Price in marketing and its functions

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Price in marketing and its functions

• What functions does price serve in marketing?
  • informative
  • promotional
  • image-building
• Price in marketing also communicates:
  • How to determine a good price?
  • So, how do you determine prices?
  • Low prices – high accessibility?
  • High prices – the exclusivity effect
• The golden mean

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One of the critical elements of the marketing mix is the price of a product. It largely determines whether a customer will choose your offer or turn to the competition. So the question is: what pricing policy will work best? Contrary to appearances, the principles governing consumer decisions are much more complicated than the rule “cheaper means better.” How, then, to establish a methodology in which price in marketing serves to achieve business goals?

What is the price really? Simply put, it is the monetary value at which a specific product or service can be acquired. For the buyer, it is information about how much they must invest to obtain something. But for the seller? Here, the matter becomes more complicated because the price is also a marketing communication.

What functions does price serve in marketing?

When selling their solutions on the market, the seller charges a specified fee for them. The price is primarily determined to ensure the company can sustain itself in the market, covering all costs associated with its operations and generating a profit. Planning the pricing policy at the level of economic strategy alone can pose significant challenges, especially in the face of immense competition. Many factors depend not only on the pure production costs of a given item or the delivery of a service but also on product demand, seasonality, and the overall market situation.

The marketing strategy also plays a significant role in shaping the pricing policy in this regard. After all, price is also a communication tool for the customer. In the marketing context, price serves the following functions:

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informative

It is one of the most important messages conveyed to consumers and the market. By setting a specific price, you show the customer the value of your products, allowing them to compare the presented offer with what the competition offers.

promotional

With prices, you can compete with other players in the market or further encourage customers to choose your offer. For example, when objections arise, you can slightly lower the price through price negotiation to convince them to finalize the transaction.

image-building

Price is an essential element in creating a company’s image. Look at the major players, such as the hardware manufacturer with an Apple logo. Behind their high prices, there is, of course, quality, but it can be confidently said that customers also pay for the brand, philosophy, and prestige it represents. This is the best proof that the lowest price is not always the best solution in every situation!

Price in marketing also communicates:

• the value of the product – both the literal value and the “symbolic” value that speaks to the buyer’s status,
• the quality of the product – consumers automatically associate a higher price with higher quality, but… this only works when the brand enjoys significant trust among the target audience.

It is also important to remember that the price level you set will impact the speed at which your company achieves profits. The higher the margin, the less you need to sell to make a profit. However, if you have been in business for some time, you know that this translation is not that simple – all marketing mix elements must work together.

How to determine a good price?

A sensible pricing policy directly affects a company’s revenues. That’s the theory. But how do you translate it into practice? There is no one right way. Let’s look at the world of major brands in the mobile device market – examine the strategy of the aforementioned Cupertino giant and its competitors from China. The American brand relies on high product prices (even several tens of percent higher than those set by the competition), while those from the Middle Kingdom opt for significantly lower rates and higher product availability. Looking at their financial results, it can be confidently stated that both pricing policies work and generate fantastic profits.

So, how do you determine prices?

Firstly, calculate precisely the cost of producing the product/delivering the service to the customer. Remember that this includes not only the raw materials used to fulfill the order but also the full labor costs and expenses of running the company. This, in a very simplified manner, is your base price. The one that allows you to “break even.” Secondly, look at the pricing policy pursued by your competition and factor it into your calculations. And what’s next? It gets tricky because you have to decide which marketing strategy to adopt. Meager prices, sky-high prices, or something in between? Let’s look at the typical effects of each approach.

Low prices – high accessibility?

If you set a low margin and sell products almost “at cost,” you can expect rapid sales growth (assuming other success factors are met). This is because you provide a very high level of inclusivity – your products are accessible to the masses. But every coin has two sides. A low price can mean:

• high demand for your products – which means you need to ensure a high production capacity to meet the adequate supply,
• product impoverishment means lower quality or a decrease in their value in customers’ eyes. Returning to a higher price will be tough if you sell something cheaper once.

A low price also tells the market that your solutions do not provide exceptionally high quality. And currently, quality is the value that influences consumer decisions.

High prices – the exclusivity effect

The other extreme is setting very high prices – for example, several tens of percent higher than the competition’s. This way, you communicate to your customers that you provide them with “exclusive goods” of higher quality than others in the segment. Of course, this approach requires appropriate marketing communication and a luxurious standard of products and services. Does it have a chance of success? Yes, but the key role in achieving success will be played by the image strategy and its credibility. That’s why price premium strategies are typically employed by larger players – those who can afford to defer profits over time.

The golden mean

This is the path followed by most companies in the market, which is a policy of sticking to the average prices prevailing in a given segment. If you follow this approach, you can reach a fairly broad audience, providing credibility to your solutions in terms of quality. However, be aware that in this case, you need to find other competitive advantages that will convince the customer to choose your product over one of the dozen others at a similar price.

Is this the end of dilemmas related to pricing in the context of marketing? Absolutely not. Matters of promotion, temporary price reductions, or margin differentiation for individual products are additional issues worth addressing to develop a thoughtful strategy. It is also worth doing so when preparing the next promotional campaign online.