Chapter 13 Pricing Concepts for establishing value Although knowing how consumers arrive at their perceptions of value is critical to developing successful pricing strategies sellers also must consider other factors which is why developing a good pricing strategy is such a formidable challenge to all firms Do it right and the rewards to the firm will be substantial Do it wrong and failure will be swift and severe But even if a pricing strategy is implemented well 1 consumers 2 economic conditions 3 markets 4 competitors 5 government regulations and even 6 a firm s own products change constantly and that means that a good pricing strategy today may not remain an effective pricing strategy tomorrow We may define price as the overall sacrifice a consumer is willing to make to acquire a specific product or service This sacrifice necessarily includes the money that must be paid to the seller to acquire the item but it also may involve other sacrifices whether nonmonetary like the value of the time necessary to acquire the product or service or monetary like travel costs taxes shipping costs and so forth all of which the buyer must give up to take possession of the product Previously we have defined value as the relationship between the product s benefits and the consumer s costs which is another way of looking at the same thing Consumers judge the benefits the product delivers against the sacrifice necessary to obtain it then make a purchase decision based on this overall judgment of value Thus a great but overpriced product can be judged as low in value and may not sell as well as an inferior but well priced item In turn we cannot define price without referring specifically to the product or service associated with it The key to successful pricing is to match the product or service with the consumer s value perceptions A price set too low may signal low quality poor performance or other negative attributes about the product or service Consumers don t necessarily want a low price all the time or for all products Rather what they want is high value which may come with a relatively high or low price depending on the bundle of benefits the product or service delivers If the firm wants to deliver value and value is judged by the benefits relative to the cost then pricing decisions are absolutely critical to the effort to deliver value Because price is the only element of the marketing mix that does not generate costs but instead generates revenue it is important in its own right Every other element in the marketing mix may be perfect but with the wrong price sales and thus revenue will not accrue Research has consistently shown that consumers usually rank price as one of the most important factors in their purchase decisions Price is the most challenging of the four Ps to manage partly because it is often the least understood Prices rarely changed except in response to radical shifts in market conditions Even today pricing decisions are often relegated to standard rules of thumb that fail to reflect our current understanding of the role of price in the marketing mix For example retailers sometimes use a 100 percent markup rule otherwise known as keystoning That is they simply double what they paid for the item when they price it for resale price wholesale cost 2 In this case it might be better for the store not to follow its standard markup practice and instead take the additional profit Price is a particularly powerful indicator of quality when consumers are less knowledgeable about the product category In summary marketers should view pricing decisions as a strategic opportunity to create value rather than as an afterthought to the rest of the marketing mix The Five Cs Of Pricing Successful pricing strategies are built around the five critical components the five Cs of pricing found in Exhibit 13 1 1 Company Objectives By now you know that different firms embrace very different goals These goals should spill down to the pricing strategy such that the pricing of a company s products and services should support and allow the firm to reach its overall goals Each firm then embraces objectives that seem to fit with where management thinks the firm needs to go to be successful in whatever way it defines success These specific objectives usually reflect how the firm intends to grow Exhibit 13 2 introduces some common company objectives and corresponding examples of their implications for pricing strategies These objectives are not always mutually exclusive because a firm may embrace two or more noncompeting objectives I Profit Orientation o Even though all company methods and objectives may ultimately be oriented toward making a profit firms implement a profit orientation specifically by focusing on target profit pricing maximizing profits or target return pricing v Firms usually implement target profit pricing when they have a particular profit goal as their overriding concern To meet this targeted profit objective firms use price to stimulate a certain level of sales at a certain profit per unit v The maximizing profits strategy relies primarily on economic theory If a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits it should be able to identify the price at which its profits are maximized Of course the problem with this approach is that actually gathering the data on all these relevant factors and somehow coming up with an accurate mathematical model is an extremely difficult undertaking v Other firms are less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments These firms typically turn to target return pricing and employ pricing strategies designed to produce a specific return on their investment usually expressed as a percentage of sales II Sales Orientation o Firms using a sales orientation to set prices believe that increasing sales will help the firm more than will increasing profits o Finally some firms may be more concerned about their overall market share than about dollar sales per se though these often go hand in hand because they believe that market share better reflects their success relative to the market conditions than do sales alone o A firm may set low prices to discourage new firms from entering the market encourage current firms to leave the market and or take market share away from competitors all