Pricing and customer value are closely linked. Basically stated, the value a customer places in a product and brand is indicated by how much they are willing to give up, usually in the form of money. The price is the monetary value set by an organisation at a level they believe is worthy of their offering. However, if a customer wants a product, but the price is too high, their value analysis of the trade is lower than the price set and they won’t make a trade.
This ‘trade’ for a customer, which is the price set from the perspective of the organisation, comes in many forms, such as rent, tuition, fees, fares, tolls, premiums, commissions, incentives and even bribes. Price is the only element of the marketing mix that produces an income for an organisation in the form of revenue. It is the one part of the marketing mix that is the easiest to adjust quickly, which is as to why organisations often opt to that element to spur a customer response to their offering, over changing the product itself, its promotion, people or distribution methods.
Bribes may be illegal in certain countries and acceptable in others, however in the illegal countries, it may be classed as other things, such as perks and added bonuses.
Who Sets the Price?
It is a typical accounting argument, where an accounting department of an organisation may believe it is their responsibility given that pricing involves monetary terms. This would be all well-and-good if the price was a simple recuperation of costs for the organisation. However, it is not that simple: pricing of a product speaks volumes to consumers.
This is why the task of setting price is with the marketing department: as the consumer receives a whole lot of messaging from the setting of the price alone. It signals to a customer what positioning and image the brand and product has. If it is expensive, often consumers will use it as a surrogate indicator for a judge of quality. This is most common in the wine industry, where higher priced wines are often thought of immediately as better in consumption.
Therefore, marketing manage the price setting tasks as it indicates much more than simply cost plus profit. It isn’t a simple equation- it takes the department familiar with communicating with the target audience, as price is just another communication stream.
Price and Demand
As can be expected, the price of a particular product directly impacts on the amount of demand it receives from customers. The actual relationship is known as the economic term of price elasticity. Whilst in reality, nothing works as simply as economic models suggest, in general, a product with a high price elasticity of demand means that a change in price results in a large, corresponding change in quantity purchased. Luxury and nonessential products tend to be within this category, as a large price increase will greatly drop demand, and visa-versa.
A low price elasticity of demand means that a change in price will not greatly affect demand shifts- this is known as inelastic demand. Less substitutable products and essentials full into these categories as, within reason, when price shifts, consumers still require them.
A more realistic approach to price and demand prediction is more toward the idea of pricing points. For example, if the price is high and quantity is purchased for a luxury brand, and the price is suddenly dropped, initially, the demand would increase as consumers believe there is more value. However dropping the price further may then decrease demand, as consumers start to feel that the luxury brand is losing its exclusivity. This makes demand fall.
All of these types of factors must be taken into account by the marketing department when setting price of their products.
The Pricing Phenomena
As much as economic theory attempts to assume that consumers are rational, they just aren’t when it comes to purchasing. The perceptions of value and price given by an individual consumer is so unpredictable that it takes the function of marketing research to really delve into why consumers think and act as they do.
Take, for example, bridal products. Large organisations over charge for pretty much everything to do with ‘the big day’, however the consumer is more than willing to pay as it’s more of an emotional purchase rather than a rational, ‘utility maximisation’ purchase. A bride doesn’t want a cheaper product, even if it is the same as an expensive version, as they value feeling expensive and exclusive and therefore justify the high prices.
Pricing as an Information Cue
As discussed before, price can be used as a surrogate indicator of quality, even if it’s not true. In the customers mind, higher price raises expectations as the amount they have to trade for it is high. There are two associated pricing techniques relevant to pricing as a communicative device:
(1) Price Skimming- this refers to setting the price very high, thus skimming the very top of the market’s customers. This creates an aura of prestige and/or technologically advanced status and is a good way to recuperate research and development costs, control initial demand and supply and generate high profit. However the product must justify this image if this technique is used.
(2) Price Penetration- this is when a product’s price is set very low to attract high quantities of sales and obtain large uptake in the market before a competitor.
(3) Yield Pricing- setting the pricing to manage exact quantities of purchasing. For example, if stock is perishable, the price may be discounted to increase numbers and then when supply is short, the price rises to manage this.
(4) Volume Pricing- setting a price to ensure high sale/bulk volume purchasing over profit per unit.
(5) Loss Leader- Pricing at a loss per unit to encourage impulse, related purchasing of other products in the same offering.
Pricing strategy all depends on the organisation’s justification and rationalisation of all aspects of their marketing strategy.
Pricing and the Psychology Of Consumption
There is a directly psychological relation between pricing/cost and the consumption rationale of a consumer. Most organisations do not draw attention to the price as it represents a cost to the consumer, and they would much rather the consumer benefit from the product’s value rather than them dwelling on how much they paid for it. This makes sense. This is why some organisations offer upfront bulk payments, season passes, bundling and so on.
However, as mentioned previously, consumers aren’t always rationale and sometimes, the constant reminder of cost is motivating for them. Basically, a consumer who doesn’t utilise their purchase will actively make a decision to not rebuy it. This means that charging upfront could make the consumer forget about the product (e.g.: a gym membership), and once they forget, they will not justify a repurchase, however smaller costs more regularly are more manageable in a consumer’s mind and the constant reminder stimulates motivation for consumption, and therefore repeat purchase.
It all depends on the organisation’s product offering and pricing strategy as to what approach they take.
Internal Pricing Factors: Objective Based
There are different types of objectives of consideration when setting a price, aiming to achieve a particular goal.
These are strictly about monetary goals, such as setting price to achieve a gross profit margin of 23%, or Return On Investment (ROI) by 12% this year.
These revolve around market and consumer focused goals, such as increasing market share, gaining more consumer awareness or increasing brand loyalty.
Pricing is set by the organisation based on managing a societal rationale. For example, adding into the cost a donation to charity, or carbon offsetting.
Internal Pricing Factors: The Marketing Mix
Does the marketing plan and current marketing mix support the proposed price? In other words, is the price set consistent with the expectations a consumer would have given the rest of the product’s attributes. The price must be reasonably consistent and in context with the product’s design, process, distribution, people, reputation, brand and positioning.
Internal Pricing Factors: The Market Classification
Pricing is also very subject to the type of market the product exists in. In a monopoly, there is only one offering organisation, so excusing government regulation, pricing can be set at whatever they wish. In an oligopoly, where there are a two to five large main players in the market, the strategy tends to be a lead and follow pricing strategy, basing price off the movements of the main competitors.
In a perfect competition market, where the product is an identical commodity, the price solely depends on the supply and demand of the time.
In a monopolistic competitive market, which is the typically normal market where many organisations are within a market offering substitutable yet differentiated products, pricing is set based more on each organisation’s marketing plan.
Internal Pricing Factors: Organisational Considerations
Naturally, the management within an organisation decides who best to set the prices of all the elements within the product offering- this is known as the pricing process. Typically, in smaller organisations, price is usually set by management but in larger organisations, it is set by product managers within the marketing team. The most important part is that the person or people that set the price must have well informed insights into the customer and their perception of value.
Revisiting the Concept of Customer Value
Remember that customer value is total benefits over the total costs. Costs include a lot of pricing, such as the initial purchase price, maintenance and repair costs, ongoing fees, installation, training, financing and so on.
The benefits of the product, such as performance, features and quality must outweigh all of the prices and costs to be worth the value to the customer.
Approaches to Pricing
There are three main approaches to setting a price.
Basing the pricing barriers (such as the price floor- the lowest possible price), on how much the product costs to produce. Generally, if fixed costs are quite high, a part of the price is set lower to maximise volume sold. If variable costs are high, price can be set to maximise the per unit margin.
The issue, again, is that this pricing is based on internal measures, rather than on the target market, and could communicate the incorrect message to them. Still, the cost-based approach can be a background consideration.
As the name suggests, this is basing it on however the competition prices and differentiating a product based on their pricing strategy. However this assumes that the competitor has a good grasp on the target market.
This approach bases costs on what level of value the target market places on the product itself. Then, the organisation can employ a price skimming strategy (pricing at the top value), price penetration (pricing at the lowest value) or somewhere in between. This requires a bit of research to discover what attributes and expectations the customer values the most and pricing it on this.
In reality, there should be a blend of the approaches. The price ceiling (or the price point at which demand becomes zero) should be set at the top, and the price floor (or the price point at which profit becomes zero) should be established first. The Price ceiling represents customer perception of value and the price floor represents the consideration for product cost.
The price is then set in the middle, in between these points, with all factors such as marketing strategy, objectives, competitors and market place factors taken into consideration here to find the ideal price.
The Value Based Approach
Basing pricing strategy on the target market is an obvious choice, given the impact price has in communicating with the target market. Through starting with the customer’s value and working backward, a price can be settled on that will allow an organisation to best maximise the price per segment and manage customer value perceptions.
The Gift Economy
With technology increasing so rapidly, a ‘gift-economy’ also referred to often as a ‘free-love’ economy has emerged. This is where an organisation offers their main product as free and finds another solid revenue stream to gain profit from. Search engines are a good example of this, where the search function is free, but the google adword service and other advertisements and services are paid for.
The issue with this is the consumers lose the perception of value when products, such as music and news) are available for free, online. This shift in mind-set is a rapid game changer for a lot of organisations as consumers start to question why they are paying for specific products. For example, years ago, customers would purchase a newspaper, because they saw the value as worth the money, however today, when news is so rapidly available online, they can no longer justify paying for it.
Today, organisations are creating business models where the consumer doesn’t pay and then charges associated organisations for their access to these customers, such as YouTube or social media advertising.
This has the risk of becoming so extreme that it may get to a point where organisations will pay or reward the customer to use their product, rather the other way around, just to give them access to the customer to sell this onto other organisations for profit.
However, there is a predicted limit with this as over-exposure to secondary ads and the other revenue-gaining ‘add-ons’ will render them ineffective and these secondary organisations will avoid these business models.
This relates to the new pricing technique known as ‘freemium’. A freemium is when an organisation gives the basic level product to the consumer for free and then charges for the premium use of it. This is very evident in free phone apps on smart phones, where the basic app is free to download and use, however the customer must pay to get the ad-free version or open up all of the service for them to use.
A pricing technique where the main product is free or extremely discounted, however then the customer must purchase an expensive associated product to utilise the main product. An example of this is office printers, where the printer is given for free, and the customer has to purchase the paper and print ink off the printer’s organisation.
The Marketing Environment
Environments Around An Organisation
For marketing efforts to be successful, an understanding of the environments around an organisation is vital as they can have varying different impacts on an organisation- these can be negative, positive or a mixture of both. Environments can be classified as two types: the micro and macro environments.
The micro-environment are all of the influential parties directly around an organisation, and thus have a close and direct impact. These include the organisation itself, its suppliers, competitors, partner companies, intermediaries, the customers, and publics (such as the media, consumer groups and so on).
The macro-environment are all of the influential, over-arching parties that, whilst aren’t in direct contact with an organisation, have a larger impact due to their nature. These include the demographics or characteristics of the larger markets and society, economic forces, the natural environment, technological forces, political, legal and governmental forces as well as larger cultural impacts.
Competitive Forces Within a Market
Competition always have a direct impact on an organisation. The best way to analyse the competitive strength within an organisation is to look at five key aspects: (1) The current industry competition, or segment rivalry between organisations
(2) How much power the suppliers have
(3) How much power the customers/buyers have
(4) The potential threat of new competitors entering the market
(5) The threat of substitute products
By judging the extent of these five forces, an organisation can determine how tough the competitive force is within a market.
Marketing must always be able to gain an understanding of the current situation the organisation is in within a market. By doing so, a marketing strategy and action plan can be devised to correctly leverage strengths, minimise or remove weaknesses, capitalise on opportunities and be wary of threats.
One way to analysis the market is through a SWOT Analysis- Strengths, Weaknesses, Opportunities and Threats. The first two are internal to the organisation and can be a list of what the organisation does well and what it doesn’t do well. The last two are external to the organisation and comprise of a list of potential events on the horizon that an organisation must be always aware of to ensure that it can perform to deal with such events.
Naturally, gathering information and performing research within a market is a fantastic way to gain knowledge on a market. There are many different types of research goals, such as those based on discovering the level of customer satisfaction, potential innovations, product redesigns to better match customer demands, product testing, promotional research and so on.
However, before anything is actually conducted, it is vital that a strong Marketing Information System (MIS) is established. All research has a benefit and a cost, just like customer value. A good set of rules and systems that compose an MIS should weigh up the benefits and costs of conducting research and to what extent.
After assessing the need for information and research, the MIS must also devise a system and strategy for effective data collection, analysis and distribution of the results to the correct parties.
This works alongside the natural progression of the research cycle: first, the problem must be clearly defined. The more concrete this definition, the better the research will be as there is a clearer target to aim for. Second, a research plan is developed. Third, the research is implemented and lastly, the data is interpreted and made available in a report.
Primary and Secondary Research
Upon conducting the research, there are two types of classifications, both with their purpose, benefits and costs.
Primary Research is when a team conducts a completely new, very tailored and specific research plan that aims to directly address the defined problem at hand. Whilst expensive both in a monetary and resource/timing sense, it aims to be the most accurate and most detailed to the problem it is attempting to address as all actions and efforts are specifically designed solely for that one problem. Primary research usually comes after secondary research.
There are a few common approaches to primary data research, most commonly exploratory, which is observing
Secondary research refers to absolutely every piece of research ever conducted before by other parties or by those on different projects to the defined problem at hand. These include past research plans and projects, internet research, and so on. Whilst cheap, abundant and very accessible, it is data that has been collected by other parties which means it may not perfectly fit the current defined problem, there may be accuracy issues, it may be too old or even biased.
Regardless of research type, data must aim to be relevant, accurate, current and impartial to be of any practical use.
Collecting Data For a Research Project
There are many different ways to collect data, each with their own characteristics, channels and methods.
Firstly, the approach. You can focus on the observational approach, which revolves around exploratory research by watching behaviour. The second is the descriptive approach through surveys and questions, and the last is the experimentative approach, which is utilising groups to determine the cause-and-effect relationship, known as causal research.
Collecting information can include online questionnaires, personal interviews, telephone interviews and focus groups.
Choosing a sample for research is another key attribute that can greatly affect the research outcome. Questions like how many, who is to be surveyed and how is the sample chosen are all important questions.
Probability Sample (random)
A simple random sample is where all members of the population have a completely equal chance of selection at random. A stratified random sample is where a particular characteristic is chosen first (such as age or location), and then from that specific group, all members have an equal chance of random selection. Lastly, a cluster sample, the total population is divided into a subgroup clusters and the research is conducted on those only, rather than the whole population.
Nonprobability Sample (non-random)
A convenience sample is where the population most accessible is chosen. A judgement sample is where the researcher decides who to choose based on their belief of which population members best represent their target. A quota sample is where specific numbers of the population are the goal of the research, rather than random representation.
Big data refers to the phenomenon where, today, huge amounts of easily accessible, live data is available pretty much at our fingertips, allowing people to make educated decisions almost instantly. Big data has rapidly changed every market and industry, especially with the rise of social media and the internet.
Freelance Copywriter at Melotti Media
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Marketing is a versatile, crucial and ever changing organisational function. It is a practise that everyone should have at least a general understanding of, which is why I am writing a series of blog articles focused on covering the basics for people who want to know more about this interesting profession.
Marketing, an overview of the basics
Marketing: What is it?
So, marketing- what is it? Basically put, it is the process of meeting a customer’s need for gain or trade, usually profit in the context of most business organisations. Of course, this is a basic definition, as it involves many steps, and can vary from organisation to organisation, consumer to consumer, market to market, and so on.
The Marketing Cycle
The process of marketing revolves around a few different aspects which act as a continuous cycle. Firstly, there is a need, want or demand by consumers which, in turn, creates a market. This market is evaluated for its potential, and an organisation creates a solution to it, in the form of a product. This product is designed with specific features that satisfy the market’s requirements to a certain extent, creating value. An exchange takes place, and then the process repeats.
Consumer Choice and Value
Marketing directly affects the way a consumer judges the value of a product and the level of customer satisfaction they receive.
Just because an organisation creates a product to meet a market’s need, doesn’t mean it’s the only one, nor is it the best or worst. All consumers judge the value of a product, both before and after the purchase. As stated above, marketing is based on an exchange or trade: this means that a consumer parts with something for the product in question. This ‘parting’ gives the consumer the ability to judge the value and the level of satisfaction they experience.
It’s important to remember that the trade doesn’t always solely involve money. Of course, the majority of products are paid for with money, however there are other costs, such as time, that also go into the transaction.
Customer value can be calculated, conceptually, by dividing total benefits by total costs.
Total benefits include all of the tangible, physical gains of a product (known as the functional benefits), as well as the emotional benefits that go with the purchase. For example, a new pair of jeans provide the functional benefit of clothing and comfort, and the emotional benefit of being fashionable and making the wearer feel good.
Total costs include the obvious monetary cost, but also costs of the consumer’s time, energy and even emotion. If a consumer is stressed about a purchase, this would be considered an emotional or mental cost.
Therefore, the benefits divided by the costs gives a consumer’s value of the entire product purchasing experience. Of course, not all of these turn out positive. The consumer may want the product, but if they believe the monetary or time cost was too high, outweighing the benefits gained, they will value the product very low. Consumers often experience what is known as the ‘turmoil of the purchase’ which is the cost they experience in acquiring the product, whether that be frustration with queues in a store, or not having the correct size, and so on. ‘Buyer’s remorse’ is the emotional conflict that a customer experiences after the purchase where they start to analyse whether there was enough value to justify their purchase- a good marketing strategy is to always reassure the consumer and create enough value for them to never associate this feeling with your product.
A good example is the Harley Davidson motorcycle. There are many different alternatives of motorbikes on the market more powerful and cheaper, however the brand Harley Davidson still presents a lot of value to a certain group of avid motorcyclists, simply because the brand carries more weight than the simply functional benefit. The customer gains more value from the prestige and image that the brand represents.
How expectations are met dictate the level of customer satisfaction in relation to a product. If a product over-delivers in comparison to what a consumer expected, satisfaction will be very high. The opposite is true from a low level of satisfaction. Marketing aims to ensure that customer satisfaction is high to ensure that their product has a positive reputation in the market place, as the resulting repeat purchase of a happy customer as well as the positive word-of-mouth is very profitable.
The market place is forever increasing their expectations with the rapid evolution of technology, competitors and social media. Modern marketing is not just the creation and delivery of the right product: it’s also about managing expectations. A product will never please everyone, and it’s important to ensure the greatest satisfaction within reasonable confines.
Managing value and customer satisfaction has created what is known as customer relationship marketing, sometimes shortened to CRM. This basically means that organisations view the consumer as the ultimate judge of their product, and therefore, creating a good relationship whilst satisfying their needs leads to customer loyalty: a goal, all good marketers strive for.
Retaining customers in a market is a key driver in organisational success. Losing customers results in less demand for a product, and significant financial loss. Often, an organisation will encourage feedback, especially complaints, as this means that they can evaluate the weaknesses in their offering and attempt to employ a recovery strategy to retain the customer. It has been shown that making a mistake and then correcting it, be that via an apology, a refund or sending free stock, etc., can greatly increase customer loyalty.
With the rise of social media, bad feedback can reach further than ever before. Employing a customer recovery strategy can result is avoiding significant losses associated.
The Evolution of Marketing
Basically, the modern practices and concepts of marketing and promotion began roughly in the 1960s to 1970s. From that time to now, the view on marketing has shifted and evolved.
The first philosophy was called the production concept which focused on mass production of products and selling them to a market as is. However, organisations started to discover that just one product didn’t always fit the demands of a versatile group of consumers. This is how the product concept developed, and it saw focus on differentiating a product’s features. Following this came the selling concept, which revolved around utilising promotion and a sales force to drive sales through communication with the market.
The next step diversified marketing further, which, funnily enough, was called the marketing concept. This involved conducting business through connecting far better with consumers, segmenting the marketing, investigating their individual needs and maximising consumer value and customer satisfaction by tailoring the product to match, setting an appropriate price, communicating effectively and ensuring delivery was convenient. Basically, it put the consumer first, and answered them with production, selling and product concepts, rather than the other way around. This was a very internally focused concept and was extremely effective, employed by most organisations even today.
There is one last stage. Whilst not all organisations do this, the benefits of an organisation that focuses on what’s known as the societal concept are quite high. This is basically taking the above marketing concept and adding a socially responsible aspect to it. The societal concept looks externally and not just internally within an organisation. For example, products can be environmentally friendly, contribute to charities, sponsor events and so on that benefit the larger community. It revolves around making profit by simultaneously satisfying consumers and acting in a way that benefits society. The positive repercussions of this can be very beneficial for an organisation as consumers seek more from them than just a good product.
The Marketing Mix
Here it comes- the obligatory 4 Ps of marketing. Considered by some to be slightly out dated, the four Ps are the real pillars of all marketing practices: Price, Product, Promotion and Place. Often, a fifth P, Positioning, is added to this marketing mix.
Price refers simply to the cost of the product. As already mentioned, this is monetary cost, as well as other costs such as time.
Product revolves around all attributes of the offering that are created by an organisation to satisfy their needs.
Promotion is about the communication techniques that educate and persuade customers to be interested in the product.
Place, also known as distribution, are the logistical practices employed in bringing the product to the consumer.
Positioning refers to the marketing technique of where your product sits in the market and how it is viewed by consumers. It’s basically a product’s reputation: is the product a low cost alternative, or an expensive luxury item with lots of prestige and so on.
When the product is an intangible service, there are three additional Marketing Ps that are added to the marketing mix: People, Process and Physical Evidence.
People refers to the human element of the service being carried out, such as relationships, personability, experience and expertise.
Process is exactly what it sounds like: the steps involved in carrying out the service to produce a gain for the customer.
Physical Evidence are the associated tangibles that the consumer will experience during the service that have an impact on how a consumer rates the service. For example, the way a lawyer dresses or the quality of the tools a builder uses.
The Wholistic Marketing Approach
Also spelled ‘holistic’, this approach suggests that a perfect marketing organisation unites the four key elements in one united operation: The marketing mix (the Marketing Ps, above), Customer Relationship Marketing (CRM), Internal employee satisfaction and the external Societal marketing concept, all discussed above.
By conducting organisational operations with these four elements, a business ensures that its main priorities ensure the greatest potential for success and profit.
How Does Marketing Do This?
The marketing function of an organisation lends itself heavily to how successful an organisation is. This is because the marketing function investigates the current position, and develops strategies, formulates tactics and executes actions that all produce the benefits an organisation strives for.
A marketing plan is a living document that outlines marketing’s analysis and proposed efforts over a particular time frame in achieving organisational success. It involves the following elements.
Overview and Executive Summary
As the title suggests, the first section is a quick snap-shot of the entire marketing plan that will follow this section.
This section outlines everything to do with the organisations position as it stands currently, both internally and externally. It analyses the current market and its trends, current competitors, all external related environments as well the organisation’s strengths, weaknesses, opportunities and threats.
The range of goals are outlined here, which can include financial goals as well as marketing goals, such as greater share-of-voice, market share, reputation, etc.
The proposed approach that will be taken in order to answer each objective.
Tactics/ Action Plan
Detailed explanations of executable steps of the strategy that will deliver results to achieve the objectives.
Forecasted results of each deliverable
Control and Evaluation
This section details how the entire plan will be monitored.
I hope this basic introduction has helped you understand the basics of Marketing! Keep following my blog for more informative posts, and feel free to comment!