7. Price After carefully studying this chapter, you should

be able to:

Define and explain price and value; Explain the relationship between price, quality, and

demand,; Explain the use of pricing within the marketing mix.

A low price will not sell a bad product.

A high price will not kill an excellent product.

7.1 Price and value

People normally say that they buy buy the cheapest. This is not true.

People normally buy on value, not price.

So, what’s the difference between price and value?

Price

The money or other consideration for which a thing is bought or sold.

(Source: Concise Oxford Dictionary)

Value

Simply speaking, good value means matching consumer needs. See p.126

The intangible package of benefit that the decision-making unit believes attached to the product offer.

(Source: Worsam)

7.2 Value

A person was surprised to find a defect in a product bought from M&S.

His reaction – ‘I am surprised, they are always so reliable.’

His action – Took the product back to the store.

Store action – immediate apology and exchange.

His reaction – ‘I always knew they were good to deal with.’

His belief – Became an even more loyal customer of M&S.

Another person wanted a computer. He found that:

– The HP and Lemel were identical except the different badges.

– Both had the same guarantees.

– Spare parts for each cost the same.

– Both were serviced in the home by the same engineers.

– The HP cost NT 35,000. The Lemel cost NT 25,000.

– He bought the HP.

The computer purchase had little to do with price. It was driven by the belief that HP has a higher

status. For the buyer, the HP brand has more value.

Remember value is within the perception of the individual. It is what he or she believes. It is not necessarily what is true; not even what is logic.

7.2.1 Value factors

Value is made up of a range of factor. Some of the most important and most common ones are: Status Product in use Life Price and value

Status We all place a value on status to some degree. We all have a sense of status. Napoleon: ‘Give me enough medals and I will conquer

the world.’

Why do people choose a brand over anther, even there is no difference in performance and quality?

To display one’s taste, wealth, or fashion sense – all status factors.

Product in use

A product offer has to meet user needs. A DMU would do pre- and post- purchase estimations. Some examples of the features of a product in use:

Delivery; installation; guarantee; instructions; service; spares

Which washing machine would you buy? A - $400 – in-store price. Carry away yourself. B - $500 – Delivered and installed. Checked. User Instructed. What would you consider about the product in use.

Life A product’s long life may be a product benefit – but not

necessarily a consumer benefit. Consumers want a product offer to work well for as

long as they need it. Why pay for an expensive, top-quality briefcase that you will

only use a few times a year? Why pay for a long-term insurance when making a short trip?

People like new things, follow the trends and want changes.

Price as value When buying, people often ask: ‘Is if value for money?’ But they actually mean: ‘Is it value for my money?’ The buying behavior changes when people are not

spending their own basic money. Think about this: how would you spend money that

Has been given you as a present? You have won in a lottery? Belongs to your boss?

People would balance what price they think is reasonable for the quality of what they buy.

Demand is usually associated with a season or a stage in a person’s life cycle.

Toys are normally in great demand in the month before Christmas. Push chairs would be in demand when a family’s first baby is a

few month old. Hairdressers…

It is the marketers job to estimate demand.

7.2.2 Price, quality, and demand

Price determines the revenue, which is expected to meet costs.

There are five key factors of price: The only P to provide income Reflects corporate objectives Supports image Helps achieve profits Provides cash for research and development

7.3 Price

The only P to provide income The 7Ps:

Product Price Place Promotion Physical evidence People Process

Only price can provide income.

Reflects corporate objectives

Pricing strategy must follow the overall image of the organization.

If a corporate aims to establish itself in the top-end market, then the price of its product must reflect this.

Rolls Royce and Rolex must be priced highly to support their brand image.

Supports image

Promote as ‘quality’, and price at a quality level. Promote as ‘exclusive’, and the price must help

maintain the exclusivity. Promote as ‘economy’, and the price has to be low.

Helps achieve profits Let’s see how price can affect profits. Think about this, which of the following is better?

To sell 100 units at $20 at 20% profit

or

To sell 1,000 units at $10 at 10% profit

100 x $20 = $2,000 at 20% profit = $400

1,000 x $10 = $10,000 at 10% profit = $1,000

Or perhaps we could sell 500 at at $15 at 15% profit?

500 x $15 = $7,500 at 15% profit = $1,125

In fact, which is better can only be decided in line with corporate and marketing long-term objectives.

Perhaps we want to build the market? Then we might need to lower the price to build the volume.

Provides cash for research and development R&D is vital to long-term success. We’ve seen in the

PLC that everything will be replaced some day. But R&D normally costs a lot. So, it is important to price correctly so that enough profit

can be generated to support the R&D of other new product offers.

7.3.1 Pricing strategies and tactics

The most common pricing strategies are: Cost plus Psychological Opportunity Penetration Skimming

Cost Plus

First, total all costs. Then add up a profit margin.

The added margin varies with the type of product. FMCG like bread have lower profit margins to encourage

sales. Luxury products will have very high margins.

Psychological To price at the edge of a price point.

$2.99 seems far less than $3.00; $999 seems far less than $1,000

Don’t put the price up from $2.99 to $3.02. Go up to $3.09 or even $3.19. They feels the same as $3.02.

But $3.10 or $3.20 seems a lot more expensive. On reductions, use real numbers rather than

percentages. $19.99 now $18.99 seems more generous than offering a 5%

discount.

Opportunity Managers and first-line sales staff have to be sensitive

about the market conditions, and be authorized to make decisions.

Eg. You are a sales at a car rental company: Business is good. Most cars are out. Your competitors are also

short of vehicles. A customer asks a price. You quote the highest on your list.

Business is bad. Most cars are in. Competitors also have cars. You offer a discount, or even offer an upgrade to a higher standard car for the same price.

Penetration In order to penetrate a market, the initial price is kept

deliberately low. The aim is to encourage purchase, and so get into the market.

However, it can be difficult to increase prices later. So a penetration policy is often set up as a special offer.

‘Normally $500, special price $299 –s short time only!’

Price skimming

Price level

Very high

Very low

PLC stage

Launch

Growth 1

Growth 2

Growth 3

Maturity

Decline

Sales volume

7.3.2 Price negotiation

The most common pricing strategies are: Bonus Discount Sale or return Special offer

Bonus A bonus is a reward paid for some action. Introductory bonuses are a regular way of encouraging

a retailer to handle a new product.

Discount A bonus is a price reduction made for a special reason.

Sales or return Goods will be taken back if they don not sell.

This encourages the stockist to handle a new product offer, but it gives no incentive for the stockist to feature the product offer.

It is better to negotiate a partial return (ie. Up to 50% will be taken back if it doesn’t sell.)

Special offer A sales promotional tool that is valid for a time.