MEANING AND IMPORTANCE OF PRICE
Price is one of the most important elements of the marketing mix. This is the only element which generates revenue for an organization and determines its growth. The other three main elements of the marketing mix are Product, Place and Promotion. A firm incurs a certain cost to produce a Product or service. The Place element is concerned with the sale and distribution of the product through various channels, therefore a firm incurs some expense there, like in choosing the sales-methods, payment to salesmen, expense incurred on transporting products to place of selling, etc. The Promotion element,concerned with the advertising and promotion of the firm’s product leads to expenditure on different promotion and advertising media like TV& Radio advertising, samplepromotion, etc. All of these are the variable costs for an organization, that is, these costs change with the changes in level of production and sales activity; therefore influence the process of setting the right price for the product. ‘Right price’ denotes the level of price which can cover all these expenditures on the final product and brings some profit to the firm.
Meaning of Price-
The term price denotes money value of a product. It represents the amount of money that customers pay to the sellers to gain benefits of having or using a good or service. In fact it is marketers' assessment of the value customers see in the product. So price indicates the money value which a buyer is ready to exchange for purchase of certain good or service.
Definition of Price-
The definition of Price according to Philip Kotler is- “Price is the amount of money charged for a product or service.” Similarly according to Stanton “Price is the amount of money needed to acquire some combination of goods and its companying services.” Pricing is defined as ‘the process whereby a business sets the price at which it intends to sell its products and services’.
It is the key variable in a firm’s marketing plan. While setting prices for its products, i.e. goods or services, the business takes into account various aspects of production, listed below.
Price of raw material- The firm considers price at which it could acquire the goods and raw material to prepare final product to be sold in the market. A higher cost of acquiring these implies a higher product-price and vice versa.
Cost of manufacturing- If manufacturing cost is higher, the price of product will also be higher, whereas lower manufacturing cost leads to lower price. This cost includes the wages of labour, expenses on power and other overheads during manufacturing. Market condition- When market has positive sentiment i.e. high demand for goods and services because of high incomes and purchasing power of consumers, companies set higher prices for their products. On the contrary when there is depression or negative sentiment due to lack of demand in market, price is also kept low by firms. For example, automobile companies increase prices of cars when there is high demand and offer heavy discounts when demand is low.
Competition in the market- If there is no other firm in the market offering similar product, the firm may set a higher price for its product or service, but if there are many market players for the same product, the price will be kept competitive. For example, Airtel initially kept high prices for its mobile services, but by entry of Vodafone, Idea and Reliance Jio the prices for various mobile services have been slashed.
Brand and quality of product- A higher brand-value and better quality corresponds to a higher product price in the market. For example, a simple jewellery store in the Chandni Chowk market of Delhi will set price its ornaments based on cost of gold/silver and making charges (cost of labour for making a particular piece of jewellery). But a high-end jewellery store such as Kalyan Jewellers or Tanishq will price similar ornaments at a much higher price owing to its brand-value and reputation in the market.
Price must be supporting other elements of the marketing mix. Too high or too low pricing of a product could mean lost sales for the organisation.
Objectives of Pricing
As an element of the marketing-mix, a firm’s pricing strategy should be directed towards the achievement of specific marketing-objectives which would lead to the accomplishment of overall organisational objectives. Pricing is not an end in itself, but a means to achieve certain objectives of the marketing department of a firm. Therefore, every firm should carefully set pricing-objectives so that there is clarity and consistency in the firm with respect to pricing in the long run.
The objectives of pricing are as follows:
Profitability objectives:
(a) Target Rate of Return on Investment or Net Sales: This is an important goal of pricing policy of many firms. In this, the price represents cost of production and profit margin. The basic objective is to build a price structure to provide sufficient return on the investment or capital employed.
(b) Profit Maximization: In practice, no firm expressly states this as an objective for fear of public criticism. However, in economic theory, profit maximization is an important objective for any business for its survival. In recent times though, the business philosophy has changed. Businessmen have started to think from the perspective of society instead of only focusing on maximizing profits, and have incorporated business with other activities which help fulfil their societal obligations.
Market-Related Objectives:
(a) Meeting or Preventing Competition in the Market: Some firms adopt pricing policies to meet or prevent competition in the market. They are ready to fix their prices at a competitive level to meet competition in the market. They even follow“below cost pricing”, that is, charge less than the cost because they believe it will prevent new firms from entering the market.
(b) Maintaining or Improving Market Share: This pricing objective is followed by firms operating in expanding markets. When a market has a potential for growth,market share is a better indicator of a firm’s effectiveness than target return on investment. A firm might be earning a reasonable rate of return on investment or capital employed but its market share could be decreasing. Therefore, this is a worthwhile pricing objective for firms operating in expanding markets.
(c) Price Stabilization: Price Stabilization as an objective is prevalent in industries that have a price-leader. For example, in an oligopoly, there are only a few sellers which follow one big seller who acts as the price leader, and try to stabilize their prices simultaneously. No firm is willing to engage in price wars. They may even forego maximizing profits in times of prosperity or short supply in order to stabilize prices. This is because price stability helps in planned and regular production in long-run.
Public Relations’ Objectives
(a) Enhancing Public Image of the Firm: A company’s public image is important to its success. Suppose a company with an established reputation in the market based on existing products and price lines introduces a new product to a different market segment. This new product could be at a higher or lower price. If this segment hasn’t tried the product but is aware of its prestige and brand-value, it might desire to purchase its products because price is no longer a deterrent factor.
Importance of Pricing
Pricing is an important element of the marketing mix of the firm. All other Ps of marketing i.e. Product, Place and Promotion are highly dependent on the price at which the firm can sell its products to the buyers. Price will usually be set relatively high by the firm if manufacturing is expensive, distribution and promotion are exclusive. On the contrary a low price may be a viable substitute for product quality, but firm requires effective promotion and an energetic selling effort to increase its market share. Similarly consumers’ buying decisions also depend upon price of the product up to a great extent. Highly priced commodities generally witness a sluggish sale trend in comparison to moderately priced
goods.
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