Price setting is a very critical area in marketing mix decisions of a company. The meaning is given to price sometimes creates Price setting difficulties. It is the only element that generates revenues for the company, and all others involve only costs. The aim of marketing is to facilitate satisfying exchanges between the marketer and consumers at a profit.
The price setting represents the value that is exchanged in a marketing transaction. A marketer usually sells a specific combination of need-satisfying product or service and additional services like warranty or guarantee. Donald Lichtenstein, Nancy M. Ridgeway, and Richard G. Niemeyer say that in most marketing transactions price is very evident, and buyers and sellers are aware of the value that each must part with in order to complete the exchange. However, a price may not always be in monetary terms. Barter is the oldest form of exchange and still used occasionally for a variety of goods between countries. From the earliest times when people learned to engage in barter to affect exchanges, settlements were based on bargaining. Bargaining is still used in markets in the majority of the countries. Certain websites, such as Priceline.com and eBay.com basically use the idea of bargaining between buyer and seller for a variety of products and services.
The pricing exercise begins with an understanding of corporate mission, target markets, and marketing objectives. Based on these factors, pricing objectives are developed. Management must examine the costs to determine how much flexibility it has in establishing prices and the lowest price level essential to meet profit and other company objectives. Determining the role prices play relative to other marketing mix variables sets boundaries and guidelines for pricing decisions. Pricing decision should take into consideration the impact on other items in the product line, promotional decisions, and distribution channels. There are two types of pricing decision situations; new product pricing, and adjusting prices of existing products. Pricing strategies of particularly new products are the high-level responsibility shared by marketing and other top-level executives.
Buyers have limited resources and their interest in price reflects their expectations of a product’s ability to deliver the desired satisfaction they may derive from it. Customers must evaluate whether the utility value gained is worth the buying power sacrificed in an exchange. After the dawn of money economy, with the passage of time, buyers in almost all present day societies have learned to assess goods, services, and ideas etc. in terms of financial price to measure the value usually used in exchange.
Price is everywhere all around people. For a variety of marketing situations, the price is expressed in different terms. For example, insurance companies charge a premium, colleges charge a tuition, a lawyer or physician charges a fee, taxis charge a fare, banks charge interest for a loan, taxes are paid for government services, a toll is charged for some bridges etc.
Pricing should never be seen as an isolated component of a company’s marketing decision-making. Companies spend large amounts of money on product development, promotion, and distribution and face risks. Price is often the only marketing mix element that can be changed quickly to respond to changes in demand or competitive moves. Developing new products or modification of existing products, any changes in the promotional program or distribution system involves much time and efforts. As mentioned above, the price is the only element directly related to total revenue generation. A miscalculation of selling prices in high turnover and low-profit margin in businesses can have a large impact on a company’s profits. The following equation is significantly important for the entire company:
Profits = (Prices × Quantities sold) – Total costs
Thus, prices have the impact on a company’s profits and are important for its long-term survival. Price also has a psychological impact on customers and can reflect product quality and user status. This is especially true forego intensive products. A company can highlight the product quality and user status by keeping the price high.
For most companies, setting prices can be a complex task involving both scientific analysis and intuitive trial and error. This is particularly true when a company launches a new product and there are no historical data or precedent on which to base expectations of how much consumers are prepared to pay for the product.