PR I C I N G
Inthe market economy the business success of any company or entrepreneur mostlydepends on the correctly chosen strategy and tactics of pricing on goods andservices. Pricing is a rather difficult process because prices mostly depend onthe situation in the market. The range of political, economic, psychologicaland social factors has a great influence on the price level. Today your pricecan be determined by the costs factor, and tomorrow its level will depend onthe customer’s behavior.
However,nowadays the most part of entrepreneurs of our country has no necessarytheoretical and practical knowledge of the complicated mechanism of goods andservices pricing. As a result, establishing prices they often make seriousmistakes that immediately reflects on the financial results, in some casesleads to suffering losses and sometimes even to the bankruptcy of a business(company).
Toavoid this situation any economist and any entrepreneur must acquire the theoryand practice of pricing.
Allcommercial and nonprofit organizations face the problem of determining pricesfor their goods and services. In the market economy pricing is a very difficultprocess which is influenced by plenty of different factors and based not onlyon the marketing recommendations. But nevertheless, the right choice of pricestrategy, approaches to the pricing for new and still manufactured goods andservices in order to increase volumes of realization and commodity circulation,to enlarge production and firm the company’s positions in the market is one ofthe marketing functions.
Pricesand the price policy are ones of the major components of the marketingactivity, which importance is permanently rising in our days. Prices are inclose dependence on other variables of the marketing and other firm’sactivities. Final commercial results mostly depends on prices and it’simportant to mention that in the long run correct or fault price policy bringspositive or negative results of firm’s activity.
Theessence of the correctly chosen price policy in the marketing is to fix andvary prices in dependence on a situation in the market in order to win acertain market share, provide the planed profits and solve other strategic andoperative tasks. Working out the general price policy all decisions aregathered into an integrated system.
Statinga single price for all buyers is a comparatively new idea. It has been formedhistorically – 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. Intheir turn buyers asked for a price lower than they were ready to pay. Whiledealing with each other they usually came to the price that was mutuallyacceptable to everyone. Common prices were widely admitted only to the end of19 century with the appearance of large retail enterprises, which proclaimed “thestrict policy of common prices” as they offered a huge variety of goods andemployed a great number of employees.
Historicallyprices were the basic factors that determined a customer’s choice. This isstill true for the third-world countries among the population groups livingbelow the normal living standards. Nevertheless, for the last tens of yearsprice factors such as sales stimulation, distribution of goods and services forthe customers have obtained a certain influence on the consumer’s choice.
Theway firms approach the pricing problems may vary. In small firms prices areusually determined by the higher leadership. In large companies departmentsupervisors and assortment supervisors deal with the pricing problems. Butstill at this level the higher leadership determines the general targets of theprice policy. The higher leadership also confirms prices offered by managers ofthe lower supervision. In space, railways, gas and oil industries companiesoften organize special pricing departments, which determine prices or help theothers do it. Such employees as sales department managers, productionsupervisors, finance managers and accountants are those who also influence theprice policy.
Firstof all a firm must determine what purposes it intends to reach with the help ofthe concrete goods. If the choice of a target sector of the market is wellconsidered the approach to forming the marketing complex including pricingproblems is quite evident. The pricing strategy is generally determined by decisionsthat were made concerning a certain position in the market. At the same time afirm can chase other targets. The clearer a firm’s idea of its target theeasier to determine a price. There are plenty of examples in practice:providing survival of the firm, maximizing current profits, winning leadingpositions in the market reaching the high quality of commodities.
Providingcompany’s survival becomes the general purpose under the circumstances of hardcompetition and when there are too many producers in the market. It’s also truein case of rapid change of the customers’ needs. To provide the work ofenterprises and sales of their goods firms have to state lower prices in hopeto get a favorable customer’s respond in return. Survival is more important thanprofits. While the prices reduced cover the production costs firms that getinto a difficult situation can continue their commercial activity for sometime.
Plentyof the firms aspire to maximize their current profits. They estimate customers’demand and costs taking into account different levels of prices and then theychose the price that will provide the maximization of future profits and cashand also provide maximum of costs compensation. In all these cases currentfinance indicators (indexes) are more important for a firm than the long-runones.
Otherfirms want to be leaders in the market share indicators in hope that a companygetting the biggest market share will have the lowest level of costs and thehighest profits in the long run. Trying to reach the leadership in the marketshare they undertake the maximum possible decrease in prices. A variant of thispurpose is to rapidly get the concrete increase of the market share.
Afirm can also make its goods the most qualitative among all the rest offered inthe market. Usually it demands to determine a higher price to cover the costsfor reaching high quality and conducting expensive surveys.
Todetermine a price taking into account the level of current prices a firmusually leans on its competitors’ prices and pays less attention to its ownindexes of costs and demand. Under the circumstances of oligopoly activity allthe firms usually ask for the same price. The smaller firms “follow the leader”changing their prices when the leader changers them, not concerning thefluctuations of the demand for their goods. Some firms can take off a smallextra charge as a premium or grant a small discount keeping the difference inthe permanent price. Such method of pricing is quite popular.
Theseller must take into account not only economic but also psychological factorsof the price. Many consumers suppose that the price must reflect the quality ofmerchandises. Some firms manage to increase the sales by raising prices fortheir goods and such goods will be considered more prestigious. Such method ofpricing based on the goods prestige is also quite effective, especiallyconcerning, for instance, perfume or expensive cars that can cost ten timescheaper but customers pay ten times higher considering that the price assumessomething special.
Thereexists one else, unofficial law of pricing, which is very popular practicallyamong all the sellers. Price should be expressed in a odd figure. For exampleinstead of $200 they put $199. And then for the plenty of consumers thismerchandise will cost $100 and plus but not just $200.
Thechosen price must be checked whether it corresponds to the existing pricepolicy. Many firms work out purposes concerning their favorable price imagegranting discounts and taking relative measures in respond to the priceactivity of their competitors.
Inrecent several years plenty of the firms have to higher their prices. Doing sothey understand that increase of prices will result in the displeasure of theircustomers, distributors and own sales personnel. Nevertheless, the successfulincrease of prices can considerably enlarge the volumes of profits.
Oneof the main condition affecting the increase in prices is the constantworldwide inflation caused by highering level of costs. The increase of costsnot corresponding to the production growth leads to the decrease of the profitsrate and makes the firms permanently higher prices. Some times the pricesgrowth crosses the growth of costs in the presentiment of further inflation orintroduction of the state control over prices. Firms are not sure to give theircustomers any long-run liabilities concerning prices, scaring that theinflation caused by costs growth will damage their profit rate. Overcominginflation firms can increase their prices in several ways.
Anothercircumstance leading to the price increase is the availability of extra demand(it’s especially typical for our country). When a firm is not able tocompletely satisfy their customers’ needs it can raise its prices. Prices canbe raised practically imperceptibly, for example by abolishing all thediscounts and enriching the assortment with more expensive variants of goods.
Sothere are lots of problems in the existing pricing system. There are plenty ofquestions to be solved. That is why in the modern economy the problems ofpricing are the matter of special concern.
Thechoice of the proper pricing policy is still the most difficult and importantproblem as in conditions of the country with high economic level as, to thegreat extend, in conditions of market reforms. Any enterprise financingstability completely depends on solving this problem as well as the output andprofit rate and ability of investing at the expense of own resources.
Theproper pricing policy is extremely important for national economy in generalbecause the rational price structure and level contribute to the economicstability.
Inthe market economy all attention is for the first turn paid to the consumerthat should be the main principal of pricing policy which in its turn should beconsidered as a part of the overall planning of the business activity process.
Theconstant appearance of new goods and services in the market is one of the mainconditions to survive under the circumstances of hard competition. Otherwise,the leg-behind firms face the serious finance problems.
Themodern market grants new challenges in determining prices and some innovationsconcerning this problem. One of the aspects here is orientation to the concretecustomer concerning establishing so called “just that price” or “faire price”.There is no doubt that such understanding of price is common for customerpsychology. Some people consider prices as the ability to obtain consumer’sbenefits, other think that the price is very high. Sometimes such personalapproach is called “moral pricing”.
Theright choice of the proper pricing strategy is the initial task for any companyotherwise it can face the problems of finance loss and unprofitability.
Sowe can repeat once again that there are lots of problems in the existingpricing 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 ofspecial concern. Pricing issues should be considered in complex taking accountof special conditions of the modern market.