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Friday, April 8, 2011

Pricing

The Marketing Mix
Marketers have tools at their disposal with which to control their offerings to consumers. These tools are called the "4 P's of Marketing" or the "Tools of Marketing". Specifically, these are
  • Price
  • Product
  • Place (distribution)
  • Promotion
With the exception of Price all of the tools are costs. Price is revenues (or sales). We control the formula for the product, its design and purpose. We decide where to sell our product and how to get it to the customer. We also determine how to communicate, advertise and promote our product. Let's discuss Price.

Price
How do you determine the price at which your product will be sold? There are several ways and we can use several formulas to arrive at price. But first, we must understand what the factors are that affect price:
  1. Costs to manufacture, transport, insure, etc. These are costs which we will have to pay for and which contribute to the cost of the product. Therefore, we must recoup them in the price of the product.
  2. Supply and Demand - The two economic variables which we cannot control. These will affect the amount of product we are able to sell. Our competition can generate inventories and supplies of the same product which will mount if the consumer is unwilling to purchase the product due to a slow economy and the danger of being laid off.
  3. Price the customer is willing to pay. If the customer feels that the product is overpriced, he is not willing to pay for it and will look for an alternative product or the product of the competition.
  4. Competition's prices and offerings - If the competition is selling at a lower price for comparable products, then the consumer will go there. If the consumer feels that your product has more value or benefits, then the consumer will purchase the your products.
  5. Other non-controllable variables - The government can place burdens on the manufacturer with additional taxes, excise taxes, export and import duties, etc. and compliance measures for environmental protection, such as chimney scrubbers, All these things add to costs and make our lives more difficult to make a profit.
Strategies
As entrepreneurs and marketers extraordinaire we have certain goals that we set for ourselves in the management of our business. Those goals have to do with the amount of sales and profits we set for our organization. These goals will impact our price for our product.
  1. Survival - Many business owners are satisfied with a minimum profit or breakeven. They are happy with the life style that the company's operations affords them and are not interested in performing better.
  2. Maximize Current Profit - This is the strategy of the low cost manufacturer. His costs are low and pricing provides for a good profit.
  3. Maximize Current Revenues - The owner is looking to gain market share in dollars. He depends on image and quality pricing. Good quality yields a high price.
  4. Maximize Sales Growth - The owner is looking to gain market share in units. The more he sells in units than his competition the greater his market share in units. This does not necessarily mean that he will be profitable or have large profits. He may be selling his product at a low price in order to sell more units.
  5. Product Quality Leadership - The owner knows that he has very good quality in the product he created. Therefore, he will charge for the quality.
Sensible Prices
As you probably realize by now, setting prices is not an easy task in view of the competition's offerings and the fact that we need to cover our own costs. We must determine a profit margin that is respectable and acceptable for us and which achieves our goals and objectives as indicated above. However, our pricing cannot be too high or our competition will benefit from this. Our pricing cannot be too low, or we will suffer for it. What we must do is consider the competitor's price, our cost structure, and what the market will bear. We cannot sell anything if the market, that consumer out there, will not see the benefit in the product and pay for it.
Remember, we must be competitive and promote our competitive advantage: quality, convenience, personalization, guarantees and warranties, etc.

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