Price is the only factor among the 4P's which can earn revenue and profit, the remaining 4ps denotes expenditure. So the company has to come up with pricing strategy and consider other factors which affect the price .Price plays an important decision maker for a customer to purchase the things. Price should give the value of the money the customer is paying (Jobbers, 2007).Customer usually perceived the quality of the product through price of the product. "It is a convenient judgment criterion, has snob value and influences the perceived risk" (M.C .Cant, J.W.Strydom, C.J.Jooste, P.J du Pleiss, 2007)
According to (M.C .Cant, J.W.Strydom, C.J.Jooste, P.J du Pleiss, 2007) the pricing model can be followed and it is explained as given below:
Source: [M.C .Cant, J.W.Strydom, C.J.Jooste, P.J du Pleiss, (2007), p.325]
Factors that influence pricing are:
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Demand Constraint: Demand sets the price of the product where it can reach maximum. If the price of the product is set very high then there will be no demand of the product and it is thus zero if customer are not willing to pay such high prices.
Cost Constraint: When we say cost it consists of four things i.e. total cost, fixed cost, variable cost, marginal, incremental cost. It determines how much the price of the product should be since cost should cover the cost of production and marketing and it should return more than the capital invested and the risk associated. It determines the floor of.
Competitor Prices: Competitor's price will help to set the price of the product to low or either goes for promotional item according to the strategies used by the competitor. In short it helps in cutting price.
Pricing objective covers:
1) Profit Objective: Its objective is to obtain maximum profit, keep a target profit, to get profit from each product and it should be a satisfactory profit.
2) Sales-Volume Objective: Its aim is to increase the sales and volume such that the market share also increases respectively.
3) Other pricing objective: It includes no price competition, to maintain a constant price so that it will be stabilized and to sustain in the market.
Determining the basic price:
1) Cost Oriented Methods: It discusses whether to use absorption/full or direct/variable costing. The absorption method uses both full and direct costs while calculating the production cost and all other cost are also included while the direct costing uses only the margin cost to set the price of the product.
2) Customer-Oriented Pricing: Here the prices are set according to the customer perceived
value and according to the customer demand and the willingness of the customer to buy that product. But while doing so the firm may set a price that does not cover the production and marketing costs and it may go through losses instead of the profit. So the price should be set such that it is according to the customer perceived value and it equals or exceed the marginal cost.
3) Competitive Oriented Methods: The firm sets the price according to the price set by the competitor without taking into consideration their production costs and demand which may lead to loss. They may not charge the same price as the competitor instead they may sell it at a bit lesser than the competitor's price or may add an additional item as an offer when they buy that particular product.
Price Level: The firm will determine whether to follow one-price policy or flexible policy while pricing the product.
External factors that effect pricing decision of ALDI:
Customers and consumers:
ALDI targets mainly the sector of people whose main concern is low price and ALDI follows the strategy offers the product at the lowest price possible.
ALDI distribution strategy is directly from the warehouse to the store. They do try to put minimum costs as far as distribution is concerned.
ALDI has strong competitors like TESCO, ASDA, Lidl, Netto which also follow the same kind of pricing strategy has what ALDI has followed.
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By using Price-Quality matrix, let's see the type of matrix ALDI exhibits and can find out the quality of the product accordingly.
Fig: Price Quality Matrix of ALDI
It can be seen from the Price Quality Matrix that ALDI follows the strategy of "high value and low pricing" strategy. And their main objective is "highest quality products at the lowest prices"( http://www.aldiuscareers.com,1st Novemeber,2010).The other competitor like Asda, Tesco follows the same strategy as ALDI and therefore ALDI has to keep on par with their strategies and should try new innovative pricing strategy to sustain in the market. Other competitors have high quality and high value strategies but when a super store like ALDI is offering product at low price but of high quality ALDI will have more market share and profits and thus revenue will be more .