Week 08 · Introduction to Marketing
Davood Wadi, PhD
Welcome to Week 8 of Introduction to Marketing.
Today we explore the second P of the marketing mix, Price.
We will examine how price affects the bottom line and customer perception.
Price is the only element in the marketing mix that produces revenue.
All other elements represent costs to the organization.
Price is highly flexible and can be changed quickly compared to product features or channel commitments.
It is a critical determinant of buyer choice and market share.
A café owner is planning next month. Does each decision set a price, which produces revenue, or is it another element of the mix, which represents a cost?
Tap a card, then tap the group it belongs to.
Setting the right price requires balancing internal capabilities and external realities.
Internal factors include marketing objectives and costs.
External factors encompass market demand and competitor behavior.
Pricing strategies must align with broader company goals.
Objectives may include survival or current profit maximization.
Other goals focus on market share leadership or product quality leadership.
A clear objective guides the initial pricing range.
Costs set the absolute floor for the price that the company can charge.
Fixed costs do not vary with production or sales level.
Variable costs vary directly with the level of production.
Total costs must be covered to achieve long-term viability.
While costs set the lower limit, the market sets the upper limit.
Understanding the relationship between price and demand is crucial.
Different markets exhibit different competitive conditions.
Pricing freedom varies across pure competition, monopolistic competition, oligopoly, and pure monopoly.
A small roaster in Verdun is pricing a bag of coffee. Does each fact help set the lower limit on price, or the upper limit?
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Price elasticity measures how responsive demand will be to a change in price.
Inelastic demand means demand hardly changes with a small change in price.
Elastic demand means demand changes greatly in response to price changes.
Companies must understand elasticity to forecast revenues accurately.
Once factors are understood, marketers must select a pricing approach.
Three major pricing strategies dominate the market.
They are customer value-based pricing, cost-based pricing, and competition-based pricing.
This approach uses buyers' perceptions of value as the key to pricing.
Price is considered along with all other marketing mix variables before the marketing program is set.
The company assesses customer needs and value perceptions first.
It is the reverse of the cost-based approach.
Before designing a new e-bike, a Montréal company asks riders what they value and what that is worth to them. It then sets a target price and designs the bike to meet it. Which approach is this?
Good-value pricing offers the right combination of quality and good service at a fair price.
It often involves introducing less expensive versions of established brand-name products.
Value-added pricing attaches value-added features to differentiate offers.
This allows companies to charge higher prices rather than cutting prices to match competitors.
Involves setting prices based on the costs of producing, distributing, and selling the product.
It includes a fair rate of return for effort and risk.
Types include cost-plus pricing and break-even pricing.
While simple, it ignores demand and competitors' prices.
Prices are set based on competitors' strategies, prices, costs, and market offerings.
Consumers will base their judgments of a product's value on the prices that competitors charge.
The company must assess how its offer compares to competitors in terms of customer value.
If the offer provides greater value, a higher price can be justified.
Which pricing approach is each business using?
The price starts from the costs of producing, distributing, and selling, plus a return.
The price is set from what competitors charge.
It assesses customer needs and value perceptions first, then sets the price.
It compared its offer with competitors. Greater value justified a higher price.
Costs plus a fair rate of return for effort and risk: cost-based pricing.
Buyers' perceptions of value are the key to the price, set before the product is built.
Which concept does this case show?
A new streaming platform enters a crowded market dominated by established giants with a unique recommendation algorithm but a smaller content library.
Discussion: Should the company use cost-based, value-based, or competition-based pricing?
Introducing a new product brings unique pricing challenges.
Pricing must be dynamic and adapt as the product passes through its life cycle.
The two primary strategies are market-skimming pricing and market-penetration pricing.
Setting a high price for a new product to skim maximum revenues layer by layer.
The company makes fewer but more profitable sales.
Product quality and image must support the high price.
Competitors should not be able to easily enter the market and undercut the high price.
A company plans to launch a new product with market-skimming pricing. Which situation would make that plan a poor choice?
Setting a low initial price in order to penetrate the market quickly and deeply.
The goal is to attract a large number of buyers quickly and win a large market share.
The market must be highly price-sensitive.
Production and distribution costs must decrease as sales volume increases.
The strategy changes when the product is part of a product mix.
The firm looks for a set of prices that maximizes its profits on the total mix.
Pricing is difficult because the various products have related demand and costs.
Common strategies include product line pricing and captive-product pricing.
Product line pricing determines the price steps between various products in a line.
It is based on cost differences, customer evaluations of features, and competitors' prices.
Optional-product pricing is the pricing of optional or accessory products along with a main product.
Companies must decide which items to include in the base price and which to offer as options.
Setting a price for products that must be used along with a main product.
Examples include blades for a razor and games for a video game console.
The main product is often priced low, with high markups on the captive supplies.
This strategy ensures ongoing revenue streams from the initial purchase.
Which product mix pricing strategy is each company using?
The cartridges must be used with the printer, and they carry the high markups.
The extras are optional products priced along with the main product.
It sets the price steps between the products in one line.
The heads must be used with the main product, so they are captive products.
It decides what is in the base price and what is offered as an option.
Price steps based on feature evaluations and competitors' prices: product line pricing.
Which concept does this case show?
Combining several products and offering the bundle at a reduced price.
This can promote the sales of products consumers might not otherwise buy.
The combined price must be low enough to get them to buy the bundle.
It helps clear out excess inventory while providing value.
A premium coffee machine manufacturer introduces a new model that requires proprietary coffee pods that only fit this specific machine.
Discussion: Should they price the machine low to sell more pods or price the machine high to maintain a premium brand image?
Pricing is the only revenue-generating element of the marketing mix.
Decisions must align internal costs and objectives with external market realities.
Whether cost-based, value-based, or competition-based, the strategy must reflect customer perceptions.
Effective product mix and new product pricing ensures long-term profitability and market positioning.