Prising

Prising

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.