Let's continue our discussions of the changing Principles of marketing and take a look at the "P" of Price. Why is price so important? Well, for one thing, the "P" of Price is directly related to the generation of revenue. If prices are too high, even though the product or service may be good, nobody will buy it. If the price is too low, the marketer leaves precious profits on the table. Take for example, Mazda's introduction of the Miata. Miata hit the streets with a sticker price of $15,000 which was determined internally as the "targeted" introductory price. When the Miata hit the streets, demand was so high that dealers were selling the cars at $25,000. By incorrectly pricing their product, Mazda left thousands of profit dollars on the table.
Most companies determine the price of their products by some internal "cost plus" based formula. In other words, they know what it costs to manufacture their product or deliver their service to market, and then, add some standard percentage mark up for profit. Sometimes companies will use a break even pricing strategy which is also a cost plus based strategy. This strategy entails pricing products at cost or just barely over cost hoping to gain economies of scale through sheer volume and hence, derive a small profit. This approach incorrectly assumes two things; first, that the manufacturing advantages which allow them to be the low cost producer will be lasting, enabling the company to continually produce at lower costs than their competitors, (this is an unlikely scenario because technology enhancements allow for quick adjustment by competitors and rapid erosion of any manufacturing oriented advantage). Secondly, it assumes that mass markets are still out there with a continuous flow of new customers (enabling the marketer to achieve volume goals). Today however, mass markets have broken up, fragmented into smaller segments and even smaller niches, so it is no longer possible to "churn" in enough one time new customers to achieve the volume necessary to allow the company to practice break even pricing strategy.
Why then do companies determine the price of their products and services this way (cost plus based formulas)? Well, mostly because that's the way to guarantee some profit above cost, it's easy to calculate, it's "how we've always done it", it's what our competitors do. But what's wrong with this scenario? The big problem is that the customer is left out of the equation, more importantly, the consumer's perceived value. This is an especially big problem today as customers have control of information, have the ability to compare value and most of all, have many choices. We must remember when formulating a pricing strategy to "start with the end", the customer need. We must first determine what the product or service needs of our targeted niche customer are, and then strive to meet those needs better than the competition through "augmented" products (meaning value added service orientations which build customer relationships and differentiate away from traditional product orientation, and price).
Before going back to produce the products and services your targeted niche customer has requested, find out what the customer is willing to pay for them. If the customer places a high enough value on the meeting of needs, you will be able to derive a healthy profit and thrive in your business. Back to our Miata example, If Mazda determined that it cost $15,000 to make the Miata and discovered that customers were only willing to pay $13,000 for the Miata (ascertained through value based pricing research), then it doesn't make sense to produce the car (regardless of whether or not it was exciting and unique).
Bottom line is that if we don't understand the customer's perceived value, there is a virtual guarantee that we will be priced either too high or too low. If we are priced too high (above customer's perceived value), then in theory, we won't be able to sell a single unit. If we are priced too low (below customer's perceived value), then if we sell a unit, we'll be leaving precious profit dollars on the table. Even worse, eventually, the customer's perceived value will be revised downward. Offer a McDonalds hamburger for twenty nine cents, and before too long, that's all the customer perceives it to be worth.
The pricing strategy which makes the most sense is "value based" pricing. It simply means, start with the end, the customer. Determine what value the customer places on your product or service and what price he/she is willing to pay for them (all accomplished through specific marketing research techniques such as split run testing), then price your products and services according to the value perceived by the customer. This ensures a customer driven approach to meeting the needs of the marketplace.
It's also very important to remember that the "P" of Price is the easiest of the four P's to change. We know that we can't change our product offerings overnight, nor can we change our distribution channels overnight. However, we can (and companies usually do) drop prices in a heart beat. If ever there were one thing that has foiled strategic marketing plans over the years it's pricing policy. In the face of competitive response, or severe short term profit pressures, an otherwise sound marketing strategy may be abandoned. The marketer plays the price card in order to meet competitive response head on or to attain some short term profit goal. Price is usually the first card played in response to competitive activities, short term profit pressures, and most importantly, the price card is usually played when the company is unable to differentiate itself from the competition. Put the price card at the bottom of the tool box and don't play it.
We've all seen burger wars, air fare wars, etc. These scenarios are essentially downward spiraling price wars which yield only one winner, you guessed it, the consumer. Today consumers can buy everything and anything on sale. We as consumers would never pay full price for a car or for a burger. Truly a great time to be a consumer but it's not a great time to be a marketer if we don't understand pricing strategy and the need to understand perceived value. We want astute customers who understand our "augmented" product, who are willing to pay a premium to have their time and convenience needs met.
If we indeed understand augmented product, if we indeed can create firm specific advantages and competitive differentiation and if indeed our customers are astute enough to understand it, we should practice value based pricing and we should be very profitable. Does this mean we want every customer? Nope. It's not a high volume/low margin methodology. Rather, it's a high margin/lower volume methodology.
Our mission as marketers is to differentiate ourselves away from price sensitivity.
