Blog Eight: If the Price is Right!

COME ON DOWN! There are four main components in the marketing mix, Product, Place, Promotion and Price! Price refers to the monetary amount which is exchanged for the ownership or use of a good, a service, or an idea. 

Consumers spend a large amount of time considering the price of a good, service, or idea in determining its value when it comes its perceived benefits such as its quality, durability, status, etc.
                 In other terms, Value= the Perceived Benefits
                                                             the Price
The greater the benefits, the greater the value, and the more a customer is willing to pay.

This gives companies a lot to think about when selecting the right price for their product, service, or idea. Obviously the ultimate goal is to turn a profit, meaning that the company's production costs associated with the product, service or idea are covered from their sales, and there is still money left over.

                 In other terms, Profit= Total Revenue x Total Costs
                                         where total revenue is the unit price x quantity sold,
                                         and total costs are fixed costs + variable costs

So how do company's determine what price will give their product, service or idea the most consumer value, while also producing the greatest potential profit for the company?

Using several different pricing approaches the price for a product, service, or idea can be established. These approaches are broken down into 4 distinct categories of pricing strategies, demand-oriented pricing, cost-oriented pricing, profit-oriented pricing, and competition-oriented pricing.

Demand- Oriented Pricing takes into account the styles, preferences, tastes, and needs of the consumer. Demand can be generated using several different pricing strategies.

• using penetration pricing, a low price is initially set in order to generate demand. 

  

  By offering consumers their first month of service for free, Netflix has established a penetration pricing strategy to attract subscribers. 

• in a price skimming strategy, a high price is initially set in order to satisfy the needs of consumers while associating the high price with a high value, and covering the initial production and marketing costs. 

  

  The new Google Glasses are priced at $1500, a clear price skimming strategy implemented by Google to position Google classes as a high quality product in the "eyes" of consumers.

• company's may adopt a price lining strategy when selling a complete line of products with different features, distinguishing such features such as quality by establishing an even incremental increase in price as the quality of the product increases within the product line. 

  

  each jacket may be set at different prices within even increments based on its features compared with that of other jackets in the line.

• using odd-even pricing products or services are priced at dollars to cents under an even number, presuming that consumers will see this as a good deal. 

  

  Arizona Iced Tea is priced at 99 cents, which is interpreted by the consumer as "less than one dollar."

• in setting a target price company's work backwards with manufacturers to determine the price a consumer would be willing to pay for a particular product, and tailor the product to suit that specific price. 

  

  Cannon uses target pricing with their cameras.

• company's use bundle pricing to sell two or more products at one single package price. The idea behind this is to lower marketing costs while selling a variety of products. 

  

  Kentucky Fried Chicken's Value menu offers combinations of entrees sides and drinks at one package price. 

• in yield management pricing the price of the good, service, or idea is always changing based on the time of day, week, month, or season. 

  

  Airlines use yield management pricing strategies to maximize profits by charging more during holiday seasons when there is an increased demand.

• using prestige pricing a high price is set to attract consumers concerned about status and quality of products. 

  

  The cost of one Cartier 'love bracelet' in yellow, pink, or white gold is $6,600- clearly a high quality product intended for consumers of high status. 

Cost-Oriented Pricing focuses on the costs of producing a product, service or idea rather than the demand that it creates. 

• in standard markup pricing a fixed percentage is added to the cost of all products to arrive at the final price. 
• in cost-plus pricing a specific amount is added to the cost of a product to arrive at a final price.

Profit-Oriented Pricing targets a specific profit that is desired.

• Target profit pricing sets a specific dollar volume desired as a profit. 
• Target return-on-sales pricing sets a specific percentage desired for profit.
• Target return-on-investment sets a specific percentage desired for a return on an investment.

Competition-Oriented Pricing focuses on prices of similar products and competitors within the market. 

• Customary pricing follows the standard, or traditional price of a product within the marketplace. 
• Above-, at-, or below-market pricing uses the prices of similar products in the marketplace as a benchmark in establishing the price.
• in a loss-leader pricing strategy, a product is intentionally sold below market value and its customary price in order to attract sales.

It is important to consider the demand, the costs involved in production, the desired profit, and the prices of competitors in establishing the right price for a product. Once an appropriate pricing strategy is selected, hopefully the right price will be produced so consumers see value in the product, and company's can produce a profit! 

Pricing, like life, is one big balancing act- but if you work hard at establishing the right pricing strategy for your product, the price will be right!