Vedantu Pro courses

Introduction to Pricing

Pricing is one of the most important factors in the field of Trade. Pricing to a commodity means attaching value to the product. To purchase or sell it both the consumer taking the product and the seller giving off the product benefits from the ‘value’ in return for some bearing. Like the customer gives the money to the seller to take up the ‘value’ of the product and the seller gives off the product to earn the ‘value’ of money selling the product.

It is a process in which we decide the value a manufacturer or a seller gets when he offers his goods or services. In this process, both the producer and consumer negate to mutually benefit at an equitably profitable price. It is dependent on various things like how much the company has spent on the inputs, what is the value of a product in the market, what is the need of the product to the customer etc.,  All the producers and businessmen want to earn profits when they start a business.  But, the expected price might vary according to the market conditions, prices of supplementary and complementary goods, changes in input cost like hike in raw materials, labour cost etc., 

Pricing being the basic necessity of trade are discussed further in this section.  

 

What is Price in Marketing?

Price is the amount which one pays for a good or service or any idea. This is the amount for which the product is exchanged with potential customers.  Pricing the product or the service is the most essential for a business decision that is to be made by the owner of the business. 

One must attach the price to the product which the target market is willing to pay, they should also keep in mind the profit margin they need to acquire to hit their target. This all will help the business to endeavor. 

Other approaches are also included in fixing the price of the commodity or service. These approaches include:

  • The accountability of cost, 

  • The degree of competition prevailing, 

  • The customer’s expectation from the product, and so forth.

‘Right Price’ is one of the important criteria for business success.  The right pricing policy is a guideline set by the top-level managers to achieve good sales of the product. Price is indeed a weapon to bring competition in the market, to change the satisfaction level of the consumers. The distribution channel of distribution is affected by the pricing policy.

Both the terms price and ‘Pricing’ are different in their aspect, Pricing is the method of translating the value of the product in price or quantitative amounts like rupees or dollars.

 

Types of pricing methods:

The entire pricing method is divided into two basic types:

  1. Cost-oriented pricing method: it is used by most companies to determine the price of finished goods. It is further divided into cost-plus pricing, markup pricing, target returning pricing. In the cost-plus method, the manufacturer calculates the cost of production and adds up a certain percentage as a profit on the cost of production. In the markup method, a certain percentage of the cost of the product is added to the end price to obtain the final product. In the target returning price method, the company fixes the price such that it gets the amount invested in the production process of a good.

  2. Market-oriented pricing method: the price of a good or service in this method is determined according to the trend and research of the market. It is further divided into 5 types. In the perceived value pricing method, the price of a good is fixed keeping the viewpoint of the customer into consideration. They consider elements like production cost, quality of the product, advertisement and promotion. 

In the Value pricing method, the company tries to produce a product that is of superior quality and inferior cost. In the going-rate pricing method, the company decides the price of their product by taking an example from the price of their competitor as an estimate. In the auction type pricing method, the product is auctioned preferably, online through an e-commerce site and they are sold to the highest bidder. In the final method of differential pricing, the price of a good is changed for different people or customers. It changes across time, area and target customers. 

 

Factors influencing Pricing

The factors influencing the price can be divided into two heads – Internal Factors and External Factors.

 

Internal Factors

Talking about the internal factors means the factors that work from within the organization. The factors are:

 

  1. Organizational Factors:

Two management levels decide the pricing policy, one is the price range and the policies are decided by the top-level managers while the distinct price is fixed by the lower-level staff. 

  1. Marketing Mix:

For implementing a price, the marketing mix needs to be in sync, without matching the marketing mix, consumers will not be attracted to the price. The marketing mix should be decisive for the price range fixed, meaning the marketing mix needs to maintain the standard of the price of the product.

  1. Product Differentiation:

In today’s market, it is uncommon to find a unique product, hence the differentiation lies in the nature, feature and characteristic of the product. The added features like quality, size, colour, packaging, and its utility all these factors force the customers to pay more price regarding other products.

  1. Cost of the Product:

Cost and Price are closely related. With the cost of the product, the firm decides its price. The firm makes sure that the price does not fall below the cost lese they will run on losses. Cost of the price includes the input cost that a company spends on raw materials, wages for labourers, advertisement cost, promotion cost and salaries for the employees

 

External Factors

External factors are not under the control of the firm. These factors affect the whole industry group uniformly. Yet, a company tries to estimate any upcoming problems in the external environment and also makes up a backup plan in advance. This is done by forecasting the market trend. 

The factors are:

  1. Demand:

The market demand of a product has an impact on the price of the product, if the demand is inelastic then a higher price can be fixed, if the demand is highly elastic then less price is to be fixed. When the demand for the goods is more and the supply of the goods is constant, the price of the goods can be increased and if the demand for the goods decreases the price of the goods should be decreased to survive in the market. 

  1. Competition:

The prices are required to be competitive without any compromise on the quality of the product. While in a monopolistic market, the prices are fixed irrespective of the competition. Thus, the manufacturer tries to estimate the price of his competitor. When the price of the supplementary goods is high, the customers will buy the manufacturer’s product. 

  1. Supplies:

If the supplies condition, the easy availing option of the raw materials are available, then the price of the product can be moderate. Once, the raw materials supply price heightens then the price also rises.

In the period of recession, price is lowered so that easy purchase is guaranteed. While in boom periods, prices shoot up high as now they can earn profit. 

 

Determinants of Price in Marketing

The main determinants that affect the price are:

  1. Product Cost

  2. The Utility and Demand

  3. The extent of Competition in the market

  4. Government and Legal Regulations

  5. Pricing Objectives

  6. Marketing Methods used

These are the particulars of pricing methods justified in the business world.


Book your Free Demo session
Get a flavour of LIVE classes here at Vedantu
FAQs (Frequently Asked Questions)

1. What is the Channel of Distribution?

The distribution channel that the company follows to make the product delivered to the customers is known as the distribution channel. In the first place there are – producer, wholesaler, retailer and consumer. This is the most basic and the shortest distribution channel, there are other more complicated distribution channels as well. 

2. What is the Right Price?

Right Price does not mean the lowest price. It is the price that is being analyzed and decided by the managers. They take a number of factors in their view, they think about the marketing mix, competition prevailing in the market, the cost and other factors too.

3. What is the Representation of Price to the Manufacturer and the Consumer?

To a manufacturer it is the quantity of money that is received by him, for his efforts in making the product. While, for a consumer it is the sacrifice being made due to the gain of the product. Hence, perception of the same price is different in different viewpoints.

4. What is Inelastic Demand?

The consumer’s demand which is not at all responsive to the price of the product is defined as inelastic demand. The price of the product does not affect its demand. Essential products like medicine, food have this kind of demand. Whether they are priced at a higher range or a lower range, the demand of the consumers remains equal throughout.

5. What are the objectives of pricing?

 Objectives of pricing:

  •  The first and important objective of why pricing is done in a firm is to fix a price that is mutually acceptable to the consumer and also a producer. if the producer compromises, they incur a loss. If the consumer has to compromise, they will buy a product from an alternate market or brand. So a mutually acceptable price is very important. 

  • Pricing can be changed according to the price of the product’s alternative and complementary products. If the demand for the product is high in the market, then the pricing is changed and increased to sell the limited goods.

  • Sometimes the firms undersell the products, they sell the goods for a lower value. This might incur loss but will increase the demand for the good in the market and sell all of the stock in less time. 

  • When a company launches a new product with new technology, they charge more as the new features do not have any substitute goods in the market. And also to launch an innovative product, more production cost is charged and this production cost is added to the price of the good. 

Comment