Pricing policy is a set of rules, principles and methods in accordance with which the company determines the value of its products or services.
Definition of a concept
Pricing policy consists of two main components, namely, strategies and tactics regarding pricing. Speaking about the first element, it is worth noting that it implies a long-term positioning of the product in market conditions. It is important to determine the price segment, as well as choose the methodology that will be used in determining the value. Pricing tactics involve the development of short-term measures that will ensure effective sales in a given specific period of time.
The pricing policy should be constantly adjusted depending on the changing market situation. This is not just a method of making a profit, but also a reasonably strong argument in the process of competition. The price should be set so that it simultaneously satisfies the consumer and provides a decent level of profit for the entrepreneur.
Pricing policy
The final cost of goods is influenced by many factors that lie both in the external and internal environment of the enterprise. The essence of pricing policy consists of the following points:
- since the product is made for the buyer, it is important to determine the maximum amount of money that he is willing to pay for a particular product;
- it is necessary to trace the trend in sales volumes depending on price fluctuations;
- determination of all costs that arise in the process of production and sale;
- determination of the degree of competition in the market, as well as the pricing policy of the main rivals;
- it is necessary to calculate the minimum price of the goods, providing zero profit, below which you can not fall;
- calculation of the maximum possible percentage of the discount, which will not have a significant impact on the financial position of the enterprise;
- compiling a list of additional services that can increase the value of the product in the eyes of the buyer, and will also increase sales.
Pricing Policy Objectives
The objectives of pricing policy can be formulated as follows:
- ensure the cost-effective operation of the enterprise (or at least a break-even level in case of sales failure);
- get the maximum level of profit that can be achieved at the moment;
- the development of new markets or gaining leadership in the priority segment;
- “skimming” during the period when the buyer is ready to purchase a popular or unique product, even at an inflated price;
- an increase in the indicator of sales volumes (permanent or one-time).
Pricing policy analysis
A rather complicated concept is pricing. Analysis of its effectiveness in the enterprise should consist of the following points:
- based on the situation within the organization, as well as as a result of studying the external situation on the market, an interval should be determined in which the optimal price of the goods will be;
- study of the reaction of customers to changes in the value of certain products;
- establishing a relationship between quality, as well as production features and the price of the goods;
- identification of factors that may affect the change in the value of the product both upward and downward;
- flexibility of demand for goods due to price fluctuations;
- calculation of the amount of possible discounts, as well as their impact on the final result of the production enterprise;
- after establishing the final price, it is worth determining how much it meets the set goals.
Pricing Approaches
The pricing policy of the enterprise can be developed on the basis of one of two approaches: costly or value. As the name implies, the first is based on production costs, as well as sales. To begin with, the costs of manufacturing products are calculated. At the next stage, it is worth assessing what will be the cost of promotional activities, as well as transporting goods to the intermediate and final consumer. It is definitely worth exploring the situation on the market, as well as the pricing policy of competitors. When all the previous factors have been taken into account, the final figure can be adjusted based on what value the product represents for the buyer.
A value-based approach does not imply actions to maximize sales. The final cost of the goods is determined in the opposite way. First, marketers study consumer behavior, as well as the value that a product represents to them. Next, it is worth evaluating the general situation in the market, as well as determining the maximum amount that the consumer is willing to pay. If the set price completely covers production costs, then you can start selling, otherwise, the final figure will have to be proportionally increased.
Pricing strategies
The pricing policy of the enterprise can be formed on the basis of one of the following strategies:
- The price leader strategy is typical for those manufacturers who have won leading positions in the market. Moreover, they can both overstate and underestimate the cost of goods, which will force all other players to adapt to this situation. Usually these are well-known brands, for the products of which customers are willing to overpay.
- The response policy is typical for relatively small enterprises that are not popular in the market. They are forced to set a lower price in order to attract buyers to their products. Those manufacturers who seek to expand market share and break out into industry leaders resort to an aggressive strategy.
- The cream skimming strategy is used when new products or their latest modifications enter the market. It is worth noting that a number of buyers (innovators) are willing to pay even higher prices for such products, which is what manufacturers are guided by.
- The strategy aimed at conquering the market implies the establishment of the lowest possible price for a particular product, which will attract the consumer. Further, the sale value begins to rise, gradually approaching the market.
Pricing Policy Management
Price policy management includes a number of mandatory tasks:
- assessment of costs and expenses that arise in the process of production and sale of products;
- definition of economic and marketing goals which the organization sets itself;
- identification of competing firms, as well as analysis of their pricing strategies;
- analysis of the financial condition of the enterprise;
- market analysis to determine priority segments, as well as acceptable prices for the buyer;
- analysis of the competitive environment;
- development of your own strategy or its adjustment in accordance with the data.
Errors in the development of pricing policy
Pricing policy is one of the key points in the work of the enterprise, and therefore it should be carefully considered when compiling it. Sometimes management and marketers make some mistakes that may adversely affect the financial results of the organization. So, you need to work closely enough with the production department so as not to miss a single item of costs that arise during the manufacture of the product. Otherwise, the company runs the risk of being ineffective.
Before launching goods on sale, you need to conduct a thorough marketing study on the subject of what value it has for the consumer. If this event is neglected, there is a risk of setting an unreasonably low price. Thus, we can talk about lost profits, which could contribute to the further expansion of production.
Do not underestimate competitors and their pricing policies. It is important to analyze several scenarios that determine the reaction of rivals to your actions. Otherwise, your pricing policy may be ineffective and lose the competition.
Price categories
The organization’s pricing policy largely depends on how the company positions itself and its products on the market. In this regard, we can distinguish a number of categories:
- The highest price category implies that for each unit of production the maximum level of profitability was laid. Also, at the expense of cost, the image of the products increases, indicating its prestige and high quality. Such a policy is characteristic of either promoted brands, or manufacturers who are the first to enter the market with a fundamentally new product.
- The average pricing policy is followed by those enterprises that do not strive for leadership or superprofits, but focus on the mass consumer.
- The lowest price category is caused, as a rule, by the low quality of products, as well as the lack of additional funds in the organization for marketing events. Also, such a firm can resort to those firms that, due to the lowest possible cost, tend to as soon as possible conquer the market.
Price types
Marketers distinguish two main types of prices for goods and services:
- The base price is the minimum limit by which a manufacturer agrees to manufacture and sell his goods. it makes it possible to fully cover the costs of manufacturing products, as well as to ensure minimal profit (or zero break-even level).
- Fair price is determined by the value of a product in the eyes of customers. It does not make sense to establish a higher sale value, because the client simply refuses to overpay. If the manufacturer wants to make the price more significant, then care must be taken to give the product specific characteristics that distinguish it from other similar products.
Discount policy
A fairly serious marketing tool is a flexible pricing policy. It involves the installation of a system of discounts, which imply a certain reduction in the sale value of goods. This tool is used to attract customers, to conquer a specific segment of the market, or to maximize sales of goods in a specific period of time. Often such a price reduction is quite short-term.
When setting a discount, the manufacturer does not work at his own expense, because before that the price is somewhat overstated. So, speaking of seasonal sales, it is worth saying that they are fully compensated by the profit received at the beginning of the sales period. When setting the size of margins and discounts, the entrepreneur should be guided not only by his own interests (base price), but also by the interests of the buyer, which are expressed in a fair price. Otherwise, these events will not bring success.
Price competition
Price is one of the most common and effective competition tools. This process can be carried out in two directions:
- Understatement is often used in a market where consumer goods are sold. Most often, large firms with large volumes of production, and, consequently, with minimal costs per unit of production, resort to this.In this case, it is quite difficult for competitors to come to the market or to gain high positions.
- Overpricing is aimed at increasing the idea of prestige and quality of goods in the eyes of customers. This is especially abused by promoted brands, taking advantage of the illegibility of consumers.
Price discrimination
The pricing policy of the enterprise can be aimed at covering the largest possible market share, attracting completely different categories of customers. Moreover, each of them pays an unequal cost. This phenomenon in the economy has been called price discrimination. An example is the discount program used by many well-known brands or retail chains.
