The bitterness of poor quality remains a long after low price is forgotten.
− Leon M. Cautillo
We as customers, often get to read advertisements from various retailers saying, “Quality product for right price!” This leads to following questions such as what is the right price and who sets it? What are the factors and strategies that determine the price for what we buy?
The core capability of the retailers lies in pricing the products or services in a right manner to keep the customers happy, recover investment for production, and to generate revenue.
The price at which the product is sold to the end customer is called the retail price of the product. Retail price is the summation of the manufacturing cost and all the costs that retailers incur at the time of charging the customer.
Retail prices are affected by internal and external factors.
Internal factors that influence retail prices include the following −
Manufacturing Cost − The retail company considers both, fixed and variable costs of manufacturing the product. The fixed costs does not vary depending upon the production volume. For example, property tax. The variable costs include varying costs of raw material and costs depending upon volume of production. For example, labor.
The Predetermined Objectives − The objective of the retail company varies with time and market situations. If the objective is to increase return on investment, then the company may charge a higher price. If the objective is to increase market share, then it may charge a lower price.
Image of the Firm − The retail company may consider its own image in the market. For example, companies with large goodwill such as Procter & Gamble can demand a higher price for their products.
Product Status − The stage at which the product is in its product life cycle determines its price. At the time of introducing the product in the market, the company may charge lower price for it to attract new customers. When the product is accepted and established in the market, the company increases the price.
Promotional Activity − If the company is spending high cost on advertising and sales promotion, then it keeps product price high in order to recover the cost of investments.
External prices that influence retail prices include the following −
Competition − In case of high competition, the prices may be set low to face the competition effectively, and if there is less competition, the prices may be kept high.
Buying Power of Consumers − The sensitivity of the customer towards price variation and purchasing power of the customer contribute to setting price.
Government Policies − Government rules and regulation about manufacturing and announcement of administered prices can increase the price of product.
Market Conditions − If market is under recession, the consumers buying pattern changes. To modify their buying behavior, the product prices are set less.
Levels of Channels Involved − The retailer has to consider number of channels involved from manufacturing to retail and their expectations. The deeper the level of channels, the higher would be the product prices.
The price charged is high if there is high demand for the product and low if the demand is low. The methods employed while pricing the product on the basis of demand are −
Price Skimming − Initially the product is charged at a high price that the customer is willing to pay and then it decreases gradually with time.
Odd Even Pricing − The customers perceive prices like 99.99, 11.49 to be cheaper than 100.
Penetration Pricing − Price is reduced to compete with other similar products to allow more customer penetration.
Prestige Pricing − Pricing is done to convey quality of the product.
Price Bundling − The offer of additional product or service is combined with the main product, together with special price.
A method of determining prices that takes a retail company’s profit objectives and production costs into account. These methods include the following −
Cost plus Pricing − The company sets prices little above the manufacturing cost. For example, if the cost of a product is Rs. 600 per unit and the marketer expects 10 per cent profit, then the selling price is set to Rs. 660.
Mark-up Pricing − The mark-ups are calculated as a percentage of the selling price and not as a percentage of the cost price.
The formula used to determine the selling price is −
Selling Price = Average unit cost/Selling price
Break-even Pricing − The retail company determines the level of sales needed to cover all the relevant fixed and variable costs. They break-even when there is neither profit nor loss.
For example, Fixed cost = Rs. 2, 00,000, Variable cost per unit = Rs. 15, and Selling price = Rs. 20.
In this case, the company needs to sell (2,00, 000 / (20-15)) = 40,000 units to break even the fixed cost. Hence, the company may plan to sell at least 40,000 units to be profitable. If it is not possible, then it has to increase the selling price.
The following formula is used to calculate the break-even point −
Contribution = Selling price – Variable cost per unit
Target Return Pricing − The retail company sets prices in order to achieve a particular Return On Investment (ROI).
This can be calculated using the following formula −
Target return price = Total costs + (Desired % ROI investment)/Total sales in units
For example, Total investment = Rs. 10,000,
Desired ROI = 20 per cent,
Total cost = Rs.5000, and
Total expected sales = 1,000 units
Then the target return price will be Rs. 7 per unit as shown below −
Target Return Price = (5000 + (20% * 10,000))/ 1000 = Rs. 7
This method ensures that the price exceeds all costs and contributes to profit.
Early Cash Recovery Pricing − When market forecasts depict short life, it is essential for the price sensitive product segments such as fashion and technology to recover the investment. Sometimes the company anticipates the entry of a larger company in the market. In these cases, the companies price their products to shorten the risks and maximize short-term profit.
When a retail company sets the prices for its product depending on how much the competitor is charging for a similar product, it is competition-oriented pricing.
Competitor’s Parity − The retail company may set the price as close as the giant competitor in the market.
Discount Pricing − A product is priced at low cost if it is lacking some feature than the competitor’s product.
The company may charge different prices for the same product or service.
Customer Segment Pricing − The price is charged differently for customers from different customer segments. For example, customers who purchase online may be charged less as the cost of service is low for the segment of online customers.
Time Pricing − The retailer charges price depending upon time, season, occasions, etc. For example, many resorts charge more for their vacation packages depending on the time of year.
Location Pricing − The retailer charges the price depending on where the customer is located. For example, front-row seats of a drama theater are charged high price than rear-row seats.