How do consumers process and evaluate prices?
The way in which consumers process and evaluate prices depends on a number of factors. While processing prices, consumers take into account the following: previous buying experience; the information obtained from brochures, sales offers, advertisement, etc.; information received from informal communication (friends, colleagues); points of purchase and information posted on the Internet.
They evaluate prices by comparing it to the “fair prices,” last prices they bought the product for, upper or lower bound prices, and usual prices on the product when there is a discount. Clients also may consider higher prices to be an indicator of quality; this works best with products that are ego-sensitive. Also, interestingly, buyers often pay attention to how prices end; for instance, they would rather buy something which ends in 0 or 5, and would prefer $999 to $1000. It is also always important to know what segment of the market the client represents, whether they are wealthy or struggling (Kotler, Keller, Brady, Goodman, and Hansen 578-581).
How should a company set prices initially for products or services?
A company needs to set a price for a new product it has created. To do so, it is important to take a number of steps. First, there are aims the company must pursue: to survive, to get maximum profits and achieve the greatest market share, to become a leader in quality, etc. Second, it is necessary to determine the demand for the product, and the product’s price sensitivity and elasticity (which can be done via statistical analysis, surveys, and experiments with prices). Third, the company should estimate the costs required to manufacture the product, and changes in these costs that occur when the number of production changes.
Fourth, the business should analyze what its rivals offer to the clients, at what prices, how much they spend on producing their goods, and how they could react to the new product. Fifth, the firm needs to consider the methods of pricing (markup pricing, pricing based on the aimed ROI, pricing based on customers’ perceptions, etc.). And sixth, the company needs to estimate some additional factors (such as the company’s pricing policies, the expected benefits, and risks, the influence of price on other parties in the market, etc.) and set the final price for the product (Kotler, Keller, Koshy, and Jha 451-469).
How should a company adapt prices to meet varying circumstances and opportunities?
It is important to know that companies usually create pricing structures instead of a single price; this is required to meet the needs and specifics of different customers (Smith 159-162). There are a number of strategies of pricing; these include geographical pricing, promotional pricing, differentiated pricing, as well as discounts and allowances. Geographical pricing means that firms set prices depending on the place where the product is to be sold; customers from one region cannot always afford to buy at prices from a different region.
Promotional pricing (sales, low-interest financing, warranty) is used when an enterprise needs to improve the volume of sales, and temporarily offering lower prices or additional services is going to yield better results. Differentiated pricing means that firms adjust their prices in order to adapt to differences between locations, clients, etc. These forms of pricing include customer-segmented pricing, location pricing, time pricing, etc. Finally, different types of discounts are quantity discounts, season discounts, functional discounts, and so on.
When should a company initiate a price change?
A price change can be of two types: price cuts or price increases. Price cuts may be initiated due to a number of reasons. For instance, if a company has excess capacity, i.e., the demand for the product is lower than it is optimal for the firm to supply, and it cannot increase the sales via product improvement or sales. Another reason for price cuts may be the dropping market share due to severe competition.
\Prices also can be decreased in order to dominate the market. On the other hand, price increases may also be initiated in some situations. Sometimes, price increases can significantly increase profits. They also may be introduced in order to keep up with the increasing costs of production. Often, enterprises have to increase the prices because of the need to address the inflation (“Pricing Strategies” n. pag.). It is also very important to consider the reaction of both clients and rivals when initiating any price changes (Kotler and Armstrong 355).
How should a company respond to a competitor’s price challenge?
If competitors change prices, a company should consider a number of issues before reacting, such as the intent and reasons for the price change, its duration (temporary or permanent), the reaction of other firms, the influence on the market share, and the reaction of rivals to any responses of the company in question to the price change. Next, a number of questions should be answered. Has the competitor decreased prices? Will these new prices have an adverse influence on the company’s profits and market share?
Is it possible or reasonable to act? If the answer is “no” to any of these questions, the enterprise should preserve its current prices and continue to observe the behavior of rivals. Otherwise, there are four main possible responses: to increase the perceived quality of the product, to lower the price, to increase both the quality and the price, and to create a new low-price “fighting brand” in order to counteract the competitors. It is also possible to “sit tight” and change nothing, waiting for the following events (Armstrong et al. 328).
Armstrong, Gary, Philip Kotler, Michael Harker, and Ross Brennan. Marketing: An Introduction. Harlow, UK: Pearson Education Limited, 2009. Print.
Kotler, Philip, and Gary Armstrong. Principles of Marketing. 13th ed. 2010. London, UK: Pearson. Print.
Kotler, Philip, Kevin Lane Keller, Abraham Koshy, and Mithileswar Jha. Marketing Management: A South Asian Perspective. 14th ed. 2012. Harlow, UK: Pearson. Print.
Kotler, Philip, Kevin Lane Keller, Mairead Brady, Malcolm Goodman, and Torben Hansen. Marketing Management. Harlow, UK: Pearson Education Limited, 2009. Print.
Pricing Strategies.2006. Web.
Smith, Tim J. Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures. Mason, OH: Cengage Learning, 2012. Print.