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Business

Markets and marketing for entrepreneurs - VI
Is pricing an art or a science?
By Nilooka Dissanayake
It is not clear whether pricing is an art or a science. It is the same for marketing, the field to which it belongs. I prefer to call them both art-sciences.

The Oxford dictionary defines a science as "an organised body of knowledge". Pricing is a science to the extent that there are theories and scientific techniques concerning it. Economists draw charts and relate to it in very straightforward, black and white terms. If demand increases and there is not enough supply, the market prices will increase, they tell you. It works in the opposite direction too. Think of seasonal fruits like mango and you will agree.

Economists also talk of price elasticity. That is, the extent to which demand will change as you change the price. As economics books say, the price of salt will not affect the demand. How ever much you increase the price, people will buy it. So, the demand for salt is called price inelastic. This works to some high degree with liquor, cigarettes and addictives. Which is why governments are always happy to raise taxes on cigarettes and alcohol. You can fool some people all the time!

Pricing is also an art. It is an art because it requires more than theories and techniques to fix it and to get away with the result. An art requires human creative skill or an application of that skill. No marketer will deny that!

Pricing may be an art, but it also goes back again to the sciences of human behaviour and psychology. "O what a tangle web we weave," exclaimed Sir Walter Scott, "when first we practice to deceive!" Was he talking of marketing? Probably not. But it does apply to what a lot of people do pass off as marketing these days.

So, as a would-be entrepreneur you need to apply the art-science of pricing. Notice that I could have equally well put science first. But, I have not. I believe pricing has more to do with subtle human feelings of the consumer and the philosophy and style of the seller or the vendor. Prices do matter - to the consumers. But, other things matter too. Science will help you understand; but, it requires empathy and deep insights into the chosen segment of customers to really apply what you learnt and to succeed in retaining loyalty.

In a science all things are limited and fall within a narrow scope. But, this is not so with art. So in practicing the art-science of pricing, there are no set rules. On the other hand, make a blunder and your consumer will decide your fate.

Think of luxury cars. Did you know that sales of luxury cars go down if the carmaker is seen as going slightly "down market" by producing cheaper models? Quite a few carmakers have learnt this lesson. What do we understand from this? When you buy a luxury car, you are not simply buying it as a mode of transport. You are buying a lifestyle. The premium price you pay is called the snob value. So, the secret of pricing lies in understanding the consumer.

In theory, there are two basic ways of pricing. One is to take your costs and add a margin to decide the selling price. In the old days, when goods were scarce, competition was non-existent and it was a sellers' market, businesses could afford the luxury of cost and mark up method. Amazingly, there are still dinosaur businesses taking this approach to pricing. But they are slowly dying. Nothing can stop extinction except waking up and adapting to the world. Today, more than in the days of Charles Darwin, it is all about survival of the fittest. So, in your new business, think of pricing to market also as an option. Here, there is an established price or range of prices which consumers will be willing to pay.

Do not take a resigned view if the profit you get by pricing to market seem utterly inadequate. Remember that customers pay for value. For the most part, they don't know or care for your costs. So, if you want them to pay you a higher price than everyone else, give them more than everyone else is giving. That is simple enough. But, don't stop there. Keep reminding yourself of the extra value you deliver. How you deliver better value and communicate takes us back to the Four Ps. Price may be only a number, but it is a very important one to both your profitability and to your customer. Watch it carefully, but don't forget the rest of the 4 Ps. Send your comments to btimes@wijeya.lk or call 074-304100.

(The writer is a Chartered Management Accountant by profession with a Masters in Business Administration from the University of Strathclyde in Glasgow. She is the Managing Editor of Athwela Vyaparika Sangarawa (Athwela Business Journal), the only Sinhala management monthly targeting the small and medium-sized business operators.)

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