Pricing Theory and Macroeconomic Factor - Term Paper Example

PRICING Introduction Price can be considered as the economic value or the numerical monetary value of a good, service or an asset. Price is an important determinant of the value and affordability of a commodity in the market. It is also very important in microeconomics as it is a one of the variables that are used in the resource allocation theory or in the price theory. There are many factors that can be used to determine the price of a commodity which all depends on the most prevalent factor that is used in a marketing system. Price is the quantity payment that is given in exchange for something. Through this may have a different social meaning, it is used for monetary value in economics. Therefore it is an exchange ratio between goods and services. Pricing is important in marketing as it determines how a product or service will be accepted in the market. It is one of the most valuable four variables that are used in the marketing mix which are used to develop a business plan. This means that it is central to the operation of a profit oriented firm. (McNamara 2007, P. 61) Importance of pricing in the marketing mix of a firm As we have seen, pricing is one of the four factors that are used in the marketing mix of a firm and which is central to the development of a viable business plan. In this regard, pricing is important aspect in market which has been as central to marketing. This is because the main aim of marketing is to take the production to as many customers as it can at the most affordable price that they can afford. Therefore the main aim of marketing as defined is to sell as many products as possible. There are many considerations that have to be made in marketing. In order to reach the target customer there are number of consideration that has to be made and the cost of the products as they are being taken to the consumers is one of those important factors that have to be considered. While pricing a product it is useful for any marketing strategy to take into account the cost structure and the willingness of the customers to pay for the product and also look to the effect of the competing from firms which are selling the same products in the same market. Therefore a good marketing strategy is not the one that blankly targets the demand market but it is the one the targets the consumer and also consider the effect of other competitors in the market. In this regard the competitor and the willingness of the buyers to buy a product at a particular price will have an effect on the overall capability of the firm to sell its products. The firm must also consider the effect of demand dynamics. There are many sources of the demand dynamics. One of the factor that affect demand dynamics is the dependence effects. This is particular to the inexpensive goods which are frequently purchased by the consumers like the household goods. For example if we take an example of Coke and Pepsi drinks, the probability that a consumers will purchase any of the product will depend on many factors which are based on preference and loyalty which affects the demand of the product. One consumer may decide buy Pepsi based on the experience one had on the product the last time it was purchased. On the other hand one may decide to by Coke as a matter of wanting to experience the difference between the two products. This would be in spirit of wanting to try something different from the other. In this case the consumer will be responding toe what can be referred to as market activities which are driven by demand dynamics. (Michael 2006, P. 34) This shows that there are many market activities that are likely to affect the way a company is going to set it price in the market. The choice of brand of a product in the market is likely to be one of the ways in which a firm is likely to set price. For example in the above given example coke and Pepsi may be coming from the company but in real sense they may be retailing at different prices. While both of them are soft drinks, the demand dynamics of the two products will affect the price that will be set for both. In this regard will can refer to the two consumer we have reviewed above. We have seen that one consumer can purchase Pepsi products consequently depending on the loyalty that one has been able to create on the product and also depending on the how the price of the product is relative to the others. The other consumer may not be very much looking at the difference in price between the two products neither will he or she be looking for the loyalty but will be seeking to experience something different. In this case the first consumer will be having a positive state dependence or inertia while the second consumer will be showing a negative state dependence or variety seeking. Here we see two types of dependence that are likely to affect the choice of a brand in the market. If we take this difference in the two consumers to a large scale operation, we will find that there is likelihood that this state will at the end characterize the share of the brand as well in the market. For example if Pepsi will have an increased market hare in a given period, there is a likelihood that the product will have an increased share in the future since it will be showing customer satisfaction based on all aspects of the trade. However there is a likely hood of the inverses happening depending on the sate of dependence of the market. For example the Pepsi brand is likely to experience an increased market share in the future if there is an inertia state of dependence in the market since consumers are likely to repeatedly buy the product in the future based on it affordability. On the inverse the coke brand is likely to have an increased market share in the future if the market shows a variety seeking state of dependence in the future. Therefore when determining price based on marketing it is usually good for the first to take a broad consideration of the state of the market and have an outward projection on the future effect of the price that they are setting based on the price of the competing product. For example if the market exhibit an inertia state of dependence, the marketing department may foresee the importance of long-term benefits for price promotion since it will be confident other current consumer who are buying their products are likely to buy them in the future. If the market exhibit variety seeking behavior, the marketing department has to recognize the long term pitfalls of promoting the brand and setting its current price since there is likelihood that in the further the level of sales of the product is likely to change. This heterogeneous mix in the consumer market is likely to affect the way a firm makes the pricing decision of its products in the marketing mix. Determining the market price of a commodity The market price of a commodity is an important factor as we have seen. It affects the way the consumer prefers to buy the product or not. Therefore it will in a way affect the viable introduction of a new product in the market and likewise affect the selling of a new product. Therefore market pricing is an important aspect of any firms that is operating to make profit in the market. Market price can be termed as an economic aspect which shows the price that goods and services are offered in the market. It is shows the market value of that particular product in the market. While coming up wit a market price of a product there are two great considerations that a firm has to make. The first consideration as we have seen with the purchasing power of the buyers who are the target consumer of the product. In this regard setting a high price for a product which buyers cannot afford will make the product redundant in the market and therefore it will record fewer sales. On the other hand setting the products at a lower market price may places the market and may be offensive to the competing goods. Therefore there is need to set the price that is within the range of the consumer that they can afford. In this case the firm has to explore all factors surrounding the consumers and the products in the market. For example, it has to look at the presence of substitute products in the market. This means that the firm will have to look at the way in which the products are being offered in the market and consider the price of other products. Not necessarily to mean the competing products in the market, but a firm will have to look at the price of the alternative products in the market. For example if a firm is marketing bread, it will have to look at the alternative products in the market like cakes which the consumer can substitute for bread. Therefore the price has to be within the range of the demands of the substitute products in the market. (Chen 2003, P. 7) The other factor that a firm has to look keenly at is the competition that it may be facing from the market. In this regard the firm will have to consider the price of other products in the market. This will require the firm to carry out a market analysis that will be aimed at looking at the price of the competing products and therefore set the price of the products at that range. This is very important especially when a firm is venturing into a new market where it has not been operating previous. In this case there are several factors that the products of the firm may be having over the other product but which the consumers cannot look at. According to Isrewl Krizner price theory, it is very important for a first of consider the force of demand and supply for a product before determining the price of the commodity. In this regard the market forces are highly dependant on the supply of the product which takes us back to the issue of competition in the market. According to the economic postulation of Adam Smith and other neoclassic economists, the force of supply and demand are very useful in the market and apparently important when making a decision on the market. In this regard, Adam smith and other economists have shown that the price of the product in the liberalized market is not determined by a board room meeting but it is rather determined by the costumer in the market. The force of supply and demand changes from time to time and can be considered to be seasonal. They are affected by other substitute commodities as well. The more suppliers for a commodity there are in the market, the higher the likelihood that the price of that product will be higher. On the other hand the lower the supply in the market, the higher the probability that the price of the product will be high in the market. Therefore both factors influence the price of the product in the market. But then there is the factor of demand in the market. A product can be in high supply in the market but it can be in short demand. This means that the price of the product is expected to be further low than a condition where there is a higher supply in the market and the same time there is a higher demand in the market. If the supply of the product in the market is low and the demand of the product is low as well, the price of the product is likely to remain constant in the market or it will be set at an average. However if the supply of the product is low and the demand of the product is very high, the product is likely to fetch high price in the market. Therefore it is the force of demand and supply the affects the price if demand and supply in the market. The Graph below shows the forces of supply and demand in the market Supply Market Price Demand Quantity demand At the same time the demand and supply of substitute product in the market is also an important factor to consider while setting price in the market. Let us take the earlier example that we had used about Coke and Pepsi and look at the substitute product in the market like undiluted soft drink. The only difference that may be between the two substitutes is that while Pepsi and Coke will be ready to drink as they are obtained from the market, undiluted drinks will need to be diluted first before they are consumed. But take an example of the an instance where the price of Pepsi and Coke have been set an unusual high price which is double of triple that of the soft drink which apparent serve the same purpose. There is a likelihood that customer will be opting to buy undiluted drinks and later diluting them since both substitutes serve the same purpose. Consumer has been known to go miles in order to save each cent especially when the product in question is not a luxury but a basic product. If the product is a luxury, there will not been any options that they can get from since luxury products are limited in the market in order to preserver their niche in the market. (Burneister, 2004, p. 53) Therefore the supply of the substitute product will be an important factor to consider since the supply will also affect the price of the product that a firm is marketing. There has to be decision that will be made in order to position the product in the same level as the substitute product. But apart from the forces of demand and supply we also mentioned that there is state dependence which the market present and which are important for a firm to look at in order to set it prices. In this regard the present and the future trends in the market are very important in setting the price of the product. There must be a systematic way in which a firm is able to predict at the future of the market based on the current trends the market which will affect the pricing decision that re made by the firm. In this regard a careful study of the firms' present position in the market is very important since it will determine how the firm fairs in the future. In predicting the future of the market, the chaos theory and market reality is very important. Under the postulation of this theory, there must be a systematic way that will be used by firms in order to predict the future trend in the market and in order to be able to set it prices well. A market research data will give a firms and glimpse of how the market twill be in the future depending on the earlier and the current trends. The firms must be able to review a commodity market price history which will help the marketing department to understand the repetitive pattern for the future. On a long term bases, the market is expected to move up and down from time to time. This is particularly important if a firm is dealing with the sale of goods or services with seasonal demands like tourist activities for a firm operating in the tourism sector which depends on seasons. (Louis 2006, P. 43) Using the market chaos theory a firm will successfully look into the future and understand the trends in the future market. The firms in looking at the repetitive pattern of the future price is likely to mathematically calculate the expected profit of the product from the future operation and therefore make a conclusion on what the firm can do in future and what price the product can be sold currently and in the future in order to balance with the overall profit margin expected from the operation of the firm. Conclusion Pricing is one of the most important factors that determine how a firm takes it product to the market. The price of the product in the market will depend on many factors. The price will affect the consumer acceptance of the products in the market and will also affect the way the product stands the competition that it may be facing from other products in the market. There in setting up the price of product in the market there are various important considerations that a firm has to make. First it has to cinder the willingness and the ability of the consumer to buy the product at that particular price as indicated by the consumers. Second it will have to consider the price of the related goods and services in the market and also the price of substitute goods and services in the market. References Burneister, E 2004, Pricing theory and macroeconomic factor, The Financial Review, Vol. 21, Issue 1 Chen, F 2003, pricing factors, Journal of Finance, Vol. 2, Issue 3, p. 6-9 Krizner, I 2003, Market theory and price system, Oxford University Press Louis, B 2006, Theory of speculation, Princeton University Press, Princeton McNamara, C 2007, Market Pricing, Harvard Business Review Michael, J 2006, Firm theory and pricing, Journal of Financial Economics, Vol. 3, Issue 2, P. 34 Read More