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4P's of Marketing
Product
Price
Place
Promotion
Supply and Demand
Pricing Strategies
Price is the amount of money that your customers have to pay in exchange for your product or service. Determining the right price for your product can be a bit tricky.
Your pricing strategy should reflect your product’s positioning in the market and the resulting price should cover the cost per item and the profit margin. The amount should not project your business as timid or greedy.
Low pricing hinders your business’ growth while high pricing kicks you out of the competition. There are a number of pricing strategies that you can follow. Some strategies may call for complex computation methods and others are intuitive decisions. Select a pricing strategy that’s based on the product itself, competitive environment, customer demand, and other products that you offer.
Vocab
Supply
Demand
Outsource/Outsourcing
Equilibrium
Manufacturer's Suggested Retail Price (MSRP)
Surplus
Scarcity
Shortage
Spoilage
Loss Leader
Unique Selling Position (USP)
Cost of Goods Sold
Subjective Pricing
Penetration Pricing
Price Skimming
Competitive Pricing
High-Low Pricing
Freemium Pricing
Value-Based Pricing
Prestige Pricing
Cost-Based Pricing
Simple Mark-Up
Contribution Margin
Simple Prime Costs
Fixed Costs
Variable Costs
Price
The price of the product is basically the amount that a customer pays for to enjoy it. Price is a very important component of the marketing mix definition.
It is also a very important component of a marketing plan as it determines your firm’s profit and survival. Adjusting the price of the product has a big impact on the entire marketing strategy as well as greatly affecting the sales and demand of the product.
This is inherently a touchy area though. If a company is new to the market and has not made a name for themselves yet, it is unlikely that your target market will be willing to pay a high price.
Although they may be willing in the future to hand over large sums of money, it is inevitably harder to get them to do so during the birth of a business.
Pricing always help shape the perception of your product in consumers eyes. Always remember that a low price usually means an inferior good in the consumers eyes as they compare your good to a competitor.
Consequently, prices too high will make the costs outweigh the benefits in customers eyes, and they will therefore value their money over your product. Be sure to examine competitors pricing and price accordingly.
Pricing a product is one of the most important aspects of your marketing strategy. Generally, pricing strategies include the following eight strategies.
Subjective pricing—not numerical based and do not take into account cost factor percentage, profit margin needed, and goals. The major concerns are that they are covering costs, there is profit, and customers are willing to pay the price.
Penetration pricing—setting a low price to enter a competitive market and raising it later
Price skimming—setting a high price and lowering it as the market evolves
High-Low pricing—setting prices higher than every day low stores, but having special sales where prices are lower than competitors
Competitive pricing—setting a price based on what the competition charges
Cost-plus pricing—simply calculating your costs and adding a mark-up
Freemium Pricing—offer a basic version of their product hoping that users will eventually pay to upgrade or access more features
Value-based pricing—setting a price based on how much the customer believes what you’re selling is worth
Prestige Pricing—when companies price their products high to present the image that their products are high-value, luxury, or premium
But, before we get into pricing, you first need to understand Supply and Demand.
Think About It: Supply and Demand
Why is equilibrium desired?
Would you consider Supreme NYC prices at equilibrium?
Why do you think shoe stores have a Buy One, Get One (BOGO) sale?
Would you rather put items you have not sold into storage until the next time you can sell it or drop price to move the product?
Think about it: Subjective Pricing
Give an example of the Reasonable Price Method.
Give an example of the Loss Leader Method.
Give an example of when you would use the Highest Price Method.
Give an example when you would use the Intuitive Price Method.
Think About It: Penetration Pricing
Why do businesses use this method?
What is the relationship between price and quantity?
Why do businesses need to increase price?
Why would customers not switch to another business offering cheaper services?
Think About It: Price Skimming
Why is the Price Skimming strategy typically used with new products only?
Why do often need to charge a higher price in the beginning?
Think About It: Competitive pricing
Why should you only use competitive pricing with another pricing strategy?
How can competitive pricing be beneficial to a business?
Think About It: High-Low Pricing
Why is it important to use both methods in pricing your items?
Give an example of a loss leader product.
Give an example of a product that has had its price change over time due to the movement in the product life cycle.
Think About It: Freemium Pricing
Why is this method beneficial?
What could be a drawback of this method?
Think About It: Value-Based/Prestige Pricing
What is difficult about value pricing?
What is difficult about prestige pricing?
Why is value pricing and prestige pricing important for a business?
Think About It: Cost-Based Pricing
Beyond labor, what other costs are involved in a product (list)?
Why might a company sell a product below the base selling price or price floor?
Why do you think cost based pricing can be difficult to calculate a price in a service business (intangible)?
How can we set our prices above a price ceiling; despite competition charging less?
Think About It: Simple Mark-Up Pricing Method
Why do businesses create a mark-up percentage?
Why is the base selling price considered a starting point and not the price?
Why would the multiplier not work for all of your products?
Contribution Margin Pricing Method
Think About It: Contribution Margin Pricing
What does this pricing method take into account that others do not?
Why would an owner want to use this method?
What would you need to consider when establishing the Required Profit?
What is difficult about using this method?
Think About It: Simple Prime Costs Pricing Method
How do you determine the approximate number of guests to your business?
How would you calculate labor hours?
Why is this method a more complete alternative to the Cost-Based, Simple Mark-up, Contribution Margin, or the Simple Prime Costs methods?
What are the drawbacks to this method in comparison to others?
Practice:
For each of the six (6) pricing strategies, find a product that uses the strategy.
Penetration Pricing
Price Skimming
High-Low Pricing (Every Day Low Pricing)
Competitive Pricing
Freemium Pricing
Value-Based Pricing/Prestige Pricing
While some products may represent several strategies, you may only use a product once. (e.g. you can only choose Louie Vuitton for one of the eight strategies)
You only need to find a product (list) and are not required to find pictures or ads.
Complete and bring to class on scheduled due dates. You may print your work in our classroom prior to coming to class. Assignments can be submitted early, but late assignments will not be graded. Early or on time submissions may be returned for corrections in order to receive points, meet minimal requirements, or to improve your grade. Late assignments can be submitted for correction and to complete modules. Consideration for grade is given to those who complete all assignments.
All activities can be found above or in the Vocab document in the Resource section.
Homework (check online due dates)
1. Vocabulary definitions
https://www.bdc.ca/en/articles-tools/marketing-sales-export/marketing/pages/pricing-5-common-strategies.aspx
https://blog.hubspot.com/sales/pricing-strategy
https://www.investopedia.com/terms/v/valuebasedpricing.asp
https://www.pricingbrew.com/insights/value-based-pricing-premium-vs-preference/
https://www.seattletimes.com/life/travel/airlines-in-hawaii-price-war-offer-9-inter-island-flights/
https://www.webstaurantstore.com/article/129/restaurant-menu-pricing.html
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