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Pricing - introduction

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Setting the right price is an important part of effective marketing . It is the only part of the marketing mix that generates revenue (product, promotion and place are all about marketing costs).

Price is also the marketing variable that can be changed most quickly, perhaps in response to a competitor price change.

Put simply, price is the amount of money or goods for which a thing is bought or sold.

The price of a product may be seen as a financial expression of the value of that product.

For a consumer, price is the monetary expression of the value to be enjoyed/benefits of purchasing a product, as compared with other available items.

The concept of value can therefore be expressed as:

(perceived) VALUE = (perceived) BENEFITS – (perceived) COSTS

A customer’s motivation to purchase a product comes firstly from a need and a want:e.g.

• Need: "I need to eat

• Want: I would like to go out for a meal tonight")

The second motivation comes from a perception of the value of a product in satisfying that need/want (e.g. "I really fancy a McDonalds").

The perception of the value of a product varies from customer to customer, because perceptions of benefits and costs vary.

Perceived benefits are often largely dependent on personal taste (e.g. spicy versus sweet, or green versus blue). In order to obtain the maximum possible value from the available market, businesses try to ‘segment’ the market – that is to divide up the market into groups of consumers whose preferences are broadly similar – and to adapt their products to attract these customers.

In general, a products perceived value may be increased in one of two ways – either by:

(1) Increasing the benefits that the product will deliver, or,

(2) Reducing the cost.

For consumers, the PRICE of a product is the most obvious indicator of cost - hence the need to get product pricing right.

Factors affecting demand

Consider the factors affecting the demand for a product that are

(1) within the control of a business and

(2) outside the control of a business:

Factors within a businesses’ control include:

• Price (assuming an imperfect market – i.e. not perfect competition)

• Product research and development

• Advertising & sales promotion

• Training and organisation of the sales force

• Effectiveness of distribution (e.g. access to retail outlets; trained distributor agents)

• Quality of after-sales service (e.g. which affects demand from repeat-business)

Factors outside the control of business include:

• The price of substitute goods and services

• The price of complementary goods and services

• Consumers’ disposable income

• Consumer tastes and fashions

Price is, therefore, a critically important element of the choices available to businesses in trying to attract demand for their products.

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