Pricing decisions can have a variety of inputs, such as value-added considerations, legal price requirements, competitive positioning, and discounting.
List a few of the key considerations to pricing aside from simple expense-oriented break-even analyses
Pricing is an important decision, as it impacts both profitability and competitive positioning.
One particularly important pricing consideration are the legal requirements in some industries (price floors and ceilings). For example, rent-controlled housing will have price limitations an organization will have to adhere to.
Functional value, social value, monetary value, and psychological value should all be taken into consideration when setting prices.
Differentiation and competitive positioning relative to other industry incumbents is another important pricing consideration. Differentiation can often lead to higher margins (though often lower volume).
For perishable goods or items which may go out of fashion (technology, clothing, etc.), discounting is a useful way to ensure that the organization gets some capital back for producing it (even if it sells at a loss on a per unit basis).
Liable to perish, especially naturally subject to quick decomposition or decay.
The pricing decision is an important one, both for profitability and competitive positioning. Organizations must take into account supply, demand, competition, expenses, profit margins, differentiation, quality, and legal concerns. The simplest methods of determining price include concepts such as break-even points, fixed/variable cost analysis, and marginal analysis. However, there are other concerns that need to be investigated when determining price.
Looking at cost structures and determining break-even points is not always enough when it comes to effective pricing strategies. As a result, marketers should be familiar with the legalities of pricing (for certain commodities in particular), the value added to the consumer (willingness to pay), competitive positioning, and potential discounts.
For some products, governments will set firm price controls (i.e. price ceilings or price floors) to ensure ethical and/or accessible pricing for a given population. Just as the name implies, price floors and price ceilings will set minimum or maximum prices for some goods. This is particularly applicable to rent, real estate, banking, food and other core necessities. When operating in an industry with price ceilings or price floors, firms must adapt their pricing strategy to these legalities and ensure compliance.
In a perfectly practical and efficient market, the expenses would almost always lead to the appropriate price through competitive forces. However, we do not live in a world of perfect markets. As a result, there are a number of value-adds that consumers receive that are not easy or intuitive to measure from a strictly financial perspective. These include:
Functional Value: This is a typical example of demand, where the product is valued at how well it accomplishes a function (i.e. fulfills the need).
Monetary Value: This is another typical value example, where the cost of resources and production correlate cleanly with the price.
Social Value: The value a consumer receives can actually be social as well as economic. This is to say that some products provide intangible value to users. Fashion is a good example here, as some fashion items return margins that are enormous due to the social perception of a given fashion item (expensive bags, for example).
Psychological Value: Some items have value to an individual for personal reasons. A collector, for example, may pay far more than an item is worth due to a strong love for something. People who collect video game action figures, or deluxe editions, for example.
Another input to pricing is the basic premise of differentiation to achieve higher value. This is not so much an exception to the above mentioned value-added pricing, but more of a facet of this. Branded items, for example, are often quite similar to generic versions of the same item. However, these brands add intangible value to the product above and beyond the cost of producing it. Buying brand name goods may be differentiated based upon celebrity sponsors, premium perception, social value or a wide variety of other differentiated factors. These can enable organizations to differentiate for a price premium (i.e. they can charge more for having a strong brand/position).
There are also a number of reasons why an organization may offer discounts. Discounting is particularly useful when it comes to B2B transactions, in which a client might buy a few thousand of a given product and receive a wholesale price that is significantly lower than the price of buying each product individually. There are also situations in which a product may be sold at a price that is actually less than the cost of producing it. This is most often done when a perishable item will soon go bad anyway. In such a situation, selling at a loss is better than getting nothing at all (opportunity cost!).
All and all, pricing is a bit more complicated than simply understanding the expenses involve. Marketers must understand social value, legal considerations, branding, discounting, and the functional value of products and services in order to capture the full potential of a given item. Pricing can be a great opportunity to capture better margins than the competition, or could offer the ability to make a mistake and lose market share!