Marketing Mix - Pricing
Pricing is the amount of money that customers are willing to pay a business for a good or service - Marketing Mix - Pricing introduction. There are a lot of contributing factors that businesses must take into consideration when it comes to effectively setting a price for a good or service. It includes direct and indirect cost as well as opportunity cost. Pricing is one of the most important elements of the marketing mix. It is the only one of the components that generate revenue, while promotion, place, and product generates cost.
Producing, designing, distributing and promoting products come with expenses. Pricing must support the other elements of the mix. Pricing can be difficult since it must also support the supply and demand relationship. Pricing a product to high or low could mean a loss of sales. There are several factors that should be taken into consideration when setting prices such as; target group, customer willingness to pay set price, company’s objective, profit, competition, fixed and variable costs, prestige and status quo to name a few.
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Pricing is an important strategic issue because it is related to product positioning. Although there is no single approach to determine price, some of the following steps can assist in developing a price for a good or service. * Develop a marketing strategy – perform marketing, analysis, segmentation, targeting and positioning. * Make an Marketing Mix decision – define the product, distribution and promotional tactics * Estimate the Demand Curve – understand how quantity demanded varies with price. Understand Environmental Factors – evaluate likely competitor’s action, understand legal constraints.
* Calculate Cost – fixed and variable cost associated with goods or services. * Set Pricing Objectives – profit maximization, revenue maximization, or price stabilization (status quo) * Determine Pricing – using information collected in above steps to select a pricing method, develop the pricing structure, and define discounts. These steps do not have to perform in this order, although are interrelated and serve to present a starting framework.
Before the product is developed, the marketing strategy should be formulated because of inherent tradeoffs between marketing mix elements, pricing will depend on other product, distribution, and promotion decisions. A business pricing objectives must be identified also in order to determine the optimal pricing. Some of the pricing objectives could be: current profit maximization, current revenue maximization, maximize quantity, quality leadership, partial cost recovery, survival, and status quo.
For new products, most of the time the pricing objective is to either, maximize profit, or to maximize quantity. To meet these objectives skim and penetration pricing strategies are often used. To set the specific price level that achieves their pricing objectives, businesses make use of several pricing methods that includes; Cost Plus Pricing, Target Return Pricing, Value Based Pricing and Psychological Pricing.
Most companies do not consider, in detail, all of these alternative pricing strategies throughout the life of a product or brand, despite the fact that the final price strategy directly affects long term profitability and market share. In addition to setting the price level, businesses have the opportunity to design innovative price models that better meet the needs of both businesses and customers. Price is an important tool, within the marketing mix. The price a business sets for its good or services must strike a balance between gaining acceptance with the target market and also make a profit for them.