Simple Discussion on Pricing Strategies in Business Marketing1 IntroductionWith more and more companies entering into the competition of marketing and countries becoming more open to each other, consumers are now facing ever more choices when they selecting the things they want to buy. How can companies stand out in this competitive market world and win the heart of its customers? The only answer to this question is to create more value on the products and services that going to sell to customers and price its products or services as low as possible. Take a glimpse around us you will see how important the price is to our daily lives. For instance, when people are intending to buy certain things, whether they are luxury items or daily necessities such as clothes, furniture, house, cars, books, everything. Normally, they would visit several places and check the prices. Therefore, there is an old Chinese saying, “When you buy things, you would not be cheated if compare the prices from three stores”. So price plays a very important role in attracting customers to buy the products you offer and the prices have to be set according your company’s Marketing Strategy and Product Positioning.2 Basic concepts about Pricing Strategies in Business MarketingThe price is a amount of money charged for a product or the value exchanged for the benefits of the product or service. The price normally reflects the relative quality of the product, of course, covers all costs associated with production, marketing, after-sale service. A right pricing strategy will help you acquire the biggest profit. Furthermore, Pricing strategy is one of the four major elements of the marketing mix. It is related to product positioning, affects other marketing mix elements such as product strategy, channel strategy and sales promotion strategy.3 Factors that Influence the Prices3.1 Inner Factors that Influence the PricesThere are so many factors existing inside an organization that affect the setting of price and all of them can hardly be overcome, such as pricing target, raw material cost, production cost, transportation cost, sales cost. Though these factors are unremovable, we can maximize company’s profits by reducing the negative impact of these factors, optimizing the use of resources and lowering the relevant costs or finding alternatives. 3.1.1 Organization PolicyEvery organization has its own policies, such as product policy, quality policy, environment policy, enterprise culture, etc. These policies, in the end would affect organization’s pricing strategy to some extent. For example, a pump manufacturer promises its customers that if the customer found the pump purchased from the company has any problems within five years they would replace the parts free of charge for its customers and send the repairmen to the application spot within 72 hours after receiving the call from the customer. This is a good phenomenon and the customer would be very satisfied because of good after-sale services. However, manufacturer, of cause had already added all the costs associated with replaced parts and quick after-sale services to the price of product itself before he promised his customers for the simple reason that the cost for replacing defective parts and cost for sending his repairmen to customer’ side could be much more expensive than the total price of pump itself. In other words, It is customer himself who paid for the replaced parts and quick services and the product price of this manufacturer is much higher than other manufacturers or agents due to free parts and quick services that manufacturer provides.3.1.2 Pricing TargetTo survive in today’s highly competitive marketplace, companies need pricing objectives that are specific, attainable, and measurable. Realistic pricing goals then need periodic monitoring to determine the effectiveness of the company’s strategy. Generally speaking, the pricing objectives can be divided into two categories: profit-orientated objectives, sales-oriented objectives. Therefore, profit-oriented pricing objectives include profit maximization, satisfactory profits, and target return on investment.Profit maximization means setting price so that total revenue is as large as possiblerelative to total costs, in other words, trying to make as much money as possible. In reality, profit maximization does not always signify unreasonably high prices because when an organization sets prices, the firm often prices its products based upon the type of competitive environment it faces, such as being in a monopoly position (being the only seller) or selling in a severely competitive marketplace.Satisfactory profits are a reasonable level of profits. Rather than maximizing profits, many organizations strive for profits that are satisfactory to the stockholders and management, in other words, a level of profits consistent with the level of risk an organization faces. Typical example of Satisfactory profits is: In some countries including China , in order to maximize profits the shop owner would keep his store open for 24 hours a day and 7 days a week, however, in some other countries, the shop owner may not want to work that hard and might be satisfied with less profit.The most common profit objective is a target return on investment (ROI), sometimes called the firm ’s return on total assets. ROI measures the overall effectiveness of management in generating profits with its available assets. The higher the firm ’s return on investment, the better off the firm is. Many companies- including GENERAL MOTERS, VOLVE, BOCSH-- use target return on investment as their main pricing goal.Return on investment is calculated as follows:Return on investment=Assuming that in 2004 Johnson Controls had assets of ＄4.5 million, net profits of ＄550,000, and target ROI of 10 percent . This was the actual ROI: 550,0004,500,000As you can see from the above, the ROI for Johnson Controls exceeds its target, which indicates that the company prospered in 2004. In practice, a company with target ROI can predetermine its desired level of profitability. The marketing manager can use the standard such as 10 percent or 20 percent to determine whether a particular Pricing and Marketing Strategy is feasible. In addition, however, the manager must weigh the risk ROI= Net profits after taxesTotal assets= 12.2 percentof a given strategy even if the return is in the acceptable range.Sales-oriented pricing objective was based either on market share or on dollar or unit sales. Many companies believe that maintaining or increasing market share is an indicator of the effectiveness of their marketing mix. Large market share indeed often meant higher profits, so many companies would like to do their best to increase their market share by reducing product price and offering better products and services. Although companies who apply sales-oriented pricing objective may earn less profits for each product, they can make up the loss of reduced prices by selling more products and services to customers, The more products, services you sell to your customers, the more profits you earn and the bigger market share you occupy.3.1.3 Research and Development CostR&D cost is a big factor that influences the pricing setting, in modern society, innovation and uniqueness plays a big part in attracting customers to buy the commodities you sell and price setting. The quicker you can innovate a new product and launch the product on to market, the more money you can earn and quicker return you can get. Of cause, the more complicated the product is, the quicker you want to get your products onto the market, the more cost you will have to spend on the research and development of new products, in the end, all of these costs have to be added into the final prices of new product and the costs have to be born by end customers.3.1.4 Production CostProduction cost is direct cost that the manufacturers and service providers have to pay, including the cost of raw material, machines, equipments, resources, labor, management, building, etc. The production cost is the direct cost and biggest cost that product or service providers have to bear. So the production cost is the biggest factor that affects the setting of price.3.1.5 Sales CostSales costs include making sales planning, hiring sales staff and selecting sales channel, hiring distributors or even setting a sales office abroad, etc. The sales processes can be very complicated and expensive. In order to lower the cost as much as possible and win bigger profits, to select right sales channel and sales staff are very important.3.2 External Factors that Influence the Prices3.2.1 Government PolicyGovernment policy has big impact on price setting, even affect the sales of the products. For instance, if government increases taxes or customs tariffs on certain commodities, or put a constraint on certain products, the sales and prices of the commodities would be greatly affected. Although in modern world, the countries are becoming more open to each other, the rate discriminations and unfairness are still existing, government policy changes frequently in some countries. So when an organization is planning to export their commodities to other country, or import the products from overseas, it is very important to make sure the situation of the country that the firm is going to deal with is stable, such as the political stability, government policy and economic status. For example, a firm signed a sales contract with a small country and delivered all the commodities that contract requires to the cooperated country, during the transportation period, there is a war broke out in that cooperated country, so it is almost impossible for the firm to get the money back or it has to spend much more efforts and costs to get the money back.3.2.2 Market ConditionsWhen setting price it is extremely important to investigate market conditions. Market conditions include general market economic status, the status of current market competition, the status of supply and demand, the development status of the world economy, these factors are critical to a price setting. As everyone knows when there is crisis in the world economy, people in each country would be more careful with their money when buying things, or they would buy less expensive stuff or buying less things as possible. So in the time of economic crisis it is very important to set the price at a more reasonable level if you want to sell out your products and services. Another example to address the importance of market conditions when setting price is that competition status. Organizations have to adjust their pricing strategy according to the severity of market competitions. When these are a few competitors in the market or your products and services have unique features, you can set prices at higher level in order to get back thereturns as soon as possible, but when the competition is fierce and the market is filled up with competitors, you have to set a price which can be accepted by you and your customers, even you would have to explore diverse ways or methods to promote the sales in order to get back the costs and make profits.3.2.3 Geographical LocationNowadays, in order to meet the need of customers in different countries and keep the price low, the international organizations tend to set their factories, production plants and sales offices in customer’s country or city to avoid the high cost of delivery and distributions. This is a good practice for the delivery and distribution charges are becoming ever more expensive. For example, a Chinese manufacturer wants to export his products to Chicago, USA, he will have to price his products at higher level to some extent because he needs to consider the risk of transportation, risk of goods damage, and bears extra costs, such as delivery charges, insurance premium, customs tariffs and permission-certificate application fees due to geographical reasons.3.2.4 Customers’ Tastes and PreferencesThe people in different countries and different places have different tastes and preferences, even in a family, the members would have different tastes. For example, in China, people in some provinces like to eat spicy foods and dishes but in some other provinces, people don’t, so it is very difficult to sell the spicy foods to the people who don’t like the spicy foods. Though some people don’t hate the spicy foods and have little interests in the spicy foods, it is very hard to sell the spicy foods to them for high price. To understand the customers’ tastes and preferences is very helpful for the marketers to sell the products or services to their customers successfully and quickly.4 SWOT Analysis for PricingSWOT is short for Strengths, Weaknesses, Opportunities and Threats. SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and for identifying both the Opportunities open to you and the Threats you face. Originated by Albert S Humphrey in the 1960s, SWOT Analysis is as useful now as it was then. You can use it in two ways as a simple icebreaker helping people get together to “kick off”strategy formulation, or in a more sophisticated way as a serious strategy tool. By using SWOT analysis you can find below useful answers.Strengths:•What advantages does your organization have?•What do you do better than anyone else?•What unique or lowest cost resources can you draw upon that others can’t?•What do people in your market see as your strengths?•What factors mean that you “get the sale”?•What is your organization’s Unique Selling Proposition (USP)?Consider your strengths from both an internal perspective, and from the point of view of your customers and people in your market.•You should also be realistic—it’s far too easy to fall prey to “not invented here syndrome”. Also,if you’re having any difficulty with this, try writing down a list of your organization’s characteristics. Some of these will hopefully be strengths!•When looking at your strengths, think about them in relation to your competitors.For example, if all of your competitors provide high quality products,then a high quality production process is not a strength in your organization, it’s a necessity. Weaknesses:•What could you improve?•What should you avoid?•What are people in your market likely to see as weaknesses?•What factors lose you sales?Opportunities:•What good opportunities can you spot?•What interesting trends are you aware of?•Useful opportunities can come from such things as:•Changes in technology and markets on both a broad and narrow scale.•Changes in government policy related to your field.•Changes in social patterns, population profiles, lifestyle changes, and so on.•Local events.Threats:•What obstacles do you face?•What are your competitors doing?•Are quality standards or specifications for your job, products or serviceschanging?•Is changing technology threatening your position?•Do you have bad debt or cash-flow problems?•Could any of your weaknesses seriously threaten your business?Finding above answers through using SWOT can be very useful when you deciding which pricing strategy you are going to use and help organizations to find their own right position in the market and set appropriate price accordingly.5 Tactics of Setting Price5.1 Psychological PricingPsychological pricing is a business concept supported by the idea that customers respond better to certain types of prices and will be more likely to buy items with these prices. Most often, such prices have end digits of nine, 99 or 95, which is believed that it would make people more assured and the customers would think they are getting a savings on what they buy. For some companies, pricing something at $19.99 instead of at $20 US Dollars (USD) will result in consumers believing they’re getting a savings, and even if that savings is only one penny, customers may feel more confident about making a purchase. For example: in the real estate market, properties are often priced at uneven dollars $239,000 instead of $240,000. The psychology of that pricing is that buyers will recognize t he $239,000 price as being much better (even though it’s only $1000 less) than $240,000. Another example lies in luxury car segment. An increase in price resulted in an increase in sales because buyers tied the price increase to a value. Psychological pricing can be ego-centric pricing.5.2 Discount pricingIt is normal to offer quantity discounts to customers who purchase in large quantities. These discounts can be cumulative, such as discounts given to customers who place multiple small orders or loyalty cards that give a free item after a certain number are purchased. These discounts reward customer loyalty. Seasonal discounts are appropriate to reward customers who purchase during off-peak times. They often serve to increase sales at the beginning of peak seasons.5.3 Skimming PricingAs the name suggests, the market skimming pricing strategy seeks to skim away or churn out all those customers from the market who are willing to pay a higher price just to get access to the marketer’s products or servi ces before anyone else does. The skimming pricing is considered as the customer segment, the premium segment that has a very high consumer’s surplus in terms of their demand for the product or service and the customers are willing to pay a higher price for outstripping their contemporaries in owning such a product. Market skimming is a variant of discriminatory pricing strategy. The strategy of market skimming is to charge a higher price for a product during it’s initial launch in the market. Once the premium paying customer segment has been optimally exploited, the price of the product is, then, gradually lowered in order to exploit the other, lower paying consumer segments. Examples of skimming pricing strategy：Most prominent instances of skimming pricing strategies can be seen in the electronics and computer technology markets because upgrades come up every 6-8 months, pushing previous technology versions towards the maturity stage of the product life cycle. One such prominent example is the Sony PlayStation 3. When launched, it was priced approximately USD 600 but these days, it is available at around USD 300. Laptops and mobile phone handsets are other prominent examples of market skimming.5.4 Promotional PricingPromotional pricing is a sales and marketing technique. It involves reducing the price of a product or service to attract more customers. This technique can be effectively used across numerous industries, including food services, cosmetics, and householdcleaning supplies. Promotional pricing often involves reducing prices to unsustainably low levels. In some cases, products and services may be sold at or below cost. A buy one get one free scheme may even be used. When this is done, interest in goods can be greatly increased, meaning sales are also likely to increase dramatically. For example, a clothing store may offer clothing at prices that are below the manufacturer’s suggested retail price. Shoppers attracted by the low prices, are likely to remember that store and visit again when they have apparel needs. A cosmetic company may offer two compacts of eye shadow for the price of one. When women need eye shadow again, it is hoped they will be motivated to buy that brand again.5.5 Penetration PricingPenetration Pricing is a strategic move where a certain product of an organization is introduced to the market in an undeniably lower price value compared to the regular prices of this product in the market. One of the main goals of this strategy is to attract buyers or consumers to try this new product and likewise to promote it to the users in order to increase its demand. It believes in the principle that consumers or users will switch to a newer product in the market given that it has a lower price value. Thus, Penetration Pricing is commonly used as a strategic move by organizations who are aiming to join a new market, increase the volume of sales, and as well as earn a long term market share. However, this strategy is only feasible if it is sure that the demand for that certain product is highly elastic and consumers will be attracted to buy more products due to its undeniably lower price.6 Advice and Suggestions on how to apply Pricing TacticsPrice strategy is an essential element in the marketing process. Price your product too low and you won’t earn a profit. Conversely, if you p rice goods and services too high no one will purchase them. The key is to research all available pricing strategies and select the best one for your particular situation. With proper diligence, you can identify the appropriate pricing strategy to achieve the maximum profit potential for eachindividual product or service. Below are some suggestions and advice for setting price.6.1 Examination of all factorsExamine all factors that may impact the development of your marketing strategy. This requires an assessment of a variety of factors, including an analysis of the market, as well as an analysis of your bra nd’s positioning within the market. You should also identify your target market and record all of the collected information in writing for future reference.6.2 Determination of the appropriate marketing mixDetermine the appropriate marketing mix for your specific product or service. This consists of defining exactly what your product or service is, developing a distribution plan, and deciding how you intend to make your products and services known to the target market. For example, it is essential to determine whether you want your product to be perceived by consumers as a necessity or a luxury item. You should also determine whether your goal is to sell a product or service which will be used by a vast number of consumers, or you would prefer to sell to only a selected market. Each of these factors will have a significant impact on your final pricing strategy.6.3 Estimation of the demand curveDemand curve is defined as “the relationship between the price of the good and the amount or quantity the consumer is willing and able to purchase in a specified time period, given constant levels of the other determinants”, according to the UNO Cen ter for Economic Education. In other words, you must determine how likely the average customer within your target market is to purchase your specific product at a given price.6.4 Calculation of all related costsCalculate the costs associated with manufacturing and distributing your product. This includes the cost of labor and overhead, as well as both the fixed and variable costs associated with manufacturing your product.6.5 Evaluation of external factorsEvaluate external factors which may impact your ability to sell your goods or services. The PEST analysis, which examines political, economic, social and technological factors that impact your organization, is a useful tool for evaluating these factors. These may include such factors as comp etitors’ pricing strategies and various legal restrictions.6.6 Identification of your specific pricing objectiveIn other words, articulate a specific goal for your pricing strategy. For example, your goal may be to offer your products at either a premium or an economy price. Or, you may simply wish to offer better services at the same price as your competitors.6.7 Utilization of all the information that you have gatheredUse the information to develop an appropriate price strategy for your specific product or service. Of cause you will have to do some treatments on the information you have gathered, such as sorting, categorization, screening, elimination in order to fully utilize the information gathered. After careful treatment on the information, these information would help you to better understand your own position in the specific market and set the price according your own situation and market status.7 ConclusionThere are many outside and inside influences that affect profitability and organization’s price bottom line. Setting the right price is a crucial step toward achieving decent profits. Organizations that are in business are to make a profit, but figuring out what and how to price products may not come easily. However, careful investigations are always essential when pricing, Include customer price investigation, national policy and condition investigation, investigation of market economic condition, competition investigation, cost calculation, etc. In addition to the pricing tactics mentioned in this thesis, there are many other tactics, such as Loss leader, Odd value pricing is available inpractice. It is difficult to say which component of pricing is more important or effective than another. Just keep in mind, the right product price is the price that consumer is willing to pay, while providing a profit to the organization. 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