Value Pricing

Pricing is much easier with one product than with multi-products. When a single good is being produced, all fixed costs associated with the business are applicable to that one product. When several products are produced, fixed costs must be applied proportionately to the various goods according to use. Many companies want to have both extensive marketing programs and the lowest price. In most cases this is not feasible. The money for the marketing programs must come from the consumer and this is not always possible with low prices. Traditionally, companies have used costs as the basis for setting prices, with no regard as to the value a customer places on a product or how competitors are pricing. A market-driven company will “price on value, knowing costs.” This is known as target pricing.

 

Target pricing is where a company studies the competition and the customer to identify a point where the product must be priced to be competitive. Once the target price is identified, the company identifies a desired profit and works backward to calculate cost at which the product must be produced to meet the profit and target price. These calculations must take into account the target profit margin, price reductions for retailers, costs of promotion and future distribution costs. This is the reason that pricing is the last of the four P’s to be covered. To properly calculate the costs incurred by a company, include present and planned activities for distribution, promotion and product development.

 

Pricing Strategies

Pricing strategies specify the role of price in implementing marketing strategy. It states what the company wants to achieve by setting a particular price. Pricing strategies are not necessarily mutually exclusive. Price strategies should be determined for each marketing strategy set by the company and must be consistent with distribution and promotion strategies.

 

Pricing Programs

Pricing strategies are arrived at through various

pricing programs

such as:

Penetration Pricing

• a low price to stimulate demand.

Used when

• lower prices result in overall increased growth in the market or increased demand for the company’s product

• the company sells higher margin complementary products that are being pulled along with the sale of lower priced products

• the company enjoys economies of scale

• competitors have high cost structures.

Parity Pricing

• setting the price near or at competitive levels, and using other marketing variables to implement strategies

Used when

• total market volume will not grow with lower prices

• competitors can easily match any price decrease

Premium Pricing

• setting a price above competitive levels

Used when

• a company can differentiate a product in terms of higher quality or special features

• a company has little excess capacity and where it is difficult for competitors to enter the industry