Price has been and will always be a vital part of marketing and in generating profits. Interestingly, it is also among the often neglected components in B2B marketing. The pricing of a company’s product or service will make or break the business. For B2B marketers, it is a must to have a good knowledge and understanding of price and demand elasticity when strategizing the product’s or service’s price.
Price Setting Factors and Strategies
In setting the product or service price, there are a few elements that companies have to consider. These include the goals, competition in the marketplace, costs, the state of the marketplace and of the economy, and bargaining power of consumers.
Goals – This illustrates the marketing goals or objectives that the company wants to achieve
Competition – Gauging the competition in the marketplace is of utmost importance. The strength or influence of the company’s competitors will tell whether or not the business can set its own price or just adopt the normal market price.
Costs – In price setting, a company has to consider the production costs or the purchasing costs. The business will most likely fail if they are marketing their product or service for less than the incurred production costs, or if the company won’t break even.
Market State and Economical State – If the demand is greater than the supply, the business can put a price premium on their product. For luxury items, companies will have to drop their price tags when there is a decline in the economy.
Bargaining Power of Consumers – Companies need to identify their consumers and establish if they have a bargaining power on the company’s price setting. For example, consumers don’t have much bargaining power on grocery items but for industrial consumers, it’s a different ballgame.
Other factors that need to be taken into account when setting a price include the product’s or service’s price elasticity of demand, market segmentation, product differentiation, distribution channel, and the market type.
There are various strategies that can help companies engage more customers and increase their revenues. These are discounting, odd value pricing, loss leader, skimming, and penetration.
Companies can use discounted products or services in attracting more consumers. It can be through clearance discounts, bulk discounts, or multiple purchases discounts. However, when offering discounts, businesses have to be careful to avoid being tagged as the “cheap option.” This will make it difficult for the company to charge its products or services at its full price.
Odd Value Pricing
An example is charging a product that costs $5 for $4.99. There are consumers who are attracted to odd value prices like this, as they seem like lower prices.
With this pricing strategy, the product is marketed at low or sometimes at a loss-making price. Even if the company can’t make a good profit out of it, customers will be attracted to purchase other profitable items or services that the company offers.
Skimming is a pricing strategy wherein a unique product is sold at a premium price. Be that as it may, the company has to ensure first that the product or service they are selling is really unique.
Penetration is the opposite of skimming. In here, companies introduce their products or services at a low price and raise it once a loyal customer base has been established.
There are arguments in B2B regarding the relationship of pricing with respect to an increase in sales. Some say that the price has no effect in creating more customers or in driving the consumers to purchase things that they do not need. Moreover, there are those who assert that lowering the price of the company’s product or service will indeed result in an increase in sales. Nevertheless, having insights on what the impact will be of setting prices on the company’s products or services is what’s deemed important.
To further understand the effect of adjusting the prices of the company’s product or service, the demand elasticity is calculated through:
% Change in Demand / % Change in Price
For example, the demand for wheat decreased by 8% when taxes were increased by 10%. The demand elasticity is 0.8. If the resulting Price Elasticity of Demand (PED) is equals 0, the demand is considered as perfectly inelastic or the price changes have no effect towards the demand. If the PED is between 0 to 1, the demand is considered as inelastic or the demand change is smaller than the price change. If PED equals 1, the demand is unit elastic or an increase in price will result in a decrease in demand. Lastly, if PED is greater than 1, the demand is considered as elastic or the demand is evenly influenced by adjustments in price.
Factors that Influence the Demand Elasticity
The availability of substitute goods, percent of consumer’s income, necessity, brand loyalty, and the consumer affect the elasticity of demand for a product or service.
Availability of an Alternative
Elasticity is higher if there are more product or service alternatives available. This involves a strong substitution effect where consumers can make a smooth switch from one product or service to another. If there are no other alternative products or services available, the substitution effect is weak, thereby the demand is inelastic.
There is a high elasticity when the percentage of the customer’s revenue that the product price represents is high. This means that consumers will most likely make a purchase due to the product’s or service’s cost.
The elasticity of a product or service tends to get lower depending on how necessary the product or service is since consumers will purchase the good or service regardless of its price.
Customers’ attachment to a brand supersedes the responsiveness of a product or service to changes in price. This makes the demand more inelastic.
If the customer does not make a direct payment for the purchased product or service, it makes the demand inelastic.