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10/01/2013

MBA Notes - Right Pricing and Managing Price Changes

Question - "Setting the right price of goods and services is an important part of effective marketing." Explain the right pricing strategy? Also explain how to manage price changes?

Answer

Introduction

It is true to say that - "Setting the right price of goods and services is an important part of effective marketing." Pricing the products properly is crucial for the success of any business. According to Charles Toftoy, associate professor of management science at George Washington University, "Pricing is probably the toughest thing there is to do." 

Out of four P's of marketing, Pricing is the only element of marketing mix that generates revenue; remaining elements - product, place, and promotion are cost to the business.

Right Pricing

There are many factors that affect profitability of a business, pricing is one of them. Setting the right price is an important part of effective marketing and crucial step toward achieving that profit. Setting the right price not only maximise profit, but also help in maintaining a good relationship with customers. Right pricing help businesses avoid the serious financial problems that may occur if the prices are too high or too low.

"Setting the price for a product at which both the customer and the business are happy (i.e. customer is willing to pay, and business is able to cover cost and make maximum profit) is called right pricing."

How to Set Right Price for Products or Services

Research help in setting right pricing. Research of following three key areas is required to set right pricing :-
  1. Research of existing cost,
  2. Research of competitors' pricing, and
  3. Research of target market
Research of Existing Cost
The research of existing cost is done to identify the actual costs, to take into account any hidden and infrequent costs such as superannuation, insurance, licensing, adviser fees, or any professional development, training or networking cost, and to reduce cost in some areas.

It may be difficult to reduce cost in some areas like rent and wages, but some costs can be reduced like purchasing cost if the stock is purchased in bulk taking into consideration the cash flow, storage, and product delivery.

Research of Competitors' Pricing
Research of competitors' pricing is necessary to know the pricing strategies of competitors to rightly set the price of products or services. If the price is much higher than the competitors' price, the pricing is out of the market. If the price is much lower than the competitors' price, there is the risk of underselling the product or service. Both problems can be avoided by doing the research of competitors' pricing before setting the prices of products or services.

Research of Target Market
It is necessary to know how much the target market is willing to pay for the product or service that is offered. If customers believe that the price of offered product or service is too high they will probably buy from the competitor. If they believe the price is too low they may question the quality of offered product or service and buy elsewhere. Target market research help in understanding the target market and setting the right prices.

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