Join Drew Boyd for an in-depth discussion in this video Setting prices, part of Marketing Foundations.
- Setting prices is the quickest of the four P's, but that doesn't mean it's the easiest. In fact, making a mistake here can be very costly, in terms of lost revenue, as well as sending the wrong signal to the market about your products and services. Let's start with some definitions. To be successful at pricing, you need to understand the difference between a product's cost, its price, and its value. The cost of the product is all the direct and indirect expenses that you experience as the manufacturer to make the product.
Things like raw materials and labor, for example. Price is what a consumer has to pay to acquire the product. A price is a signal, a piece of information. About what, you might ask. About the value. Value is what the consumer gets out of the product, the collective set of benefits delivered by the product. The most common mistake in pricing is setting it based on your costs. It may seem counter-intuitive, but price is unrelated to costs.
Your customer doesn't care what it cost you to produce the product. They don't compare your costs to what they pay. Instead, they compare what they pay versus the total value they get from the product. If value exceeds price, then they'll buy the product, and if not, they'll ignore the product. Value-based pricing, then, is the process of calculating the total delivered value from using the product, then setting the price at or just below that amount.
Think of price as a shortcut. The price quickly tells a customer a lot about the quality and value. But what about the competition and their prices? Go back to the five box positioning tool and look at your value proposition. If your positioning your product as superior to the competition, then you should set the price higher than theirs. If your product is equivalent to the competition, make the price the same, and if your product is inferior to the competition, set the price lower.
That's how price becomes a signal of value in comparison to competitors' prices. Let's do an example. Let's imagine you're selling laptop computers. You have two competitors with comparable models, and one is priced at $1099, and the other is priced at $1599. If you compare the features of your model to theirs, you'll see that they differ in available memory, size of the hard drive, and processing speed.
It looks like your price will be somewhere in the middle, but where exactly? Well, it depends on how customers will value the difference in prices to the difference in features. You have an advantage over competitor A in memory space and hard drive space, so you want to price above them. You could buy that additional memory and storage space from third parties for around say $200. If you price more than that, customers could buy the model and possibly upgrade it on their own.
So, that puts your price at about $1299. What about competitor B's model at $1599? That would put it at $300 more than your price, if you keep it at $1299. For that additional amount, the customer gets twice the hard drive space and a little faster processing speed. If the customer thinks it's well worth it, you may need to lower the price a bit to make your model look like a better value. Here's a tip. Have you ever noticed how a lot of prices end in the number nine? Research shows that customers are more attracted to prices that end in the number nine.
So, it's a widely used pricing approach. Price is a signal of value and a powerful part of the four P's, so make sure you put it to effective use in your marketing campaign.
You'll also learn to address tactical challenges and present the plan to get buy-in throughout an organization, from the C-suite to the sales team, as well as use the marketing plan to guide outside agencies and vendors. Finally, you'll learn how to launch the campaign and measure its performance.
- Marketing in an organization
- Assembling the team
- Creating the marketing plan
- Analyzing your products, customers, and market
- Segmenting customers
- Creating a value proposition
- Developing a strategy
- Setting goals
- Setting prices
- Using social media
- Presenting your plan to leadership
- Budgeting your plan
- Measuring success