Pricing my friends is the second “P” of the marketing mix. And it is as important as any other factor in determining the sales and success of any product or service.
In a free market, firms can only charge that price which does’nt affect demand too much nor does it bring them any loss.
In order to determine such a price they find out equilibrium price by drawing the demand and supply curve of a product. This brings us to the demand and supply and demand of a product. Demand is a collective term that refers to the group of consumers who are willing and able to buy a product or a service at a given time period. E.g if there are 1million consumers of a local cigarette company who regularly smoke its cigarettes, they are referred to as the demand of the cigarette brand. Likewise, supply is the quantity of products, tangible or intangible that a business can supply to consumers at a given time period. Demand curves look something like this
Price
Demand
This shows that the greater the price the lesser the demand and the lower the price the greater the demand. Quite simply, we can conclude that these two are inversely related. The gradient of the curve can vary depending ob the elasticity of the product . For products that are more elastic, a small change in price can trigger a larger change in demand and vice versa. Whereas those products that are less elastic and have a steep gradient experience a lesser chang in demand against a greater change in price. Therefore, we can call Price elasticity of demand, the responsiveness of demand to a change in price.
Supply curve has a positive gradient as the curve moves higher. This means that supply increases with price. If you imagine yourself as a factory owner, whose goods are now being sold at a much higher price, you would definitely increase your supply to take advantage of that time. So supply is positively correlated with price.
Factors affecting Demand and Supply
Demand and supply are not only influenced by price but also by other non-price factors. Let’s take a look at demand first. The factors that affect demand are the no. of substitutes of product: If the product has a lot of competitors then even a slight change of price can cause its consumers to shift to other brands, hence lowering its demand by a great margin. The price of a product can also influence it demand. If the product is expensive and has a higher proportion of income of people, it will automatically be more elastic.
In supply, the cost of raw materials can be considered a factor affecting supply. This is only if the raw materials become expensive or rare, this will automatically cost supply to slump. The transportation costs to the market are also a pressing factor. This is because if the fare becomes high the amount of goods supplied will reduce.
Pricing strategies
Cost-based pricing:
This type of pricing strategy involves calculating the variable costs and fixed costs involved in one product. And attaching a fixed profit margin to the unit price. This is very simple way of calculating price but it can seriously affect sales if the price that is calculated is higher than that of the competitors.
Penetration pricing:
This involves setting a very low price for the product in order to capture market share. This is usually done when new businesses enter a mass market where there is very much competition. It nevertheless ensures the sales of a product.
Price Skimming:
This is the opposite of price penetration, and it involves setting a price very high. This is only done when a businesses enters a niche market or comes up with a brand new and improved product.
Competitive Pricing:
This is when a firm charges a price just in line with those of your competitiors. This does maintain your sales and it is used in the maturity phase of the product. However, profits can be low.
Promotional Pricing:
This is when a product is sold at a discount price for a set period. This is usually adopted during the decline of a product. And can help to float sales for only a limited time just to clear stocks.
Well that’s all for now, let’s do some FAQs
Q:1 What is price?
Ans. It is the amount that consumers pay for a product or a service. And it usually depends on the quantity, quality and necessity of the concerned good.
Q:2 List the various pricing strategies a business uses.
Ans. The different pricing strategies that are used by a business are the following:
- Cost- based pricing
- Price penetration
- Price skimming
- Competitive pricing
- Promotional pricing
- Psychological pricing