Week 4 Project

Pricing and Methods of Price Determination

© 2016 South University

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Marketing Management

©2016 South University

2 Pricing and Methods of Price Determination

Week 4 L1

Pricing and Methods of Price Determination

Price is the second element of the marketing mix. The economic function of price is to create possession utility. This means when consumers pay the price on a product, they gain possession of the product or the right to benefit from its use. Price is an important element for marketing managers to remember when crafting a marketing strategy.

The foundation of pricing is to first recover the cost of producing a product and delivering it to the customer. The ability of a firm to survive is based on its ability, over the long term, to recover the costs of delivering a product to its target market. Products that don’t cover their production and logistics costs will not last long in a competitive marketplace.

Beyond simple cost recovery, pricing also has a psychological element. Customers tend to assume a higher price indicates higher-quality products. If the products fail to provide the expected quality, customers will not buy them again.

Over the years, many different pricing methods have been developed in marketing, and these may be broadly divided into two categories, posted pricing and individual bargaining pricing.

First, let’s learn about posted pricing.

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Marketing Management

©2016 South University

3 Pricing and Methods of Price Determination

Week 4 L1

Posted pricing is the most common type of pricing. It is used as the most efficient means of accommodating a large number of buyers of standardized products, which have a known value.

Now, let’s learn about individual bargaining pricing.

Individual bargaining pricing is the opposite of posted pricing. Traditionally, it is used with nonstandardized products, such as automobiles or antiques, because of the variance in the attributes of the products as well as the needs of the individual consumer.

Two factors commonly affect pricing decisions. Usually, the decision to select a posted price versus a bargaining price is based on what is traditional for that product category. The second factor in developing a pricing strategy takes into account the psychological aspects of pricing.

Bargaining pricing is traditional in the automobile industry. In fact, attempts to develop a posted-pricing strategy for automobiles have been unsuccessful. In contrast to bargaining pricing, common in the automobile industry, posted pricing is traditional or standard for products such as soda pop.

Starbucks coffee has successfully made use of the psychological aspects of pricing. By setting a price higher than the competition’s price, Starbucks is sending a message to its target market that its product is of a higher quality. The strategy used by McDonald’s coffee is, in essence, aimed at attracting those who like coffee but don’t want to pay the premium price of Starbucks. McDonald’s

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Marketing Management

©2016 South University

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Week 4 L1

uses its product cost advantages to offer a more affordable product.

Common Pricing Strategies

There are several pricing strategies that marketing managers can select when creating their marketing mix. The most common pricing strategies are going-rate pricing, target-return pricing, standard markup pricing, perceived-value pricing, and value pricing. The selection of a pricing strategy depends on what is traditional in the target market.

Going-Rate Pricing

In this strategy, you set your price at the same level as your competitor’s price. This strategy is generally used with products that sell in mass markets, such as candy bars. It is also used with commodities for which prices are established by the markets in those commodities. This is one of the most common strategies used in marketing because it is the easiest.

Target-Return Pricing

In this strategy, marketing managers base the price on the average cost of the product plus a percentage to cover the rate of return they require for their investment. This pricing is used most commonly in regulated markets—for example, by utilities and by contractors selling goods to the government.

Standard Markup Pricing

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Marketing Management

©2016 South University

5 Pricing and Methods of Price Determination

Week 4 L1

In this strategy, retailers sell at a price that is a standard percentage added to the price they pay to the manufacturers. The markup is generally based on tradition, and it needs to cover the costs of the retail operation. This is a common practice because, like going-rate pricing, it is easy to implement.

Perceived-Value Pricing

This strategy, also known as prestige pricing, is based on the value of the product as perceived by the customers. It is a strategy used for premium and luxury goods, where the price is part of the attraction and is used to signal product quality.

Value Pricing

A successful value-pricing strategy requires solid research on the target market and the need the product meets. This is a difficult strategy to implement since it requires knowledge of the value of the product to the target market.