Making Pricing Decisions

Making Pricing Decisions

Chapter 19 and chapter 20 of our marketing book are about the pricing decisions of the four p’s in the basic marketing mix.  In this unit, I learned about pricing concepts and how to set the right price.  The right price on a product is very important or it will not sell, as it should.

            According to author’s Lamb, et al., “Price is that which is given up in an exchange to acquire a good or service. Price plays two roles in the evaluation of product alternatives: as a measure of sacrifice and as an information cue. To some degree, these are two opposing effects” (2014, p. 325).  Price is a measure of sacrifice because the consumer must sacrifice something, usually monetary units, in order to receive a good or service.  Price is also an information cue because most of the time higher quality equals a higher price.

            Today’s market is highly competitive.  Therefore, companies have to set their pricing objectives to be specific, attainable, and measurable.  The company’s goal is to maximize their profit and target return on investments.  Return on investments is a way for management to measure their overall effectiveness with profit generation with the assets available.  For many companies, return on investment is their main pricing goal.  Every company has many different costs, some of them are variable costs and some are fixed.  Variable costs can change when the levels of output change.  Fixed costs however do not change at all, whether the change in output increases or decreases. 

            In order to set a price on a product, companies must go through a four-step process.  The steps in this process include establishing pricing goals, estimating demand, costs, and profits, choosing a price strategy to help determine a base price, and fine-tuning the base price with pricing tactics.  To establish a pricing goal, managers should have a good understanding of the marketplace and their consumers.  This will help them realize whether their goal is realistic or not. 

            After a manager has established their pricing goals, they should estimate their total revenue at different prices.  Managers should be studying their options concerning revenues, costs, and profits.  After that, they should be able to determine which price will best meet their company’s pricing goals.  Next, managers will choose a price strategy.

            As defined by author’s Lamb, et al., price strategy is “A basic, long-term pricing framework that establishes the initial price for a product and the intended direction for price movements over the product life cycle” (2014, p.344).  This strategy helps the company to set a competitive price in a specified market.  Lastly, the company will fine-tune their base price with pricing tactics.  These tactics are short-run approaches that do not usually change the general price level. 

            I have learned all about pricing in these chapters.  I now know the process of how to set a price and estimate the revenues a company can expect from that set price.  There is a lot of work that goes on behind the scenes of setting a price that consumers do not realize.

           

References

Lamb, C. W., Hair, J. F., & McDaniel, C. (2014). MKTG7. Mason, OH: Cengage