What Is a Price?

A price and pricing decisions are the crucial part of any marketing strategy. The decision what price to charge for a product is extremely complex and remains the most difficult to get right in the entire Marketing Mix.

Price is the amount of money paid by a customer to purchase a particular product – good or service, irrespective of its value.

The Differences Between Costs, Price and Value

How to start setting a price?

All businesses, both small firms, medium firms and large firms, will typically begin the pricing process by figuring out the cost of producing a product. And then, adding an expected profit margin to come up with the target price.

What to think about when setting a price?

Cost. How much did it cost to buy or make the product?
Competition. What price are other businesses charging?
Market. What are customers willing to pay for the product?

One business will not however use the same approach towards setting the price for all of its products.

Different pricing methods will be used to set final prices for different products in the product portfolio. It is because cost of production is never the same for all products, the market conditions for the different products could vary greatly and the level of competition constantly changes within the market.

When is the price of a product set right?

Business managers need to set the price that makes the product both competitive and also profitable. When the price is low, it is competitive but may not be profitable. And when the price is high, it is profitable, but may not be competitive.

So, how to get the price just right?

Objective 1: Good for the business. The price must cover all the costs of producing a product including Variable Costs (VC) and Fixed Costs (FC). In order to allocate different costs into products, either Full-Costing Technique or Contribution-Costing Technique can be used. Additionally, the price needs to have a profit margin built in to allow the business earn profit on the sale of the product. The target price should exceed the Average Cost (AC) of production to earn sufficient profit.

Objective 2: Good for the customer. The price must be acceptable to customers and reflect value for money for them in order to make any sales. The business needs to consider what added value it is able to offer to the customer, what the competition offers as well as the purchasing power of the target market.

The ideal price is one that achieves a balance between the many needs of different stakeholders that have to be satisfied.

Who sets the price?

In the free-market economy, prices are determined by the interaction of demand and supply.

Demand is the amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price. If the price decreases, demand will increase. And, if price increases, demand will decrease.
Supply also varies with the price, but in the other way. If the price increases, more producers will be willing to sell their products. If the price decreases, less producers will be willing to sell their products.

Additionally, the interactions between price makers and price takers in the marketplace have an impact on setting prices.

Price makers (price setters). This is the dominant firm with the highest market share (often a monopolist), which has high degree of power to set its own prices making other smaller firms in the market to follow.
Price takers. This is a firm in a competitive market which accepts the price given by other stronger firms in the market.

Overall, businesses ought to charge the market price.

When the price of a product is wrong

There is no one formula for arriving at the right price, but the consequences of choosing an incorrect price to sell at are high. Research has shown that poor pricing decisions have led to many products failing.

Here are two possible scenarios when pricing goes wrong.

Price is too high. Customers will not be willing to make a purchase when a product is overprices, no matter how good the product might be. Or, it could attract new competitors causing a decrease in market share as more suppliers are willing to produce the product with higher price.
Price is too low. Customers may not be willing to buy the product which can be perceived as of low quality. Price is often considered an indicator of value; however price is not the same as value! Or, setting too low a price could lead to high demand and a lack of stock, hence leaving many customers who could not get the product dissatisfied.

If for a long time the price is too high hindering sales or too low causing a loss, this situation threatens the performance, or even existence, of the entire business.

Price and corporate image

Price can seriously affect the image of a business and its products. In the modern world where customers have almost unlimited number of choices, the complete cohesive brand image is increasingly important. As many producers offer similar good value, it can help to persuade the customer to choose the product over competitors’ products.

Price and luxury goods. Producers of luxury brands set high prices for their prestige lifestyle products to create a certain image. They also establish the rest of the Marketing Mix to follow suit as price also provides marketing communication about the retail outlet in which the products are sold. Suppliers of luxuries will sell their products in iconic fashion outlets in major cities, or in expensive shopping malls. While luxury producers might benefit from price cuts in the short-term to boost sales, keeping prices at the low level in the long-term could lead to an undesirable image.
Price and Fast Moving Consumer Goods (FMCG). When purchasing daily products, customers expect good value for money. In marketing, good value means that all elements of the Marketing Mix are suitably combined and integrated together giving customers what they pay for. Customers wish to pay a fair price for acceptable quality. Hence, there is little benefit to be gained by adopting a low-price strategy in the world of fast-moving consumer goods. Customers not necessarily expect to pay low prices for necessities as low-priced products might have substandard quality, be risky to use or unhealthy.

Therefore, the price point provides customers with insights about the product far more detailed than what it will actually cost the consumer to buy it.

Price and quantity sold

The amount to be paid by the customer to the supplier when buying a product helps to decide whether to buy it and how many units? Price often plays the most important role in influencing customer demand for a product having direct impact on the volume of sales.

Low price and high sales. This mainly applies to products sold to mass markets. When the volume of sales is extremely large and the business is charging very low prices for its product making a tiny fraction of profit on each unit sold, it can still earn money overall.
Low price and low sales. Some people may not be willing to purchase a low-priced product knowing that quality will be substandard. Customers may worry that the product is made of hazardous materials or will put them in danger of accidents.
High price and high sales. Some customers only buy products if the price charged is very high. These products give them a certain status in the society, or show that they belong to a certain social class.
High price and low sales. Even if consumers think that one product is better than a similar product, they simply cannot afford the higher price for the better product. Or, they do not believe that higher price justifies product quality.

Price levels of products can easily influence purchasing behavior of customers that marketing managers need to be aware of. Therefore, market research should be used to test the impact of different prices on market demand. Hence, businesses must establish a clear understanding of the link between the price and the demand for their products through the concept of Price Elasticity of Demand (PED).

Price and quality

On the top of telling the customer how much money is necessary to buy the product, the price level also conveys additional information about positioning, corporate image and quality.

One product is a quality product when it has features that allow to satisfy the needs and expectations of customers. Product quality should be considered in regards to the whole experience of buying and using the product.

There usually is a trade-off between product quality and price. It can be assumed that products of high quality tend to have high price while products of low quality tend to have low price. Therefore, appropriate pricing is an important variable positioning the product on the market.

Obviously, if there is little difference in quality between similar products, customers will most likely choose to buy the lower-priced product.

In summary, the market for most goods and services is very competitive. Price is very important element in the Marketing Mix because customers base their buying decisions mainly on the price of a product. Therefore, setting the right price for a product is extremely important both to sell a product to the customer and make profit for the business. Customers’ buying decisions highly depend on price and price directly affects the revenue and profits of the firm.