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As we know the marketing mix (made up of product, price, place and promotion) is the perfect combination of elements you need to get right for effective marketing. Pricing is one of the most important elements of the marketing mix, as it is the only element of the marketing mix, which generates a turnover for the organisation. The other 3 elements of the marketing mix are the variable cost for the organisation;
Product - It costs to design and produce your products.
Place - It costs to distribute your products.
Promotion - It costs to promote your products.
Price must support the other elements of the marketing mix. Pricing is difficult and must reflect supply and demand relationship. Pricing a product too high or too low could mean lost sales for the organisation.
Pricing should take the following factors into account:
- Fixed and variable costs
- Company objectives
- Proposed positioning strategies
- Target group and willingness to pay
An organisation can adopt a number of pricing strategies, the pricing strategy will usually be based on corporate objectives.
Types Of Pricing Strategies
The Pricing Strategy table below provides the definition for ten different pricing strategies and an example to explain each pricing strategy.
|Here the organisation sets a low price to increase sales and market share. Once market share has been captured the firm may well then increase their price.
|A television satellite company sets a low price to get subscribers then increases the price as their customer base increases.
|The organisation sets an initial high price and then slowly lowers the price to make the product available to a wider market. The objective is to skim profits of the market layer by layer.
|A games console company reduces the price of their console over 5 years, charging a premium at launch and lowest price near the end of its life cycle.
|Setting a price in comparison with competitors. In reality a firm has three options and these are to price lower, price the same or price higher than competitors.
|Some firms offer a price matching service to match what their competitors are offering. Others will go further and refund back to the customer more money than the difference between their price and the competitor's price.
Pricing Strategies Table Continued
|Product Line Pricing
|Pricing different products within the same product range at different price points.
|An example would be a DVD manufacturer offering different DVD recorders with different features at different prices e.g. A HD and non HD version.. The greater the features and the benefit obtained the greater the consumer will pay. This form of price discrimination assists the company in maximising turnover and profits.
|The organisation bundles a group of products at a reduced price. Common methods are buy one and get one free promotions or BOGOFs as they are now known. Within the UK some firms are now moving into the realms of buy one get two free can we call this BOGTF I wonder?
|This strategy is very popular with supermarkets who often offer BOGOF strategies.
|The price is set high to indicate that the product is "exclusive"
|Examples of products and services using this strategy include Harrods, first class airline services, and Porsche.
|The seller here will consider the psychology of price and the positioning of price within the market place.
|The seller will charge 99p instead £1 or $199 instead of $200. The reason why this methods work, is because buyers will still say they purchased their product under £200 pounds or dollars, even thought it was a pound or dollar away. My favourite pricing strategy.
|The organisation sells optional extras along with the product to maximise its turnover.
|This strategy is used commonly within the car industry as I found out when purchasing my car.
|Cost Plus Pricing
|The price of the product is production costs plus a set amount ("mark up") based on how much profit (return) that the company wants to make. Although this method ensures the price covers production costs it does not take consumer demand or competitive pricing into account which could place the company at a competitive disadvantage.
|For example a product may cost £100 to produce and as the firm has decided that their profit will be twenty percent they decide to sell the product for £120 i.e. £100 plus 100/100 x 20
|Cost Based Pricing
|This is similar to cost plus pricing in that it takes costs into account but it will consider other factors such as market conditions when setting prices.
|Cost based pricing can be useful for firms that operate in an industry where prices change regularly but still want to base their price on costs.
|Value Based Pricing
|This pricing strategy considers the value of the product to consumers rather than the how much it cost to produce it. Value is based on the benefits it provides to the consumer e.g. convenience, well being, reputation or joy.
|Firms that produce technology, medicines, and beauty products are likely to use this pricing strategy.
As we have discussed the price you charge for your products and services is important because it is an income source and unlike the other elements of the marketing mix isn't a cost. It is also important because it determines how much profit you make. Your challenge however is setting the right price for your product and ensuring that your pricing strategy doesn't turn customers way.