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Simply speaking, the price of a product or a service is its monetary value at which it is offered for sale in the market.

 

The price of a product is arrived at after intensive deliberations and brainstorming based on data and information pertaining to various areas. These areas include costing, profit margin, competition, market dominance, customer demographics and customer behavior and so on. By looking at these areas, it can be easily inferred that pricing is not just based on statistics but also on analysis and strategies. This article shall attempt to highlight some of the most important considerations in determining the price of a product/service.

Pricing Approach and Strategies

Pricing decisions are guided by a pricing approach or strategy which provides businesses a sense of direction in the process of price determination. Pricing strategies depend upon the nature of the product, demand and supply, marketing goals and the status and position of the business enterprise in the market.

When there’s a demand in the market for high-end products or the products come with a strong USP, companies usually adopt premium pricing policy. The other important prerequisites for premium pricing are the presence of market demand and absence of close substitutes.

When the competition is intense and products are homogenous, companies go for penetration pricing where the prices are set relatively lower than the prevailing rates in the market with the objective of attracting customers and quickly capturing market share.

Economy pricing is very helpful where price sensitivity is a major influencing factor. In economy pricing, companies adopt a no-frills approach and costs are kept to the minimum.

New innovative products are often offered at high prices at the introductory stages before competing substitutes are launched in the market. This practice is known as price skimming and businesses try to extract the most out of the novelty of a product.

When the competition is intense and products are homogenous, companies go for penetration pricing where the prices are set relatively lower than the prevailing rates in the market with the objective of attracting customers and quickly capturing market share.

Costing

No business would desire to sell their products at anything less than what it had cost them to make the goods available for sale going through the value-chain process. Costing mainly comprises of two parts – fixed cost and variable cost, which collectively forms the total cost. Total cost divided by the number of units produced gives the cost per unit. Thereafter, a profit margin is added to the cost per unit to arrive at the final price of a product. However, the price of a product cannot be determined only by its costing and desired profit margin. There are other factors like prices of competing products, price sensitivity, brand value, regulatory framework etc. which are discussed below. However, cost-based pricing provides a standard base or a starting point for business enterprises to get closer to the final price.

cost-based pricing provides a standard base or a starting point for business enterprises to get closer to the final price.

Competition and Competitors’ Prices

In the absence of competition and presence of a substantial market demand, a business enterprise can aim to assume the role of a market leader. Although this does not give them a free hand in fixing the prices of their products and services at will but with a reasonable pricing policy they can easily recover the costs and earn a healthy profit margin.
In the presence of competition, a business enterprise cannot fix the prices of its products and services without taking into consideration the prices at which its competitors are offering the same goods and services under the same conditions. But while considering the competitor’s pricing it is also relevant to take into account the degree of similarity with the competitors in terms of market share, production technology, value-chain process, distribution network, skills and expertise of workforce, process management, and brand status. A business enterprise cannot just price its products at par with its market competition without considering the strengths of the competitors. It is relevant to figure out the ability, flexibility and strategies of competitors in the pricing of their products.

In the presence of competition, a business enterprise cannot fix the prices of its products and services without taking into consideration the prices at which its competitors are offering the same goods and services under the same conditions.

Market Share and Dominance

A dominant player or a market leader enjoys a certain degree of flexibility in the pricing of their products. A dominant customer base is an indication of extensive operations, wide distribution network, economies of scale and brand loyalty. Because of this dominance, a market leader can stretch the prices of their products. Players with smaller market share do not have this vantage point. However, the market challengers, who are as good as the market leader as an organization and in terms of capabilities and competitiveness, engage into fiercely aggressive price wars with the market leader to capture more and more market share. Market followers, on the other hand, tend to play safe and avoid price confrontation. Niche players adopt a focused approach to target a very small and specific market segment. This gives them the liberty to charge premium prices for their high-end products and services.

Players with smaller market share do not have this vantage point. However, the market challengers, who are as good as the market leader as an organization and in terms of capabilities and competitiveness, engage into fiercely aggressive price wars with the market leader to capture more and more market share

Customer Behaviour – Price Sensitivity

Price elasticity refers to the degree of change in the demand for a product resulting from a small change in its price and it constitutes a very important element of customer behavior. That is why homogenous products offered for sale under the same marketing conditions are priced at the similar levels. However, business enterprises constantly try to differentiate their products from that of its competitors by altering the other elements of the marketing mix like promotional activities, delivery and distribution, product development etc. This helps them to decrease customers’ sensitivity to prices and price their products competitively.

Price elasticity refers to the degree of change in the demand for a product resulting from a small change in its price and it constitutes a very important element of customer behavior

Regulatory Framework

Companies cannot fix the prices of their products and services arbitrarily. There are laws and regulations governing business practices (also covering pricing) which have to be adhered to. The regulatory framework aims to ensure fair competition and prevent unfair trade practices in business. In the telecom sector, it was seen that even free services are bound by the rules and regulations of TRAI.

The regulatory framework aims to ensure fair competition and prevent unfair trade practices in business

The process of determination of the prices of products and services involve consideration of several internal and external factors which include business strategies, level and nature of competition, nature of products and services, costing, brand and positioning, customer behavior and so on. Everything at once may make this process look like an uphill task but a systematic, logical step-by-step approach can help a business get closer and closer to an appropriate price zone.

To know more about “Business Process Management” get in touch with our Retail Experts on consult@mindamend.net


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Author Bio

Rupal Agarwal

Chief Strategy Officer

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