Key Factors That Affect Pricing Decisions
There was a time when products were sold at a price desired by the manufacturer. The customer bought without delay, and the seller was satisfied. In this "ecosystem," the price was a mere monetary expression of the good, nothing more. Today selling products at a price established only based on costs is an impracticable strategy.
In a complex and fragmented economic world like the one we live in, the power of a company to determine the price of its products has decreased significantly. The price represents, in fact, the expression of a value, which goes beyond the simple monetary quantification and is determined by the satisfaction of one or more needs through the monetary sacrifice. Furthermore, quantifying the price of a good or service is a Marketing choice, a choice tied to profitability constraints, but also to the general economic context and the market context in which it operates. The price decision also reflects a Strategic Plan in which objectives, activities, and choices dictated by product positioning, distribution, and communication strategies are put in place.
The aspects that make the autonomy in choosing the price rather limited pertain to the micro and macroeconomic context in which the company is located. Here are some factors to consider:
- the level of demand for a given good or service
- the decrease in the life cycle of products
- the proliferation of brands and similar products and the consequent fragmentation of the offer
- technological innovation continues
- the strategies of distributors
- the increase in the cost of raw materials
- inflation and price controls
- rigid wages and shrinking purchasing power
- Legal and tax regulations.
From this, we understand the importance and complexity of launching a pricing policy appropriate to the business objectives. In light of the above, let us explain how to determine the selling price?
According to the objectives, you will have to adjust the pricing strategy based on three factors: the costs, the application, the competition.
The costs, the starting point. We said it at the beginning; it is no longer sufficient to establish the sale price based on financial criteria.
The costs only represent the starting point; with them, it is possible to determine the financial implications related to the production of the products.
The method most used in the past, and which is perhaps still used today, consists of quantifying the direct costs that are those necessary to produce the product, the fixed costs. For instance, wages and expenses are related to marketing and communication activities, and the general costs of the company for production. In addition, a profit margin is included in the quantification of the price, sufficient to remunerate the capital invested.
It is a simple and easy to apply method. However, it does have one drawback; it does not take into account the sensitivity of demand concerning price. The misconception is that with this method, it is thought that the level of product demand from customers can be determined automatically. Unfortunately, for various reasons, this is not the case to obtain a sufficient product demand; other aspects must be considered.
Considering costs as the only factor takes into account the internal values of the company but does not, for example, consider the reaction of the target to the proposed price. Furthermore, a purely quantitative indicator is revealed, excluding other qualitative aspects.
The question, the market-oriented price
In a market economy like ours, the price is not only determined by the company. But, it must also take into consideration potential customers, who ultimately choose the products that will be most sold. The market orientation suggests adopting a pricing policy that can satisfy the needs of those who will buy the goods.
In this case, the corporate profits linked to the product will be determined based on the price deemed acceptable by the market. The focus on which to pay attention will be the customer's sensitivity to the price. Price sensitivity represents the reaction of the demand concerning a change in price. Determining whether demand is not or is (and to what extent) sensitive to the price makes it possible to understand the scope of maneuver within which to change its level while keeping profits almost unchanged.
This concept in economics is indicated through the concept of elasticity. However, estimating the elasticity of demand is not enough to correctly determine the sale price. In fact, other aspects influence the customer's mind and purchase decision. For instance, the image he has of the manufacturing brand and the way the product is perceived, factors that contribute to determining the so-called perceived.
Value of the product by the customer
Furthermore, in most cases, a single selling price is not practiced but is modified according to different market situations. The reason why a company practices these flexible prices lies in the different price sensitivity between groups of customers, in the variation of costs or in promotional objectives.
Common examples of flexible pricing are:
- the offer of products based on seasonality
- promotion prices
- discounts and discounts on the price
- sale through e-commerce
- Price discrimination practiced by some service companies such as airlines.
Competition influences much the price choices.
The pricing policy cannot go beyond an analysis of competitors' moves.
Understanding the pricing strategies of competitors is useful in defining the company's autonomy over the choice of price.
This degree of autonomy is influenced by two variables, the intensity of competition and the aforementioned perceived value of the product by the customer. If the number of competitors is low and the perceived high value, the company will have a high degree of autonomy. Conversely, a high number of competitors with a low perceived product value will limit the autonomy in the price decision.
The most frequent market situation in the economic situation is the intermediate one, in which the company has a degree of autonomy in the choice limited by an average market price that will act as a common reference. Before making any decision as to the price to be charged, the average price and possible reactions of competitors should be analyzed in advance. We must also pay attention to the choices of the market leader.
We have presented the three main factors that influence the company's determination of the selling price of products. The argument is complex and does not end with what has been said. Other situations influence the process of determining the most suitable price to simultaneously ensure profitability, customer satisfaction, and product placement in a competitive context. Here they are below.
1. The product is in the launch phase
If the product in question is new, it will probably be without competitors and will satisfy a need originally. In this case, it is possible to make two choices, offer a high price by turning to those who are willing to pay this price.
2. The range of products sold
If, on the other hand, the products offered are complementary or substitute, the pricing policy can influence the various market shares. Therefore, a realistic goal could be to maximize the profits of the entire range and not of the individual products, avoiding the various market shares from attacking each other. The feasible solutions are to offer the products at a single price but less than the sum of the individuals; sell the same product to different price ranges and, therefore, to different groups of customers. Offer the basic product at a low price and the accessory products at a higher price, for example, for razors and razor blades.
3. Export to foreign markets
In this delicate situation, some specific aspects have to be addressed. First of all, the transfer cost applied to the export division. It is necessary to make the export profitable for both the local and the exporting department. In addition, the quantification of export costs i.e., defining them precisely reduces the price of the product considerably and improves competitiveness in the country in which it is exported. In the case of export within an EU member country that has the euro as its currency, it will be necessary to check the difference in the average price between the markets takes into consideration. If the currency is the same, the legal differences, tax, distribution, and competition between countries have not allowed the alignment of prices between them.
It is clear that the decision on the selling price of products is not a choice that should be taken lightly. Price is a strategic component, and as such, it must be chosen by carefully examining all possible variables and conjectures. The chosen price can, in fact, sanction the success (or failure) of a company product.
Most of the time, the competitive pricing strategy is determined by the same dynamic that the industry imposes. Retailers have a vast catalog of products, but much of this coincides with that of their competitors, which is why competition is fierce, and margins are largely adjusted. Therefore, this method of determining prices, which starts from an idea as simple as that of observing and conducting an analysis of competition. It requires that prices be monitored in real-time to keep the offer competitive.
Author: Vicki Lezama