Price and Channel Strategy
Price and Channel Strategy
There are several price setting and distribution strategies that can be used by a business to sell its products and services. The commodity price may be used to gain entry into new markets, to increase the business’ market share within a particular market or to protect an existing consumer base from new entrants. It may be set in such a way that it maximizes profitability of each product unit sold. Price setting also helps consumers to conceptualize the standards that a business offers through its products and services, thus creating exceptional reputation (Kohli, 2011).
The effects of price setting are not limited to the unit cost of production. Price setting is the positioning statement just as it is the definition of the cost of buying the product. It determines the business’ entry threshold: competitors the business will encounter, level of demand for products/ services offered, the kind of people the business will be negotiating with, type of consumers and their preferences/ sensitivities, and expectations of the consumers.
One important factor to take into consideration when developing marketing strategy such as, price setting strategy is to have an in-depth understanding regarding current and potential product consumers. The more the business understands its consumer’s preferences, the higher likelihood it will be in a position to maximize both its revenue stream and the effectiveness of its products and services. Appropriate price setting and distribution promotes growth of the business.
Prices in competitive markets are determined through the point of intersection of demand curve and supply curve. Basically, as the unit cost of a commodity increases, more goods are released into the market but the purchasing power of consumers is reduced. This creates goods oversupply in the market. On the other hand, reduced unit cost of a commodity increases consumer’s purchasing power but reduces the willingness of sellers to release goods into the market. This results in commodity shortage due to high demand.
At some unit price, the demand for goods equals the supply. This point is known as market clearing unit price; this is the expected price if external forces such as taxes and government regulation are assumed to be negligible. Increase in the cost of unit production makes the supply curve to shift upwards thus resulting in a corresponding increase in unit market price. The degree to which price increases is dependent on the shape of demand and supply curves. This concept is known as elasticity. In reality, both curves are not linear because of the various reasons: decreasing marginal utility, substitution effects and economies of scale.
List pricing (recommended retail price) is setting the commodity unit price by a manufacturer. The purpose of setting price is to standardize prices in a particular market. However, there are certain stores that sell the goods below the recommended retail price. Retailers charge less than the list pricing depending on the wholesale unit cost, especially when there is bulk purchase of goods from the manufacturers. Manufacturers impose fixed unit cost for their products so as to offer price protection to small retailers who are in competition with large merchant organizations.
Promotion pricing is a technique whereby prices of commodities are heavily discounted for a limited time duration. The sole purpose of this is to increase the market demand for a particular product. Schemes such as purchase two get one free are used. This technique reduces commodity price with an aim of attracting more clients and thereby increasing the volume of sales. Promotional pricing is used by businesses to attract customers and gain market share. The justification behind offering price discounts is that losses incurred are compensated by increased sales volume and increased number of new loyal product consumers (Palazon, 2009).
The difference between costs of a commodity from a particular time to another is known as price change. Price change may be calculated for any period of time, though the price change that is commonly cited by financial media is “daily pricing”. Daily pricing refers to the change of unit price of products or stock from the previous day’s close of business to the current trading day’s close. Price change is used to compute business performance.
Businesses have to ensure that their products and services reach the final end consumer. These consumers may be hard to reach, or difficult for the business to identify. More so, the goods may require extensive support, require informed, special promotion or may be complicated. Businesses usually consider these variables when determining the appropriate distribution channels to deliver their products and services to the market and serve its consumers effectively and efficiently.
Kohli, C. &. (2011). The price is right? Guidelines for pricing to enhance profitability,. Business Horizons, 54(6), 563-573.
Palazon, M. &. (2009). The Moderating role of price consciousness on the effectiveness of price discounts premium promotions,. Journal of Product & Brand Management,, 18(4), 306-312.
Rigby, D. (2009). Price for Today and Tomorrow: How to Manage Pricing Effectively in Tough Times. Harvard Business School Press.