The price of a product says far more than what it will actually cost the consumer to buy it. As an integral part of the marketing mix, the price point communicates additional information to customers related to quality, brand image, positioning and value.
Price also provides marketing communication about the retail outlet in which a product is placed. There usually is a trade-off between product quality and price, so price is an important variable in positioning. The prices of clothing will vary enormously from those in an iconic fashion outlet in a major city to those sold in multiple retail outlets in the provinces. Can you imagine the effect of selling budget clothing in an Armani store to the image of that retailer?
If the price does not cover costs for any period of the time, the existence of the firm will come into question. All business, small or large will probably begin the pricing process by totalling their per-unit production costs and expenses and then adding on a profit margin to reach a target price. At this point additional internal and external factors will come into play:
- Objectives relating to the mission statement and corporate objectives, e.g. does the firm want to profit maximise or seek market share?
- Liquidity requirements may mean that a firm will set price low to generate higher sales levels and cash availability.
- The image required by the firm may underpin the pricing strategy. A firm wanting to be seen as a premium product will attempt to charge a premium price if they can be persuade their target market that the product has a unique selling proposition and is fundamentally superior to its rivals.
- Management attitudes to risk and growth. Traditional management may be more conservative in pricing decisions.
The mission statement is likely to be the basis of pricing decisions.
- Pricing decisions by competitors.
- Economic conditions will influence what customers are prepared to pay.
- High barriers to entry will allow prices to be set at a higher level than markets which are vulnerable to new, leaner competitors.
- Pricing will change as a product moves through its life cycle.
- Regulation may play an important role in price setting in certain industries such as utilities where government regulators may have the power to restrict price increases or even demand reductions.
The combined influence of these internal and external factors may find its expression in a particular pricing strategy. Higher level students will be expected to know more of these than Standard level students: