Price - Number 2 of the 4 P's in Marketing

Here is a detailed overview of the price segment within the marketing mix.  The perspective from a customer-centric point of view is in parenthesis:

 

Price (Cost).  What the customers pay for the product or service.  When determining a product’s price as it relates to the target market, and how to position that product in the market (positioning will be discussed later in this lesson), a company must consider how it must price the product in order to keep the business afloat.  Pricing mistakes can kill a good product.  First off, you need to determine the price in relation to the prices of similar products that either your company or your competition sells.  This is called the price point.  You then determine the point where you will make money on the product.  Here are some basic pricing strategies:

 

• Premium Pricing, which sets a high price because the product is unique.
• Penetration Pricing, which sets the price low to discourage competitors and capture a larger market segment.  Once the market share goal is achieved, pricing will be increased.
• Economy Pricing, which is used to sell no-frills products at a no-frills price.  Manufacturer and marketing costs are kept to a minimum in order to make a profit.
• Skim Pricing, which sets the price high to capture short-term profit until competitors enter the market or demand drops.
• Competitive Pricing, which is selling your product at the lowest price of all your competitors.  This strategy is used mostly when dealing with commodities and in retail where high volume is key.
• Cost-Plus Pricing, which takes the company’s cost to sell or make the product, and then adds on the profit in order to pay its bills, make payroll, etc.  For example, if a manufacturer’s cost to make the product is $60, and they need to make a gross margin (profit) of 40%, they would have to sell it for $100 (this was determined by 100 – 60 = 40 and 40 ÷ 100 = 40%).  The formula used to determine the gross margin of the product is by subtracting your costs from the consumer cost.  This type of strategy is used mostly with labor-intensive services and manufacturing businesses.  It is straightforward and ensures that you will make money if you are able to sell the product.  This could also be known as Keystone pricing.
• Discriminatory pricing, which is used for customers who will pay different prices for the same product or service, such as charging less for a child at an amusement park.
• Value Pricing, which bases the price on the value delivered to the customer.  An example would be a high tech product with very high appeal in which a customer is willing to pay a high price.  In time, however, the price will inevitably fall.  Another example of value pricing would be a fine dining restaurant in which you are paying more for the atmosphere, or because it is trendy.  In fact, high prices can automatically create the perception of value.  This phenomenon is called the Veblen Effect and can also be considered as Psychological Pricing.  This type of pricing goes against normal price theory in which the lower the price, the more you will sell.
• Promotional Pricing, which is a low price for just a temporary period.  The hope is for the consumer to like the product so much that they will pay the inevitable higher price.
• Geographic Price, which charges different prices for different regions.
• Pricing Leader, which determines whether you will be a price leader or follower.
• Fixed Pricing, which is non-negotiable between buyer and seller.
• Variable Pricing, which is negotiated between buyer and seller.
• Price Lining, which sets just a few prices for all of its product line.
• Customary Pricing, which has a set price at a standard level.
• Prestige Pricing, which equates price with quality and status.
• Optimal Product Pricing, which is selling options or accessories along with the main product.
• Captive Product Pricing, which sells the main product for a low price knowing that the consumer will have to continually buy supplies in order to use the product.  An example would be printer ink set at a high price with a high margin.
• By-Product Pricing, which is used to sell waste or by-products from the manufacturer of its core products.  An example would be an oil by-product used to make plastics.

 

It is a good idea to always consider all possible pricing strategies.  Pricing is dynamic because as products, competitors and customers change, so must the price.  Other economic factors like recessions, booms, inflation, and interest rates also come into play.

 

It is important to determine a pricing strategy.  You need to be able to make decisions to determine, for example, if you are looking for a profit or just a “Return On Investment” (ROI)?  You need to be able to answer questions like these.  For example, if a product costs more to make than you are selling it for, you might think there is no sense in making it.  However, you might want to attract customers to possibly buy other products you offer by selling this particular product.  It might be worth selling, even if you do not make any profit.  This is called a loss leader. 

 

Decisions need to be made regarding suggested retail price, volume discounts, wholesale pricing, cash and early payment discounts, seasonal pricing, and bundling.  The pricing structure can say a lot about the product.  If priced too high, it can drive customers away, while a price that is too low, may leave potential customers wondering what is wrong with the product.  The value of the product must justify the price.  This is why it is so important to clearly let the customers know what they are going to get.  For example, if your company provides 24/7 customer support, advertise that fact as it is a service that clearly adds value.  A low price shouldn't be the only competitive edge.  There will always be competition that will sooner or later beat that price.

 

While the price may motivate customers to buy, it is also just as important to state the features and value that are associated with the product that separates your product from the rest.  It is also important to know that Internet buyers are more price-savvy than traditional consumers because they can easily shop around for competitive pricing and features.  The bottom line, pricing needs to be competitive, yet still allows your company to turn a profit.  One last thing to keep in mind, there are laws that regulate pricing, such as the Clayton Act, regarding monopoly issues that might need further investigation.