Price Setting and Pricing as Part of the Marketing 4Ps
Written by Samuel Muriithi for Gaebler Ventures
Of all the marketing decisions that a firm has to make, settling on the most appropriate price is perhaps one of the hardest. At all times the firm should endeavor to adopt a pricing strategy that will give the consumer confidence to buy a product/service, and one which will take on the competition effectively while still realizing the set profitability objectives.
The entrepreneur should always ensure that his or her price setting decisions will be able to attract the target market and also help the business actualize its profitability agenda.
The pricing strategy adopted should not remain static but should be responsive to a product's evolving lifecycle.
To be successful at price setting and overall pricing strategy an entrepreneur will make a point of making in-depth use of competitive analysis. He or she must attach great importance to the calculation and results of break-even analysis and the measurement of price sensitivity. Entrepreneurs would rather rely on hard evidence to make pricing decisions and not mere hunches. They should also realize that there are a number of factors that are crucial in affecting price sensitivity and that these should not be ignored. A good example of such a factor is the customers' perceived value of a product/service.
That price setting is important is not in question. It is however more entrepreneurial to convince customers that you are offering great value as opposed to a great price. It is equally important to segment a given market and make long term plans on how to be successful in it.
Entrepreneurs must ask themselves a series of questions as they prepare to adopt a pricing strategy. They must understand the nature of their pricing strategy i.e. whether it is high-end, low-end or medium in nature. They must have the characteristics of their customers in mind i.e. whether they shop for service, convenience or low price. Entrepreneurs should seek to know if the price they have set will help offset all their operating costs. They should also make a point of investigating what prices their competitors are offering in addition to knowing how often they will make changes to their set prices.
There are a number of pricing strategies that can be adopted in this context and they are as follows:
- Competition-based pricing – this is where the price is based on the prices that similar competitors charge
- Cost plus pricing – it is the simplest technique and involves calculating the costs involved in production then adding the desired profit to this price as a percentage
- Skimming/creaming – this price setting technique involves selling at high prices, aiming to make profits from this rather than high sales volumes
- Market-oriented pricing – this is where the price set is as a result of target market analysis and research
- Loss leader – this is where a certain product is sold at a loss just to attract customers who'll then buy other products that are sold at full prices
- Predatory pricing – this is an aggressive price setting technique that is designed to scare competitors away from a designated target market
- Price discrimination – where different prices are set for different market segments but for the very same product/service
Samuel Muriithi is a business owner in Nairobi, Kenya. He has extensive international business experience in the United States and India.
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