TheMarketing Mix: Price Setting
Businessinvolves acquisition of raw materials or stocks for it to keeprunning. This logistics requires a lot of finances and human resourceso as to provide goods and services demanded by consumers. Thesecauses the business to incur some fixed and variable costs which addto the overall cost (Tirole,1988).In contrary to the cost incurred, it have to set prices of finishedproduct in a way that covers the cost incurred in the acquisition andthe production of goods and services. Pricing strategy of thebusiness determines profit to be earned in return after deducting theoverall cost. Hence in order for the business to maximize profit itshould be able to calculate the price that maximizes it.
Pricedetermination in the business may involve different approachesdepending on which bests gives the best outcomes. Also it depends onthe analyses conducted by the researchers which give appealingresults depending on the behavior of the customers on prices (Tirole,1988).It may take the following strategies:
TEMPORARYSETTING OF PRICES
Thismechanism of setting the prices is used by many businesses (Smith,2012).It involves changing the set prices time by time by increasing it orreducing it due to the preference of the seller. The research hasshown the perfectiveness of this strategy as the consumer fails torecall the lower price charged in a given period of time (Phlips,1989).
Whobenefits from price promotion?
Inthe market, there are parties which play in the market (Phlips,1989).Taking manufacturer and retailer, and doing an evaluation about theeffects of promotion in the market. For example, when a Chinesemanufacturer announces about a certain product brand promotion for agiven week, the Chinese manufacturer receives an increased revenue of$95000 since customer purchased the product brand in large quantitiesfrom manufacturer. Retailer who deals with the same identical productbrand receives a loss of -$13500 since more customers shifted frombuying from his shop. Hence, this shows that price promotion is atactic but not a strategy and it requires some alignment for bothmanufacturer and the retailer to reap and mitigating the downsizingof revenue on one side.
Thisinvolves charging the same product differently for all customers.Customers depending on various characteristics as perceived by theseller, may end up buying the same product charged differently. Forexample, bus tout may discriminate bus fare by charging differentfare for passengers who boards the bus first and sits on the lefthand in order to attract more passengers (Phlips,1989).Those who comes after the first row is full will be chargeddifferently most probably a higher price. Price discrimination are ofthree degree, namely
Firstdegree price discrimination
Thisinvolves the capturing of the consumer surplus of the customers. Thisis known as reservation price. The seller discriminates customersindividually by inducing each individual customer to buy a productbrand in his maximum possible price (Smith,2012).Generally, the seller first analyzes his or her customers to discovertheir maximum willingness to pay for a product hence receiving theproducer surplus.
Seconddegree price discrimination
Thistype involves discrimination with respect to the bulkiness of thepurchase. The more a customer purchases, the more added advantagesaccrued to him or her. This advantage includes incentives, discountsto mention but a few depending on the seller strategic decision(Smith,2012).This helps to differentiate customers and hence increasing turnover.For example, air flight contains the first class section and theeconomy section. Due to this discrimination, seller is able todifferent customers and hence capturing their consumer surplus.
Thirddegree price discrimination
Thisinvolves discrimination through market segmentation. Seller segmentsthe market and analyze customers at a closer view under differentground. These ground includes, social-economical background factor,their tastes and preferences factors, age, sex, gender, maritalstatus among others (Smith,2012).After analyzing and evaluating the market, he now formulate strategyof hoe to distribute products according to factors researched. Forexample, children and adult will be charged with different prices,that is, children are charged $UD 4.5 and the adult is $UD 1.5.
Pricediscrimination result in categorizing customers hence all fitting intheir respective categories.
Expectedprofit will be calculated as:
Expectedprofit = expected total revenue –expected overall cost.
Forexample, a company and his subsidiary employs the mechanism of pricediscrimination of an electronic brand, the main firm sells it at$1000 while in their subsidiary it is priced at $800. The total costof the mentioned product logistics cost $500. Observing the sales andthe demand of the product for a week and provided the main firm andthe subsidiary is not located in the same place.
Expectedprofit= expected total revenue – expected overall cost
Expectedtotal revenue= revenue (main) + revenue (subsidiary) =$1000*demand1+ $800*demand2
Hence,expected total profit = ($1000*demand1 + $800*demand2) – $500.
Pricedriscrimination helps to capture consumer surplus while temporaryprice setting makes customer fail to recall the least price charged.
Phlips,L. (1989). Theeconomics of price discrimination.Cambridge: Cambridge university press.
Smith,T. J. (2012). Pricingstrategy: Setting price levels, managing price discounts, &establishing price structures.Mason, Oh: South-Western Cengage Learning.
Tirole,J. (1988). Thetheory of industrial organization.Cambridge, Mass: MIT Press.