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Price: Meaning, Role, Steps of Price Setting Process, Reaction to Price Change

Price is an important aspect of any business. It determines the revenue generated and affects the company’s profitability. In setting its pricing policy. A firm must consider many factors and follow a logical process. The price-setting process and strategy play a significant role in maximizing value perception and increasing customer attention and loyalty.



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Definition


According to Prof. William J. Stanton, Price is the amount of money and/or other items with utility needed to acquire a product.

 

According to Prof. Philip Kotler, Price is the only element in the marketing mix that produces revenue, the other elements produce cost.

 

According to David J. Schwartz, Price is the exchanged value of the product or service expressed in terms of money.”


Meaning of Price in Business

Price refers to the amount of money a customer pays for a product or service. It’s the exchange value of a product or service, which represents its worth in the market. The price of a product or service is decided by various factors. Such as the cost of production, target market, and competition.



The factors that determine the value and price of a product in the market. The costs of production and the marketer’s profit expectations play a role in setting the value of the product. As the marketer seeks compensation over the actual costs.



On the other hand, buyers also play a role in determining the value of the product by weighing the benefits of purchasing. It is against the costs of forgoing other purchases or retaining their money.



This creates a trade-off value for the buyer. The final price of the product is a result of the balance between the seller’s value and the buyer’s trade-off value. If these values do not match, changes must occur or the product will fail in the market.


It’s important to note that different sellers may have different profit expectations and different buyers may have different perceptions of the benefits of a product, leading to a reflection of personal values in the price. 



The price acts as a mechanism for negotiations between individuals with goods, services, or money to trade.




Role of Price in Business


Price plays a critical role in any business.

  • It affects the company’s revenue and profitability, as well as its competitiveness in the market.
  • Pricing strategies and policies can either attract or deter customers. They also play a significant role in shaping a company’s image and reputation.
  • Price is an important factor in determining customer behavior
  • It can affect the customer’s perception of a product’s value.






The Impact of Pricing on Revenue and Profitability

It’s not uncommon for small and medium-sized businesses to focus more on their costs rather than the right pricing model, which can lead to missed opportunities for increased profits.



Also, people have certain price ranges they are willing to pay for products, and businesses must take this into consideration when setting their prices. For example, stores may set up displays of gifts at different price levels, such as $25, $50, $75, or $100.



Companies like IKEA also set a price for a product based on what they believe consumers are willing to pay, and then work backward from that price to design the product.

When it comes to setting prices. It’s important to find a balance between maximizing profits and being competitive in the market. 


You want to charge enough to cover your costs and make a profit, but not so much that customers are deterred from purchasing your product.





The Impact of Pricing on Customer Behavior

Price is an important factor in determining customer behavior. If a customer perceives a product to be overpriced, they may look for alternative options or choose not to buy it at all.

On the other hand, if a customer perceives a product to be a good value for its price, they are more likely to make a purchase. Pricing strategies can also play a role in attracting or deterring customers.

For example, offering discounts or sales can incentivize customers to make a purchase, while high prices can turn them away.







The Impact of Pricing on Company Image and Reputation

Besides to affecting revenue and profitability, pricing also plays a significant role in shaping a company’s image and reputation. 


For instance, a company that consistently offers high prices may be perceived as premium and exclusive. While a company that frequently offers sales and discounts may be perceived as budget-friendly.


It’s important to consider the long-term impact of pricing strategies on your company’s image and reputation. Consistently offering low prices may attract customers in the short term, but it may also hurt your brand’s perceived value over time.

So, consistently offering high prices may establish your brand as a premium option, but it may also limit your customer base.





Steps of Price Setting Process

In setting its pricing policy, a firm must consider several factors and follow a logical process, as mentioned in. The seven steps involved in the price-setting process are:

  1. Selection of pricing goal
  2. Assessment of the target markets
  3. Evaluation of price and its ability to purchase
  4. Determination of demand
  5. Analysis of costs
  6. Analysis of competitors’ costs, prices, and offers
  7. Setting the final price

Let’s know these steps in detailed by the way if you want to learn more about price and price adaptation?


Steps of Price Setting Process definepedia




Step 1: Selecting Pricing Objectives

A firm must consider what they want to achieve with its pricing policy. Do they want to increase profits, increase market share, or increase sales? Knowing your objectives will help you set prices that are in line with your overall business strategy.



Even though basic pricing elements (costs, competition, demand, and profit) are the same for all organizations, the best combination of these factors changes depending on the nature of the products, markets, and corporate objectives.




Step 2: Assessment of Target Markets

You need to understand your customers’ needs, wants, and purchasing power. This will help you determine the price they are willing to pay for your product or service.

A marketer is best placed to know how much attention to focus on pricing by examining the target market’s price evaluation. Price evaluation information from the target market can also help a marketer determine how far above the competition a firm can set its prices.





Step 3: Evaluation of Price and its Ability to Purchase

Next, you need to evaluate the price you have set and determine whether it is in line with your customers’ purchasing power. So if the price is too high, customers may not be able to afford it, and if the price is too low, you may not be able to cover your costs.




Step 4: Determining Demand

Now, you need to determine the demand for your product or service. This will help you understand how much you can charge for your product and how many units you can sell.

The demand schedule indicates how much a product will be demanded (sold) at different prices. Except for a few exceptions, the price-quantity relationship is known to be inverse. That is, if the price is charged high, less will be demanded, and more will be demanded if the price is charged low, indicating that customers are price sensitive.





Step 5: Analysis of Costs

Now, you need to analyze the costs of producing your product or providing your service. So this includes the cost of raw materials, labor, and overhead expenses. The cost of production will help you determine the minimum price you can charge for your product or service.





Step 6: Analysis of Competitors’ Costs, Prices, and Offers

In step six, you need to analyze your competitors’ costs, prices, and offers. This will give you an idea of the prices your competitors are charging for similar products or services, and help you determine if your prices are competitive.

If the company finds that its offer is similar to that of competitors, it should price similarly to avoid losing sales. If it discovers that it is in a superior position, it can charge a high price; if its offer is proven to be inferior to competitors’ offers, it can charge a lower price.

It is not always easy to become aware of competitors’ prices, especially in producer and reseller markets. The price lists of competitors are frequently closely guarded secrets.





Step 7: Sales Forecast

The final step involves the process of setting prices is to perform a sales forecast. So this will help you estimate the number of units you can sell in the next period of time, and ensure that you have a clear understanding of the costs involved.






Price Strategy to Maximize Value Perception and Increase Customer Engagement

To understand the role of KVCs and KVIs in strategy, as mentioned in, price strategy can be expressed as purposeful pricing by channel. And customers to maximize value perception and business results (such as traffic, basket, sales, and margin). 


And to increase customer engagement and loyalty. Price strategy can be effective in attracting customers, building brand image, and increasing sales.



Reactions to Price Changes

An organization may react to price changes in different ways, as mentioned in. The three ways by which an organization can react to price changes are:

  1. Maintaining the status and not reacting to any price change
  2. Setting the prices equal to the organizations’ prices
  3. Setting the prices less than the organizations’ prices


    Maintaining the Status

    One option for organizations is to not react to any price changes at all. This means maintaining their current prices, even if the competition is lowering their prices or if the cost of goods and services is rising. 


    This approach can be beneficial in a number of ways, including:



    Providing stability for customers: Customers admire consistency and stability, and maintaining prices can help to build trust and loyalty over time.


    Protecting profit margins: If the cost of goods and services rises, maintaining prices can help to protect profit margins and insure that the organization remains profitable.




    However, there are also some drawbacks to this method. For example, if the competition is lowering prices, organizations that maintain the status may find it difficult to compete and attract new customers. Additionally, if the cost of goods and services rises significantly, it may become necessary to raise prices finally, which can be a difficult and potentially damaging decision for an organization.






    Setting Prices Equal to the Competition

    Another option for organizations is to set their prices equal to the competition. This approach can help organizations to remain competitive and attract new customers, while still maintaining profitability. The key benefits of this approach include:

    Staying competitive: By setting prices equal to the competition, organizations can ensure they are not being priced out of the market and that they remain competitive.

    Attracting new customers: If the competition has lower prices, setting prices equal to the competition can help to attract new customers and increase market share.

    There are also some potential drawbacks to this approach. For example, if the competition has lower profit margins or is not as profitable as the organization, setting prices equal to the competition may not be sustainable in the long term. Also, if the competition raises their prices, organizations may find it difficult to remain competitive without also raising their prices.



    Setting Prices Lower than the Competition

    Eventually, organizations can choose to set their prices lower than the competition. This approach can help organizations to attract new customers and increase market share, but it also comes with a number of potential challenges, including:



    Reducing profit margins: By setting prices lower than the competition, organizations may be forced to reduce their profit margins in order to remain competitive.

    Attracting price-sensitive customers: While setting prices lower than the competition can attract new customers. It may also attract price-sensitive customers who are less likely to be loyal in the long term.

    Impacting brand perception: If an organization is seen as being significantly cheaper than the competition, it may impact the perception of its brand and the quality of its goods and services.

    The process of analyzing the prices of competitors can be difficult. But it’s an important aspect of the price-setting process. The analysis of competitors’ costs, prices, and offers can provide valuable insights into the market. And it helps a company to make the right decisions.


    S. No.PriceProduct and Services
    1SalaryService of an executive, manager and staffs.
    2InterestUse of money
    3TuitionEducation
    4WageService of workers and labor
    5FairTaxi and airline flight
    6CommissionService of seller and distributors
    7PremiumInsurance (Various insurances)
    8FeeService of the doctor and lawyer
    9DuesMembership in a union or a social club
    10RevenueTax and custom of government
    11RentUse of living quarters or piece of equipment for a period of time
    12BillTelephone, water and electricity

    Conclusion

    So price plays a critical role in any business, and the price-setting process and strategy are crucial factors in maximizing value perception and increasing customer engagement and loyalty. A comprehensive understanding of the meaning


    Reference

    https://www.facebook.com/iedunote. Price: Meaning, Role, Steps of Price Setting Process. iEduNote. Published October 23, 2020. Accessed February 9, 2023. https://www.iedunote.com/price-setting

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