Pricing

Pricing - setting the price of a product or service. There are two main pricing systems: market pricing based on the interaction of supply and demand and centralized state pricing based on pricing by government agencies. In a market economy, the process of choosing the final price is made depending on the cost of production, prices of competitors, the ratio of supply and demand and other factors.

Price and pricing are the most important concepts of a market economy. The most common words, the price we call the amount of money that the buyer gives to the market in exchange for the goods sold by the seller. Thus, the price - the main characteristic of the product from the point of view of a market economy.

There is no universally accepted definition of such a complex economic category as price. One of the most successful figurative definitions can be called the following: the price is determined by the cost of the manufacturer and the art of the seller. The price is intended to reflect the interests of all market participants: the manufacturer must refund the invested funds and make a profit; the buyer must justify the cost of the purchased goods, having in turn benefited from its use.

Pricing is one of the key factors of a market economy and the most difficult part of marketing work. The commercial success of any manufacturer of goods or services is largely determined by the choice of pricing strategy and tactics. The difficulty lies in the fact that the price at a particular point in time may depend on many factors - not only economic, but also political, social, and psychological.

The optimal price for a product or service:

• provides profitability of the enterprise;
• interesting to the buyer;
• allows you to maintain the presence of goods on the market and its sales at a minimum level.

Price Management Goals

There are several main goals that a manufacturer of goods or services can pursue when setting prices:

• Preserving an enterprise - such a task is forced to be solved by the producer in a very high competition market, or in the case when consumer requests are subject to sharp fluctuations of unexplained nature.
• The maximum current income , that is, an increase in sales and gross revenue.
• The maximum current profit , that is, the extraction of the greatest profit in the conditions of the balance of supply and demand determined by the market at the current time.
• Winning the market - the manufacturer seeks to maximize sales, neglecting short-term profitability, with a goal in the future to make up profits by reducing the share of fixed costs in the price of goods.
• Achieving a leading position - the manufacturer is ready to maintain a fairly high price for the goods, which allows to cover the costs of innovation and product development in order to ensure the reputation of a leader in quality.

Types of prices in world commodity markets

In the practice of economic entities, various types of prices for goods are applied:

• Retail price - is used when selling goods to final individual consumers at retailers.
• The wholesale price is determined, as a rule, by a supply contract. Depending on the possibility of revising the price during the execution of the contract, the wholesale price can be determined as follows:
  • Solid price (stable price, fixed price, guaranteed price) - is set upon signing the contract and is not subject to revision during the entire delivery period;
  • Mobile price - varies depending on fluctuations in the price of goods on the market; in the conditions of price revision (called the price clause ), the official source of statistical information on the average market price that will be used is indicated. Such a price is usually set in the case of a long-term contract for the supply of raw materials, agricultural products, and heavy industry products;
  • The sliding price is adjusted depending on possible changes in the cost of goods. Such a price can be set in the case when products of a long production time are purposefully created within the framework of this contract. At the same time, the parties not only establish the initial price, but also determine its structure in the contract, as well as the method of adjusting the price for the case of changes in the cost of materials, the level of wages, changes in taxation conditions and other factors affecting the costs of the manufacturer.
• Reference price - the price of the goods published by the manufacturer in catalogs, price lists, periodicals. This price is the basis for setting the contract price with a specific buyer; it can be nominal (that is, a specific marketing service based on its own calculations) or based on the latest sales of a similar product.
• Auction price - the price of the goods, determined by the auction. This price is the most “fair” in the sense that it is determined solely by the real balance of supply and demand, which was formed on the date of the sale of goods.

Factors affecting pricing

The price of a product in a certain market is not a constant value even within a small period. Prices are subject to change and fluctuations depending on a number of factors, ranging from political and macroeconomic events to fashion and weather. Some of these factors may be predicted, while others are probabilistic or unpredictable. In this regard, when pricing it is important to understand which factors influence the determination of prices, the extent to which the manufacturer can use the positive and level the influence of negative factors.

Internal factors affecting the formation of prices by the manufacturer:

• the goal pursued by the manufacturer
• implementation strategy for a certain group of goods (product promotion methods),
• financial capabilities of the enterprise,
• possibility and ability of timely and accurate point-by-point assessment of production costs,
• organization of pricing, the possibility of operational and elastic price regulation,
• related services provided by the manufacturer to the end user (maintenance, warranty repair).

External factors to consider when pricing:

• macroeconomic - the phase of the economic cycle, the general state of aggregate effective demand, the value of inflation;
• microeconomic - the value of the costs of production and circulation, taxation conditions;
• the level of demand and supply of goods on the market, as well as similar in quality of similar (interchangeable) goods;
• consumer qualities of the product - utility, efficiency, reliability, design, economy, prestige;
• dependence of demand on specific conditions - seasonality of demand, availability of repair and maintenance points, the size of the operating costs of the consumer;
• political, for example, government regulation of the circulation of certain types of goods and pricing on them.

Pricing Strategies

Pricing strategy formation involves a number of stages:

• determination of the optimal value of production costs in the conditions of the current price level in the market;
• establishing the usefulness of the product offered to the market and comparing its consumer properties with the asking price;
• calculation of the volume of production and market share, ensuring optimal achievement of the set managerial goal;
• competition analysis: forecast of competitor response and its impact on price measures.

The following directions of pricing strategies are distinguished:

• The penetration strategy is to set the price of the product notably lower than the level perceived by most consumers as corresponding to the economic value of the product. This strategy allows expanding the circle of consumers and attracting a large number of customers to the brand. At the same time, the implementation of the penetration strategy may adversely affect the image of the product and reduce its prestige; in addition, it can bring effect only if competitors cannot respond by adequately reducing the price of such a product.
• The skimming strategy is inverse to the penetration strategy and is an overpricing setting to cut off most buyers. It makes sense in the event that the increase in profits due to the high price will be able to level the losses caused by the decline in sales.
• Neutral strategy presupposes maintaining the occupied market share and the achieved profit level. In practice, it is used when the implementation of a skimming strategy is impossible due to the consumer's sensitivity to the price level; At the same time, an attempt to use the penetration strategy will be met with a harsh reaction of competitors.
• The differentiated pricing strategy is to use a wide range of various discounts and preferential prices for various buyers in order to stimulate sales of certain types of products, attract certain groups of customers, maintain the buyer’s “fidelity” to the brand or seller, leveling the seasonality of sales.
• The prestigious product strategy provides for improving the quality of the product relative to similar samples of competitors with a simultaneous price increase. At the same time, the price should grow in proportion larger than the costs due to the increase in quality, which gives an increase in profits.
• The market leader strategy involves setting and adjusting prices in accordance with the actions of a leading enterprise in the industry.
• Investment strategy does not focus on the current state of the market. The price of a product (usually technologically complex, with a long production time) is set on the basis of cost using the established rate of return for the enterprise.

In this case, it is possible to apply different pricing strategies when selling the same product in different markets (for example, in the domestic and export markets).

Pricing Techniques

With the most general approach, pricing methods can be divided into three groups - cost-oriented, demand-driven, and competitor-oriented.

Cost-oriented methods are good because there is no need to collect information about the state of the market and the magnitude of the demand; all the data necessary for pricing to the manufacturer is represented by its accounting department. The simplest option involves determining the cost of goods with the accrual of the established rate of return. This method is used mainly in cases where products are intended for export; when the main consumer of products is the state; or when products are sold through participation in tenders. If such a product is sold on the open domestic market, then the estimated price is compared with the current market price. According to the results of such a comparison, a decision is made on the advisability of producing a certain type of product.

A modification of the method, taking into account the dependence of production costs on the volume of production, is the method of analysis of the control point. In this case, in the conditions of a known market price for a product, the minimum allowable volume of output is determined, allowing to reach zero profit. If the manufacturer has the technological ability to produce a greater number of products, then a decision is made to start production; otherwise, the manufacturer refuses to release.

Demand-oriented methods (consumer assessment methods) are based on knowledge of need and predictive estimates of consumer perception of goods. In this case, it is considered that the buyer determines for himself the value of the offered goods and relates it to the asking price. At the same time come to the fore advertising campaigns, marketing strategies for product promotion, the formation of its image. In the interests of the manufacturer to ensure product differentiation according to technical and consumer qualities, design, targeting; and, accordingly, high price elasticity.

Parametric pricing methods are also widely used (the method of specific indicators, the method of structural analogy). They are used when the price of actually sold products with a certain set of consumer properties is known; at the same time, with general similarity, the new products differ from the previous ones by any parameters. In this case, the price of a new product can be calculated on the basis of the previous price by applying correction factors that take into account the “improvement” of a new product relative to the old one (for example, an increase in the strength of the yarn; or an increase in the net volume of the refrigerator) . It should be borne in mind that, in general, the percentage of price increase should lag somewhat behind the percentage of increase in quality, otherwise the competitiveness of products will be lost.

Competitor-oriented methods allow you to set prices based on the current prices in the market. This takes into account the conditions of competition, the ratio of the quality of a competing product and its value. Depending on the chosen marketing strategy, the price is set slightly higher or slightly lower than that of competitors.

Pricing control and analysis

For each trading company control and analysis of pricing is very important. Why?

• Without analysis, a manufacturer or a trading company will not be able to sell (offer) a competitive price in the consumer market, because you need to know the main factors affecting pricing: who makes this product or its analogues, what quality the product is, what is the cost price of the product, logistics features, number of organizations selling this product in your area.
• A trading organization will not be able to purchase goods at a low price, as thousands of organizations can sell this product because of what the price range may be large.
• Control and analysis (marketing research) of pricing is a very complex and laborious business process that requires large labor and budget from enterprises.

The scheme of control and analysis of pricing in enterprises

You can control the pricing process in commercial, non-profit, state-owned enterprises. Including employees themselves, who directly commit transactions for the purchase, sale of goods and services for the needs of organizations. These are hired personnel who may be part of the company's management team (directors, top managers, supervisors, deputies, etc.), and lower-level specialists (sales managers, purchasing managers, etc.).

An example of pricing in enterprises

The organization (the owner of the business) instructed the supply department (supply manager) to purchase a wholesale batch of water heating tanks in the amount of one hundred pieces, for further retail sales of these tanks. The supply manager is challenged. Find and buy this equipment at the lowest price, and the sales manager should sell at the highest price, thereby making the organization (business owner) a profit. But, as a business owner will be able to check at the lowest price the product was purchased or not. Statistics show that 80% of Russian enterprises have kickback schemes. The price of water tanks at the dealer with a maximum discount of 35% for a volume of 100 pieces is 9,750 rubles per unit, the retail price of such a tank in the city is 15,000 rubles. The purchasing manager buys 10,000 rubles each, the difference of 250 rubles goes into the pocket to the purchasing manager. Then the equipment goes to the warehouse of the organization (business owner). Where already the sales department (sales manager) is instructed to sell these tanks with a wrap of 40%, the sale price of the tank was 15,000 rubles, while the sales manager was announced that he could make a discount of up to 10% on these tanks at his discretion. It turns out that the sales manager has the opportunity to play on the difference in discounts. Which again allows the sales manager to put the difference in his pocket.

Below is a pricing control scheme and its subordinates.

The pricing control scheme and the fight against kickbacks on the business business portal

This diagram shows the whole process of control and interaction between organizations that sell and buy on the trade business portal. It is anonymous requests for demand, without specifying the contact details of companies that promote healthy competition.

Такая схема работы выгодна обеим сторонам, у продавцов отпадает надобность в холодном прозвоне и поиске клиентов, а у покупателей в поиске лучшей цены, что делает эту схему привлекательной в разрезе сегодняшнего дня. Когда цена на один и тот же товар может сильно колебаться из-за 1000 торгующих организаций одним и тем же продуктом.

Хозяин бизнеса (контролирующий орган) — имеет полный доступ к архиву данных, он в любой момент может проверить работу своих сотрудников и самостоятельно провести анализ ценообразования на закупаемый товар либо услугу, сравнив документооборот своей компании с ценами, предлагаемыми на рынке товаров и услуг.

Покупающая сторона (менеджер по снабжению) оставив такую заявку, будет дальше заниматься своими насущными делами. Его не будут тревожить лишними звонками из других компаний, предлагать (навязывать) купить у них товар. Ему просто через какое-то время, нужно проверить ответы, выбрать самый подходящий по всем условиям и созвониться с предлагающей стороной.

Предлагающая сторона (менеджер по продажам) не может знать, какой компании именно он отвечает (предлагает) и сколько конкурирующих компаний ответило помимо него. Заведомо зная это, менеджер постарается дать конкурентоспособную цену, что приводит к снижению цены, а не к её повышению.

see also

• Ценообразование на НИОКР
• Ценообразование в строительстве
• Эластичность спроса
• Теория 4P
• Коллективная скупка
• Price
• Психологическое ценообразование
• Pay what you want