What is pricing?

Pricing is about working out how much to charge customers for a product or service.

In many cases, price can act as an influence on buyer choice. When setting price, you need to consider your overheads, competitors’ pricing strategies and the customer’s perception of value for money.

A well chosen price will help to achieve the financial goals of the organisation, reflect the customer’s view of value for money and support the product’s positioning in the market.

What do consumers think about price?

It’s important to research consumers’ opinions about pricing because it can tell you how much they value the product or service, as well as what they are willing to pay.

A purchase decision is usually based on what the consumer believes the price should be – not the price the marketer places on the product. Here are three factors that influence a consumer’s perception of price:

1. Reference prices: Many consumers compare the price of a product or service to a ‘reference price’. For example, next time you’re in a book store, have a look at the price tag on the back of a novel. You might notice a recommended retail price, which is usually higher than the price you are offered in store. This price acts as a reference point for consumers and influences their perception of value for money.
2. Price as an indicator of quality: In many cases, price is viewed by consumers as a reflection on the quality of the product or service. The price/quality relationship is particularly relevant in situations where the consumer is unfamiliar with the product or service. For example a customer might believe that a $200 pair of jeans is better quality than a $50 pair of jeans, even though they are made from the same fabric.
3. Price cues: Marketers use ‘price cues’ to convey the notion of a discount or a bargain. Price cues include sale signs and pricing which ends in a “9”;. For example the MP3 player which costs $299 instead of $300.

How to set price

The key to setting price, is to do your research. Here are some questions to get you started:

• What are your price objectives? Are you looking to break-even, maximise profits or increase market share?
• What are your competitors’ charging? Do they offer discounts, product bundling or other buyer incentives?
• How does price affect the level of demand? If the product is priced at a premium does the demand increase or decrease?
• How sensitive are customers to a change in price? How would a price cut or a price increase impact sales?
• Will the price cover the costs of production, promotion and distribution?
• What pricing method will you use? Will you mark-up products, determine the return investment or price the product according to the customer’s perceived value?
• How will customers and competitors react to a change in price?

The impact of the web on price

The internet is changing rules of pricing by allowing consumers to get instant price comparisons from thousands of vendors. It also provides consumers with easy access to product and company information, allows them to negotiate prices in online auctions and makes the search for products more efficient.

The last word on price

Price is the most important ingredient in the marketing mix (next to the product, of course). From the marketer’s point of view, an effective price is one that is close to the maximum that customers are willing to pay. What’s the right price worth to you?

About the Author

Renee Hancock is a marketing and communications specialist, whose experience spans finance, government, education, not-for-profit, telecommunications and law. She has consulted for two of Australia’s most prestigious public relations agencies and now works in-house for a leading financial services organisation.

This article was originally published in Australian Anthill Magazine, issue #18 (June/July 2006).