The Price is Right

Welcome to Topic 7: The Price is Right. In this topic you will learn about:

• What price is
• Essential pricing considerations
• Other pricing considerations
• Price elasticity
• Pricing strategies for new and existing products.

Have you ever bought a product and think that it is ‘good value for money’? Take a second to reflect and figure out what made you think this. This topic explores and examines another element within the marketing mix – price. Having a high-quality product that delivers all the benefits customers require is not enough. We must also make sure that customers feel that the price is justified, while covering our costs in producing the product too.

These relate to the Subject Learning Outcomes:

1. Evaluate market conditions and consumer needs when forming marketing strategies.
2. Describe a range of common strategies for use with each of the various marketing mix tools: product, pricing, promotion, and distribution.
3. Recommend and justify an appropriate mix of such strategies to form a cohesive overall strategy to address given marketing tasks or situations.

Welcome to your pre-seminar learning tasks for this week. Please ensure you complete these prior to attending your scheduled seminar with your lecturer.

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What is price?

From a business perspective, price is the amount of money charged for a product (Kotler & Armstrong 2021). Whereas from the customer’s perspective, price is the amount of money paid to acquire a product. This relates to marketing exchanges whereby something of value (money) is traded for another thing of value (product benefits).

Within the marketing mix, price is the only element that directly generates revenues. Therefore, it can affect the operating margin or profitability of a business. It is shown that a 2 to 7 percent increase in return on sales can be expected just from effective pricing strategies (Chan et al. 2015).

Price serves two functions – to create value and to capture value (Kotler & Armstrong 2021). A higher price may signal higher quality, thereby creating more value. When a customer is willing to pay more due to the perceived value of a product, the value is captured through a higher price.

Essential pricing considerations

Managers often face this conundrum: charging too little can leave the company without enough revenue to maintain the business, but charging too much can drive customers away. Somewhere along this fine line are competitors’ or substitute products that often serve as a frame of reference for how much one should be paying. As such, when it comes to employing a pricing strategy and setting a price for a product, there are three essential elements to consider:

1. Cost
2. Value
3. Competition.

Cost

Costs will dictate the minimum price required to be charged in order to make a profit or to break even (when no profit nor loss is made). When costs are discussed, the first thing that comes to one’s mind might be the cost of goods sold, for example raw materials and salaries. However, it is important not to overlook other marketing-related costs such as advertising costs and commissions. The following video explains the two (2) types of costs, fixed costs and variable costs.

Value

Would you pay for something that is not useful to you, does not satisfy your needs, nor deliver you any benefits? The answer is probably no. Why? Because the product does not bring you any value. Perhaps it might bring value to others but not you.

From our previous topic, you would have had a good understanding of what consumers truly value in a product or the core benefits they receive. The next step is to set a price to capture that value (Kotler & Armstrong 2021).

From looking at the equation below, we can see that perceived benefits and perceived costs act as a lever for customer value. For businesses wanting to deliver more value, they can either increase perceived benefits or reduce perceived costs. While costs to the customers include other non-monetary costs such as time and effort in acquiring a product, we will focus on the monetary aspect here, which is the price paid for a product.

To increase perceived benefits, a business will turn to improving their actual and augmented products. For example, improving product features, quality, branding or after-sales services. Consumers do not evaluate a product based on what happens behind the scenes but rather what it does for them. In other words, the benefit they personally receive.

Educating the consumers is just as important as improving the product itself. Businesses should be highlighting how the product can benefit consumers through their promotional strategies (Leszinski & Marn 1997). If consumers do not perceive the benefits or if the benefits are not really beneficial to them, then it would not deliver any value. The following comedy sketch demonstrates how a number of different factors can influence the perception of benefits by consumers thereby increasing their willingness to pay:

Another route to increase the value delivered is by lowering the perceived cost (price) for customers. When a person describes a product as ‘good value’, they typically refer to getting their money’s worth from a purchase or purchasing a high-quality product at a low or reasonable price. Some companies do this particularly well by delivering value via everyday low prices so their customers can spend less and save more – think Aldi and Costco.

Competition

When purchasing products, consumers often evaluate a product’s value by comparing prices for similar products on the market (Kotler & Armstrong 2021). This allows them to have a sense of the ‘going-rate’ or average price within an industry. However, this is not to say that a business must always price their products similar to their competitors.

A business can choose to price above its competitors, below its competitors or even ignore it altogether. If they can deliver more value for customers or have a highly differentiated product then a higher price is justified.

Other internal and external considerations

Setting prices will also depend on the other marketing mix elements and how the product is positioned within a market. The relationship between price and quality has long been investigated and suggested by academics (McConnell 1968). Price can act as an indicator for quality where, typically, a higher price signals higher quality. If a product is being positioned as high-end and high-income earners are the target market, then charging low prices may not be wise. The following video demonstrates how consumers often associate price with quality.

As mentioned in our previous topic, economic forces within the macro-environment can have a profound impact on the purchasing power of consumers. During a recession, consumers will become more value-conscious as their disposable income may be affected (Kotler & Armstrong 2021). For some businesses, dropping prices is a way to generate demand during an economic downturn. But it is a good strategy?

Price elasticity

Are there certain products that you will stop buying if their price increases? How much of an increase in price would you tolerate until you stop buying the product? According to the law of demand, if a product is more expensive then consumers will buy less of it. What this does not tell us is how sensitive consumers are to the price changes. This is why we should understand the concept of price elasticity, which is the responsiveness of demand from a change in price (Kotler & Armstrong 2021).

Why is this important for businesses? This would allow them to decide on whether to increase or decrease prices to maximise revenue. If a business raises its prices but only loses a few customers, they can still make more revenue from the increased price. Conversely, if introducing a discount does not drive a substantial amount of sales, then it is not a good decision, since customers who are already willing to pay will now pay less.

Different products are also subject to different price elasticities. Naturally, the goal for marketers is to create inelastic demand for their products and ensure customers are less price sensitive. The following video explains the factors that affect the price elasticity of demand.

Pricing strategies

For new products

Pricing in the initial stages of the product life cycle is tricky as there will be the burden of educating consumers about the new product while trying to recoup the initial investments before competitors start entering the market. The two options here are to either charge high or low from the outset (Dean 1976). Access the following articles to learn about the different pricing strategies for new products:

• Market skimming – Entering the market with a higher price initially to skim revenues from those willing to pay (Beltis 2019).
• Penetration pricing – Entering the market with a low price initially to lure customers (Prater 2021).

For existing products

Pricing in the later stages of the product life cycle may require revisions to its initial strategies as the market may be saturated with competitors, leading to a weakening in brand preference or disruptors may exist in the market (Dean 1976). Access the following articles to learn more about the different pricing strategies for existing products:

• Dynamic pricing – Pricing a product based on the current demand for it (Fuchs 2021).
• Differential pricing – Charging different prices to different market segments or different purchase scenarios (Hunter 2021).
• Bundle pricing – Packaging a number of products together and selling it at a single price (Gleason 2018).
• Loss leader pricing – Pricing some products at a loss to attract customers to stores (Coleman 2021).
• Discounting – Lowering prices for a limited amount of time to increase revenue (Simpkins 2021).

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The learning tasks are listed below. These will be completed during the seminar with your lecturer. Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.

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In-seminar learning tasks

The in-seminar learning tasks identified below will be completed during the scheduled seminar. Your lecturer will guide you through these tasks. Click on each of the following headings to read more about the requirements for each of your in-seminar learning tasks.

Welcome to your post-seminar learning task for this week. Please ensure you complete this after attending your scheduled seminar with your lecturer. Your lecturer will advise you if this is to be completed during your consultation session.

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Each week you will have a consultation session, which will be facilitated by your lecturer. You can join in and work with your peers on activities relating to this subject. These session times and activities will be communicated to you by your lecturer each week. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.

Click here to access your consultation session.

Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.

Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)

• Dolan, RJ 1995, How do you know when the price is right?, Harvard Business Review
• Chung, S, Kermisch, R & Burton, M 2019, Why you shouldn’t slash prices in the next recession, Harvard Business Review

References

• Abdelnour, A, Babbitz, T & Moss, S 2020, Pricing in a pandemic: Navigating the COVID-19 crisis, McKinsey & Company, https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/pricing-in-a-pandemic-navigating-the-covid-19-crisis
• Abdelnour, A, Babbitz, T & Moss, S 2020, Pricing through the pandemic: getting ready for recovery, McKinsey & Company, https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/pricing-through-the-pandemic-getting-ready-for-recovery
• Beltis, AJ 2019, Everything you need to know about price skimming strategy, Hubspot, https://blog.hubspot.com/sales/price-skimming-strategy
• Berkshire Hathaway 2008, Berkshire’s Corporate Performance vs. the S&P 500, https://www.berkshirehathaway.com/letters/2008ltr.pdf
• Chan, K, Jubas, J, Kordes, B & Sueling, M 2015, Understanding your options: Proven pricing strategies and how they work, McKinsey & Company, https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/understanding-your-options-proven-pricing-strategies-and-how-they-work
• Coleman, B 2021, The risks, benefits, and point of a loss leader pricing strategy, Hubspot, https://blog.hubspot.com/sales/loss-leader-pricing
• Dean, J 1976, Pricing policies for new products, Harvard Business Review, https://hbr.org/1976/11/pricing-policies-for-new-products
• Decker, A 2021, The ultimate guide to pricing strategies, Hubspot, https://blog.hubspot.com/sales/pricing-strategy
• Dholakia, UM 2016, A quick guide to value-based pricing, Harvard Business Review, https://hbr.org/2016/08/a-quick-guide-to-value-based-pricing
• Fuchs, J 2021, The plain English guide to dynamic pricing, Hubspot, https://blog.hubspot.com/sales/dynamic-pricing
• Gallo, A 2015, A refresher on price elasticity, Harvard Business Review, https://hbr.org/2015/08/a-refresher-on-price-elasticity
• Gleason, D 2018, Product bundling strategy: how to get it right, https://cxl.com/blog/product-bundling/
• Heda, S, Mewborn, S & Caine, S 2017, How customers perceive a price is as important as the price itself, Harvard Business Review, https://hbr.org/2017/01/how-customers-perceive-a-price-is-as-important-as-the-price-itself
• Hunter, R 2021, Differential pricing: what is it and how to use this pricing strategy effectively, https://www.simon-kucher.com/en-au/blog/differential-pricing-what-it-and-how-use-pricing-strategy-effectively
• Indounas, K 2006, ‘Making effective pricing decisions’, Business Horizon, 49:415-424.
• Kotler, P & Armstrong, G 2021, Principles of Marketing Global Edition, 18th edn., Pearson.
• Leszinski, R & Marn, MV 1997, Setting value, not price, McKinsey & Company, https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/setting-value-not-price
• McConnell, DJ 1968, ‘The price-quality relationship in an experimental setting’, Journal of Marketing Research, 5(3):300-303.
• Peters, B 2021, How to price a product: a scientific 3-step guide (with calculator), Sumo, https://sumo.com/stories/how-to-price-a-product
• Piercy, NF, Cravens, DW, Lane, N 2010, ‘Thinking strategically about pricing decisions’, Journal of Business Strategy, 31(5):38-48.
• Prater, M 2021, The beginner's guide to penetration pricing, Hubspot, https://blog.hubspot.com/sales/penetration-pricing
• Simpkins, T 2021, the ultimate guide to discount pricing strategies, Omnisend, https://www.omnisend.com/blog/discount-pricing-strategy/