Purchasing anything entails paying a price. But, what is exactly a price?
Prices may seem so trivial. It’s what you pay, isn’t it? But is that really all there is to say about prices? What is a price?
Let’s take a closer look at the precise definition of prices. In addition, let’s review how to set a price (pricing strategies) and the role of prices in marketing.
What is a Price? – Definition of Prices
Let’s start with the definition of prices. The price of an item or service is the amount of money charged for it. A piece of apparel, for example, costs a specific amount of money. Alternatively, a computer professional may change a fee to repair your computer. Prices obviously apply to both goods and services. However, the definition of prices does not stop here.
A price is also the amount of money that a consumer must spend in order to get a product or service. Price may not always imply money value. The exchange of products and services in exchange for other products and services is called Bartering. For example, in return for teaching me graphic design, I can teach you English.
Price is the simplest marketing element to adjust and also the simplest to imitate.
Despite the fact that the inquiry “How much” might be worded as “How much does it cost?”, price and cost are not the same thing. Whereas the price of a product is what you, the customer, must pay to receive it, the cost is what the company incurs in costs to manufacture it. When you inquire about the price of a product or service, you are essentially asking how much you will have to forego in order to have it.
As you can see, the definition of prices is a bit more complex than you may initially think. With that in mind, let’s proceed to pricing strategies.
How To Set A Price – Pricing Strategies
The price of a product or service is the outcome of a sophisticated series of computations, study and research, and risk-taking skills. A pricing strategy considers, among other things, segmentation, ability to pay, market conditions, competitor activities, trade margins, and input costs. It is usually aimed towards certain clients and competes with other firms.
There are four primary techniques with multiple variants employed in the business world:
- Premium Pricing: High price is used as a defining characteristic in premium pricing. Such pricing tactics are effective in segments and industries where the business has a significant competitive advantage. For example, Porsche in automobiles and Gillette in razor blades.
- Penetration Pricing: The price is made actually low in order to swiftly capture market share. When a new product is introduced, this is done. It is expected that prices would be hiked once the promotion period has ended and market share targets have been met. For example, mobile phone tariffs, home loans, and so on usually use penetration pricing.
- Economy Pricing: The margins in this type of pricing are razor narrow, and overheads such as marketing and advertising expenditures are extremely minimal. It targets the mass market and aims at reaching a significant market share. Examples include environmentally friendly laundry detergents, Nirma, and local tea makers.
- The Skimming Strategy: A high price is paid for a product until competitors allow, at which point prices can be reduced. The goal is to recover as much money as possible before the product or segment attracts new rivals, who would reduce earnings for everyone. For example, early costs for mobile phones, VCRs, or any other electronic devices dominated by only a few companies.
The Different Perspectives of Prices
When thinking about the definition of prices, it may help to consider the different perspectives of customers vs. society.
The Customer’s View
A client or customer might be either the end consumer of the final product or a firm that buys components of the finished product. The client is the one who attempts to satisfy a demand or set of requirements by purchasing a certain product or a collection of products and items. As a result, the client employs a number of factors to determine how much they are willing to spend, or the price they are prepared to pay, to meet their demands. The consumer would want to spend as little as feasible.
To improve value, the company can either increase perceived advantages or decrease perceived expenses. Both of these factors should be considered pricing elements.
To some extent, perceived benefits are inversely proportional to perceived expenses. Paying a premium price, for example, is offset by having this wonderful work of art exhibited in one’s house. Other potential perceived benefits that are closely tied to price-value equations include: Convenience, status, the deal, quality, brand, and choice.
Many of these advantages are mutually exclusive. An expensive Car like Mercedes Benz for example, is a high-status brand name with top-notch quality. This makes the high-price tag justified. Furthermore, if one can negotiate a bargain that reduces the price by a margin, the consumer will have an incentive to buy. Similarly, someone living in a remote mountain village is ready to spend significantly more on food at a small store rather than driving several miles to the nearest Safeway. That individual is likewise prepared to forego choice in exchange for more convenience.
A freshly formed word, value-added, represents increasing these perceived advantages. Including value-added aspects in a product has become a common strategic option.
Perceived costs include the actual dollar figure printed on the good as well as a variety of other considerations. As previously stated, perceived costs are the inverse of perceived benefits. When looking for a gas station that sells its best grade for a small amount of money, customers must consider the travel, the long wait, the fact that the medium grade is unavailable, and severe traffic. As a result, inconvenience, a lack of choice, and bad service are all potential perceived costs. Other typical perceived costs include the danger of making a mistake, associated expenditures, missed opportunities, and unanticipated repercussions.
Finally, viewing pricing from the customer’s perspective is advantageous because it helps establish value, which is the most crucial premise for developing a competitive advantage.
The Society’s View
The historical perspective of value has been price, at least in dollars and cents. The monetary system of any civilization, derived from a bartering and basic trading system (exchanging products or services of equal value), provides a more convenient means to acquire things and accumulate wealth. Price has also become a variable that society uses to manage its economic health. The price might be all-inclusive or all-exclusive. High costs for things such as food, health care, housing, and vehicles in many nations, such as Russia, China, and South Africa, imply that the majority of the people is unable to afford them. Countries such as Denmark, Germany, and the United Kingdom, on the other hand, charge very little for health care and thereby make it available to everybody.
There are two main perspectives on the role of pricing in society in general: rational and irrational men. The former is the basic underlying premise of economic theory, and it implies that the outcomes of pricing manipulation are predictable. The latter pricing role recognizes that man’s response to price is sometimes unpredictable, and therefore pretesting price manipulation is a required activity.
The Different Terms Used To Reference Pricing
In the definition of prices, we must also consider the different terms available to reference pricing. The term “Price” has been used a lot. Other terms that act as synonyms for this work are:
The Price Point
The price of an item is also referred to as the price point, particularly when referring to businesses that have a restricted number of pricing points.
For example, a general shop that only charges even sums, such as one, two, or ten dollars. Other stores have a policy of finishing the majority of their pricing with 99 cents or pence. Other stores only have one price point, although in certain circumstances this price can buy more than one of some extremely tiny things. The price is lower than the cost price.
When a customer wants to know the cost of a service, they may inquire, “How much do you charge?” The term “charge” is a synonym for price in this context.
The primary justification for pricing, in the eyes of the client, is value. Customers frequently lack a knowledge of the costs of materials and other charges that go into the production of a product. However, such buyers grasp what the product accomplishes for them in terms of value. Customers make product purchasing decisions based on this information. There is specific pricing strategy based on this concept called value-based pricing.
If you inquire for the price of their services, service providers may give you with a charge list rather than a price tag.
Flying, taking the bus, and taking the train all come at a cost. In many businesses, the price is stated as a fare.
The Importance of Price for Marketers
Setting the proper price is critical to a company’s success since pricing has a direct influence on sales and consequently profit.
Price is crucial to marketers because it symbolizes the marketers’ estimate of the value customers see in a product or service and are willing to pay for. Other parts of the Marketing Mix (product, venue, and promotion) may appear to be more glamorous than pricing and hence receive more attention, yet choosing the price of a product or service is one of the most crucial management choices, and this is why:
- While product, location, and advertising all have an impact on expenses, pricing is the only factor that has an impact on sales and consequently a company’s profitability. Price may determine whether a company survives or dies.
- Price changes have a significant influence on marketing strategy, and depending on the product’s price elasticity, they frequently affect demand and sales as well. A price that is too high or too cheap might both impede growth. The improper pricing might also have a detrimental impact on sales and cash flow.
- Problems arise when the marketer fails to set a price that matches the other components of the marketing mix and the company objectives, because pricing influences how buyers view a product or service. A high price signifies a high level of quality. The phrase “luxury” comes to mind. If, on the other hand, a company wishes to market itself as a low-cost service, it will offer cheap pricing. Consumers, like high-end suppliers, know what to anticipate when they see reduced costs.
It is critical for a corporation to determine the correct pricing. It may make or break a company’s success. However, with so many variables to consider, as well as the lack of a crystal ball to predict the impact of a price shift, it isn’t that simple.
The Role of Prices in Marketing
As you can imagine, pricing as one of the key elements of the marketing mix takes a central role in marketing. Actually, prices take on several roles in marketing, which are closely related to the definition of prices from different perspectives:
- Communicating Quality: Price is an important aspect in establishing the consumer’s perceived value of a product (or brand). Many customers associate price with overall product quality, and a more costly product is often seen as better.
- Profit Generation: Price, in conjunction with a suitable unit margin, is critical to providing the firm’s total profitability. Price considerations are critical and must be set in combination with predicted sales volume in order to achieve a favorable unit margin/ sales turnover situation. If the price is set too high, sales will fall, resulting in less money. Prices that are too low may not have enough margin to produce substantial earnings.
- Value Communication: Consumers become regular customers when they believe they’re getting excellent value from a possible transaction. Consumers will assess the possible advantages against the different expenses associated with purchasing the goods. Because pricing is the most important expense that buyers evaluate, putting a price at a given level influences the impression of value. For example, if a store sells small pizzas for 5$, many customers will see value and purchase one. However, if the business priced the same little pizzas at 25$, most customers would not sense value and would most likely not make a purchase.
The Influence of e-commerce on the relevance of pricing in the Marketing Mix
Because more individuals are making their purchases online, pricing has become the most crucial pillar of the marketing mix at this time. When we are in need of anything, we may find it on a variety of websites. The offer as well as transparency on price differences have grown enormously.
As a result, a rising number of businesses have a diverse product offering. Because more and more firms are selling the same items, pricing competition is rising. It is true that customers are finding it simpler to compare pricing. This makes so-called product mix pricing strategies even more important.
As we have learned, the answer to the question What is a Price is a bit more complex than you may initially think. The definition of prices reveals that there is more to prices than meets the eye. Likewise, prices take on several key roles in marketing, which makes choosing the right pricing strategy even more important.