In terms of the marketing mix some would say that pricing is the least attractive element. Marketing companies should really focus on generating as high a margin as possible. The argument is that the marketer should change product, place or promotion in some way before resorting to pricing reductions. However price is a versatile element of the mix as we will see. Read more
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.
Pricing is one of the most important elements of the marketing mix, as it is the only element of the marketing mix, which generates a turnover for the organisation. The other 3 elements of the marketing mix are the variable cost for the organisation; Product - It costs to design and produce your products. Place - It costs to distribute your products. Promotion - It costs to promote your products. Price must support the other elements of the marketing mix. Pricing is difficult and must reflect supply and demand relationship. Pricing a product too high or too low could mean lost sales for the organisation.
Pricing Factors
Pricing should take the following factors into account:
A business can use a variety of pricing strategies when selling a product or service. The price
can be set to maximize profitability for each unit sold or from the
market overall. It can be used to defend an existing market from new
entrants, to increase market share within a market or to enter a new
market. One of the four major elements of the marketing mix is price. Pricing
is an important strategic issue because it is related to product
positioning. Furthermore, pricing affects other marketing mix elements
such as product features, channel decisions, and promotion. While there is no single recipe to determine pricing, the following
is a general sequence of steps that might be followed for developing the
pricing of a new product:
Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo).
Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts.
These steps are interrelated and are not necessarily performed in the
above order. Nonetheless, the above list serves to present a starting
framework.
Marketing Strategy and the Marketing Mix
Before the product is developed, the marketing strategy is
formulated, including target market selection and product positioning.
There usually is a tradeoff between product quality and price, so price
is an important variable in positioning. Because of inherent tradeoffs between marketing mix elements, pricing will depend on other product, distribution, and promotion decisions.
Estimate the Demand Curve
Because there is a relationship between price and quantity demanded,
it is important to understand the impact of pricing on sales by
estimating the demand curve for the product. For existing products, experiments can be performed at prices above and below the current price in order to determine the price elasticity of demand. Inelastic demand indicates that price increases might be feasible.
Calculate Costs
If the firm has decided to launch the product, there likely is at
least a basic understanding of the costs involved, otherwise, there
might be no profit to be made. The unit cost of the product sets the
lower limit of what the firm might charge, and determines the profit
margin at higher prices. The total unit cost of a producing a product is composed of the
variable cost of producing each additional unit and fixed costs that are
incurred regardless of the quantity produced. The pricing policy should
consider both types of costs.
Environmental Factors
Pricing must take into account the competitive and legal environment
in which the company operates. From a competitive standpoint, the firm
must consider the implications of its pricing on the pricing decisions
of competitors. For example, setting the price too low may risk a price
war that may not be in the best interest of either side. Setting the
price too high may attract a large number of competitors who want to
share in the profits. From a legal standpoint, a firm is not free to price its products at
any level it chooses. For example, there may be price controls that
prohibit pricing a product too high. Pricing it too low may be
considered predatory pricing or "dumping" in the case of international
trade. Offering a different price for different consumers may violate
laws against price discrimination. Finally, collusion with competitors
to fix prices at an agreed level is illegal in many countries.
Pricing Objectives
The firm's pricing objectives must be identified in order to
determine the optimal pricing. Common objectives include the following:
Current profit maximization - seeks to maximize current
profit, taking into account revenue and costs. Current profit
maximization may not be the best objective if it results in lower
long-term profits.
Current revenue maximization - seeks to maximize current
revenue with no regard to profit margins. The underlying objective often
is to maximize long-term profits by increasing market share and
lowering costs.
Maximize quantity - seeks to maximize the number of units
sold or the number of customers served in order to decrease long-term
costs as predicted by the experience curve.
Maximize profit margin - attempts to maximize the unit profit margin, recognizing that quantities will be low.
Quality leadership - use price to signal high quality in an attempt to position the product as the quality leader.
Partial cost recovery - an organization that has other revenue sources may seek only partial cost recovery.
Survival - in situations such as market decline and
overcapacity, the goal may be to select a price that will cover costs
and permit the firm to remain in the market. In this case, survival may
take a priority over profits, so this objective is considered temporary.
Status quo - the firm may seek price stabilization in order to avoid price wars and maintain a moderate but stable level of profit.
For new products, the pricing objective often is either to maximize
profit margin or to maximize quantity (market share). To meet these
objectives, skim pricing and penetration pricing strategies often are
employed. Joel Dean discussed these pricing policies in his classic HBR
article entitled, Pricing Policies for New Products. Skim pricing attempts to "skim the cream" off the top of the
market by setting a high price and selling to those customers who are
less price sensitive. Skimming is a strategy used to pursue the
objective of profit margin maximization. Skimming is most appropriate when:
Demand is expected to be relatively inelastic; that is, the customers are not highly price sensitive.
Large cost savings are not expected at high volumes, or it is
difficult to predict the cost savings that would be achieved at high
volume.
The company does not have the resources to finance the large
capital expenditures necessary for high volume production with initially
low profit margins.
Penetration pricing pursues the objective of quantity maximization by means of a low price. It is most appropriate when:
Demand is expected to be highly elastic; that is, customers are
price sensitive and the quantity demanded will increase significantly as
price declines.
Large decreases in cost are expected as cumulative volume increases.
The product is of the nature of something that can gain mass appeal fairly quickly.
There is a threat of impending competition.
As the product lifecycle
progresses, there likely will be changes in the demand curve and costs.
As such, the pricing policy should be reevaluated over time. The pricing objective depends on many factors including production
cost, existence of economies of scale, barriers to entry, product
differentiation, rate of product diffusion, the firm's resources, and
the product's anticipated price elasticity of demand.
Pricing Methods
To set the specific price level that achieves their pricing
objectives, managers may make use of several pricing methods. These
methods include:
Cost-plus pricing - set the price at the production cost plus a certain profit margin.
Target return pricing - set the price to achieve a target return-on-investment.
Value-based pricing - base the price on the effective value to the customer relative to alternative products.
Psychological pricing - base the price on factors such as
signals of product quality, popular price points, and what the consumer
perceives to be fair.
In addition to setting the price level, managers have the opportunity
to design innovative pricing models that better meet the needs of both
the firm and its customers. For example, software traditionally was
purchased as a product in which customers made a one-time payment and
then owned a perpetual license to the software. Many software suppliers
have changed their pricing to a subscription model in which the customer
subscribes for a set period of time, such as one year. Afterwards, the
subscription must be renewed or the software no longer will function.
This model offers stability to both the supplier and the customer since
it reduces the large swings in software investment cycles.
Price Discounts
The normally quoted price to end users is known as the list price.
This price usually is discounted for distribution channel members and
some end users. There are several types of discounts, as outlined below.
Quantity discount - offered to customers who purchase in large quantities.
Cumulative quantity discount - a discount that increases
as the cumulative quantity increases. Cumulative discounts may be
offered to resellers who purchase large quantities over time but who do
not wish to place large individual orders.
Seasonal discount - based on the time that the purchase is
made and designed to reduce seasonal variation in sales. For example,
the travel industry offers much lower off-season rates. Such discounts
do not have to be based on time of the year; they also can be based on
day of the week or time of the day, such as pricing offered by long
distance and wireless service providers.
Cash discount - extended to customers who pay their bill before a specified date.
Trade discount - a functional discount offered to channel
members for performing their roles. For example, a trade discount may be
offered to a small retailer who may not purchase in quantity but
nonetheless performs the important retail function.
Promotional discount - a short-term discounted price offered to stimulate sales.
Market segmentation is the first step in defining and selecting a target market to pursue. Basically, market segmentation is the process of splitting an overall market into two or more groups of consumers. Each group (or market segment) should be similar in terms of certain characteristics or product needs.
Definitions of market segmentation
The concept of market segmentation was first identified by Smith back in the 1950s. He was one of the first to recognize the importance of market segmentation, as shown in the following quote:
“Market segmentation is based upon developments on the demand side of the market and represents a rational and more precise adjustment of product and marketing effort to consumer or user requirements.” (Smith, 1956)
To clarify this statement in simple language, he basically saw market segmentation being an important tool to enable marketers to better meet customer needs. Since that time, market segmentation has become a widely accepted and used marketing approach. Here are some more recent definitions of what is market segmentation:
“Market segmentation is the process of splitting customers, or potential customers, in a market into different groups, or segments, within which customers share a similar level of interest in the same, or comparable, set of needs satisfied by a distinct marketing proposition” (McDonald & Dunbar, 2004)
“Market segmentation involves aggregating prospective buyers into groups that (1) have common needs and (2) will respond similarly to a market action.” (Kerin, 2011)
Both of these definitions highlight that market segmentation is designed to split customers into similar groups. They also indicate that market segmentation is simply a step in the process of identifying and evaluating potential target markets, which is best achieved by breaking the overall market into smaller, related groups of consumers. Therefore, an alternate definition provided by this market segmentation study guide is:
Market segmentation is the process of splitting a market into smaller groups with similar product needs or identifiable characteristics, for the purpose of selecting appropriate target markets.
Its objective is to design a marketing mix that precisely matches the expectations of customers in the targeted segment. Few companies are big enough to supply the needs of an entire market; most must breakdown the total demand into segments and choose those that the company is best equipped to handle.
Four basic factors that affect market segmentation are
clear identification of the segment, measurability of its effective size, its accessibility through promotional efforts, and its appropriateness to the policies and resources of the company.
Media (e.g. television, newspapers, and magazines) they see
Quantities they buy
Time and place that they buy
Market segmentation offers the following potential benefits to a business:
Better matching of customer needs
Customer needs differ. Creating separate products for each segment makes sense
Enhanced profits for business
Customers have different disposable incomes and vary in how sensitive they are to price. By segmenting markets, businesses can raise average prices and subsequently enhance profits
Better opportunities for growth
Market segmentation can build sales. For example, customers can be encouraged to "trade-up" after being sold an introductory, lower-priced product
Retain more customers
By marketing products that appeal to customers at different stages of their life ("life-cycle"), a business can retain customers who might otherwise switch to competing products and brands.
Target marketing communications
Businesses need to deliver their marketing message to a relevant customer audience. By segmenting markets, the target customer can be reached more often and at lower cost
Gain share of the market segment
Through careful segmentation and targeting, businesses can often achieve competitive production and marketing costs and become the preferred choice of customers and distributors
There are various methods (or "bases") a business can use to segment a market. You'll learn more about the details of these approaches in your later business studies. However, here is a summary:
