Reasonable pricing plays an important role in achieving business goal. Price remains as crucial matter for business companies. Its importance is linked with various aspects. The importance of pricing is related mainly to economy, organization and customers. They can be mentioned as follows:
1. Importance to the economy
In fact, price is the important element of economy. It directly affects demand and saving. It also controls means of production. To make it clearer, a short description has been made as follows:
• Determinant of demand and supply: As the price of products directly affects demand, price plays an important role in determining the quantity of demand. So, price has been accepted as basic element. If the price is increased but the quality of the product is unchanged, and then demands of the products decreases, and if the price is decreased, demand for the products increases. In other words, when price decreases, demand increases, and when price increases, demand decreases, hence the low of demand applies. In this way, the quantity of demand and supply depends on price; price can be identified as determinant of demand and supplies.
• Effect to the factors of production: Price of products is very important to economy and industry. It directly affects wages, rent, interest and profits. Capital, labor, land and venture are the factors/means of venture productions. Wage for labor, rent for land, interest for capital, reasonable profits for venture should be distributed. The factors/means of production (wages, rent, capital and venture) affect demand and supply. Rate of wage attracts labor whereas high interest rate attracts capital. Hence, price strongly affects factors/means of productions.
• Effect to the saving and investment: Determined/fixed price for target market may affect inflation. This indicates that inflation causes increases in price of products. If the price of products or service increases, the customers get in difficulties. When the price of products or services increases, consumers’ saving decreases, due to which investment is discouraged. But, if price decreases and saving increases investment, investment also increases. This situation contributes to the development of society and nation.
2. Importance to organization
Price of product or services is an important element/factor of marketing mix. Price management is very difficult task for profit making organizations. So, rational decision should be taken for price management. Success in market competition can be achieved; income and profits can be earned only through price. The following points are discussed to make the importance of price clearer.
• Revenue and profit: Price plays an important role in determining income and profit of an organization. Total income can be made out/found out by multiplying per unit price by sold quantity. When sale quantity remains same, but price is decreased, income also decreases. If price is increased and sale quantity remains same, income is increased. Profit can be made out/found out also by subtracting total cost from total revenue. So, profit can be increased or decreased by increasing or decreasing price of products. But policy of frequent change in prices and profit/revenue is detrimental to the company.
• Competition: Business organization should face various competitions appeared in market. It has to face price competition certainly. If market competition increases in the price already fixed, the organization can attract increased number of customers by decreasing the price. This increases sales volume and decreases production cost.
• Expansion of the product line: Price directly affects organization to expand target markets and add product line. Price also helps in taking decision whether to add new product line or expand new product or not. This can be decided by comparing production cost with the price. If profit seems sure, decision for expansion should be taken. But, just opposite to it, if there is no possibility of profit but only loss, then decision should be taken not to expand the products.
3. Importance to the customers
Determination of price should be based on genuine reasons. If price has been determined rationally, this helps general customers. Following points can be discussed to make clearer the importance for general customers:
• Importance of the product selection: Most of the customers give priority to price and analyze it. They try to select products considering their prices. Such customers minimize quality and utility. They can take decision to buy the products which contain relatively low prices.
• Importance of the quality perception: Price plays an important role to meet customers’ necessity/want. Similarly, it is also equally helpful to assure them of the quality of the products. If high price products or services make the customers realize high quality and low price product signifies low quality.
• Importance of customers’ benefits: Price of products affects customers’ benefits. The customers by low priced products/goods even when the income sources have fallen down. In the situation when income has increased, demand for products does not decrease even if the price is high. The customers who are sensitive to price may take decision to buy products when the price has decreased or discount is provided. Some customers give priority to their social dignity, respect and satisfaction.