The Importance of Price and Pricing Decisions

Price is the one aspect of the marketing mix that is most easily changed. Setting a price does not require the investment involved with advertising or developing products or establishing distribution channels. Price changes are certainly more easily implemented than distribution and product changes. Consequently, the fastest and most effective way for a company to realize its maximum profit is to get its pricing right. Price also effects customer demand. Price elasticity of demand, or responsiveness of demand to changes in price, is more than 10 times higher than advertising elasticity. That is, a certain percentage change in price can lead to 10 to 20 time stronger effects on sales than the same percentage change in advertising expenditures. For these reasons pricing decisions are among the most important decisions that marketers regularly confront.

Price promotions or price reductions have become so common in some consumer product categories that sale prices represent the norm. Price reductions provide many benefits to consumers, manufacturers, wholesalers, and retailers.

The primary benefits of price promotion are the following:

• Stimulate retailer sales and store traffic.

• Enable manufactures to adjust to variations in supply and demand without changing list prices.

• Enable businesses to compete against brands with large advertising budgets.

• Reduce retailer’s risk in stocking new brands by encouraging consumer trial and clearing retail inventories of obsolete or unsold merchandise.

• Satisfy trade agreements between retailers and manufacturers.

• Stimulate demand for both promoted products and complementary (nonpromoted) products.

• Give consumers the satisfaction of being smart shoppers who are taking advantage of price specials.

Both the importance and difficulty of pricing decisions have increased in recent years. These changes have risen because of several environmental phenomena.

• Introduction of look-alike products increases sensitivity to small price differences.

• Internet access to price and competitive information has made price comparisons easier and has increased pressures on prices.

• Demand for services, which are labour-intensive, hard to price, and sensitive to inflation, has increased.

• Increased foreign competition has placed added pressure on firms’ pricing decisions.

• Changes within the legal environment and economic uncertainty have made pricing decisions more complex.

• Shifts in the relative power within distribution channels from manufacturers to retailers, who are more price-oriented, also has increased the importance of price decisions.

Comprehension questions:

1. What does a setting price require?

2. What does price affect?

3. What do price reductions provide?

4. What are the benefits of price promotions?

5. What are the changes in pricing decisions that have increased in recent years?

Competitive Pricing

Prices may be set in reaction to competition. As in penetration pricing, a firm may keep prices low to inhibit competition from entering. Or it may set prices close to those of lower-priced competitors to avoid losing sales. Price competition occurs most often when the competing brands are very similar, or when differences between brands are not apparent to prospective buyers.

ITT Sheraton’s simplified pricing system, modeled on the airlines’ pricing approach, has been criticized by competitors as “rate cutting”. The Sheraton pricing structure involves one room rate for business travelers, another for 14-day advance reservations, and a third for weekend rates. Sheraton also lowered its standard price. Not surprisingly, Hilton and Hyatt spokespeople warned that price competition would hurt the industry.

Price competition may result in price wars, with prices spiraling downward in succeeding rounds of price cuts. They may lead to such low prices that all competitors operate at a loss in the short run. Price wars are frequent in the airline and computer software industries. Recent price wars over software in Europe may reduce the sizable margines U.S. companies once obtained for their products, margines once justified by the costs of translation.

In nonprice competition, the firm attempts to develop buyer interest in benefits such as quality, specific product features, or service. For this to work, customers must view the distinguishing attributes as desirable. Finally, focusing on unserved target markets in which competition is minimal may allow a firm to charge higher prices. For example, Charles Schwab uses its technological communications advantages to offer low competitive prices for financial services.

Competitive strategies have been described as being arrayed on a continuum labeled the competitive strategy-positioning continuum. This continuum is anchored by “low-cost leadership” on one end and “differentiation” on the other. For example, one furniture store may emphasize low costs of overhead and operation, a “no frills” warehousing positioning. Alternatively, a competing store may emphasize a more luxurious atmosphere with extensive decorations that appeals to more sophisticated customers. This latter store is more likely to compete on attributes other than price, while the former retail outlet attempts to attract consumers largely by low prices.

Comprehension questions:

1. How can prices be set?

2. When does price competition occur?

3. What occurs in nonprice competition?

4. How have competitive strategies been described as?