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Marketing Academy.

The most common methodologies for defining the price of a good

What is pricing

Among the main elements of the marketing mix, price appears to be fundamental both for the strategic corporate (or corporate) phase and for the operational marketing phase, as it represents the main lever that produces revenues for the company. It is therefore the determining factor of company profitability and at the same time influences demand. For the consumer it represents in economic terms the sacrifice he is willing to make to obtain a product or service.

On the company side, the price of a product or service is determined by production costs, marketing costs and business objectives. In particular, production costs influence the minimum price at which a product can be sold, while marketing costs and business objectives affect the maximum price.

The price determination process is called Pricing and is conditioned by a series of factors both internal and external to the company: the market in which it operates, quantity of demand, prices offered by competitors and all costs incurred for the production of the good or service.

How to define pricing

There are cases in which the prices of goods and services are regulated by law, as is the case for public services. The selling price of a product must normally cover the various costs related to it: production, marketing, etc.

Two elements have a profound impact on the price of products: differentiability and perishability.The first concerns the ability of a product to be considered irreplaceable, in such a way as to have a distinctive positioning on the market.

Perishability, on the other hand, refers to the ability to find the product over time.

There are four different methodologies for defining Pricing:

  1. Mark up pricing method (mark up pricing): applies a percentage increase to the production or purchase cost of a good to obtain the final selling price. p>

  2. Cost plus pricing method: also takes into account indirect prices and the expected result from each unit of product.

  3. Desired profit method (rate of return pricing): determines the final price with the objective of recovering the costs incurred and achieving a specific profit. p>

  4. Break even analysis method: much more precise because it consists of identifying the production volumes or sales revenues necessary to cover all production costs . In this case the analyst must have three values: sales price per unit of product, fixed costs, variable cost per unit of product.

Finally, there is the possibility that a "price war" may be triggered, when two or more competitors focus exclusively on price reductions to acquire or/and retain the customer.

The risk is to cause a continuous race to the bottom which can have serious effects on the profitability and brand equity of the company.

Important notes

The most widespread method for determining the price is certainly the first, i.e. the mark up pricing, which involves determining the price based on the production cost plus a profit margin. This method is particularly suitable for standardized products and those with inelastic demand. In practice, it is often abused because it is quite simple in its implementation. But it exposes it to many problems, first of all the distance between price and brand strength.

In this sense, an innovative tool for determining the price is increasingly making its way, i.e. pricing based on the value perceived by the consumer, which considers the price not based on the costs incurred by the consumer. business, but based on the value that the product or service has for the customer. This method is particularly suitable for luxury products or products with elastic demand.

In a future article we will delve deeper into the individual pricing methods. Stay tuned!

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