What to think about when pricing a product
Getting the price of a product or service right is critical. Customers want to know they are getting value for money but businesses must ensure they’re not leaving any money on the table, so it’s a fine art.
“Of all the words associated with marketing, the one we should focus on the most is value. This is because when you boil down what we as marketers do, it is about creating, generating, communicating and then harvesting value.” Those are the words of Professor Mark Ritson, leader of Marketing Week’s Mini MBA in Marketing.
But getting pricing right is a complex art, and one that many marketers struggle with, something which he looks to address during the course’s ‘pricing’ module.
As Harley Mathieson, social media manager at travel company David Urquhart, and a recent graduate of the course, says, “It’s easy to get involved in the glamorous creative side of the marketing process; I suspect fewer of us have a strong foundation in the fourth ‘P’.”
The pricing ‘P’ is different to the other ‘Ps’ in the marketing mix because it isn’t about creating value for the customer, it is about reaping value for the organisation.
READ MORE: The big debate: Are the ‘4Ps of marketing’ still relevant?
Ritson quotes Professor Mark Bergen, who describes pricing as the point “where all of your marketing strategy really meets that final decision point with your customers”.
It is a statement that struck a chord with Jolanda Wells, UK product manager at natural product specialist Rio Health, and another recent graduate.
“It reinforced the thinking that pricing is the ultimate moment of truth, as it is the final decision point for consumers. It’s make or break. Get it right and everyone’s happy, get it wrong and all of the months or years of work which have preceded it go out the window.
“I work in FMCG where price is critical, and will therefore be focusing on it more for my next new product development launches by using focus groups to test different price points.”
Communicating the value of a product
The module explores two key approaches to pricing: cost plus pricing and value-based pricing, both based on Robert J Dolan and John T Gourville’s ‘Pricing Thermometer’ concept. While the former model is simple – comprising the cost of goods sold plus a profit margin – it has many drawbacks, not least, as Ritson says, “leaving money on the table” due to not taking the product’s true value into account.
The value-based pricing approach however, while more complex and requiring research, looks at crucial factors including true economic value and perceived value. The gap between the two is a measure of an organisation’s true marketing core competence, based on whether the consumer has understood the value of the product.
John Ozimek, another recent graduate and director of PR and marketing consultancy Big Ideas Machine says this insight has helped the company to start approaching marketing products based on the perceived value, rather than purely on price.
“Companies that fixate on cost often are in a race to the bottom. Better, and smarter, marketing is clearly a better approach,” he says.
For Mathieson, he says that while David Urquhart still follows a cost-oriented pricing model, he is “at least able to argue the merits of adopting a value-oriented approach. It is an uphill battle but one I am hopeful of winning in the long term.”
How Samsung v Apple illustrates a crucial point
Another area of the module that really resonated with graduates i the importance of not pricing a product too low. Ritson illustrates this point with the example of Apple and Samsung in the smartphone market.
Samsung has almost twice the amount of global market share than Apple, yet its latest product costs more to produce. But Samsung’s recommended retail price and, critically, its average selling price (ASP) are both considerably lower than Apple’s because it offers a lot of discounts and lower-end models.
It means Samsung’s gross margin is less than half of Apple’s, translating into 11% of global profits from smartphone customers in 2016, compared to Apple’s 94%.
“The real story of Apple’s genius is price – both having a price premium and holding the line against anyone trying to discount the product,” says Ritson.
READ MORE: Mark Ritson – The era of price promotions is over
The dangers of charging too little
Ritson also quotes an article from McKinsey & Company which states that charging too little is far more dangerous than charging too much: “A company not only foregoes significant revenues and profits but also fixes the product’s market value position at a low level… once prices hit the market it is difficult, if not impossible, to raise them.”
As Wells says: “[It can lead] to negative perceptions of product quality, damage to brand equity, a negative impact on margins, and it fixes the price at the low end leaving the brand vulnerable to price wars, reduced marketing investment and vulnerability around commodity prices.”
Mathieson cited the dangers inherent in price discounting as one of the biggest lessons he took from the module, while it was also an area that made Ozimek think: “With the amount of discounting and offers we see all around us every day, you’d assume that it’s a well-tried model for increasing profits and revenues. However, the explanations in the MBA module shows very clearly why this isn’t really the case. For something that’s so common it is actually quite shocking.”
The truth about discounting
Yet according to market research specialists, IRi, more than 50% of food and non-food products are sold at a discount, meaning it is more common to buy a product in the UK on a sales promotion than on non-sales promotion. This is in spite of the fact that discounts decimate profits, even if they improve sales and market share – as Samsung can testify.
“I believe that too often price is left to the sales team, who are chasing volume rather than value,” says Ozimek. “It shows once again that marketing really needs to be a consideration at every point of a product lifecycle.”
It comes back to the importance of value in marketing, and how ill-considered pricing can negate an otherwise brilliant marketing strategy, and waste a lot of hard work.
But doing your research and finding the pricing sweet spot is one thing – sticking to your guns is another: “I have one single piece of advice when it comes to discounting – don’t,” concludes Ritson. “Hold the line.”
Professor Mark Ritson will be teaching the next class on the Marketing Week Mini MBA in Marketing from September 2017. To find out how it could make you a more confident, more effective and more inspired marketer, and to book your place, click here.
Profit is the only consideration.