What is Pricing? Definition, Objectives, Importance, Factors, and Strategies

What is a Price?

Price is the amount we used to pay to get something either a good, service, or idea. Pricing is the means to set the value (price) of the product or service. The price set in the pricing process is what one buyer should pay while seeking to use such a product or service.

Price is a value that will purchase a finite quantity, weight, or other measures of goods or services. Price is the 2nd most important component of the marketing mix that the marketing manager must consider while preparing a marketing program. Price is the prime factor in generating the return on capital invested in a business enterprise. Therefore, pricing is regarded as a backbone, on which the success of a business enterprise mainly depends.

In economic terms, price is the quantity of money or commodity (barter economy), which must be exchanged for one unit of a good or service. Price is generally paid in terms of money; while in a barter economy, price is paid in terms of commodity: For example, the price of one cow maybe twenty sacks of maize or ten goats.

In marketing terms, price is considered as the exchange value that may take place between two or more two parties in a particular transaction. In simple terms, price is the value or amount of money sacrificed for service. In other words, price is the total amount of money exchanged for an article or service that is being purchased.

Moreover, the price can be looked upon from two viewpoints: one through sellers and another through the consumers.

• To the seller, the price is the revenue and profit source.
• To the consumer, the price is what he/she gives up to get what he/she wants.

Forms of Price

Price has different forms in different contexts. Following are some of the forms of the price we see in our daily lives.

• Rent – for using a room, apartments, equipment, etc.
• Interest – for using money.
• Fare – for means of transportation.
• Tuition fee – for education-related activities.
• Fee – for taking service from a doctor, lawyer, engineer, etc.
• Toll – for using highways.
• Salary – for working in an organization.
• Wage – for doing labor.
• Commission – for accomplishing some activities or selling some products or services.

What is Pricing?

As already mentioned, pricing is the setting up a price for the prodcut or service by which price a marketer wants to sell his prodcut or service. It is also called product pricing.

In the words of W.J. Stanton – Pricing is the function of determining product value in monetary terms.

It involves determining some object that can be used to establish the value of the exchange to all parties involved in the transaction. For marketers, pricing their offerings is a compulsory task. They should have to price their offerings to make sales fairly and earn some returns.

For the marketers determining the value of the product are a very difficult task as such it requires market knowledge, a great deal of experience, huge efforts, and strategies. However, while pricing the product, the marketer should not only focus on the firm’s profits, but rather at the same time, he should satisfy the customers, and compete with the prices offered by the competitors.

These days pricing has become a very complicated job since varieties of products prices are there and huge competition in the market. The most common situations companies face problems while determining the price of the product are:

• Pricing is a problem when a company develops a new product and must set a price for the first time.
• It is a problem when circumstances such as inflation, shortages, or excess inventories lead a firm to consider initiating a price change.
• It is a problem when a company produces several products that have interrelated demands or costs, and
• It is a problem when competition initiates price change.

Objectives of Pricing

Before determining a product‘s price a marketer should be clear about what objectives he is putting in the price. The pricing objectives of the business firm can be one of these three:

Profit-Oriented Objectives

In the profit-oriented objectives, the main goal of the business firm is to generate more on more profits and ignores others’ objectives. It includes the achieving target return (i) – in which the firm targets some percentage of profits on the price of products. The firm adds desired profit percentage to produced costs of the products.

And, maximizing profit (ii) – here the firm aims at maximizing its profits as far as possible. For this objective, the firm can maximize its profits on every single item marketed and on total sales.

Sales-Oriented Objectives

Especially the larger firms consider sales-oriented objectives by making aim to increase the volume of sales. Though they ignore to some extent the profit of the firm but believe the increased volumes of products sales ultimately increase the profits. By this objective, the firm can increase its sales volume and market share.

Status-Quo Objectives

Firms adopting the status quo objective of pricing follow the slogan “don’t rock the boat”. The firm acts some aggressively and some conservatively. The goal is not to earn more profit nor to lose more. This objective is related to price stabilization and meeting competition.

Also Read: Full Explanation on These Pricing_objectives

Importance of Pricing

Determining the price for the prodcut is an integral part of the company’s marketing program. As the competition going on rapidly the importance of pricing is also. The importance of pricing can be seen in three viewpoints as an economy, firm, and customers, also mentioned below:

To the economy, the importance of pricing can be listed as below:

• It enables the proper allocation of goods and services.
• Regulates the factors of production.
• Promotes consumer savings.
• It is a source of income.

To the firm,

• Acts as the determinant of the market demand.
• It is a source of revenue.
• Acts as a competitive tool.
• Helps to gain position in the market.

To the customers,

• Helps to select goods and services.
• Helps to determine the quality of the products and services.
• Becomes the basis of purchase decisions, etc.

Also Read: A complete explanation of this Pricing_Importance

Factors Affecting the Pricing of the Products

While pricing the product or service the marketers are influenced by various internal and external factors. The internal price factors are to some extent controllable whereas external price factors are not. Internal and external factors that affect the determination of the price for the product can be listed as follows:

Internal price factors

• Pricing objectives
• Level of organizational involvement
• Marketing mix program
• Product differentiation
• Production cost

External price factors

• Demand for the product or service
• Competitive situation
• Supplier’s characteristics
• Distribution system
• Economic system
• Government control

Also Read in detail: Price Factors: 11 Factors That Affect Company’s Price Strategy

Pricing Strategies

Once the factors affecting price are identified, the next task of the marketer is to set the price for the products. To set product price, one could apply the three most popular pricing strategies/approaches – cost, demand, and competition.

Cost-Based Pricing

The first pricing strategy a marketer could use is cost-based. This pricing strategy is generally based on the cost of the product’s production. It assumes the price of the product should at least cover the cost incurred in the production of products. In this strategy, one could adopt the mark-up, target return, and break-even method pricing.

Demand-Based Pricing

In this strategy, the product’s price is determined on the basis of consumers’ perceptions and demands instead of the cost of the production. Thus, it is also called a market-based strategy. Under this strategy, one can determine the price by three strategies – perceived value, value-based, and demand differential pricing.

Competition-Based Pricing

Under this approach, generally business firm determines the product’s price by considering the competitor’s offering prices. Under this, a firm can adopt a going rate and sealed bid pricing strategy.

Also Read: 8 Popular Pricing_Strategies That Maximize Sales and Profits