Product pricing is more an Economics decision looking for the answers of the following questions:
- What should be the price of product to the customer?
- Whether it should be kept low or high?
- What role product maturity plays in the pricing?
- Why some products are able to command premium in the pricing than rest others?
Demand and supply factors do come into play while determining the pricing. But, the important question to enquire is
“Whether organisation has any role in product pricing or the same is decided by market forces?”
Why pricing decision important?
- Pricing determines the profitability of the organisation;
- The better the price → the better profit margins → better cash inflows → business expansion → more turnover;
- Pricing decision positions the product in market → different strategy for different positioning
- Premium product → Higher price → product to differentiate from others;
- Economy product range → competitive price → volume management with economies of scale → cost of production to be cheap to remain profitable.
Factors in pricing decision
Product pricing is dependent on large number of factors. Some of them are:
- Maturity of market
- Whether the market has informed customers who have all the available information through information channels (like Internet, TV, phones, radios, newspaper, etc.)?
- The more informed customer; the more market-determined pricing.
- Presence of competitors and their profile
- Whether large competitors are available?
- Whether these competitors are local or international brands?
- More competitors; the more market-determined pricing.
- Product maturity cycle
- The more the product at the maturity cycle → less control on pricing due to availability of large competitive products.
- Niche area
- Whether the product of the organisation caters to niche area which nobody does?
- Whether the product has unique features?
- The more niche area product; the more premium in pricing.
- Access to market
- Whether access to market limited due to difficult access or location at remote place?
- Difficult access → less number of competitors → less market forces.
- Proximity to industrial towns
- Movement of families alongwith manpower to industrial towns bring more business;
- Families have larger needs than manpower working in an organisation;
- If industrial town has presence of overseas and multinational organisations → more premium to the product.
- Product positioning strategy
- Whether premium product for a certain section of society? → premium pricing of the product;
- Whether mass product with affordable price tag? → volume turnover with thin margin.
- Brand ambassadors
- Association of product with Amitabh Bachhan, Amir Khan, Shah Rukh Khan and others create brand and add premium to pricing.
- Range (variants) of a product
- Large range of a product catering different customers, their tastes, etc. → large market share → more pricing premium (e.g. Samsung launched large range of mobiles in Indian market).
- Customer as a king
- Organisation giving royal treatment to the customers (“No questions asked”; “100% refund”, etc.) → better pricing premium
Impact of Technology in Product Pricing
- Internet & mobile changed all the models of product pricing;
- More availability of
- corporate information & its business practices;
- customers’ feedback regarding organisation’s products;
- comparative analysis of organisation’s products vis-à-vis others;
- 360 degree view of the product features.
- World becoming increasingly flat → Customer can come from anywhere in the world and purchase the product;
- Customer able to create his / her product and pricing accordingly (e.g. DELL selling through online stores only);
- More online sales through internet stores and mobiles;
Cartels / Monopoly vs. Competition Law
- Cartels are group of organisation working towards common market strategy with reserve pricing (i.e. price not going below a certain range), no competition within cartels, elimination of competition with rest others, etc.;
- Monopoly is presence of a single player determining the product pricing, eliminating the competition to maintain monopolistic presence;
- Competition Laws in various countries to protect the consumers, retailers or manufacturers from abuses of dominant pricing à various restrictions while deciding the product price;
- Worth reading research report of competition law in India with comparative analysis with US and UK