Mba507 Summary of Chapter 15 - Marketing Management

Why is setting a right price important for a company? A firm always has one or the other objective to meet, such as gaining market share or introducing a new product. Pricing strategy plays a vital role here by helping the firm achieve its objectives by offering the product desired by its customers at the right price. Price setting is quite tricky because as businesses, we have to be able to predict what price our customers are willing to pay. To set prices, companies make use of 3 methods which are as follows:

1. Cost based pricing: In order to be profitable in the long run, the price charged by a firm must exceed the cost to produce the item. Here, the fixed and variable costs are identified, and a mark-up is added to that cost which makes up the selling price. This is one of the most widely used methods of pricing and does not take into account what the competition is doing.
2. Competition based pricing: This method has companies looking at their direct competitors when setting a price. Here, pricing is used as a competitive tool. The objective is to gain additional volume by imposing lower prices and they believe having a large market share leads to increased profitability. In order to compensate for the lower contribution margin, the firm relies on high volume sales.
3. Value based pricing: Here, the first thing a business does is to understand what value means to the customers. If they don’t buy from me, who are they going to buy from? The key here is to understand the perception of customers and also to educate them why they would get more value when they buy your product as compared to other competing products.

Everyday low pricing (EDLP), high-low pricing and new product pricing are some common strategies a firm employ. EDLP strategy has prices which customers value by offering a consistency in pricing. Here, the firm sets prices below what competitor is offering but not having any particular sales. With high-lo pricing, the prices vary because at one point, the items are sold in full price and sometimes, a sale is introduced with low prices. Unlike EDLP, high-low pricing targets two different sets of audience- one which doesn’t mind paying full price and other price sensitive group who wait for sales to make a purchase.

New product pricing can be done using either penetration or skimming methods. Penetration pricing starts off with offering products at a low price point. With the gradual increase in market share, the price also increases gradually, increasing the profit. However, this requires time because the customers should get to know the brand first. Conversely, with price skimming, the price introduction starts in the higher end which helps recoup the costs of introducing the product.

In order to facilitate the purchase for its customers, a firm may decide to use tactics such as provision of coupons, markdowns on items, quantity discounts, price bundling and so on. In the same way, firms cater to their B2B relationships with slashing prices too. With B2B, the methods include seasonal, cash, quantity discounts and so on. Whether it be business or customers, when a company is giving out coupons to quantity discounts, their main aim is to increase sales. However, there are some ethical boundaries that the firm must stay within while playing with prices. Like misleading advertisements, deceptive pricing can cause a firm a great deal of trouble. In addition to that, colluding with other firms to fix a price is also considered an illegal practice. For example, when a retailer is seen marking down a product, the price mentioned in the markdown must be the amount that the product was sold earlier.