What is Pricing? Definition, Importance, Strategies, and Affecting Factors

For every product we buy, we have to pay some prices. The price is the main factor for determining the value of the product or service. Pricing determines the prices for the products or services.

So, what is the pricing? Let’s understand what it is, its objective, importance, and strategies.

What is Pricing?

Pricing is the process of setting value (price) for the product, upon which the manufacturer sells his products, and paying that price consumers buy the product.

It includes the determination of the appropriate price for the product. It is also called the value the customers sacrifice to get benefit from the product.

So, what is the price? A price is an amount that is set for the product to sell or buy. In marketing, it is an exchange value of goods or services that takes place between two parties in any transaction.

Price or pricing is the second most important part of the marketing mix. It is what is done after the production of a product.

While setting a price for the product, it is important to consider not only the cost of the product but also the profit to the firm, customer satisfaction, and the price should compete with the competitor’s price.

Objectives of Pricing

The following are the main objectives of pricing.

• Increase sales volume.
• Meeting competition.
• Stabilization of prices.
• Achieve target return.
• Maximize profits.

Importance of Pricing

Setting an appropriate price for your product does not only benefit you, it also equally benefits the consumers and economy too. The followings are some notable importance of pricing to the firm, customers, and economy.

Read Also: What is Product Line?

To The Firm

• Competitive Tool – Pricing is the main competitive tool for any business. With competitive prices, companies easily attract the attention of consumers.
• Increase Demand – The price of the product is the major determinant of the product’s demand in the market. Usually, low price results in high demand, and high price results in low demand.
• Source of Revenue – It is the major source of revenue for the firm. From the 4 Ps of marketing, pricing is the only element that generates revenue for the company.

To The Consumer

• Helps in Selection – Customers can easily determine the right products for the just by looking at the prices of the products. For price-sensitive consumers, product prices greatly help them in the selection of the right product for them.
• Differentiate Quality – Through prices, customers can also determine the quality of goods and services. Usually, low price means low-quality products and high price means high-quality products.

To The Economy

• Allocation of Goods and Services – Pricing serves as a means of distributing goods and services among the members of a society and facilitating the growth of a market economy that operates on the principles of supply and demand.
• Saving – The impact of pricing on a country’s savings is significant, as higher prices can lead to a decrease in both individual and overall economic savings. Therefore, governments often use pricing as a crucial metric to assess their economic status and implement appropriate measures.
• Source of Income – In order to finance their operational and developmental activities, governments utilize the pricing mechanism to generate revenue. This involves setting prices for essential public services such as security, law enforcement, and social welfare programs.

Read Also: What is Product Positioning?

Pricing Strategy

Setting the right price for the product is the most important task for companies. The following are the most effective strategies for product or service pricing.

Mark Up or Cost Plus Pricing

As the name suggests, cost plus, under this strategy, a certain profit is added to the cost of the product. It is alternatively presented as, Price = Total Cost + Profit.

Target Return Pricing

In this context, the marketer seeks to achieve a specific percentage return or a targeted total value by estimating an average rate of return based on either the total investment or the total sales.

Break Even Approach

Under this, the product’s price is set at the point where revenue equals zero. The Break-even strategy helps to know the relationship between cost and revenue and find out a point where revenue equals the total cost.

Perceived Value Pricing

In this approach, companies prioritize the buyer’s perception of value when setting prices, using market research to gauge the relative perceived value of their product or service.

By taking into account the market’s perception, they strive to establish a price that accurately reflects the value of their offer.

Read Also: What is Core Product?

Value Pricing

It refers to the practice of setting a fair and reasonable price for a product or service that aligns with the customer’s perception of its worth.

This approach, which is based on the principle of value-based pricing, entails establishing the price of a product or service based on the value that consumers attribute to it.

Demand Differential Pricing

This approach involves selling a product at two or more prices that do not correspond to a proportional difference in marginal costs and is commonly referred to as price discrimination.

This technique involves adjusting prices for different consumers based on factors such as income, purchasing power, and lifestyle, among other things.

Going Rate Pricing

As the name suggests, going rate, under this strategy, the products or services price is set according to the changes in markets.

Factors that Affect Pricing of Products

Setting a price is a complicated task for marketers. When an ineffective price is set for products, companies will encounter negative performance and loss.

Read Also: What is Product Mix?

Therefore, there are some factors that you need to be considered while setting the price for the products. Let’s look at some factors.

Objectives

The primary factor that affects the setting of product price is the objective for which the price is being set. If a company aims to achieve higher profits, it will make higher price products, and so on.

Demand

Generally, when the demand for the product is high, in such as case, a product’s price can be set higher, and it is beneficial too. On the contrary, the product’s price should not be set higher.

Competition

Competition in the market has a significant impact on the pricing of products. In a highly competitive and saturated market, companies have to set even no profit margin prices in order to beat the competition. In such a situation, small companies might not be able to survive.

Marketing Mix

Since the price is one of the important elements of the marketing mix. The price of a product is also affected by the other elements of the product mix such as product, promotion, and distribution.

Cost

It is essential for the price of a product or service to cover the costs incurred in its production, distribution, promotion, and other marketing activities. While some marketers may opt to sell their products below the cost price in the short term, it is imperative that costs are ultimately recovered in the long run.

Failure to do so can be detrimental to a business’s survival. As a result, the cost of producing a product or service is a significant factor in determining its price.

Read Next: What is Product Life Cycle?