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
