Pricing: Concept of Pricing, Factors affecting price of a Product/Service, and Strategies of Pricing

Concept of Pricing

The term price means the monetary value to be charged from the customer for a product or service. The decisions related to pricing of a product or service are called price mix. In other words, price mix involves determining the price of the product and establishing policies regarding cash, trade and quantity discount and also credit sales.
Price denotes the amount of money for which a product could be exchanged. It is very difficult to define the price of a product. When a person is buying a product, he may buy certain services also along with the product. The more the number of services he wants to get, the higher the price he will pay. A seller prices a combination of the physical product plus several other services and benefits along with the product including warranty, accessories, repair facilities, free home delivery, and credit facilities.
The price of the product of a firm constitutes an important element of its marketing mix. It affects the other components of the marketing mix of the firm. A firm will improve the quality of the product, increase the number of accompanying services and spend more on promotion and distribution if it feels that it can sell its product at a price high enough to cover the additional costs.
Pricing is also important from the point of view of the consumer. Prices determine his purchasing power and the standard of living. Goods and services offered by various producers at different prices help the consumer to make buying decisions and satisfy his wants in a better way.

Factors affecting the price of a Product/Service

It is very difficult for the marketing manager to fix the right price of a product that will ensure its sale. If it is too high, the product might be rejected by the customer. And if the price is too low, the firm will not earn the desired profits. That is why a number of factors have to be considered before fixing the price of a product. These factors are:

1. Cost of Product: While fixing the price of a product the cost of production and distribution must be considered. Such costs must be sufficiently covered by the sale to avoid losses.
2. Demand of Product: If the demand for the product is inelastic, high prices may be fixed. On the other hand, if demand is elastic, the firm should not fix higher prices, rather it should fix lower prices than that of the competition.
3. Extent of Competition: Competition in the market is a crucial factor in price determination. The prevailing information about what price the competitors are charging for similar products and what possibilities lie ahead for raising or lowering prices also affect pricing.
4. Product Differentiation: The price of the product also depends upon the characteristics of the product. In order to attract the customers, different characteristics and benefits are added to the product, such as quality, size colour attractive package, alternative uses etc. Generally, customers pay more price for the product which is of the new style, design, better package, etc.
5. Types of Customers: The target customers must be able to pay the price. That is why T.V. manufacturers introduce cheap T.V. sets for lower income groups and costly deluxe models for higher income groups.
6. Government Regulation:  The maximum sale price of some products is fixed by the Government. No firm can charge beyond the statutory price. 

Strategies of Pricing

There are many strategies of pricing. Some of which are as follows:

1. Premium Pricing: Premium Pricing is the strategy in which a company charges higher prices for their products than the customers. Generally, the perception of customers is that a high-priced product will itself be a high-quality product. Companies take advantage of this perception and sell high-priced products even when the products may not be of the quality expected by the customer.
   
2. Skimming Pricing: Skimming Price is the technique where a firm charges higher price for its product at the initial stage. As soon as the demand of the first customers is fulfilled and new competition enters the market, the price is reduced to target another set of customers. Price skimming is generally used on new technology products, For Example, Mobile Phones.
3. Economy Pricing: Economy pricing works when a firm has lower overheads and costs than their competitors so that they can offer the same products at a cheap rate to gain higher market share.
   
4. Penetration Pricing: Penetration Pricing is the technique where a firm charges lower price for its product at the initial stage to gain higher market share. Although the low prices make each sale less profitable, the high volume results in lower costs and allows to maintain a healthy profit margin.