P R I C I N G
In the market economy the business success of any company or
entrepreneur mostly depends on the correctly chosen strategy and tactics
of pricing on goods and services. Pricing is a rather difficult process
because prices mostly depend on the situation in the market. The range
of political, economic, psychological and social factors has a great
influence on the price level. Today your price can be determined by the
costs factor, and tomorrow its level will depend on the customer’s
behavior.
However, nowadays the most part of entrepreneurs of our country has no
necessary theoretical and practical knowledge of the complicated
mechanism of goods and services pricing. As a result, establishing
prices they often make serious mistakes that immediately reflects on the
financial results, in some cases leads to suffering losses and sometimes
even to the bankruptcy of a business (company).
To avoid this situation any economist and any entrepreneur must acquire
the theory and practice of pricing.
All commercial and nonprofit organizations face the problem of
determining prices for their goods and services. In the market economy
pricing is a very difficult process which is influenced by plenty of
different factors and based not only on the marketing recommendations.
But nevertheless, the right choice of price strategy, approaches to the
pricing for new and still manufactured goods and services in order to
increase volumes of realization and commodity circulation, to enlarge
production and firm the company’s positions in the market is one of the
marketing functions.
Prices and the price policy are ones of the major components of the
marketing activity, which importance is permanently rising in our days.
Prices are in close dependence on other variables of the marketing and
other firm’s activities. Final commercial results mostly depends on
prices and it’s important to mention that in the long run correct or
fault price policy brings positive or negative results of firm’s
activity.
The essence of the correctly chosen price policy in the marketing is to
fix and vary prices in dependence on a situation in the market in order
to win a certain market share, provide the planed profits and solve
other strategic and operative tasks. Working out the general price
policy all decisions are gathered into an integrated system.
Stating a single price for all buyers is a comparatively new idea. It
has been formed historically – a price was a result of the deal between
a buyer and a seller. Usually sellers asked for a price higher than they
counted to get first. In their turn buyers asked for a price lower than
they were ready to pay. While dealing with each other they usually came
to the price that was mutually acceptable to everyone. Common prices
were widely admitted only to the end of 19 century with the appearance
of large retail enterprises, which proclaimed “the strict policy of
common prices” as they offered a huge variety of goods and employed a
great number of employees.
Historically prices were the basic factors that determined a customer’s
choice. This is still true for the third-world countries among the
population groups living below the normal living standards.
Nevertheless, for the last tens of years price factors such as sales
stimulation, distribution of goods and services for the customers have
obtained a certain influence on the consumer’s choice.
The way firms approach the pricing problems may vary. In small firms
prices are usually determined by the higher leadership. In large
companies department supervisors and assortment supervisors deal with
the pricing problems. But still at this level the higher leadership
determines the general targets of the price policy. The higher
leadership also confirms prices offered by managers of the lower
supervision. In space, railways, gas and oil industries companies often
organize special pricing departments, which determine prices or help the
others do it. Such employees as sales department managers, production
supervisors, finance managers and accountants are those who also
influence the price policy.
First of all a firm must determine what purposes it intends to reach
with the help of the concrete goods. If the choice of a target sector of
the market is well considered the approach to forming the marketing
complex including pricing problems is quite evident. The pricing
strategy is generally determined by decisions that were made concerning
a certain position in the market. At the same time a firm can chase
other targets. The clearer a firm’s idea of its target the easier to
determine a price. There are plenty of examples in practice: providing
survival of the firm, maximizing current profits, winning leading
positions in the market reaching the high quality of commodities.
Providing company’s survival becomes the general purpose under the
circumstances of hard competition and when there are too many producers
in the market. It’s also true in case of rapid change of the customers’
needs. To provide the work of enterprises and sales of their goods firms
have to state lower prices in hope to get a favorable customer’s respond
in return. Survival is more important than profits. While the prices
reduced cover the production costs firms that get into a difficult
situation can continue their commercial activity for some time.
Plenty of the firms aspire to maximize their current profits. They
estimate customers’ demand and costs taking into account different
levels of prices and then they chose the price that will provide the
maximization of future profits and cash and also provide maximum of
costs compensation. In all these cases current finance indicators
(indexes) are more important for a firm than the long-run ones.
Other firms want to be leaders in the market share indicators in hope
that a company getting the biggest market share will have the lowest
level of costs and the highest profits in the long run. Trying to reach
the leadership in the market share they undertake the maximum possible
decrease in prices. A variant of this purpose is to rapidly get the
concrete increase of the market share.
A firm can also make its goods the most qualitative among all the rest
offered in the market. Usually it demands to determine a higher price to
cover the costs for reaching high quality and conducting expensive
surveys.
To determine a price taking into account the level of current prices a
firm usually leans on its competitors’ prices and pays less attention to
its own indexes of costs and demand. Under the circumstances of
oligopoly activity all the firms usually ask for the same price. The
smaller firms “follow the leader” changing their prices when the leader
changers them, not concerning the fluctuations of the demand for their
goods. Some firms can take off a small extra charge as a premium or
grant a small discount keeping the difference in the permanent price.
Such method of pricing is quite popular.
The seller must take into account not only economic but also
psychological factors of the price. Many consumers suppose that the
price must reflect the quality of merchandises. Some firms manage to
increase the sales by raising prices for their goods and such goods will
be considered more prestigious. Such method of pricing based on the
goods prestige is also quite effective, especially concerning, for
instance, perfume or expensive cars that can cost ten times cheaper but
customers pay ten times higher considering that the price assumes
something special.
There exists one else, unofficial law of pricing, which is very popular
practically among all the sellers. Price should be expressed in a odd
figure. For example instead of $200 they put $199. And then for the
plenty of consumers this merchandise will cost $100 and plus but not
just $200.
The chosen price must be checked whether it corresponds to the existing
price policy. Many firms work out purposes concerning their favorable
price image granting discounts and taking relative measures in respond
to the price activity of their competitors.
In recent several years plenty of the firms have to higher their prices.
Doing so they understand that increase of prices will result in the
displeasure of their customers, distributors and own sales personnel.
Nevertheless, the successful increase of prices can considerably enlarge
the volumes of profits.
One of the main condition affecting the increase in prices is the
constant worldwide inflation caused by highering level of costs. The
increase of costs not corresponding to the production growth leads to
the decrease of the profits rate and makes the firms permanently higher
prices. Some times the prices growth crosses the growth of costs in the
presentiment of further inflation or introduction of the state control
over prices. Firms are not sure to give their customers any long-run
liabilities concerning prices, scaring that the inflation caused by
costs growth will damage their profit rate. Overcoming inflation firms
can increase their prices in several ways.
Another circumstance leading to the price increase is the availability
of extra demand (it’s especially typical for our country). When a firm
is not able to completely satisfy their customers’ needs it can raise
its prices. Prices can be raised practically imperceptibly, for example
by abolishing all the discounts and enriching the assortment with more
expensive variants of goods.
So there are lots of problems in the existing pricing system. There are
plenty of questions to be solved. That is why in the modern economy the
problems of pricing are the matter of special concern. The choice of
the proper pricing policy is still the most difficult and important
problem as in conditions of the country with high economic level as, to
the great extend, in conditions of market reforms. Any enterprise
financing stability completely depends on solving this problem as well
as the output and profit rate and ability of investing at the expense of
own resources.
The proper pricing policy is extremely important for national economy in
general because the rational price structure and level contribute to the
economic stability.
In the market economy all attention is for the first turn paid to the
consumer that should be the main principal of pricing policy which in
its turn should be considered as a part of the overall planning of the
business activity process.
The constant appearance of new goods and services in the market is one
of the main conditions to survive under the circumstances of hard
competition. Otherwise, the leg-behind firms face the serious finance
problems.
The modern market grants new challenges in determining prices and some
innovations concerning this problem. One of the aspects here is
orientation to the concrete customer concerning establishing so called
“just that price” or “faire price”. There is no doubt that such
understanding of price is common for customer psychology. Some people
consider prices as the ability to obtain consumer’s benefits, other
think that the price is very high. Sometimes such personal approach is
called “moral pricing”.
The right choice of the proper pricing strategy is the initial task for
any company otherwise it can face the problems of finance loss and
unprofitability.
So we can repeat once again that there are lots of problems in the
existing pricing system. There exist plenty of questions to be
considered and solved. That is why in the modern economy the problems of
pricing are the matter of special concern. Pricing issues should be
considered in complex taking account of special conditions of the modern
market.
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