Pricing strategy in a business

A proper pricing strategy of utmost importance in any business

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Writuparna Kakati | 04 Apr, 2011
In general terms, price is the amount of money needed for purchasing something; in marketing, price is one of the four aspects of marketing mix; in business and economics, price is "the assigned numerical monetary value of a good, service or asset".

In any business, the price charged for its products or services is regarded as one of the most important decisions to be taken. Pricing too high or too little both are dangerous and finding out the best price for the products or services is therefore of so much importance in any business.

For a new business, pricing its products carefully can help to make a place for itself in the market easily. On the other hand, an established business can improve its profitability through regular pricing reviews. Thus, a proper pricing strategy is very important for any business to adopt.

Cost, price & value
Cost refers to the amount spent to produce a product or service, price is the financial reward a business achieves for delivering some products or services to its customers while value is what the customers believes the product or service is worth to them. A business can succeed only when it prices its products or services in line with the value. In addition, it should also keep in mind how its competitors price their products.

While pricing your products, always try to find out he following things-

What are the benefits your customers can gain using the products or services delivered by your business?

What influences the buying decision of your customers- product quality, reliability, prompt and efficient delivery, or anything else?

What is the value your customers place on your products or services on receiving the benefits your business provides?

Fixed cost & variable cost
Fixed cost may be defined as a cost that does not change with the level of sales or production. Fixed costs are always there regardless of increase or decrease in sales. For example, rents, salaries of permanent employees, etc.- all these costs are termed as fixed costs.

Variable costs are those which are directly related to the sales of goods or services of your business. In other words, variable costs are those which are required for doing a business, such as costs related to shipping, packaging, handling, warehousing, etc.

Primary pricing methods
There are primarily two types of methods for pricing a product or service: Cost Based Pricing and Market Based Pricing.

In cost based pricing method, no account is taken of market requirements. Only the cost of production (of a product or service) is taken into account and an amount is added to it to determine the price. This type of pricing method is suitable for a business which deals in large volumes of products or operates in a market dominated by its competitors.

In market based pricing method, pricing of a product or service is determined only after careful analysis of the market demands and customer requirements. Here, pricing of a product or service depends upon the strength of the benefits a business can prove it offers to its customers. When one knows how much customers are willing to pay, one can price its products accordingly. For example, when a new and innovative product is launched into the market for the first time, the product may be priced a little higher as there is little competition. On the other hand, a new and non-innovative product may be charged less so that it is able to get a hold in the market.

Regulatory considerations
In India, the Central and State Governments have passed certain legislations in order to control production, supply, distribution as well as price of a number of commodities. The most important regulation in this respect is the essential Commodities Act,1955. Under this act, the government has right to issue Control Orders for controlling the production, supply, distribution etc. of essential commodities for maintaining or increasing supplies and for securing their equitable distribution and availability at fair prices. Find below the list of the commodities declared as essential under the essential commodities act, 1955.under the essential commodities act, 1955 9As on 15.12.2004).

1. Cattle fodder, including oil cakes and other concentrates.
2. Coal, including coke and other derivatives.
3. Component parts and accessories of automobiles.
4. Cotton and woolen textiles.
5. Drugs.
6. Foodstuffs, including edible oil seeds and oils.
7. Iron and Steel, including manufactured products of Iron & Steel.
8. Paper, including newsprint, paperboard and strawboard.
9 Petroleum and Petroleum products.
10 Raw Cotton, either ginned or unginned and cotton seed.
11. Raw Jute.
12. Jute textiles.
13. Fertilizer, whether inorganic, organic or mixed.
14. Yarn made wholly from cotton.
15. (i) seeds of food crops and seeds of fruits and vegetables, (ii) seeds of cattle fodder and (iii) jute seeds

(The Essential Commodities Act, 1955 is reviewed from time to time)

Tips on pricing products or services

Set a pricing objective of your firm. Ask yourself about your business strategy. You may think of keep the price of your product or service lower so as to attract more customers. On the other hand, you may also charge a higher price of your product or service if your target customers are highly quality conscious.

While pricing your product or service, take account of the demand for the product in the market. If there is strong competition in the market, you can fix the below the competitive level in order to obtain attract more customers. Later you may iYet pricing decisions can have important consequences for the marketing organization and the attention given by the marketer to pricing is just as important as the attention given to more recognizable marketing activities. Some reasons pricing is important include:Yet pricing decisions can have important consequences for the marketing organization and the attention given by the marketer to pricing is just as important as the attention given to more recognizable marketing activities. Some reasons pricing is important include:increase the price after your product or service is accepted in the market.

Carefully consider various costs involved in production while pricing your products. What matters at the end of the day is how much you have earned. Also take into account the long term costs of your business while setting a price for your product or service.

Take into account the competition in the market. Ask yourself who are the competitors in the market, what is their number and what pricing policy each of them follows. Competitive pricing is very much important while there is strong competition in a target market.

The success of a business largely depends upon the way how it fixes the price for its products or services. Pricing is one of the major elements of the marketing mix and it affects all other marketing mix elements such as product features, channel decisions, and promotion. In the recent times, several non-price factors have become also important but the importance of proper pricing strategy in determining the market share and profitability has remained unchanged as ever before. Pricing decision plays an important role for a business to be successful and, therefore, pricing should be given as much attention as business entrepreneurs give to other more recognizable marketing activities.