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MARKETING: Pricing Strategies
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altA marketing mix consists of 4Ps: Product, Place, Promotion, and Price. Many would say that price is the least attractive element, and that companies should really focus on generating as high a margin as possible. The argument is that companies should change the product, promotion, and place in some way before resorting to price reductions. However, price is a very versatile element of the mix.
 
In general, pricing strategies encompass three main ways to improve profits. Firstly, the company can cut costs.  Secondly, the company can sell more. Thirdly, the company can increase profit with a more suitable, and thereby better, pricing strategy. Since many companies have worked intensely on reducing costs and more sales are hard to find, many are left with the option of revising the pricing strategy in order to stay viable.
 

Pricing strategies 

Some of the more common pricing strategies will be described in this section.
 
Cost-plus pricing: This is the simplest pricing method. The company simply calculates the cost of producing the product and then ads on a percentage (profit) to that price to give the selling price. This method has two flaws: it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price. 
 
Premium pricing: This approach is used where a substantial competitive advantage exists and the market is safe in the knowledge that they can charge a relatively higher price often when the brand is unique in some way. 
 
Penetration Pricing: The price is set artificially low in order to gain market share. Once this is achieved, the price is increased. Often, it happens when companies need to gain a larger number of customers to make it worth their while. For example, this is the strategy used by many new telecommunication companies, where critical mass is important.
 
Economy pricing: This is a no frills low price. The costs are kept to a minimum. Supermarkets often have some economy brands and budget airlines are famous for keeping their overheads as low as possible in order to offer a low price.
 
Price Skimming: This is when a company charges a higher price without it being justified. This will often attract new competitors and then the price will eventually fall due to higher supply.
 
These last four strategies can be illustrated like this:
 alt
 
Market-oriented pricing: Setting a price based upon analysis and research compiled from the target market. 
 
Optional Product Pricing: Companies will attempt to increase the amount customers spend once they start to buy. Optional “extras” increase the overall price. Airlines are a good example again, since some budget airlines charge extra for meals, window seats, blankets etc.
Captive product pricing: When products have complements then companies sometimes charge a premium price since the consumer has no choice. The most popular example of this is razor manufactures. They will charge a low price for the razor handle but a premium for the razor blades that fit the handle.
 
Geographical pricing: When price varies in different countries. For example, in China, the import tax makes some of the imported brands more expensive to buy compared to other countries without such an import tax. 

The Internet is changing the pricing game 

The above mentioned strategies have been employed by companies for many years and are still employed. In all of the strategies described, every customer is getting the same deal. This is changing now. The concept of dynamic pricing is possible, which is changing the pricing game for both offline and online companies.
 
Dynamic pricing: A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations and large amounts of data gathered from customers, dynamic prices allow online companies to adjust the prices of identical goods to correspond to a customer’s willingness to buy. 
 
It is no longer enough for a store to compare the prices with a nearby physical store. There is also a spectrum of digital rivals operating on the web and through mobile devices. The idea of a perfect price within a category, one that makes sense on the shelf, no matter which customer is looking at it and where the store may be located, is fading. In its place is an understanding that in order to price effectively, companies will have to move to a dynamic approach based on each product’s economic value and each customer’s buying needs. 
 
This will bring companies to a tricky intersection where personalised pricing and transparency collide. Each company needs to find ways to address this. One way could be to create different tiers for customers.
 

altFactors affecting how prices are perceived

 
Some factors influence how a consumer perceives a given price and how price sensitive they are likely to be. Some of the more common ones are the following:
 
Reference price effect: Price sensitivity increases the higher the product’s price relative to perceived alternatives. What are perceived as alternatives varies from consumer to consumer.
 
Difficult comparison effect: Buyers are less sensitive to the price of a known product when comparing to potential alternatives is difficult.
 
Switching cost effect: The higher the product specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives.
 
Price-Quality effect: Buyers are less sensitive to price the more that higher prices signal higher quality. 
 
Expenditure effect: Buyers are more price sensitive when the expense accounts for a large percentage of a buyers’ available income or budget.
 

Pricing in China 

When it comes to China and prices, the first thing that comes to mind is inflation. The inflation rate last reported in China was 3.6 % for March 2012. China and other emerging economies have been seeing significant inflation as robust growth and rising costs for raw materials have pushed up prices.  In China, where millions struggle to make ends meet and where food makes up a large chunk of household spending, inflation is a particularly sensitive topic. Inflation is affecting the pricing strategies of companies operating in China. The basic problem is that rising input cost, such as skyrocketing wheat prices and increasing wages, are somewhat skewing the bargain basement economics that have made China the most robust economy in the world. Beijing has pushed back with retail-price controls, putting retails brands in a tough position. Carrefour is just one of the global brands in China facing this dilemma. Carrefour has begun winding down its franchises in China. Best Buy announced it will close all nine of its stores in China. Meanwhile Tesco, the world’s third largest retailer after Wal-Mart and Carrefour, is counting on significant sales increases in China. KFC in China is looking at this in a positive light as well, counting on the fact that rising wages will be a net positive for pocketbook power that Chinese consumers can use at KFC outlets.
 
altAnother component that is affecting pricing strategies in China is privacy rights. Protecting privacy rights in China is difficult. Microsoft represents a good example of a company in China for which privacy rights have had an impact on pricing. Microsoft employs flexible prices in China and has decided to adjust its prices in helping improving their anti-piracy efforts along with trying to make their product more affordable for more users. Millions of Microsoft users in China have had issues, with many people having their computers hacked, screens blacking out, and major piracy problems which have led to major problems between Microsoft and its users in China. Microsoft is trying to satisfy  Chinese consumers by lowering its price. 
 
Finally, culture plays a role in price setting in China, as well as anywhere else in the world. China is one of the four BRIC (Brazil, Russia, India and China) countries in global regions where price is the most important feature for shoppers. Research shows, that 63% of China’s shoppers rank price as the number 1 factor in deciding whether or not to buy a product. China traditionally pays low wages which is a very important cultural trend that companies operating in China need to understand and take into consideration. 
 
The price element of a marketing mix is often more difficult to get right than many anticipate. Of the 4 Ps in the marketing mix, price is the one which creates sales revenue, all others are costs. The price of an item is clearly an important determinant of the value of sales made, and so this should not be neglected.  
 

By Heidi Skovhus 
 
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