Meaning of Pricing
Generally, the amount to be paid for any goods or service is called price. Price is one of the important factors of marketing mix. This is also the main source of income of any business organization. So, profit or loss of business organization depends on the price of products. Price also expresses the quality of products/goods. Generally, high quality goods have high price and low quality goods have low price. Customers select goods on the basis of the price according to their buying capacity. Without certain price no exchanges of any goods or services can be done. So, price has important role in marketing. Generally, price is measured in currency.
| In the developing or underdeveloped countries like ours where economic condition is very weak, goods or services are also measured in other form. Price of any goods taken or given according to the product exchange system is not fixed. In other words, in such system price of goods is not determined in currency. |
Price is the strong equipment of marketing. It simplifies exchange function of marketing. There are many names of such price. For example, interest paid for the use of currency, rent paid for the use of capital or capital assets, commission paid for use of service, tuition fees paid for the education, salary paid to employees for using their service, tax paid for earning income, premium paid for insurance, etc.
Different writers and experts have defined ‘price’. Some important ones are as follows:
According to Prof. William J. Stanton, “Price is the amount of money and/or other items with utility needed to acquire a product.
According to Prof. Philip Kotler, “Price is the only element in the marketing mix that produces revenue, the other elements produce cost.”
According to David J. Schwartz, “Price is the exchanged value of the product or service expressed in terms of money.”
The above mentioned definitions make it clear that the amount to be paid for any products / goods is called price. The producer should take rational decision to determine such price. Generally, price is expressed in money / currency. Customers study the goods / products, select it and buy it. So, price has an important role in marketing. Price is expressed in salary, interest, tuition fees, rent, commission, premium, fee, revenue, bill, royalty, etc. This is made clearer by the following table.
A List of Names of Price
| S. No. | Price | Product and Services |
| 1. | Salary | Service of an executive, manager and staffs. |
| 2. | Interest | Use of money |
| 3. | Tuition | Education |
| 4. | Wage | Service of workers and labor |
| 5. | Fair | Taxi and airline flight |
| 6. | Commission | Service of seller and distributors |
| 7. | Premium | Insurance (Various insurances) |
| 8. | Fee | Service of the doctor and lawyer |
| 9. | Dues | Membership in a union or a social club |
| 10. | Revenue | Tax and custom of government |
| 11. | Rent | Use of living quarters or piece of equipment for a period of time |
| 12. | Bill | Telephone, water and electricity |
The task of determining price of any product or service is called price. Determining price of any product is very challenging. So, in determining price of any product, special consideration should be taken to production cost, competitors’ prices, prices of substitute products and market environment. Besides this, internal and external obstructions also should be identified. After the obstructions have been identified, ways for facing such obstructions should be found out. Only then proper method of pricing should be applied. The price determined in such way becomes long lasting and reasonable.
Objectives of Pricing
The task of fixing reasonable value of any product or services is called pricing. To fulfill this task all the costs and profits should be included. Various expenses are included under production cost. They may be direct and indirect expenses. Before determining price of any product or services, all the objectives which are directly influenced by the organizational goal should be made clear. If the organizational goal is clear, it becomes easy to prepare the objectives of pricing. Main objectives of pricing are as follows:
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| Objectives of Pricing |
1. Profit oriented objective
All the business organizations or companies are conducted with the main objective of earning profit. Their profit making objective may be for long term or short term. Under such task, companies or organizations form two types of objectives as follows:
- To achieve a target result: The certain rate of profit intended by an organization or company to earn during certain period is called target result. Business firms or companies fix prices of their products with the objective to get certain result from sale or investment, for instance, 8% profit from sale, 7% profit from investment, etc. Most of the wholesalers and retailers estimate targeted result with the objective of earning short term profit. The firms or companies who do not need to face strangling competition take decision to fix such price.
- To maximize profit: There are various types of profit making objectives. Among them profit maximization is the second important objective. Fixing maximum rate of price of any product or service to earn maximum profit in very short term adversely affects the customers. So, a strategy should be adopted to earn maximum profit in long term. Sales volumes should be maximized with the minimization profit margin for earnings maximum profit. As a result, profit amount increases. This becomes beneficial to the company/firm and society in the long run.
2. Sales oriented objective
A company may adopt a policy to increase sales volume by fixing lower rate of price of products or services. In fact, sales oriented objectives aims to increase sales quantity and market share. This objective can be studied by dividing into two classes as follows:
- To increase sales volume: Increasing sales quantity of any product also may be one of the objectives of pricing. The emphasizes to increase certain percent of sales quantity can be increased getting permission from sales department or adopting other pricing strategies. Such strategy discourages possible competitions. Besides this, profit can increase in the long run due to minimum production cost.
- To increase market share: Every company or firm wishes to promote sale of its products. The objective of pricing may be to increase sales quantity. This also increases market share. In this age of competitive environment of market, it is also necessary to increase market share. Some companies adopt a policy to expand market share gradually; some others adopt the policy to expand market share immediately and control it. In order to expand market share, price of products or services should be low in comparison of competitors. Japanese auto products have become very high in price in American market due to which Toyota, Nissan, Honda Companies have cut down production cost fixing low margin profit and adopted a policy to increase share in American markets. This makes it clear that market share can be increased fixing low profit margin.
3. Status-quo oriented objective
Status-quo objective is formed to maintain the present situation for long time. In this objective, price of products remains same for long. Firm or company does not take any step to change the price. This status-quo includes the objectives like continuation of same price, facing competition and continuation of existence. They can be mentioned as follows:
- Stability in price: Price stability is one of the importance objectives. This remains effortful to maintain price at the same rate for time. Price leadership companies, frequent demand changing companies and the companies wishing to maintain reputation try not to let price fluctuate. All such companies make their objective to maintain price same at the same level. Such organizations or companies also wish to maintain revenues, price of their products, profits etc. at the same level. They do not want to take risk. They try to maintain same price by increasing production and supply in prosperity period and decreasing production and supply in depression period.
- To meet competition: This is the age of market competition. Every business company needs to face competition for survival/existence. Companies/firms have to fix price of their products or services as fixed in the markets. So, price is fixed with a view to facing/meeting competition in market. The price leadership companies should fix/determine price of their products by studying and considering market prices. Otherwise, the prices of their products cannot face/meet competition in market; as a result they are compelled to flee away from the market.
- Survival: It becomes very difficult to save the company/firm from high competition in market. In such situation, the firm should fix prices of their products in a way that only production cost can be recovered. In such situation, production cost may be equal to revenue. (Production cost = Revenue). This situation is called breakeven point. In this situation, there is neither profit nor loss. In this way, company’s existence is saved and it expects improvement in future. Business companies make such objectives waiting for bright future.
Importance of Pricing
Reasonable pricing plays an important role in achieving business goal. Price remains as crucial matter for business companies. Its importance is linked with various aspects. The importance of pricing is related mainly to economy, organization and customers. They can be mentioned as follows:
1. Importance to the economy
In fact, price is the important element of economy. It directly affects demand and saving. It also controls means of production. To make it clearer, a short description has been made as follows:
- Determinant of demand and supply: As the price of products directly affects demand, price plays an important role in determining the quantity of demand. So, price has been accepted as basic element. If the price is increased but the quality of the product is unchanged, and then demands of the products decreases, and if the price is decreased, demand for the products increases. In other words, when price decreases, demand increases, and when price increases, demand decreases, hence the law of demand applies. In this way, the quantity of demand and supply depends on price; price can be identified as determinant of demand and supplies.
- Effect to the factors of production: Price of products is very important to economy and industry. It directly affects wages, rent, interest and profits. Capital, labor, land and venture are the factors/means of venture productions. Wage for labor, rent for land, interest for capital, reasonable profits for venture should be distributed. The factors/means of production (wages, rent, capital and venture) affect demand and supply. Rate of wage attracts labor whereas high interest rate attracts capital. Hence, price strongly affects factors/means of productions.
- Effect to the saving and investment: Determined/fixed price for target market may affect inflation. This indicates that inflation causes increase in price of products. If the price of products or service increases, the customers get in difficulties. When the price of products or services increases, consumers’ saving decreases, due to which investment is discouraged. But, if price decreases and saving increases, investment also increases. This situation contributes to the development of society and nation.
2. Importance to organization
Price of product or services is an important element/factor of marketing mix. Price management is very difficult task for profit making organizations. So, rational decision should be taken for price management. Success in market competition can be achieved; income and profits can be earned only through price. The following points are discussed to make the importance of price clearer.
- Revenue and profit: Price plays an important role in determining income and profit of an organization. Total income can be made out/found out by multiplying per unit price by sold quantity. When sale quantity remains same, but price is decreased, income also decreases. If price is increased and sale quantity remains same, income is increased. Profit can be made out/found out also by subtracting total cost from total revenue. So, profit can be increased or decreased by increasing or decreasing price of products. But policy of frequent change in prices and profit/revenue is detrimental to the company.
- Competition: Business organization should face various competitions appeared in market. It has to face price competition certainly. If market competition increases in the price already fixed, the organization can attract increased number of customers by decreasing the price. This increases sales volume and decreases production cost.
- Expansion of the product line: Price directly affects organization to expand target markets and add product line. Price also helps in taking decision whether to add new product line or expand new product or not. This can be decided by comparing production cost with the price. If profit seems sure, decision for expansion should be taken. But, just opposite to it, if there is no possibility of profit but only loss, then decision should be taken not to expand the products.
3. Importance to the customers
Determination of price should be based on genuine reasons. If price has been determined rationally, this helps general customers. Following points can be discussed to make clearer the importance for general customers:
- Importance of the product selection: Most of the customers give priority to price and analyze it. They try to select products considering their prices. Such customers minimize quality and utility. They can take decision to buy the products which contain relatively low prices.
- Importance of the quality perception: Price plays an important role to meet customers’ necessity/want. Similarly, it is also equally helpful to assure them of the quality of the products. If high price products or services make the customers realize high quality and low price product signifies low quality.
- Importance of customers’ benefits: Price of products affects customers’ benefits. The customers by low priced products/goods even when the income sources have fallen down. In the situation when income has increased, demand for products does not decrease even if the price is high. The customers who are sensitive to price may take decision to buy products when the price has decreased or discount is provided. Some customers give priority to their social dignity, respect and satisfaction.
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