Do you want to know how to set pricing strategy? In setting prices, there are certain components that should be viewed by the business organization. In other words, the decisions about pricing of the business organization are affected by many components like internal components and external environmental components.
How to Set Pricing Strategy
Following are the two main categories of components you need to consider while setting prices.
(A) Internal Components Influencing Pricing Decisions
The internal components that influence the pricing contain marketing objectives of business organization, Costs, marketing mix strategies and organizational conditions. These internal components are as follow.
Marketing Objectives
The strategy for the product should be decided by the business organization before setting the price. The marketing mix strategy or pricing of the business organization will be effectively clear, when it carefully choose its target market and positioning.
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The decisions about market positioning provide basis for pricing strategy. The additional goals will also be searched by the business organization at the same time. It becomes easier to set prices when the business organization is clear about its goals.
Examples of marketing goals contain market share leadership, survival, current profit maximization and product quality leadership.
When business organizations are disturbed by heavy competition, too much capacity or variation in customer wants, then they set survival as their main goal.
If the business organization wants to maintain its production it should low down its price in order to hope an enhanced demand. Profits are less significant than survival, in this case.
They will stay in the business as long as their prices compensate some fixed cost and the variable costs. However, endurance is just a short term goal. The business organization should understand how to add worth that consumers will compensate for or deal with extinction, in the long run.
Current profit maximization is considered as pricing goal by many business organizations. Estimation is made by them about what costs and demand will be at various prices and selects the price that will generate the highest current profit, return on investment or cash flow.
The business organization requires current financial results instead of long rum execution. Other business organizations desire to get market share leadership. They consider that the business organizations obtain highest long run profit and lowest cost with largest market share.
The price can be minimizing too much by the business organization in order to get market share leader.
In some cases the business organization makes decision that it should accomplish the product quality leadership.
This generally requires for charging an enhanced price to enhance quality performance and enhanced costs of R&D. The other more specific objectives may also be obtained by setting price.
Competition is prevented to be moved into the market by lowering down the prices of particular business organization or it stabilizes the market by setting its price of products according to levels of competitors.
The loyalty and support of resellers can be kept by the business organizations by setting price or to avert government interference. The attractiveness for a product can be generated by reduction in prices or capture more customers into a retail store by this.
The sale of one product is supported by setting the price of other product of the particular line of business organization. Thus the objectives of the business organizations at many levels are effectively attained by setting the prices properly.
Costs
The basis established for charging price for products of the business organization is referred to as costs. A suitable price is charged by the business organization in order to compensate its entire costs of generating, selling and distributing the product and receive a better rate of return for all the risk and efforts.
In setting pricing strategy, the costs of business organization play a significant role. Business organization having low costs set their prices lower which in turn increase their profits and sales.
Types of Costs: The costs of the business organization are of two kinds which are variable costs and fixed costs. Fixed costs do not change with sales or production level. On the other hand variable costs changes with the production level directly.
The variable cost remains same for every number of units manufactured. These costs are known as variable because of the reason that their total changes with the number of units manufactured. For any given level of production, total costs are aggregate of the variable and fixed costs.
At least fair price is desired to be charged by the management that will compensate the total costs of production at a provided degree of production. The business organization should monitor its costs properly.
When the costs of a business organization, regarding production and sales, is higher than its competitors then it should increases its price or minimize its profit which put it into competitive disfavor.
Costs at Various Levels of Production: It is required by the management to understand that how its costs differ with various levels of production in order to price effectively.
The reason for this is that the fixed costs are distributed farther units, with every one bearing little contribution of the fixed costs.
Organizational Considerations
It has to be decided by management that which person in the organization should determine prices. Prices are handled in many ways by the business organizations.
Top management determines prices rather than sales and marketing department in small business organizations. Divisional or product line managers typically determine prices in large business organizations.
The salespeople will have the permission to negotiate with the customers within particular price compass, in case of industrial markets.
Even so, top management determines the pricing goals and policies, and it mostly sanctions the prices suggested by sales people or lower-level management.
Pricing department is present in business organizations of industries where pricing is key component and this pricing department determines prices or assists others in determining them.
Top management or marketing department is reported by pricing department. Others who can affect pricing contain production managers, sales managers, accountants and finance managers.
(B) External components Influencing Pricing Decisions
Pricing decisions are also influence by external components like competition, nature of market & demand and other environmental factors.
The Market and Demand
The market and demand determine the upper limit of prices whereas costs determine the lower limit. Price of a product is balanced by both consumer and industrial purchasers against advantages of owning it. The relation between price and demand of the product is ascertained by the marketer before determining prices.
Competitors, Costs, Prices and Offers
The business organization’s pricing decisions are also influenced by an important external component known as competitors, costs, prices and possible competitors response to the business organization’s own pricing variations.
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Other components in external environment should also be considered by business organization before determining prices. On business organization’s pricing strategies, economic conditions have potential influence.
Pricing decisions are affected by economic components like inflation, recession or boom and interest rates because they influence both the consumer perceptions of price and value of product and the costs of manufacturing a product.
The business organizations should also consider that what influence its prices will have on other groups in its surroundings. How will the resellers response against different prices?
Those prices should be determined by the business organizations that provide resellers a sufficient profit, encourage their support and help them to sell the product efficiently.
The government is another significant external factor that affects pricing decisions. Finally social aspects should also be considered. In determining prices, a business organization’s short term profit goals, market share and sales should alter by wider societal thoughts.
