One of the most undervalued element os marketing mix (4 P’s of the Marketing Mix) is Price. However price manipulation can gain competitive andante what many companies mis out. However for those marketers who use it, it can be powerful weapon. Large retailers in the world like Auchan, Tesco, Lidl or Walmart make price research constantly but most of the companies does that maybe once a year thinking it is enough. Why price is one of the core elements of successful marketing ?
Importance of Price strategy within 4Ps of the marketing mix.
Price seems to be an orphan in 4Ps of Marketing Mix. While Promotion, Place and Product seems to be the cost for the company but the price is the one that determines the profit of the company and it is not a secret that profit is the aim for most of the businesses around. That’s why price is the key strategy for overall marketing efforts.
With usage of other elements of marketing mix, the business can improve customer’s perception o the product value. Price manipulation can bring satisfying or counter-productive results. This can even happen if the price is too low. Product may look cheap and some groups of customer will not spent time on that product. In this situation the marketers must be creative and think about outcomes of the price setting.
Why price should be correct and why is it so important
Price is directly directed to the profit from that product or service. Profit is the key aim of the most of the companies even those non-profit as they also must cover all the costs of their existence. This applies also in hard times when company strive to survive. They must pay attention on all pricing strategies all the time. Price is also important from the fact. It have key influence on the major corporate and marketing objectives (goals, targets). You can read how price impacts the company below.
What is Profit ?
In common language the profit is what’s left when all bills have been paid. Those bills are deducted from revenue made by company. Profit = sales revenue – costs. By looking on this equation it is easy to guess that revenue should be higher than costs to generate profit.
So what is sales revenue ? Sales revenue is sales volume x selling price. So as we see we should have costs smaller than revenue to make some profit. Simple as that . Really ?
Profit vs Revenue
Where is the key to profit ? Let’s consider two examples. If the company wish to sell a lot of items … how to do that ? Sell very cheap right ? But in this case the profit is very low or even that strategy can generate looses. So what if price is set high ? Company may have zero sales or just few symbolic that does not bring any profits at all when consider costs. What is the solution ? Finding the spot in the middle. The highest price at which the most people will purchase product. We can say that this will be the price that brings the most profit.
In general, marketing focuses on maximising sales revenue rather than keeping the costs down. However if the costs are too high for the price, marketers can make up for it.
“Pile it high, sell it cheap” . This motto can be attached to various supermarkets. Employed practice of selling large quantities for the lowest possible price appears as downmarket (poor) tactic. Price affects image of the company too. Not too many businesses wants to have that image as this is not the recipe to success.
Survival vs Price
Setting prices lower than costs is a sure way to go out from the business. If there is a threat or hard time for the company, it can set low prices until this period is over. Of course that can be implemented for short-term periods, but in a long way that is recipe for loosing the business.
Market share and competitors
If the company wish to sell more (increase sales) it usually mean taking customers away from other businesses (competitors). Unless entire market is growing and usually every business is gaining new clients. But in general each increase in one business market share mean decrease in another’s. The most common way to do this is by undercutting competitor’s prices. (“Market penetration”, “Predatory pricing” further in the article)
But what really is a Price ?
You and I would say : the money charged for a product or service. That is correct in some way but price is more than that. But there is few conception of price. One on them is customer (buyer) point of view. He is going to the shop with specific product in the ming. Let it be latest Apple iMac 27″ computer. He know that there are just 4 models he can purchase in the Apple store. He know the price he must pay to get one and that number is in his head. However the salesperson see that differently. He see that iMac as starting point of a deal as he will try to sell also warranty with it, accessories lice cables, mousepad and other peripherals like external backup disc for Time Machine backups and others. Maybe he will be able to convince buyer to purchase higher model ?
So the more comprehensive definition of the price will be : Everything that a customer has to give up in order to acquire a product or service.
Now that we have basic knowledge what is the price and why is it so important, let’s dive deep in the problem of pricing strategies in marketing in next article related to price within 4Ps of Marketing Mix : Pricing Viewpoints – Importance of Price Strategy (Price : Part 2)
More about Price importance in Marketing planning ?
- Importance of Price Strategy – 4Ps of the Marketing Mix (Price : Part 1)
- Pricing Viewpoints – Importance of Price Strategy (Price : Part 2)
- Pricing Techniques – Strategies, Tactics and Methods (Price: Part 3)