Pricing is an extremely important decision in marketing strategy. While pricing, for a firm, is a direct source of revenue, at the same time pricing decisions involve strategic marketing variables to meet competition. Price must cover the costs while leaving some profit but without making customers feel a pinch.

For small and medium enterprises (SMEs), pricing decisions can determine their fate as entering into a price war - like big firms - is hardly possible for them. So, pricing demands extreme attention so that it ensures profitability. Price must be viable for the firm and affordable to the customers, especially in terms of market competition - unless which there will be a question mark over a small firm's existence and longevity.

Cost, along with competition and demand, is a basic factor to determine price. In fact, in the long-run, if costs are not covered, no firm can exsit. So, costs should not be ignored while taking pricing decisions, but their relevance to the pricing decision must not be exaggerated. A number of other factors are there which needs to be properly addressed.

Demand is of equal, and, in some cases, of greater importance than costs while taking pricing decisions. For example, when demand is low, a firm should not increase prices even if rising costs justify higher pricing. On the other hand, an increase in demand justifies an increase in prices even without any increase in costs.

Competition is also crucial in determining pricing strategy. In fact, most SMEs, treat their competition's pricing strategy as the base while pricing their own products. However, this is not an ideal way for determining pricing strategy despite the fact that marketers have little control over the prices in today's competitive market. Instead, the key to pricing, in terms of competition, should be differentiation. In other words, as long as consumer has an impression that your brand is different and superior to others, he will be willing to pay you more.

Cost, demand and competition are the primary determinants of pricing strategy but they are not all. Consumer psychology,  nature of buyers in terms of users, current stage of a product's life-cycle, positioning strategy, and some other important factors should also be considered before making any pricing decision.

When it comes to consumer psychology, a firm can have considerable flexibility in pricing its products if it can differentiate the products in terms of quality, through branding, packaging and advertising. Price constitutes a barrier to demand not only when it is too high, but also when it is too low, and so the key to justify what prices you charge your customers is not lowering your prices but justifying it, at least psychologically.

Firms dealing with industrial buyers, however, should keep in mind that they are more price conscious and can act more rationally than an average buyer of consumer goods. Their knowledge of markets is more intensive and exact. So, convincing them to make a purchase just by creating imaginary image about a product and without maintaining desired level of quality is hardly possible.

A firm's pricing policy also needs to be adjusted over various phases of the life cycle of a product. The distinctiveness of many products fades as they moves through different stages of product cycle, such as introduction, growth, maturity and decline. As a product moves through these stage, pricing discretion enjoyed by its producer also gradually declines. Products like radios, ball pens, etc. are subject to this perishable distinctiveness.

While launching a new product, a firm may consider charging a high price, together with heavy promotional expenditure, for a period till competitors prepare for making a similar product after studying its usefulness. On the other hand, another approach is to charge a low penetration price when launching a new product. This strategy is usually useful in a market where sales respond quickly and strongly to low prices and there is threat of potential retaliatory steps by competititors before which the market must be captured.      

Marketers, while fixing a price, should keep in mind the basic rule that price is just one element of the marketing mix and it must be adjusted according to how he wants to position the product in the mind of customers. A room freshener launched in the market with ads promising novelty and to attract the elite must not be sold at a cheaper price. If pricing does not match the positioning strategy, even reduction in price may lead to a disaster.

Finally, certain other basic factors, such as production programme, advertising policy, selling methods, quality-price issues, promotional pricing, distribution-pricing interdependence should be considered carefully while determining a firm's pricing policy. All businesses, large or small, need to give as much attention to pricing as they do to other more recognizable marketing activities while for small firms, a solid pricing strategy also helps to escape a price war and low price position.

(* The author can be contacted at rituparna@tradeindia.com)