Marketing Mix | Pricing in Four P’s
After product, pricing plays a key role in the marketing mix. The reason for this importance is that where the rest of the elements of the marketing mix are cost generators, price is a source of income and profits. Through pricing, the organization manages to support the cost of production, the cost of distribution, and the cost of promotion.
Simplistically, price is the value measured in money term in the part of the transaction between two parties where the buyer has to give something up (the price) to gain something offered by the other party or the seller. Pricing is a complicated element, which needs to reflect supply and demand, the actual value of the object, and the perceived value of it in the mind of the consumer. A price that does not reflect these factors and is either too high or too low will lead to unsuccessful sales. This is why an organization’s pricing will change according to circumstances and time.
In this article, we look at 1) why is pricing important, 2) pricing objectives, 3) types of pricing strategies, 4) how to price, and 5) pricing issues.
WHY IS PRICING IMPORTANT?
There is often a tendency for marketers to focus more on activities like promotion, product development, and market research while prioritizing their responsibilities. These are often perceived as the more interesting aspects of the product and marketing mix. However, pricing needs to be given its due attention since it has great impact on the rest of the activities and the company. Pricing is of vital importance because of the following reasons.
Pricing as a Flexible Variable
Pricing changes can be made quickly and with almost no lead time if the business needs to make some product positioning changes or to counter a competitor’s activities. In comparison, a change to the product or to a distribution channel can take months and sometimes significant cost inputs. Similarly any promotion decisions will also require additional financial input. Though it is important to plan for pricing changes and their impact on the brand and product perception, this can still be accomplished much faster than any other changes.
Define the Right Pricing
Any pricing decisions for a product need to be made through proper research, analysis and an eye on strategic objectives for the organization and the product. A decision made too quickly with superficial assessment can result in a loss of revenue. A price below the perceived value can lead to both a loss in potential additional revenue and a target audience that judges the quality of the brand through price points. If this price is raised later on, the existing customers may feel like they are being unfairly burdened. A price set too high can result in potential buyers staying away altogether. Pricing is often done by a team of experts who spend time conducting research that considers all variables of the market and brand.
Pricing as a Trigger for First impressions
In some product categories, a consumer will form a perception about its quality and relevance as soon as they see the price. Eventually, the decision to buy or not may be based on the perceived value of the entire product or marketing mix offering. But there is always a danger that the first impression triggered by the price point will either make the rest of the offering irrelevant or it will be a biased assessment.
Pricing as a Key to Sales Promotions
Sales promotions are often a short time price based offering such as a percentage reduction or a two in one type offer. These are meant to generate interest in the product or make use of a special occasion or event. Used wisely, this can be a useful method of increasing sales but the company must avoid the temptation to offer these special prices too often. In this scenario, buyers will put off purchasing the product till the next sales promotion of price reduction.
Before any pricing decisions are made, a company must establish what it means to achieve through pricing. Often, these objectives include:
1. Profit Maximization: Keeping in mind revenue and costs, a company may want to maximize profits. Profit maximization objectives should be long term and not focus only on the short term.
2. Revenue Maximization: With less focus on profits, a company may focus on increasing revenues in order to increase market share and lower costs in the long term.
3. Maximize Quantity: A company may want to sell a specific number of items to decrease long term costs.
4. Maximize Profit Margin: Another objective may be to increase the profit margin for each unit and not focus on the total number of units sold.
5. Quality Leader: A company may want to use price to signal high quality and establish itself as the quality leader.
6. Partial Cost Recovery: If an organization has multiple revenue streams, it may not be too focused on recovering a hundred percent of its costs.
7. Survival: Sometimes, the best a company may want to do is to cover costs and to remain in the market. If the market is in decline or there are too many competitors, survival may take temporary priority over profit.
8. Status Quo: There may be a need to avoid price wars with competitors. So a company may maintain a stable price to continue a stable profit level.
TYPES OF PRICING STRATEGIES
There are a number of pricing strategies that a company can use to sell its product. The strategy used at any time will depend on the company’s strategy and objectives. Some of these pricing strategies are the following.
A low price is set by the company to build up sales and market share. This may be done to establish position in a market with preexisting similar products on offer. Once a position is created, the prices may be raised. A satellite channel provider may offer an introductory price and then increase as business grows.
Here, the initial price is set high and may slowly be brought down. This will allow the company to introduce the product step by step to different layers of the market. Electronic and tech gadgets often start at a very high price which is subsequently lowered with the lowest point reached right before a new model is launched.
When trying to go head to head with competitors offering similar benefits, a company may decide to:
a. price higher to create a higher quality perception or to target a niche market
b. price the same to show more benefits for the same price
c. price lower to try to gain a wider customer base
Product Line Pricing
Here, different products in the same range may be set at different prices. Television sets are priced differently depending on whether they are HD or not, whether they have wifi features of not and whether they are 3D or not.
A group of products may be bundled together and sold at a reduced price. Supermarkets often use this method through their ‘buy one get one free’ offers.
Often a company will make small changes to prices to make a customer think the item is priced lower than it is. This is often seen in prices ending in 99. For example, an item market 199 will be perceived as closer in price to 100 than 200.
A high price is set to establish an exclusive product of high quality. Designer cars and premium brand stores are a good example of this type of pricing.
A company may add optional extra items within the price to increase a product’s attractiveness. Car sellers may offer car insurance for the first year for example.
Cost Based Pricing
Simply, a company may determine the exact cost of producing and selling an objective, add a markup that may be desirable for profits and price accordingly. This method may be used in a changing industry where even costs of production are unpredictable.
Cost Plus Pricing
A percentage is added to the costs as a profit margin to determine final price.
HOW TO PRICE
Basic Pricing Process
As previously mentioned, a company’s pricing strategy and method changes with circumstances and time. This is why there is no fixed methodology to aid a company in its pricing endeavors. However, the following steps can act as a general guideline:
1. Develop Marketing Strategy
A detailed market analysis acts as a logical starting point for pricing decisions. A business follows up a market analysis with a division and definition of the market into segments each with its distinct requirements and needs. After this, a decision needs to be made regarding the desired segments to be targeted. The product and brand positioning is then based on these identified segments.
2. Make Marketing Mix Decisions
Once the segments and positioning is somewhat in place, the marketing mix planning comes into effect. Here the product, distribution, and promotional elements are decisions to focus upon and to finalize.
3. Estimate Demand Curve
Another market analysis needs to be conducted at this point. In this one, there needs to be specific information gathered about how the price affects the quantity of the product demanded.
4. Calculate Costs
A company can now get an accurate assessment of the total fixed and variable costs associated with the product. These are a necessary inputs for pricing decisions as the final price needs to at least cover these costs.
5. Assess Environment
Another vital element that feeds into pricing is the environment. This means an understanding of the competitor’s strategies, their product and its value as well as an understanding of any industry or legal constraints.
6. Set Pricing Objectives
As detailed above, there are several objectives that a company can have from its pricing strategy. This is the point in the process that those objectives need to be discussed and agreed upon.
7. Determine Price
Using all the information collected and analyzed till this point, a company is now in a good position to set the best price for its products. A pricing method and structure can be formulated along with any possible sales promotions or discounts.
These steps are no necessarily all followed in this sequence. Some steps might be skipped or bundled together, while others performed at different stages in different order depending on several factors, like product or business model.
Factors That Affect Pricing
There are several basic factors that affect pricing for almost all companies and industries. These can be categorized as internal factors and external factors.
These are those elements that are under the control of the organization. However, it is vital to note that though they may be within the company’s domain of control, changing them may not be as easy as it seems. For example, production process changes may require significant cost, time and process redesign. Internal factors include:
- Fixed and variable Costs
- Company objectives and strategies
- Market segments, targeting and positioning decisions
Those factors which have a significant impact on pricing decisions but are not completely controllable by the company are known as external factors. Since these are very important to the pricing method, a company can exert some control by conducting detailed analyses to understand in depth how these factors will behave. External factors may include:
- Target market behavior and willingness to pay
- Industry trends
- Industry or legal Constraints
In business, there are often grey areas that may seem simple but are often difficult to address. Some issues such as minimum wage, worker benefits and safe work environment are easy to understand, others such as pricing strategies can sometimes become quite blurry and difficult to judge on an ethical scale. Though there are legal measure in place to prevent unethical pricing methods, there are many areas not controlled by laws that can nonetheless create negative situations for buyers. For example, misleading promotional campaigns or the use of harmful or low quality materials can lead to incorrect buying decisions.
It is often impossible to prove that a misstep by a company is deliberate or not. These grey areas can be entered upon accidently by a company as well. Some of these grey areas to watch out for are:
In a competitive market, prices are often lowered to the benefit of the consumer. If these competitors were to get together and decide to sell at a fixed price, it would mean more expensive products for the user and more benefits for the company. It is therefore, a good idea for a company to study the competition and the market, but not to enter agreements to the detriment of the consumer.
When the same product is sold at different prices to different sets of consumers, it is called price discrimination. This is a tricky category, as special offers for seniors and children are acceptable while presenting only high cost options to higher income consumers may not be well received.
When a product is priced high initially and then eventually sold at lower prices, it is called price skimming. The company aims to gather maximum benefit from premium users first and then slowly move down the chain to access all levels of consumer groups. Usually employed in the tech industry, if not managed well it can create a negative impression in the consumer’s mind. Eventually, some people may catch on to the pattern and stop buying till a lower price is introduced.
Sometimes, the value attached to a product may be much higher than its cost. This allows a company to charge a premium price for their products. The grey area here is whether the company should follow this practice in all instances. If there is a shortage of a necessary good, or a special situation such as a natural disaster, then this opportunistic pricing may be very unethical.
However, software products that may be less expensive to produce but offer great benefit may not be similarly frowned upon. It is a good idea for a company to assess whether their premium pricing limits a consumer’s access to a necessary item such as food or medicine.
Pricing plays a very important role in determining a products perceived value, in building brands and in ensuring long term profits and sales for the company. It is therefore important to give it due importance and allow in depth analyses to become the basic of pricing decisions.
Marketing Mix – Pricing
Welcome to the 23rd episode of our podcast with Chris Kelsey from Cazza! You can download the …