One of the most complex but important issues that an entrepreneur must decide is the amount to charge for the products and services they offer. This means that they must have a pricing strategy. Unfortunately, pricing strategies are often ignored as part of the marketing mix but they can have a considerable impact on the profit margin (Kottler,2009). This means that pricing strategies should be given consideration just like the other strategies in the marketing mix. In order to gain a market share, Proctor & Gamble has been lowering its prices. However there are a lot of conflicting signals as to whether or not the consumers are willing to accept the prices that were there before the current recession. Proctor and Gamble is also selling its products in its own stores and also to distributors and retailers that compete with the Proctor and Gamble stores. The aim of this paper is to determine that pricing strategies that P&G should use. The paper will first look at the different pricing strategies that the firms use then look at different factors that are used to determine pricing strategies before looking at the interrelationship between pricing strategies with products, promotional strategies and networks. The paper will conclude by recommending a pricing strategy that Proctor and Gamble should use to gain a competitive advantage in the market.
Different Pricing Strategies that Firms can Use
There are different pricing strategies that firms can use. The first one is competitive pricing where a firm uses the prices of the competitor as a benchmark for pricing. The price can be slightly higher or lower than the competitor’s price but this is much determined by the positioning strategies (Kent 1999). The second pricing strategy is called cost mark up plus pricing which is actually the opposite of competitive pricing. In this strategy, firms do not look at the market; they look at their cost structure. The firm must decide on the profit it wants to make and add it to the operations and production cost to determine the selling price. However, the firms must be realistic because the prices must be in line with what the customers are willing to pay for the product because if the price goes higher than what the consumers are wiling to pay, then it is highly unlikely that the products and services will sell. The third strategy is called the loss leader. This strategy involves setting the price of a product or a service lowly in order to attract customers who will end up buying high profit items alongside the lowly priced one. This strategy is a short term promotion technique and is effective when one product can lead to the purchase of several more. Close out is another pricing strategy and is necessary when firms have excess inventory (Kottler,2009). In this strategy, the inventory is sold at steep discount because the firm does not want to store or discard it. The goal is to minimize loss and not to make profit. The other price strategy is called membership or trade discounting where firms create market segments. The firms attract profitable customers by setting special prices for them because even when the price is lowered for them, they will bring in more profits because they either buy in bulk or buy regularly. Bundling and quantity discounts are another important pricing strategy which is more of a reward scheme meant to reward customers who make voluminous purchases. Finally, there is a strategy called versioning which is popular with services or products that have a technical dimension. The firm sells the product in two or three configurations and this method is also called price differentiation where value added products are sold at premium prices to customers who are willing to pay more for products with an extra value(Monroe,2003). Some firms create trial versions of the products which are offered free then the upgraded products are sold at a higher price.
Factors that Firms must Consider when they are Setting their Pricing Strategies
Which are the factors that firms must consider when they are setting their pricing strategies? The first factor is positioning. Pricing has to be consistent with positioning. For example, a discount store must keep their prices as low as possible while a product being positioned as an exclusive luxury product may be hurt by low prices. The second factor is the demand curve. One question that firms should ask themselves is whether a certain pricing strategy being used will affect the demand for the products on offer. The prices must be in tandem with the demand and the theory of demand and supply. For example, the price should be low when the supply is high and the demand is low and vice versa (Monroe,2003). The other factor that needs to be considered is the cost involved in the development of the products and the services. Firms must calculate the fixed and the variable costs the gross margin must cover the fixed overhead for a firm to make profits. Environmental factors must also be considered while determining pricing strategies. These environmental factors include legal constraints, government policies, social factors, economic factors and even political factors as outlined in the PESTEL analysis.
There is a relationship between costs and prices of products. To start with, the price of a product must be higher that the combination of the fixed and variable costs of the product for a firm to make profit. However, the relationship between cost and prices is affected by the customer’s perceived quality of the products. The main question that arises out of this relationship is whether pricing is reflective of value the customers and willing to pay or the cost of production. Cost is one primary aspect that affects pricing. There are many costs that are involved in the development of a product or a service. These costs include cost of production, variable costs, and operation costs. Secondly, returns on investment also influence pricing because the shareholders expect a profit on their investment. However, the most important thing that prices should reflect is the value the consumers are willing to pay. There is a price that customers expect of a certain product and they may not be willing to pay more for that product meaning that pricing a product or a service beyond the value the customer is expecting might affect its marketability. However, what if what the customers are willing to pay does not returns on investment or does not even cater for the various costs involved in making the product? A business will be running at a loss and in a short period of time, it might be unable to provide the products or services to the consumers. This means that a price cannot be reflective of a single factor. It must balance the two factors because if a price is way above what the customers are willing to pay, then the product or service will not sell effectively and if the price is below the cost of production or expected returns on investment, then a business runs a risk of closing down.
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Relationship between pricing Strategies and Other Variables
Finally, firms pricing strategy is related to the nature of the product, distribution and promotion strategies. To start with the nature of the product determines the price. If a high quality product is being offered at an extremely low price, it might fail to sell because it might raise suspicions. On the other hand, a low quality product selling at a high price will not sell because price must be reflective of the quality of the product. Pricing strategies also have a relationship with product distribution (Kent,1999). Distribution costs are also factored when prices are being set. Firms must set prices that factor the profit the different members of the supply chain will get. Promotion strategies and pricing strategies go in hand. The success of the promotion strategies that firms used is determined by the pricing strategies because if the prices set are way too high for the target customers, the promotional strategies might hit a snag
The pricing method I would recommend for Proctor and Gamble is the perceived value pricing because this method ensures that the price of a product is directly proportional to the value it provides to the customers. If the perceived value of a product or the service is high, then the price is expected to be high and vice versa. This method is good because it also helps the customers to identify the difference between the normal products and the differentiated premium products which have added value and have higher price so that those who can afford the premium products can enjoy them and those who cannot afford can stick to the normal products.