Clues to effective pricing strategies - Marketing Management

It is interesting to observe that many companies fail to price effectively, even when they employ effective marketing strategies. A reason is that they do not apply to their pricing decisions the same fundamental principles of marketing that they apply to other marketing decisions. Success in marketing comes from understanding how customers evaluate marketing decisions, since the customer’s response to those decisions will ultimately determine their success or failure. Shrewd managers reason that by creating exceptional value through careful attention to customers, they can reduce the importance of price in the buying decision. They also acknowledge that price is of primary importance to their companies and conclude that it is appropriate to evaluate product, promotion and distribution strategies from a customer perspective while evaluating pricing from the company’s perspective. However, there is a tendency to forget about the customer when pricing, focusing instead on the company’s need to cover costs, to maintain cash flow, or to achieve a target rate of return. Clearly, this is a strategic mistake and goes a long way towards explaining why many pricing decisions are ineffective from a strategic marketing point of view. The customer’s goal is to obtain the most value for their money. For commodities, that often means buying the cheapest offering. For differentiated products, that often means paying a little more for the perceived superiority of a particular brand. Whether the product is common or unique, customers will base their decisions on the value of the transaction to themselves rather than to the selling firm. A few pence difference in price may be of great importance to a firm selling millions of units, while being of little consequence to a customer who buys just one, yet that will not stop potential customers from rejecting any price that is a few pence more than they are willing to pay. Customers are not concerned with the seller’s need to cover production costs, to improve cash flow or to meet a target rate of return. Their concern is to get value for money.

An effective pricing strategy cannot be achieved unless it is co-ordinated with other elements of marketing strategy. The crucial relationship between pricing and other aspects of marketing is particularly important with new products.

Pricing depends as much on good judgement as on precise calculation, but since it relies on reasoning, there is no justification for pricing decisions based on intuition. Good judgement requires understanding. One must comprehend the factors that make some pricing strategies succeed and others fail. The manager must understand how costs, price sensitivity and competition determine a product’s pricing environment. In some companies when the time arrives to make a pricing decision, managers simply meet at specified times and make a decision. They do not study the firm’s costs to find out how they will change with changes in sales. They do not talk first to potential buyers to learn what role price will play in their purchase decisions, and they do not analyse past behavior and likely actions of competitors. Consequently, the pricing process becomes internally oriented and ignores key information necessary to setting effective prices. All too often price is considered and implemented as an essentially tactical decision. There are times when price can, and indeed has to be, used tactically, particularly when reacting to competitors’ price changes. Even then, the marketer must know when to follow competitor price changes and when to ignore them, so tactical pricing decisions need careful consideration before they are implemented.


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