What are the elements of pricing decisions? Define the following terms pricing o

Question

What are the elements of pricing decisions?

Define the following terms pricing objectives, penetration pricing, market share, target return on investment (ROI), reference pricing, zone pricing and target return pricing.

Why might penetration pricing potentially negatively impact brand image and product positioning in the long run? Given this risk, why would a marketing manager use penetration pricing? Identify a brand that you believe is engaged in penetration pricing.

Define the terms supply chain, value network, vertical marketing systems, channel power, customer communities and direct selling.

Define the terms personal selling, motivation, sales skill levels and direct marketing.

Identify three important personal characteristics that a key account sales person for a global manufacturer of networking hardware would need to be successful?

Explanation / Answer

Part A) Elements of pricing decisions:

Pricing plays a very important role in the success or failure of a business. The price at which a company decides to sell their products decides a lot of other variables for the company. These are return of investment, market share, market value, short term gains, long term gains and the company’s future strategies. Therefore, a lot of thinking should go in the process of identifying the rightmost price for a product. Some of the common elements that affects the pricing decisions for a company are:

1) Competitor’s pricing: The most valuable and feasible strategy that a company can follow to price their products is to match the prices of their competitors. A competitor would be any other company who is selling a similar product targeted to a similar target audience in a similar geography. Although, there are some competitors who under price their products in order to gain more market share, therefore, while deciding the price of the product, it makes sense for the company to identify their own costs as well that they would want to recover through the sale of the product.

2) Customer perceived value: Companies should also consider the perceived value that the customers have towards different kinds of products. From a customer’s point of view, they have a set or pre-conceived value that they would like to shell out for a particular type of product. For example, when you go out to buy a sandwich for yourself, you have a pre-determined cost of sandwich in your mind. Now, if a new business enters the market that sells very good sandwiches but has priced them at let’s say $1000 per sandwich, there’s a very less probability for you to buy sandwiches at that price because back in your mind, you know how much a sandwich usually costs.

3) Maximising Return on Investments (ROI): This type of pricing strategy works only when the products have some differentiating factor from the other similar products in the market. Only then, the company will be able to charge premium on their products and maximise the return on investments. Apple products are a good example for this kind of pricing strategy. All apple products iPhone, macbook, ipads, ipods, etc. are priced at a premium in comparison to their competitors. Apple defends the premium pricing on the basis of superior design and technology that goes in the making of their products.

If a company does not price their products appropriately, they may have to face undesirable consequences like customers not accepting their products due to high prices or company suffering losses because of under pricing their products. Therefore, lots of strategising and thinking should go in deciding the correct price of the products.

Part B) Pricing Objectives:

Pricing objectives are the overall goals of any company. The first step for any company while deciding the prices of their products is to identify what are they looking to achieve from that product. The pricing objectives can be different for different companies. For some, it can be short term profits, for others, it can be long term profits. For some, it can be increase in sales volume, for others, it can be increase in market share. Some company might want to affect their competitor’s market share, while some other company might want to achieve a target rate of return on investment (ROI).

The pricing objectives takes into consideration the objectives of individual departments of the organisation like marketing, finance, operations, strategic management, etc.

Part C) Penetration Pricing:

It is a very common practice for the organisations to offer low prices and discounts for the newly launched products or services. This kind of pricing is called penetration pricing. The objective of using penetration pricing as a marketing strategy for businesses is to attract the customers to the new products. When a new product enters the market at a comparatively low prices, it affects the sales volumes and therefore, the market share of the competitors.

Penetration pricing is more often observed in the retail industry. Once the companies gets the attention of the customers and gain a considerable market share, the prices of the products are then increased gradually. The benefit of using the penetration pricing strategy is that it results is quick trials and adoption of new products and if the early users finds value in the product attributes, it further results in to a positive word of mouth for the company. But at the same time, this kind of pricing strategy has some disadvantages as well. The most common one is that the customers starts expecting long term discounts and low prices for the products and if there is any increase in the prices, it may discourage the customers from the further usage of the product.

Part D) Market Share:

Market share is defined as the total sales of a particular company as a percentage of the total sales of the entire market or industry over a specific time period. A simple formula to calculate the market share of a company is to take the sales figures of that company over a particular time period and divide it by the total sales figures of the market over the same time period.

Market share for a company can be in terms of value or in terms of volume. Value market share is calculated the total value of products that a company has sold as a percentage of total value of products sold by the entire industry over the same time period. Similarly, volume market share is calculated as the total volume (i.e. number of units of products) that a company has sold as a percentage of total volume of products sold by the entire industry over the same time period.

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