Running head: PRICING PRODUCTS
1. Identifies questions marketers should consider when pricing products.
2. Explains two strategies used for presenting options to consumers.
3. Identifies approaches marketers assign when pricing products.
4. Explains reasons the Economic Value to the Customer is not the perceived value the customer would place on a product.
5. Identifies market prices by comparison to the Economic Value to the Customer.
6. Identifies what the EVC approach is useful for understanding.
7. Incorporates accurate, well developed written communication that conveys the overall message.
Pricing is such basic components of business many wonder why it is such a difficult practice to master. Pricing is not a set equation. Pricing is a general guideline that is evolved over time and that structure changes relative to the product’s life cycle.
Mitchell (1999) in an article for Market Week states,
The notion of a fixed list price is a relic of a fading industrial age, which depends on standardized prices to make its system of mass production, distribution and advertising work. Everything about the modern era - from mass customization and life-time customer value-driven marketing strategies to the emergence of auctions, reverse auctions and buying clubs - points in the opposite direction. Markets, not marketers, set prices. For marketers, rethinking the pricing strategy is now the number one priority.
Kotler and Keller (2005) confirmed the complexity of setting a pricing policy by describing a six-step procedure. These steps include: selecting the pricing objective; determining demand; establishing cost; analyzing competitor’s costs, price and offers; selecting a pricing method; and selecting the final price.
(Basic Questions when Pricing Products, 2006) is an article published by MarketingProfs.com, which identifies five questions marketers should consider when pricing products.
1. Ease of comparison (How difficult is it for buyers to compare the products of other suppliers? Can the benefits be easily observed, or must they be experienced first?)
Consumers have a great opportunity to comparison shop especially with the advent of the Internet. As soon as the consumer is quoted a price he/ she can use the Internet based tools to check for a cheaper price.
2. Alternative Solutions (What alternatives do buyers have for solving their problem? Are they aware of these alternatives?)
If there are alternatives to the product business might set itself apart by discounting, offering free delivery, or pointing out quality issue with the competitor’s product. Increase service contracts will also help in the pricing wars.
3. Complementary Costs (To what extent must buyers make complementary expenditures in anticipation of its continued use? Are buyers locked into these expenditures?)
Products often have complementary goods that boost sales. Hp will often sell an inkjet printer at or below cost with the idea the customer will buy cartridges that have a high profit margin.
4. Monetary Significance (How significant are buyer's expenditures, both in absolute terms and in percentage terms?)
5. Unique Benefits (Does the product have any unique benefits that differentiate it from any competing products? Do customers feel these unique benefits are very important to them?) Often tools such as surveys and test groups are used to discover customer preferences.
Branding and brand identification is very important. When the consumer has made a connection with your product at a price, which is acceptable, the relationship can last for years.
Two Strategies of Pricing
The two strategies used for presenting options to consumers explained in (McInnis, 2006) are the Additive option strategy and the Subtractive option strategy. These two strategies help the consumers choose ways to customize a product to meet the needs of their budget. The customer might see this as an empowering set of choices.
Additive option strategy and Subtractive option strategy
Two methods of pricing often seen in pricing are the additive or subtractive methods. In the additives the base product is displayed in a stripped down fashion. The consumer has the option of adding parts or services to the base until one reaches the fully loaded end product. This allows the consumer the feeling his or her product is customized to fit there needs. It often does not matter that this adding of options will cost more then if the entire package had been put forward as a single unit.
In the subtractive method the unit is put together as a fully loaded model and the consumer my take away options as his or her desires or budget might allow. This is also a customization of a product. This type of method appeals to a different psychological need within the consumer. Even though this might have negative impacts on the customer’s impression of the product the practice is often used in the car industry.
(EVC) Economic Value to the Customer
EVC centers on what the customer values in the product. Perceived value on the customer’s part allows pricing flexibility. Ehrbar (2005) writing for Fortune states, “A rising brand secures more customer loyalty, higher margins, greater pricing flexibility, and new opportunities for growth.” There is also the counter part to this situation the firm also increases sales.” Kotler and Keller (2005) shows perceived customer value as made of such elements as the buyers image of product performance, the channel deliverables, the warranty quality, customer support, and suppliers reputation, trustworthiness and esteem. It is important that the internal organizations understands and have the ability to explain what qualities are included in a product’s value. The customer might ask why one should buy at a premium when other companies have a similar product at a lower price. The sales staff or customer contact apparatus should be able to highlight the value to the customer.
Value pricing has been used to win customer loyalty by charging a fairly low price for high quality products. This can be seen in at the retail level as the everyday low price or the high-low pricing where frequent specials or promotions price products at a price lower then the everyday low price. Often this is seen in a company like Safeway where card members pay a lower price than non-card holders. Even though the cards are free the customer feels a value in having one. Often there are often 10 for 10 promotions that bring in customers. In this case ordinary items are offered at a discounted price of one dollar. The cards have the added benefit of tracking purchases of the individual customer. This will allow targeted purchasing on the firms side and targeted sales to the customer.
It is important that a business connect with the customer’s perceived economic value when setting the price. McInnis (2006) states that many approaches to pricing include cost-based, going-rate, target profit, cost-plus, and break-even approaches. “When you think about it, all of these approaches to pricing a product are based on the company and its cost structure or on how the competition prices it products.” This is indirect contrast to the method here where the customer’s economic value must be discovered and used as the pricing method. Maynard (2006) puts forth a dual-track approach that if applied will greatly increase the likelihood of successfully capturing the expected value the customer perceives from IT investments. He places the burden of understanding value on the internal organization as well as the seller to achieve the desired result. Maynard states, “Most important, the intended users and beneficiaries of the new applications must be shown what's in it for them. People will need to see tangible value in exchange for modifying their behavior.” This requires an internal understanding within the organization of the purchaser. When this is not done the value desired by the purchaser would not match the value desired.
Typically, the market price will compare in a favorable manner to the Economic Value to the Customer. When this happens the customer knows the value they are receiving for the products and will create a lasting relationship with the seller. According to the McInnis (2006) the EVC approach is a useful tool for understanding what the customer and how the customer perceives the value of a product.
Kotler and Keller (2005) identifies a Six step approach that marketers use assign when price to products. These include selecting the pricing objective; determining demand; establishing cost; analyzing competitor’s costs, price and offers; selecting a pricing method; and selecting the final price. Companies seek lean production techniques. Lewis (2006) shows that the goal of lean manufacturing is about eliminating waste from all manufacturing and administrative processes so that manufacturers can deliver customer-perceived value, when, where and how it is required. (Song & Zadhedi, 2006) look at methods to differentiate between the Internet and traditional market channels and defined two fundamental strategies for operating on the Internet as: pure and mixed.
Looking closely at the many methods of pricing companies
create a pricing structure that will guide the firm in setting prices that will
create lasting customers. Even so, Mitchell (1999) says
it best; “Markets, not marketers, set prices.” Customers are looking for value and the
Internet and other technologies have made the world a smaller and more
competitive place. As fast as a firm sets a price the same product might be
found at auction on the internet or at a cheaper price at another company’s
site. Differentiating a product by price alone is very difficult. The new
customer with the power to seek products globally is looking for value that
might include any number of aspects. It is the job of business to find and
deliver that value to the customer. In that sense price is just one part of a
very complex buying process.
Basic Questions when Pricing Products. [Data File]. (2006). MarketingProfs.com. Available from http://www.marketingprofs.com/about/index.asp
BREAKAWAY BRANDS. Fortune.
Kotler, P., & Keller, K. L. (2005). Marketing Management (12th Ed.). Prentice Hall.
Eliminate overproduction waste. Upholstery Manufacturing.
Maynard. (2006). Measuring the value of IT investment. Journal of Commerce.New York, p. 1.
McInnis. (2006). Profitable Strategies for Presenting Products with Multiple Options. [Data File].
Technology breaks chain linking price with value. Marketing Week.
Song, & Zadhedi.
(2006). Internet marketing strategies: Antecedents and implications.
Information & Management.