Pricing: Meaning, Types, Objectives, and Importance


Meaning of Pricing

Pricing is a very crucial aspect of every product which determines its acceptability rate in the market. It is defined as the process of determining an accurate price for the product. Pricing is all about setting prices for goods and services of business enterprises and influencing their overall demand to great extent. It is an integral part of a product that needs to be considered wisely by every organization in addition to its quality. A product without the right pricing cannot exist in the market and may eventually fail, bringing losses for the enterprise. Right-priced products are always preferred by customers over highly or inaccurate priced products.

Concept of Pricing

Pricing decisions are taken by top management of the company with a focus on attaining organizational goals. It assists firms in reaching their overall goals which may be in terms of sales volume, profit level, competition, market share, image building, owners’ interest, and many more. The prices are also decided in accordance with the product life cycle stage and the country’s competitive situation in the case of international marketing. Therefore, every business shall take all necessary steps to decide appropriate pricing for their range of products in order to survive in today’s highly competitive market. 

Types of Pricing

Various types of pricing strategies can be well-understood from the points given below: –

Demand Pricing

Demand pricing is a pricing strategy where product prices are set as per the demand of customers in market. It is also called demand-based pricing or customer-based pricing. The customer’s perceived value for product is considered key element in setting prices.

Competitive Pricing

Competitive pricing is also called as strategy pricing where competitor’s prices form the basis for deciding price by business enterprise. Business analyzes the price charged by their competitors in market and accordingly set higher or lower price for their products. It is very useful strategy for firms who have just started their business and do not leave any opportunity of growth.

Penetration Pricing

Penetration pricing involves fixing lower prices in order to enter new market or launching of new products. It helps in attracting customers toward a product via offering cheaper prices with the aim of developing large customer base. Penetration pricing also act like deterrent to competition as newer firm if entering market, will have to sell their products at low prices by sacrificing their profit. 

Cost-plus Pricing

Cost-plus pricing is simplest form of pricing strategy where key basis for setting prices is overall cost incurred in production of product. Companies adopting this strategy, sum up all cost associated with product creation be it fixed cost or variable cost and then finally add some percentage (profit margin) to it for coming to final price. Cost-plus pricing will always yield profit for business unless and until all costs and sales have been calculated in accurate manner.

Geographic Pricing

This strategy of pricing is one under which company charges distinct prices for same product/service in distinct geographical markets or locations. Here, price of products varies with changes in geographical locations in which it is sold.

Discount Pricing

Discount pricing refers to pricing in which products or services are sold at reduced prices. The discount on prices offered by company may be in the form of seasonal discounts, loyalty rebates, buy one-get one free discount, quantity and promotional discounts, etc.  

Economic Pricing

Economic pricing method is basic and low-cost method of marketing. It is more common strategy with wholesalers and retailers. Under this, prices are set low for goods in order to target sales at highly price-sensitive segment of society. The overall goal is to make large amount of money via generating huge sales volume.

Price Skimming Pricing

It is also termed as skim-the-cream pricing which is used by firms enjoying strong competitive position in market. Firms enter the market with high-priced products for making larger revenues. Later on, they lower prices of product with the aim of reaching everyone else. 

Objectives of Pricing

The objectives of pricing are as follows: – 

Market Survival

Pricing strategies plays a key role in determining the survival of firm in market. In today’s highly competitive environment, appropriate price is much need for running business in long run. Firms even cut their prices for grabbing customer attention, when facing trouble due to presence of large competitors.

Maximization of profit

Profit maximization is most important objective of pricing. Many companies view their pricing policies as key tool for maximizing their overall profit level. The price for product/service is set keeping in mind the firm objective of generating higher profits, although sometimes it become difficult in highly competitive market. 

Growing sales volume

Pricing have an essential role to paly in attaining sales-oriented objectives of business enterprise. Companies want to raise their sales volume and therefore prices are set in such a way, that are intended to boost overall sales. An assumption is taken that if sales will get increase, profit will also increase. Therefore, all pricing decisions including setting prices and altering in prices are targeted towards raising the sales.

Prevention of competition

It also help companies in preventing the degree of competition in their product market. Pricing decisions of firm avoid entry of new competitors as setting of low prices discourages the competitors from market entry with similar range of products. When company sets lower price for its product then marketer is more likely to incur losses. This thing demotivates new competitors from selling their product in same market. 

Attaining market share

Pricing carries a basic objective of maintaining market share. Market share is key indicator of overall health and success of company’s marketing strategies. Greater the market a product holds, more are its chances of getting succeed. A firm is also able to enjoy economies of scale, when it acquires larger market share. Pricing is used to achieve market share objectives by business which may be either to increase market share, decrease market share or to maintain it.

Early recoupment of investment

Marketer utilize pricing strategies for early recoupment of his investment value in product or project. Some products have shorter life cycle and are more likely to get influenced by swift technological changes. There may also be danger of cut throat competition and political threats. Under such scenarios, marketer tries to recovers all invested amount as soon as possible. Price bring revenues into business, therefore if high price is set during initial period, then manufacturer can easily recoup his investment earlier.

Disposal of surplus

A business enterprise resort to dumping price policy if it has surplus stock lying idle. Dumping is price policy of global level under which goods are sold at much lower prices. Imported product is priced at smaller prices in comparison to what is charged in domestic market. Export sales are viewed like passive contribution to sales volume by companies.

Stabilization of prices

Price stability involves maintaining prices of products stable over a period of time which also reflects efficiency of organization. Many companies prefer setting their pricing objectives in a way such that they are able to stabilize their prices, thereby preventing them form market uncertainty and risk of losses. However, in current scenarios where costs are changing from time to time, achieving price stability becomes quite difficult.

Importance of Pricing

Some of the importance of pricing for the business firms are: – 

Determines profitability

Pricing determines the overall profitability of business as it directly influences the sales volume. It is a key component of marketing mix that form the basis for generating revenues. A right price is needed for increasing the sales level along with profitability. Many customers are price sensitive which frequently change their buying decisions on the basis of pricing thereby making it crucial aspect for business. Rise or fall in product prices can be instantly seen in rise and fall of its demand. 

Competitive weapon

Price is major competitive weapon with business to operate efficiently in today’s highly competitive environment. The pricing strategies are revised from time to time for countering competition. A market leader dominating the market always sets price that helps in preventing new competitor’s entry into market. Price of market leader and other competitors are taken into consideration by price followers while setting prices. Therefore, due to presence of stiff competition and in meeting competition, decisions related to pricing acquires their own real importance.

Regulates demand

The demand for products is directly influenced by variations in their prices. Price is main parameter considered by customers while taking decision to buy product in presence of large competitor’s products. It is strongest component of marketing mix which plays great role in producing results for product in market. Demand can be increased by bringing down prices whereas it reduces with increase in prices. A business should always be very cautious while using this instrument of marketing mix as improper pricing can do damage to brand and may defame its products.

Builds product image

Pricing also help in building image for product among customers in market. It is believed by customers those high-priced goods are of high quality and offers good service in comparison to low-priced goods. Companies also use price as tool for positioning their products superior in customer’s mind. They charge more price for premium range products and less price for regular products.

Marketing communication

Market communication is another major importance of pricing. It enables firm in communicating product value to customers. When product carries high price, it conveys people about its production quality and overall expected life. Customers are basically value-driven who wants to maximize value from given purchase. Expectations of value is formed by them and accordingly act on it. A price is seen acceptable as long as product is meeting expectations and value definition of customers at given price point.