Pricing

The price of an item is more than just a sequence of numbers and a decimal point. In actuality, the Price is any value exchanged for a good or service. A variety of terms can be used in place of price, including wage, salary, commission, interest, tuition, and rent. The price is whatever you exchange for something you want.

Price is often the most crucial aspect of the marketing mix, and is inextricably tied to the other components. A product’s features, a company’s promotional decisions, and methods of distribution have a direct impact on the retail price of that product. Further, the price affects how a product is perceived in the marketplace.

Within all of that, a pricing strategy must be profitable for the company and reasonable to the consumer.

Pricing Terms:

Markup

The difference between the Cost and the Selling Price. Markup is typically expressed as a percentage of the cost, and depends on the amount of profit desired versus the costs of services not included in the factory cost.

For example, a company that offers training or delivery will charge a higher price than one that does not.    

Elasticity of Demand

Basically, if demand increases and decreases along with the price, then your demand is elastic. If the demand remains static despite price changes, then the demand is inelastic (or static).

Breakeven Point

When profits generated finally meet the expenditures to date. Any revenue generated from this point forward is Profit.

Fixed Pricing

Also known as flat rate.

For example, hotels often charge one rate throughout the week because demand is fairly constant.

Variable Pricing

This method allows flexibility in price to manipulate demand.

For example, that same hotel may have a weekend discount to lure in more tourists.

Transfer Price

The cost assigned to a product when transferred between departments/ divisions of an organization.

For example, at Sony Metreon, the maintenance dept. charges a $25 per hour transfer price for servicing Melvin the robot in Retail Attractions.

Another Example, BMW ‘s manufacturing division “sells” M3’s to BMW’s North American Distribution Unit.

Factory Price

The cost of an item when completed at the factory, ready for shipment

Destination Price

The cost of an item, including shipping charges.

Pricing Goals

Increase Profit

A company’s ability to grow is directly affected by how much profit can be generated.  

Maximize Sales

Price a product too low, it’s “cheap”; price it too high and it’s “exorbitant”. Beware of the Price-Quality Inference. Be sure that your pricing strategy is flexible enough to offer special pricing when necessary.

Enhance Market Share

Market share = profitability. Industry leaders can typically focus almost entirely on selling the features and benefits of their products. By not having to reduce price as often to increase sales, they maintain an even higher overall profit margin.

Promote quality

Quality is relative. The perception of quality can influence a company to charge a higher price, which will increase the markets perception of quality to a point.

Keep in mind that if your overall marketing strategy is to be the cheapest, then you may not be overly concerned with this particular goal.