Welcome to my fourth post on marketing. If you have not read the first three posts, I encourage you to read the introduction post and the articles on products, people, promotion, and place before reading this article.
The fifth P being “Price” is extremely important in all aspects of business. From the buyer’s perspective, price determines if the product has any purchase value. In fact, perceived value in the purchase of a product is the difference between the benefits reaped from a product and its price (value = benefits – price). Prices that are too high or too low send the wrong message to the customer, and this is especially true at product launch. High price creates a perception of low value. Low price may create a perception of poor quality because buyers often think that benefits of owning a product must be somewhat equal to the product’s price.
From a marketer’s perspective, pricing is a strategic tool that requires market research. First and foremost, pricing directly affects how much money you can make. Ideally, a product or a service’s price is what it is worth to a target audience group at a specific time; in other words, it is the highest amount you can charge the customer such that they still buy your product. At a minimum, though, a price should be set high enough to meet the company’s minimum profit expectations, be equal to the perceived benefits to the customer at a specific time and location, and be comparable to competitor prices after considering differences in quality, features, and brand perceptions.
Initial price setting requires market research into the firm’s break-even point for reaching minimum required profits, your customer’s value perception, and the competition prices. You should answer the following questions before you set a price for your products:
- How much does the product cost (break-even point)?
- Who has the problem/need/want we solve?
- What is the magnitude of the problem?
- What are the client’s quality expectations? (see the post on product)
- What are customer buying behaviors (see the post on place)
- What other options in this market solve the same problem?
- Who can solve the problem as well as (or better than) we do?
- Are you in a monopoly, oligopoly, or pure competition?
Regardless of what your current prices are and how the market reacts to your prices, changes in price should be proactive or responsive, not reactive. Pricing should align with the benefits of the product, the company’s short-term and long-term business objectives, the life-stage of the product, and your desired status/image for the product (e.g. premium product vs discount product). For example, a product being launched and is intended to steal market share may be priced differently, with an emphasis on cash flow, revenue, and market share, when compared a mature product for which profitability is of main concern. If maximizing profits is the goal, the chosen price should maximize the product’s contribution margin, ignoring fixed costs. As a refresher, please read the below formula:
contribution margin = revenue – cost = (Price x unit sold) – (cost x unit sold)
If contribution margin is maximized at two different price points, you should sell at higher price and lower quantity to achieve lower overhead, less inventory, and an elevated image.