How to Define Pricing in Marketing? 💰
Marketing – whether online or offline – is the greatest source of profitable revenue growth for the majority of small businesses and a sustainable source of value capture for large businesses. But still, many executives ask: how do we define pricing in marketing?
The price component in the marketing mix accounts for the revenue that the business creates. Price is the amount of money someone charges for a product or service and what the consumer is willing to pay to receive that product or service. Nevertheless, the price is more than that. Price is the total of all values like money, energy, time, and mental cost that buyers are willing to exchange to have or use a product or service.
Setting a price for products or services is one of the most significant decisions that a business needs to make. The business should make sure that the price of a good or service is a price that the customer is willing to pay and a price that provides revenue for the company.
The retail sector today hugely differs from the 90s and even a decade ago. The internet has basically changed the retail market. This change has a big impact on the way stores manage their marketing. Also, on which of the Ps they should pay more attention to in the marketing mix. Price came out as the clear focus for many customers.
Price is very important. In fact, one famous piece of consulting research revealed that even just a 1% improvement in pricing increases profits by 6%.
In this article, we will tackle the topic of how to define pricing in marketing. We will also discuss the different perspectives on price. Additionally, we will explain the significance of price to marketers. Lastly, we will provide you with the two ways of how pricing affects marketing or how to define pricing in marketing. By the end of this article, you’ll understand exactly how price relates to marketing and how to set and manage price to ensure profitable revenue growth for your business in the best way possible.
Different Viewpoints on Price
The notion of price differs depending on the frame of mind from which it is being viewed.
The customer uses various criteria to identify how much they are willing to spend, or how much they are willing to pay, to satisfy their needs. Normally, the customer wants to pay as little as possible.
For the company, it can either increase the perceived benefits or decrease the perceived costs to increase value. These two components should be considered as elements of price.
However, to some degree, perceived benefits are the opposite of the perceived costs. For instance, paying a higher price for an item is remunerated by having that expensive product displayed in one’s home. Other perceived benefits related to the price-value equations are convenience, status, brand, the deal, choice and quality.
On the other hand, perceived costs consist of the actual price tag printed on the product and other additional factors. As mentioned, perceived costs are the exact opposite of the benefits.
In the end, it is favourable to look at the price from the customer’s viewpoint because it helps define value which the most vital grounds for building a competitive advantage.
Taken from the barter method (or exchanging of goods of the same value), the monetary structure of each society gives a more convenient way to buy goods and gather wealth.
The two distinct ways that price plays in society are a rational man and an irrational man. The first one suggests that the outcome of price manipulation is predictable (the basic belief underlying economic theory). The second one acknowledges that man’s reaction to price is unpredictable at times and pretesting price manipulation is a vital task.
Why Price is Essential to Marketers?
Pricing directly affects the revenue of the business, thus, setting the right price is important to a company’s success.
Price is essential to marketers because it is how the marketers assess the value that customers see in their products and the customers’ willingness to purchase the product or service. Setting the price of a product/service is one of the most vital management decisions. Below listed are the reasons why:
- Price is the only component that affects profits rather than costs (which affect product, place and promotion of the marketing mix). Price is the element that makes or breaks a business.
- Modifying the price has a great impact on the marketing strategy. Depending on the price elasticity of a certain good, it often affects the demand and sales also.
- Price plays a significant role as a competitive weapon to assist a business in utilising market opportunities.
- Pricing also determines how customers perceive the product. A higher price means higher quality and associated with luxury. On the other hand, a low price means low-quality products too. Setting a price that either too high or too low will limit the growth of the business. The worst part is, it could cause major problems for sales and cash flow.
Unfortunately, it’s tough to get the pricing right. There are a lot of factors to take into consideration. Also, many uncertainties on whether a price change will have the desired effect.
The law of demand says that, for almost all products, the demand is lower if the product is priced higher. Meaning, sales will drop if prices are increased. However, a high price can also mean high margins.
Price can lead to a company’s survival or downfall. Therefore, a business must set the right price.
How Do We Define Pricing in Marketing??
What is the impact of price on marketing? Let’s take a closer look at their relationships. The two ways wherein pricing affects marketing performance are budget and efficiency.
1. Marketing budget
The price of a product is a determining factor of how much profit the product will generate. Having a high profit means having more money to market a product. On the other hand, low profit means less money in marketing the product.
2. Marketing efficiency
The probability that customers will buy your product is higher when you are priced a bit lower than your rivals. Thus, it gives the business a sign of effective marketing.
However, there’s a clear challenge if having high prices create a larger marketing budget and low prices increase the efficiency of the marketing campaigns. The dilemma of the business is finding the right price that is ideal for both the marketing budget and efficiency.
It even gets more complex when you think that this balance is not the same for every product on the market. The reason is, customers don’t value items the same way and react to price changes accordingly.
- The business should price their products/services effectively if they don’t want their sales to take a hit because of having a relatively high price compared with its competitors. Neither should a company keep a price very low to maximise margins or enter into losses. Therefore, a company should price their product/service wisely and effectively and consider every aspect before pricing a product.
- How does price relate to marketing then? Price is significant to marketers because it provides them with an idea of how customers view the value of their product and the willingness to pay for their product or service.
- Increasing or decreasing the price has a deep impact on the marketing strategy. In addition, it mostly affects the demand and sales as well, but depending on the price elasticity of the product/service.
- Marketing generates profit for most businesses.
- Pricing plays a big role in how customers view a product or a service.
- Price accounts for profit.
- Setting a price for its products/services is one of the most significant decisions that a business will make.
- Having low-priced products is not usually a strong position for small businesses.
- Pricing high or low gives customers an idea of what to expect from a business.
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