The marketing mix - Agribusiness Management - page 153

Complications arise because these two price effects work in opposite directions. Lower
prices produce less revenue per unit, but usually generate an increase in quantity sold, while
the opposite is true when price is increased. Of course, increased sales mean that fi xed costs
are spread over more units; therefore, per unit costs may be reduced, at least to a point. The
net result is that pricing decisions are a real challenge to marketers.
Some price decisions involve highly complex mathematical methods, while others depend
on simple rules of thumb or intuitive judgments. The type of product, customer demand,
competitive environment, product life-cycle stage, and product mix are some of the factors
considered in price determination. A successful pricing strategy is made after giving careful
consideration given to the value delivered, the cost of the product/service bundle, the goals
of the pricing strategy, and the pricing strategies of competitors.
The perceived value of the product bundle becomes a ceiling on the price charged ( Figure
7.6 ) . If the fi rm sets the price higher than the perceived value, the customer's benefi t/cost
calculation moves in the wrong direction and the customer won't buy the product. Obviously,
fi rms must understand the value they provide to customers when developing a pricing
strategy.
The fi rm's total cost of providing the product bundle provides a fl oor on price. At least
over the longer run, the fi rm must cover full costs through the sale of the product if it is to
remain in business. However, the fi rm can never focus entirely on costs when making a pric-
ing decision. In the end, customers do not care what it cost the fi rm to provide a product
bundle; they only care about the value it creates for them.
The fi rm's pricing goals are important considerations in any pricing decision—what does
the fi rm want to accomplish with the pricing strategy? Is the goal to maximize market-
penetration, getting as much market share as possible, as quickly as possible? Or is the
agribusiness less concerned about market share and more intent on skimming profi ts in
the short-run, knowing that a premium price and strong margins will attract competitors
over time? A variety of other goals are possible, each with a unique impact on the fi rm's
pricing strategy.
Finally, the fi rm must evaluate the competition as it makes pricing decisions. In the end,
the agrimarketer wants to know what value competitors add and what pricing goals
they have for their bundle of products and services. This is important since the value the
Pricing range
Firm
cost
Figure 7.6 Upper and lower limits on pricing decisions