In pricing strategies and policies, price is one of the most critical variables in the marketing mix, as it directly impacts a company’s revenue and profitability. Making the right pricing decisions is fundamental to market success.

What Is Price?

Traditionally, price is narrowly defined as the amount of money a buyer gives up for a product, or the amount of money a seller receives for a product.

However, a broader definition of price encompasses more than just the simple monetary cost. This definition includes all the efforts a consumer makes to obtain a product, encompassing:

• Physical efforts: Such as travelling or searching for information.
• Psychological efforts: Such as perceived risk.
• Related expenses: A clear example is a night at the opera, where the price isn’t just the ticket. It also includes travel, parking, time invested (opportunity cost), and the need to arrive on time.

Ways to Modify Price

Companies can modify their prices in various ways to adapt to market needs or their objectives:

• Varying the amount of money requested.
• Modifying the quantity of product offered.
• Offering discounts or gifts.
• Changing the time and place of ownership transfer.
• Altering the place, time, or method of payment.
• Varying the quality of the product.

Pricing Objectives

A company’s different strategic objectives drive pricing:

• For new products:
• Selecting the market.
• Achieving rapid and substantial market penetration.
• Focused on profit and profitability:
• Maximising profit.
• Achieving a specific rate of return.
• Concentrate on sales volume, revenue, and market share.
• Focused on competition:
• Maintaining leadership.
• Counteracting competitors’ moves.
• Avoiding price competition.
• Concentrate on brand positioning and image.

Pricing Methods

Price determination can be based on three main factors: costs, demand, and competition.

Cost-Based Pricing

This method is essential for ensuring a company’s economic viability and is structured at different price levels:

• Limit Price: This is the unit variable cost (c). Below this price, the company doesn’t even cover its direct production costs.
• Technical Price: This is the unit total cost, which includes the unit variable cost plus fixed costs divided by the level of activity (c+FC/Q). This price covers all production costs.
• Target Price: This adds a desired profit to the technical price (technical price + Profit/Level of activity). This price aims to achieve a specific return.

Demand-Based Pricing

Demand is a fundamental determinant of price, influenced by its price elasticity. Key factors are:

• Product originality and degree of differentiation.
• Customers’ awareness of substitute products.
• Ability to compare products in terms of quality: if it’s difficult to assess, the customer is less price-sensitive.
• The relative importance of the expenditure for the consumer.
• The effect of the perceived price-quality relationship.
• The acceptable price range for the market.

Competition-Based Pricing 

A company’s pricing strategy must often consider the actions of its competitors:

• Setting the price at the current market level.
• Matching the level set by the industry leader.
• Setting the price based on the desired competitive positioning.
• In the case of tenders, the higher the price offered, the greater the potential profit if the contract is won, but the lower the probability of getting it.

Pricing Strategies for Launching New Products

When a new product is launched, there are two main strategies for setting its price:

• Skimming Strategy: This involves setting a high initial price to “skim” the market—that is, to capture segments of customers who are less price-sensitive and who value novelty.
• Penetration Strategy: This involves setting a low initial price to rapidly penetrate the market, gain market share, and discourage competition.

International Pricing

Expanding into international markets adds complexity to pricing decisions. Crucial questions arise, such as who should set prices (headquarters or local managers) and whether pricing objectives should be the same or different for each country/market.

• The company faces the standardisation/adaptation dilemma:
• Factors favouring a price standardisation strategy:
• Maintaining the consistency of the marketing mix globally.
• Protecting the global brand image.
• Avoiding diverted trade (grey market).
• Limits to standardisation: Despite the benefits, price standardisation isn’t always possible or advisable due to:
• The purchasing power of consumers in each country.
• Local consumption habits.
• The market and competitor price structure in each region.
• Country-specific regulations.