When setting a price the overriding factor to consider is that your objective must be to make a profit. However, that does not necessarily mean that you must make a profit from the outset. One pricing strategy could involve a low initial price purely to quickly gain market share. On the other hand, with a totally new and innovative product, your initial strategy may be to charge as high a price as the market will stand.You will appreciate, then, that the price will vary to meet the changing demands of the market, by the supply and demand for the product within the market. The major factors affecting pricing decisions are:The first of these – customers – is of significant importance. Whilst you have to achieve a price that will gain an eventual profit, you also need a price that will entice consumers to make a purchase.
How Important Is Price To The Consumer?
To answer this question it is necessary to consider the factors that influence the consumer’s decision to make a purchase. Initially, consider the fact that the actual purchaser is not always the same
person who made the buying decision, nor are they necessarily the person who will actually use the product.
There are four main groupings that can be used to outline the individuals involved in the purchasing process. They could be represented by up to four different people, or indeed be one and the same person.
- Users – the person who will actually use the product. For example, the product may be a gift of some description purchased by someone else.
- Deciders – the person who actually takes the decision to make a purchase but who does not necessarily buy the product themselves.
- Buyers – The person who actually buys the product. They may not, however, have taken the decision to purchase or be the end user.
- Influencers – people who may have some influence over the decision to purchase – children, for example.
Buyer Behaviour Factors
When considering pricing you need to be aware that consumers can often have some very strange ideas about what constitutes ‘the right price’. The purchasing choice can be influenced by perceived risk. In this context, a higher price seems to reduce the risk factor because of greater perceived quality in the product. The most expensive product need not actually offer greater quality.
As examples of the deliberations of consumers relating to pricing, consider the following:
- A reduced price can mean that there is something wrong with the product and it may be faulty in some way.
- If quality is established a reduced price could mean a bargain.
- A cut in price could be followed in due course by further reductions and so the purchasing decision is delayed.
- Numerous changes in price cause confusion.
- The true price, especially for products purchased by way of necessity, may not be known by the consumer.
- Small price reductions, from say £10.00 to £9.99, are perceived as offering better value.
- Large discounts usually make the consumer think that the product could be obsolete in the market.
As you can see, it is sometimes difficult to understand what goes on in the mind of the consumer. You could, for instance, enter the market with a cheaper comparative product than your competition but still fail to gain sales because, rightly or wrongly, your product is considered to be of inferior quality. This is where your market research is critical: understand what the consumer is prepared to pay and what they see as being of higher priority – reduced price or higher quality.
There will never be a right price for all consumers. The influence that consumers have over price cannot be emphasised enough. You ignore the views of the consumer at your peril.