Pricing Decisions - The Marketing Mix

Generally speaking, company management has a number of variables or ingredients that it can control. For example, the management of a company has discretion over the range of products to be produced, their feature, quality levels, etc. The task of marketing management is to blend these ingredients together into the successful recipe. The term marketing mix is appropriate, for there are many marketing mix ingredients and even more ways of combining them. Each element of four Ps requires that decisions are taken:

• Price: price levels, credit terms, price changes, discounts
• Product: features, packaging, quality, range
• Promotion: advertising, publicity, sales promotion, personal selling
• Place: inventory, channels of distribution, number of intermediaries


Price

As with the product element of the mix, pricing decision encompasses a variety of decision areas. Pricing objectives must be determined, price level set, the decision made as to credit and discount policies and a procedure established for making price changes. In the determination of price levels, a number of factors must be considered. Here are some of the main ones:

Company objectives

A company must first determine what objectives it wishes its pricing to achieve within the context of overall company financial and marketing objectives. For example, company objectives may specify a target rate of return on capital employed. 

Marketing objectives

A company may determine that the most appropriate marketing strategy for a new product which it has developed is to aim for a substantial market share as quickly as possible. This is called a market penetration strategy. It is based on stimulating and capturing demand backed by low prices and heavy promotion. At the other extreme, the company might determine that a market skimming strategy is appropriate. Here high initial prices are set - often backed by high levels of promotional spending - and the cream of the profit is taken before eventually lowering the price. When the price is lowered, an additional, more price-sensitive band of purchaser then enters the market. Whatever the financial and marketing objective set, they determine the framework within which pricing decisions are made. These objectives should be communicated to sales management and to individual members of sales team.

Demand consideration

In most markets, the upper limit to the price a company can charge is determined by demand. One is able to charge only what the market will bear. The demand curve shows that at lower prices, higher quantities are normally demanded. It is also possible to read off the curve the quantity demanded at any given price. It is also possible to assess how sensitive demand is to changes in price. In other words, we can calculate the percentage change in quantity demanded any given percentage price increase or decrease. 

Demand Chart

However, it is dangerous to assume that at lower prices higher quantities are demanded is always the case. Sometimes it doesn't happen like that, low prices also may cause the customer to suspect the quality of a product. 

Cost consideration

If demand determines the upper threshold for the price, then costs determine the lower threshold. In a profit making organization in the long run prices charged need to cover the total cost of production and marketing, with some satisfactory residue for profit. In fact, companies often begin the process of making decisions on price by considering their costs. 

Break-Even Analysis

Break-even analysis is quite a powerful aid to decision making. Sales managers should understand the different costing concepts and procedures and although they do not need detailed accounting knowledge, they should be familiar with the procedures that go into the costing of products they are responsible for selling.

Competitor consideration

Few companies are in the position of being able to make pricing decisions without considering the possible actions of competitors. Pricing decisions, particularly short-term tactical price changes, are often made as a direct response to the actions of competitors. Care should be taken whether using this tactic, especially when the movement os price is downwards. Once lowered, prices can be very difficult to raise and where possible, a company should consider responses other than price reduction to combat competition. 

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