach a wide fraction of the market and initiate word of mouth. The strategy works on the expectation that customers will switch to the new brand ...
, price lining,
value-based pricing Value-based price (also value optimized pricing and ''charging what the market will bear'') is a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer ...
,
geo
Geo- is a prefix derived from the Greek word ''γη'' or ''γαια'', meaning "earth", usually in the sense of "ground or land”.
GEO or Geo may also refer to:
Arts, entertainment, and media
* ''GEO'' (magazine), a popular scientific magazine ...
and premium pricing.
Pricing factors are manufacturing cost, market place, competition, market condition, quality of product.
Price modeling using econometric techniques can help measure
price elasticity
A good's price elasticity of demand (E_d, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elastici ...
, and computer based modeling tools will often facilitate simulations of different prices and the outcome on sales and profit. More sophisticated tools help determine price at the SKU level across a portfolio of products. Retailers will optimize the price of their
private label
A private label, also called a private brand or private-label brand, is a brand owned by a company, offered by that company alongside and competing with brands from other businesses. A private-label brand is almost always offered exclusively by th ...
SKUs with those of National Brands.
Uber's pricing policy is an example of demand-based
dynamic pricing
Dynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing, is a pricing strategy in which businesses set flexible prices for products or services based on current market demands. Businesses are able to change prices ...
. It uses an automated
algorithm
In mathematics and computer science, an algorithm () is a finite sequence of rigorous instructions, typically used to solve a class of specific Computational problem, problems or to perform a computation. Algorithms are used as specificat ...
to increase prices to "surge price" levels, responding rapidly to changes of
supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
in the market. By responding in real-time, an equilibrium between demand and supply of drivers can be approached.
Customers receive notice when making an Uber reservation that prices have increased.
The company applied for a
U.S. patent
Under United States law, a patent is a right granted to the inventor of a (1) process, machine, article of manufacture, or composition of matter, (2) that is new, useful, and non-obvious. A patent is the right to exclude others, for a limited ...
on surge pricing in 2013, though airlines are known to have been using similar techniques in seat pricing for years.
The practice has often caused passengers to become upset and invited criticism when it happens as a result of holidays, inclement weather, natural disasters or other factors.
During
New Year's Eve
In the Gregorian calendar, New Year's Eve, also known as Old Year's Day or Saint Sylvester's Day in many countries, is the evening or the entire day of the last day of the year, on 31 December. The last day of the year is commonly referred to ...
2011, Uber prices were as high as seven times normal rates, causing outrage.
During the
2014 Sydney hostage crisis, Uber implemented surge pricing, resulting in fares of up to four times normal charges; while it defended the surge pricing at first, it later apologized and refunded the surcharges. Uber CEO Travis Kalanick has responded to criticism by saying: "...because this is so new, it's going to take some time for folks to accept it. There's 70 years of conditioning around the fixed price of taxis."
Multidimensional pricing
''Multidimensional pricing'' is the pricing of a product or service using multiple numbers. In this practice, price no longer consists of a single monetary amount (e.g., sticker price of a car), but rather consists of various dimensions (e.g., monthly payments, number of payments, and a downpayment). Research has shown that this practice can significantly influence consumers' ability to understand and process price information.
Micromarketing
Micromarketing
Micromarketing was first referred to in the UK marketing press in November 1988 in respect of the application of geodemographics to consumer marketing. The subject of micromarketing was developed further in an article in February 1990, which emph ...
is the practice of tailoring products, brands (
microbrands), and promotions to meet the needs and wants of
microsegments In marketing, a microsegment is a more advanced form of market segmentation that groups a number of customers of the business into specific segments based on various factors including behavioral predictions. Once identified, microsegments can become ...
within a market. It is a type of market customization that deals with pricing of customer/product combinations at the store or individual level.
Theoretical considerations in pricing
Price/quality relationship
The ''price/quality relationship'' comprises consumers' perceptions of value. High prices are often taken as a sign of quality, especially when the product or service lacks search qualities that can be inspected prior to purchase. Understanding consumers’ perceptions of the price/quality relationship is most important in the case of complex products that are hard to test, and experiential products that cannot be tested until used (such as most services). The greater the uncertainty surrounding a product, the more consumers depend on the price/quality signal and the greater premium they may be prepared to pay.
Consumers can have different perceptions on premium pricing, and this factor makes it important for the marketer to understand consumer behaviour. According to Vigneron and Johnson's figure on "Prestige-Seeking Consumer Behaviours", Consumers can be categorized into four groups. These groups being; Hedonist & Perfectionist, snob, bandwagon and veblenian.
[Vigneron, F., & Johnson, W., L. (1999). Interpersonal effects. ''A Review and a Conceptual Framework Of Prestige-Seeking Consumer Behavior,'' pp. 1-17] These categories rank from level of self-consciousness, to importance of price as an indicator of prestige. The Veblen Effect explains how this group of consumers makes purchase decisions based on conspicuous value, as they tend to purchase publicly consumed luxury products. This shows they are likely to make the purchase to show power, status and wealth. Consumers that fall under the "Snob Effect" can be described as individuals that search for perceived unique value, and will purchase exclusive products in order to be the first or very few who has it. They will also avoid purchasing products consumed by a general mass of people, as it is perceived that items in limited supply hold a higher value than items that do not. (Vigneron & Johnson, 1999). The bandwagon effect explains that consumers that fit into this category make purchasing decisions to fit into a social group, and gain a perceived social value out of purchasing popular products within said social group at premium prices. Research shows that people will often conform to what the majority of the group they are a member of thinks when it comes to the attitude of a product. Paying a premium price for a product can act as a way of gaining acceptance, due to the pressure placed on them by their peers. The Hedonic effect can be described as a certain group of people whose purchasing decisions are not affected by the status and exclusivity gained by purchasing a product at a premium, nor susceptible to the fear of being left out and peer pressure. Consumers who fit into this category base their purchasing decisions on a perceived emotional value, and gain intangible benefits such as sensory pleasure, aesthetic beauty and excitement. Consumers of this type have a higher interest on their own wellbeing. (Vigneron & Johnson, 1999). The last category on Vigneron and Johnson's figure of “Prestige-Seeking Consumer Behaviours” is the perfectionism effect. Prestige brands are expected to show high quality, and it's this reassurance of the highest quality that can actually enhance the value of the product. According to this effect, those that fit into this group value the prestige's brands to have a superior quality and higher performance than other similar brands. Research has indicated that consumer's perceive quality of a product to be relational to its price. Consumers often believe a high price of a product indicates a higher level of quality.
Even though it is suggested that high prices seem to make certain products more desirable, consumers that fall in this category have their own perception of quality and make decisions based upon their own judgement.
They may also use the premium price as an indicator of the product's level of quality.
Price sensitivity and consumer psychology
In their book, ''The Strategy and Tactics of Pricing'', Thomas Nagle and Reed Holden outline nine laws or factors that influence how a consumer perceives a given price and how price-sensitive s/he is likely to be with respect to different purchase decisions:
* Reference price effect: Buyer's price sensitivity for a given product increases the higher the product's price relative to perceived alternatives. Perceived alternatives can vary by buyer segment, by occasion, and other factors.
* Difficult comparison effect Buyers are less sensitive to the price of a known / more reputable product when they have difficulty comparing it to potential alternatives.
* Switching costs effect: The higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives.
*:High switching costs: Organizations that produce that have scarcely any substitutes and require huge exertion to ace their utilization appreciate huge exchanging costs. Some firms has additionally fused membership deals, which add greater consistency to its plan of action and further secure their clients. Similarly as with numerous innovation organizations, vulnerability remains in regards to its new item improvement cycle and reception of new items.
*:Low switching costs: Organizations that offer items or administrations that are exceptionally simple to imitate at equivalent costs by contenders regularly have low exchanging costs. For example, clothing company have restricted exchanging costs among customers, who can discover garments bargains effectively and can rapidly think about costs by strolling starting with one store then onto the next. The ascent of Internet retailers and quick transportation has made it significantly simpler for customers to search for attire at their homes over numerous online stages.
* Price-quality effect: Buyers are less sensitive to price the more that higher prices signal higher quality. Products for which this effect is particularly relevant include: image products, exclusive products, and products with minimal cues for quality.
* Expenditure effect: Buyers are more price sensitive when the expense accounts for a large percentage of buyers’ available income or budget.
* End-benefit effect: The effect refers to the relationship a given purchase has to a larger overall benefit, and is divided into two parts:
*:Derived demand: The more sensitive buyers are to the price of the end benefit, the more sensitive they will be to the prices of those products that contribute to that benefit.
*:Price proportion cost: The price proportion cost refers to the percent of the total cost of the end benefit accounted for by a given component that helps to produce the end benefit (e.g., think CPU and PCs). The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the component's price.
* Shared-cost effect: The smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be.
* Fairness effect: Buyers are more sensitive to the price of a product when the price is outside the range they perceive as “fair” or “reasonable” given the purchase context.
* Framing effect: Buyers are more price sensitive when they perceive the price as a loss rather than a forgone gain, and they have greater price sensitivity when the price is paid separately rather than as part of a bundle.
Approaches
Pricing is the most effective profit
lever
A lever is a simple machine consisting of a beam or rigid rod pivoted at a fixed hinge, or ''fulcrum''. A lever is a rigid body capable of rotating on a point on itself. On the basis of the locations of fulcrum, load and effort, the lever is div ...
.
Pricing can be approached at three levels: the industry, market, and transaction level.
* Pricing at the industry level focuses on the overall economics of the industry, including supplier price changes and customer demand changes.
* Pricing at the market level focuses on the competitive position of the price in comparison to the value differential of the product to that of comparative competing products.
* Pricing at the transaction level focuses on managing the implementation of discounts away from the reference, or list price, which occur both on and off the invoice or receipt.
A "price waterfall" analysis helps businesses and sales personnel to understand the differences which arise between the reference or list price, the invoiced sale price and the actual price paid by a customer taking account of contract, sales and payment discounts.
Pricing mistakes
Many companies make common pricing mistakes. Jerry Bernstein's article ''Use Suppliers' Pricing Mistakes'' outlines several sales errors, which include:
* Weak controls on
discounting
Discounting is a financial mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee.See "Time Value", "Discount", "Discount Yield", "Compound Interest", "Efficient ...
(
price override A price override is a feature of a retail management system which allows an authorised person to change the automated price of a product or service, in order to apply a discount.
Price overrides occur for a variety of reasons. One common reason i ...
)
* Inadequate systems for tracking competitors' selling prices and market share (
Competitive intelligence
Competitive intelligence (CI) is the process and forward-looking practices used in producing knowledge about the competitive environment to improve organizational performance. It involves the systematic collection and analysis of information from ...
)
*
Cost-plus pricing
Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage (a " markup") to the product's unit cost. Essentially, the markup percentage is a method of generating a particular ...
* Price increases poorly executed
* Worldwide price inconsistencies
* Paying sales representatives on sales volume vs. addition of
revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
measures
Contrary to
common misconception
Each entry on this list of common misconceptions is worded as a correction; the misconceptions themselves are implied rather than stated. These entries are concise summaries of the main subject articles, which can be consulted for more detail.
...
, price is not the most important factor for consumers, when deciding to buy a product.
See also
References
Further reading
*
William Poundstone
William Poundstone is an American author, columnist, and skeptic. He has written a number of books including the ''Big Secrets'' series and a biography of Carl Sagan.
Early life and education
Poundstone attended MIT and studied physics.
Personal ...
, ''Priceless: The Myth of Fair Value (and How to Take Advantage of It)'', Hill and Wang, 2010.
External links
Engineering New Product Success: the New Product Pricing Process at Emerson Electric. A case study by Jerry Bernstein and David Macias Published in ''Industrial Marketing Management''.
How To Price and Sell Your Software Product ''
Redpoint Ventures
Redpoint Ventures is an American venture capital firm focused on investments in seed, early and growth-stage companies.
History
The firm was founded in 1999 and is headquartered in Menlo Park, California, with offices in San Francisco, Los Ange ...
''
{{Authority control
Competition (economics)