Balancing the Pricing Strategy (E)
What is the Pricing Strategy? What is the Price Sensitivity? What is the best price for your product?
Posted: Oct 2008
Choosing the right Pricing Strategy is important for success of the product in the market. Wherever we go, or whatever we do, we come across to different products or services that we need, in order to satisfy our needs. Our whole life is composed from many needs, from elementary, like food or clothing, leisure expenses, like coffee with friends or going to the cinema, until the large assets, like a car or a home. Every of these needs has its price. The product price is value of the product expressed in certain amount of money.
The purchasing is determined by our need and, of course, the amount of money that we posses. So what are the factors that determine what to spend money on? We have many needs, but our funds are limited. They are always limited. When we are buying we try to satisfy several needs. Firstly, we are satisfying the functional needs. "I am thirsty, I need a drink". But when we go to the grocery, there are a plenty of drinks, which one we will choose? From this point, people that came with basic functional need, called the thirst, are dividing into different segments, depend upon their preference. At this point some people will act according to their emotions, their will choose the branded beverage, since they consider that beverage as something that they deserve, regardless the price. Some other consumers will check the prices first and then choose the product optimal from perspective of price and quality.
It is obvious that people behave differently in the same situation. Everybody is looking for the product that is the best for him. This product needs to satisfy their needs. It needs to bring the biggest value for the shopper. This value is perceived differently from one shopper to the other, but basically, everybody is choosing the best value, represented as ratio between benefit and price.
From this formula we see that more benefit that some product or service brings, the greater price can be applied. For example, what do you thing what would be the price of the Elixir of Youth? What benefit this product might bring? Imagine what the price could be?
From the other side, if the brand owner wants to increase the brand price, it must provide the greater value too. Otherwise, overpriced product could be de-valuated, since the price is greater than benefits that brings.
What is the relation of price and the product?
Choosing the right pricing strategy is the sensitive marketing stage of every company. Pricing is not just financial part of commercialization, but it is also part of the marketing and sales strategy. Right pricing strategy will have a direct implication to success of the product in the market. It will affect the sales, market share, revenue and profit. Shortly speaking, product needs to be profitable. Precondition for this is the optimal price.
Pricing strategy also need to satisfy the retailer. The product needs to sells enough in order to justify investment of working capital, space dedicated in the outlet and it needs to have sustainable margin. So, the product needs to be profitable for retailer too.
Finally, the price of the product need to satisfy the consumer. The product needs to bring the right value for the money given.
How is the Price determined?
The pricing strategy needs to fulfill the main business objectives, such as Profit, Turnover, Volume and Market Share. Basically, there are three types of pricing strategy:
Cost pricing strategy: Based on understanding of direct and indirect expenses, as well as break-even point.
Competitor pricing strategy is based relative to competitors.
Value pricing strategy is based on value perceived by market.
Decision of pricing strategy is not only matter of product pricing. All elements of Marketing Mix should be taken into consideration.
What is the Pricing Sensitivity?
If we decide to apply the different pricing strategy for the same product in the identical market, the results will be different. If we collect data from these markets, we will see how the sales differs depend on the price change.
Simply, consumer's demand depends from the value perceived. If the price is higher than the value it brings, the demand and the sales volume will go down. For some products price will decline more or less proportional to price shift. This is the effect of Price Elasticity.
Pricing Elasticity in Different Channels
Although products sell at different volume when the price changes, still there are other factors that determine demand compared to the price. For example, when shopping in the discounter hypermarkets, most of the people check prices very carefully. Buying the beer 6-pack can be determined by the best price compared to the benefit perception. But the same shopper can go to the bar, after visiting the hypermarket, and order the same beer, but at the much higher price than in the grocery, without too much thinking.
Obviously, the price sensitivity of shoppers differs between the channels. The price elasticity tends to affects consumers less when they are shopping while driven by impulse and short-term need. On the other side, the shoppers are much more sensitive to price when shopping according to pre-defined shopping list. Therefore, choosing the right Pricing Strategy is crucial part of the product commercialization.