Chapter 14Determining the Best Price
The Price Is Right
Pricing is one of the four Ps of the marketing mix. Price determines the revenue for a business or entrepreneur. Pricing is the manual or automatic process of applying prices based on a wide array of factors. A good price shouldachieve the financial goals of the firm, fit the realities of the marketplace, support the product’s positioning, and align with the other variables in the marketing mix. Price is directly influenced by the product’s distribution, promotion, and quality. The price will usually be high if manufacturing is expensive, distribution is unique, and the product must be supported by extensive advertising and promotional campaigns. A low price may relay poor quality of product, effective promotion, or an energetic selling effort by distributors.
The Perfect Price
Effective price is the price the company receives after taking into consideration discounts, promotions, and other incentives used to sell products. Price lining involves using a limited number of prices for all product offerings. The original dime stores had merchandise that sold for either 5 or 10 cents. Dollar Tree and Dollar Generalprice merchandise for $1.00 or less. One dollar is seen as a suitable price point for a whole range of products by prospective customers. The one- or two-price strategy is easy to administer; however, it is inflexible during times of inflation or unstable prices.
A loss leader is a product that has a price set lower than the operating margin. Loss leader pricing involves selling a product below the operating margin, resulting in a loss to the business on that item. This strategy believes that the loss leader will draw customers into the store and that some of those customers will buy higher margin items.
Promotional pricing highlights pricing as the key element of the marketing mix. Automobile dealerships and furniture stores use promotional pricing to move merchandise before the new line of product comes onboard. Price/quality relationship is a perception by most consumers that a relatively high price is a sign of good quality. This belief is the strongest for complex products that are hard to test and service. Consumers place more value on the price/quality theory when greater uncertainty surrounds a product. Consumers are prepared to pay a premium on products that they perceive to be valuable or expensive. When Twinkies decreased its price, many consumers perceived it is a lower-quality food item.
Prestige or premium pricing uses the strategy of consistently pricing at, or near, the high end to attract status-conscious consumers. Rolex, Mercedes, and Bentley are examples of brands that use premium pricing. Consumers buy apremium-priced product because they believe the high price represents good quality. Some individuals associate their self-worth to the prestige items they own. The product must have flawless performance because the cost of product malfunction is too high to buy anything but the best.The heart pacemaker is an example of a product with premium pricing that requires flawless performance.
Goldilocks pricing provides a “gold-plated” version product at a premium price in order to make the next-lower priced option look more reasonably priced. Airlines encourage customers to see business-class airline seats as good value for the money spent by offering an even higher priced first-class option. The name of this pricing strategy comes from the Goldilocks and the Three Bears story. It involves selecting the product or porridge that is “just right.”
Demand-based pricing reacts to consumer demand. Price skimming, price discrimination, psychological pricing, bundle pricing, penetration pricing, value-based pricing, and premium pricing are strategies that react to consumer demand.
Think Critically
- Why are stores willing to sell loss leaders?
- Give examples of three automobile manufacturers that use premium pricing.
- How do consumers react to products with low prices?
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