Why is pricing so important

The other elements of the marketing mix product, place and promotion may seem to be more glamorous than price, and thus get more attention, but determining the price of a product or service is actually one of the most important management decisions. So, as you can see, it is important that a company sets the right price.

Value is the worth of goods, and relative value is attractiveness measured in terms of utility of one good relative to another. Value is the worth of goods and services as determined by markets. Thus, an important part of economics is the study of policies and activities for the generation and transfer of value within markets in the form of goods and services. Often a measure for the worth of goods and services is units of currency such as the US Dollar. But, unlike the units of measurements in Physics such as seconds for time, there exists no absolute basis for standardizing the units for value.

One of the most complicated and most often misunderstood parts of economy is the concept of value. One of the big problems is the large number of different types of values that seem to exist, such as exchange value, surplus value, and use value. But then remember that it took economists more than a hundred years to figure it out: something is worth whatever you think it is worth.

This statement needs some explanation. Take as an example two companies that are thinking of buying a new copying machine. One company does not think they will use a copying machine that much, but the other knows it will copy a lot of papers.

This second company will be prepared to pay more for a copying machine than the first one. They find a greater utility in the object. The companies also have a choice of models. The first company knows that many of the papers will need to be copied on both sides. The second company knows that very few of the papers it copies will need double- sided copying. Of course, the second company will not pay much more for this feature, while the first company will.

In this example, we see that a buyer will be prepared to pay more for the increase in utility compared to alternative products. So we can summarize this with the statement that the economic value of an item is set by the increase in utility for customers. This increase in utility is called marginal utility, and this is all known as the marginal theory of value.

But how does the seller value things? Well, in pretty much the same way. Of course, most sellers today do not intend to use the object he sells himself. The utility for the seller is not as an object of usage, but as a source of income.

And here again it is marginal utility that comes in. Nothing else defines a business and a product more. Pricing is important since it defines the value that your product are worth for you to make and for your customers to use. It is the tangible price point to let customers know whether it is worth their time and investment.

Regardless of your product, pricing decisions remain an afterthought for many growing businesses. Your pricing strategies could shape your overall profitability for the future. Depending on who you ask, a business serves hundreds of different purposes and embodies hundreds of definitions.

Businesses provide jobs to individuals supporting themselves and families, they produce goods and services for those seeking them, and they even pay taxes to help support public goods. Yet, my favorite definition comes from my Economics advisor back in undergrad, who summed it up simply: businesses exist to provide value.

I know it seems obvious, but take a look at your business. Your resourcefulness and wit have one purpose that we just alluded to: you want to exchange that value for compensation. You may already have a cost-cutting strategy in place in order to boost profits. But no matter how heavily you invest in increasing volumes and cutting costs, this can only take you so far, and intensive efforts have often already exhausted all potential.

So where should you go next? Even though price is a multiplicative factor in this formula, our experience is that it often receives the least attention. However, pricing is often the only untapped lever left to achieve higher profits. How can you shift from a predominantly internal and cost-cutting focus to an outside-in focus?

There is always a profit-optimal price point and the way to find it is through a systematic and quantified approach. Pricing is a game of intelligence. Start playing it! Price can be the biggest profit lever, but also the most dangerous profit destroyer.

Where does pricing go wrong in daily practice and what can you do turn this around? Here are our five top solutions to overcome the most common pricing pitfalls:. In markets with increasing volume and price pressure, the right pricing approach is essential to remain competitive. It brings you the value you deserve for your products and services offered and secures the profits you need to invest in change and growth. Enjoyed reading our article? Download our free eBook now and learn how to achieve a sustainable, competitive advantage through pricing!

Part 6: Price increase? No problem. Preparation beats price pressure! Part 8: Skimming or penetration pricing? How to make your sustainability transformation a commercial success. That's more influential than a 1. How a person finds your product online, and how much the displayed price is, are the most crucial checkpoints for shops to make a sale online.

Considering this, it might seem like Pricing and Promotion share equal importance in the marketing mix. But the reality is that Pricing stands far above Promotion because Pricing controls Promotion.

In fact, pricing is the single most important factor to consider while managing your online marketing product ads on platforms like Google Shopping. The line graphs represent the price and the bar chart at the bottom shows the number of units sold. A margin-focused strategy from the beginning of July to the 24th, where the shop is priced higher than the market average.

An aggressive strategy from the beginning of August until the end of the data where the shop is priced lower than its competition.

All other conditions staying the same, the simple change in price led to a dramatic change in sales. Although there might be a high volume of sales, the prices and margins, as a result might be lower.

But you can use this information strategically to decrease prices on select items and draw traffic to your website. There are two ways pricing influences marketing performance: budget and efficiency. The following graphic illustrates the relationship between the two silos:. The price of a product online determines how much margin that product will make, a portion of which can be used for marketing.

If the product has high margins, marketers have more money to market a product. However, if a product has lower margins, there is less money for a marketing strategy.

When you are priced lower than your competitors, the chance customers will click on your ad and buy your product increases. These higher click-through rates CTR and conversion rates are signs of healthy, effective marketing campaigns.