Page 186 - DMGT408DMGT203_Marketing Management

Unit 8: Pricing: Understanding and Capturing Customer Value

Introduction Notes

You must have noticed that most of the marketing decisions involve expenditure by marketing
managers. Whether to develop an advertising campaign or to recruit sales people, one needs to
spend money. Price is the only element of the marketing mix that directly affects the income of
organizations.

For companies with a higher volume of sales and lower profit margin, a small mistake in
pricing decision may affect its whole existence. If company keeps its prices low, it may be able
to generate high sales but will be able to make lesser profit. For many organizations deciding a
price for their products is one of the difficult tasks and one has to be very careful about the
pricing decision because if the price is perceived as high, it may not invite a higher level of sales
and if the price is perceived as low, either people who value quality will not buy or the profit
contribution will be comparatively low due to marginal gain in each sale. In this unit, you will
lean various strategies that firms adopt to fix prices for their products and services.

8.1 Price Setting

Price setting is a very critical area in marketing mix decisions of a company. The meaning given
to price sometimes creates pricing difficulties. It is the only element that generates revenues for
the company, and all others involve only costs. The aim of marketing is to facilitate satisfying
exchanges between the marketer and consumers at a profit.
Price represents the value that is exchanged in a marketing transaction. A marketer usually sells
a specific combination of need-satisfying product or service, and additional services like warranty
or guarantee. Donald Lichtenstein, Nancy M. Ridgeway, and Richard G. Niemeyer say that in
most marketing transactions price is very evident, and buyers and sellers are aware of the value
that each must part with in order to complete the exchange. However, price may not always be
in monetary terms.
Barter is the oldest form of exchange and still used occasionally for a variety of goods between
countries. From the earliest times when people learnt to engage in barter to affect exchanges,
settlements were based on bargaining. Bargaining is still used in markets in majority of the
countries. Certain websites, such as Priceline.com and eBay.com basically use the idea of
bargaining between buyer and seller for a variety of products and services.
Pricing exercise begins with an understanding of corporate mission, target markets, and
marketing objectives. Based on these factors, pricing objectives are developed. Management
must examine the costs to determine how much flexibility it has in establishing prices and the
lowest price level essential to meet profit and other company objectives. Determining the role
prices play relative to other marketing mix variables sets boundaries and guidelines for pricing
decisions. Pricing decision should take into consideration the impact on other items in the
product line, promotional decisions, and distribution channels. There are two types of pricing
decision situations; new product pricing, and adjusting prices of existing products. Pricing
strategies of particularly new products are high-level responsibility shared by marketing and
other top-level executives.
Buyers have limited resources and their interest in price reflects their expectations of a product’s
ability to deliver the desired satisfaction they may derive from it. Customers must evaluate
whether the utility value gained is worth the buying power sacrificed in an exchange. After the
dawn of money economy, with the passage of time, buyers in almost all present day societies
have learnt to assess goods, services, and ideas etc. in terms of financial price to measure the
value usually used in exchange.
Price is everywhere all around people. For a variety of marketing situations price is expressed
in different terms.

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