The Dynamics of Pricing

Pricing is one of the most difficult aspects of marketing. The higher the price, the greater the profits. There is of course the danger of losing customers. The lower the price, the greater the sales. In this case, there is the possibility of leaving money on the table. So how to get to that optimum price? And do keep in mind that pricing is not something that happens in a vacuum. The competition is always playing its moves, changing prices proactively as part of its strategy or reactively to counter the market conditions. So how does one go about developing a pricing strategy?

There are different types of pricing methodologies such as cost plus, competitive, channel driven, and value based. While the first three are passive and follow from existing structures, value based pricing is one methodology which seeks to capture the actual value of the product or service being sold. It not only seeks to address the functional benefits, but also seeks to capture the emotional and self-expressive benefits monetarily. Value based pricing is perfect for top brands where the functional benefits are but a minor component of the entire picture.

While cost plus and channel driven pricing strategies ensure that there is no loss, they do not capture the true value of a good or service. Competitive pricing is solely based on what the competition is doing and is generally observed where there is commoditization. In any case, these methods are still necessary to keep a check on the costs and competition in general. But coming back to the notion of value, it then becomes important to understand it well so that it can be incorporated into the pricing model. But how does one go about defining something that can mean different things to different people?

Prior to currency, all exchange of goods and services happened via the barter system. This usually made one-on-one transactions easier since they happened at a personal level upon mutual agreement. However, with the introduction of currency, it isn’t feasible to define value at an individual level and capture it monetarily through differential pricing, at least on a large scale. This is where techniques such as conjoint analysis come into the picture where customers provide inputs in terms of different prices they would be willing to pay for various features or benefits.

In general, it is important for every company to evolve a sound pricing strategy that not only ensures sufficient sales but also captures the true value of its products.

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