This article focuses on the principles of marketing and the concept of marketing mix is analyzed. Pricing is one of the four aspects (product management, pricing, promotion and place) in the marketing mix, and directly effects how a product is positioned in the market. Pricing strategies will be discussed. The foundation of business marketing strategy is based on three concepts: Segmentation, targeting and positioning. These three concepts are introduced.
Keywords Market Segmentation; Penetration Pricing; Positioning; Pricing; Price Skimming; Pricing Strategies; Targeting; Value Based Pricing
Most individuals who study the field of marketing know the foundation of the concept. It is based on a marketing mix, which consists of four basic elements. These elements are: Product, price, promotion, and place. These elements are also known as the 4 P's of marketing (Golden & Zimmerman, 1980).
- Products are what the seller provides for the buyer for a price.
- Place refers to how the seller gets the merchandise to the customer.
- Price is what the seller charges the buyer for the service or product.
- Promotion is the method in which the seller advertises in order to get customers.
The Five Forces
Once the marketers have understood the concept of the marketing mix, it would be advantageous for them to develop a strategic plan for selling their products or services. A popular model for determining competitive advantage is Porter's Five Force Analysis model. This model lists five key areas that marketers and strategic planners should evaluate when analyzing the competitive environment. The five forces are: Threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry (Porter, 1985). Each force has a list of questions to be answered as follows.
Threat of Entry
- Are there any benefits associated with bulk purchasing?
- How much will the latest technology cost?
- Do the competitors have a stronghold on most of the distribution channels?
- Are there any cost advantages not associated with the size of the company?
- Will competitors retaliate?
- Will new laws weaken the company's competitive position?
- How important is differentiation?
The Power of Buyers
Are there any large players in the market (i.e. chain restaurants)?
- Will the large players have the support of small suppliers (i.e. companies such as Home Depot receiving flowers from local nurseries)?
- Is the cost of switching between suppliers low (i.e. a conference coordinator switching from Hertz to Avis)?
The Power of Suppliers
- Are the costs high for switching suppliers?
- Is the brand powerful (i.e. Cisco)?
- Is there a possibility of the supplier integrating (i.e. banks offering insurance)?
- Are the customers fragmented so that they have limited bargaining power?
The Threat of Substitutes
- Is there a product-for-product substitution (i.e. cell phones instead of land lines)?
- Is there substitution of need (i.e. lighter textbooks reduces the need for chiropractic care)?
- Is there a generic substitution (i.e. for insurance purposes, getting a generic prescription versus a brand prescription)?
- Can we do without the product (i.e. fast food because it can lead to obesity)?
- If there is a strong chance of entry, competitive rivalry will be high. There is a danger that involves substitute products as well as suppliers and buyers attempting to take control of the market.
Pricing is one of the four aspects (product management, pricing, promotion and place) in the marketing mix, and directly effects how a product is positioned in the market. It should take into consideration fixed and variable costs, competition, organizational objectives, proposed positioning strategies, target groups and their willingness to pay the price. When an appropriate price is selected, it should: Assist the organization in reaching its financial goals, be a realistic price for the target market, and support a product's positioning and be consistent with the other variables in the marketing mix. Many organizations have utilized various factors when determining the pricing strategies for their products and services. However, there are some general guidelines that all share. For example, the marketing representatives may go through a series of steps as follows.
Develop marketing strategy (perform marketing analysis, segmentation, targeting and positioning). The team will have to determine the mix of each aspect of the marketing mix formula. The first step will be to develop a marketing strategy for the product or service. At this point, a decision is made as to who the target market will be and how the product will be positioned. Another factor will be the response to "is pricing going to be a key point of the positioning"? For example, if the product is going to be sold on eBay, the company may consider researching how other companies have set up a pricing structure for the same or similar items.
Make marketing mix decisions (define the product, distribution and promotional campaign). There will be trade offs between the variables in the marketing mix. Pricing will be based on other decisions that have been made in the areas of distribution and promotion. For example, is the expectation to sell a small number of luxury items at high prices so that the product becomes a rare, unique commodity?
Estimate the demand curve (understand how quality demanded varies with price). There tends to be a relationship between price and quantity demanded. Therefore, the marketing team will attempt to estimate the demand curve for the product or service since pricing impacts sales. The first step will be to conduct market research to find out if price will have an effect on the demand for the product. If the product already exists, the marketers may want to survey whether or not the market will accept prices above and below the current price. The results will give the marketing team an idea of the price elasticity of demand for the product.
Calculate cost (include fixed and variable costs associated with the product or service). Once it has been determined that the product will be launched, the marketing team will need to understand all of the costs involved. Therefore, they will need to calculate the fixed and variable costs related to the product or service, which is referred to as the total unit cost. The unit cost of the product determines how much is needed in order to break even. Any price set higher than this could set the profit margin.
Understand environmental factors (evaluate potential responses from competitors and understand legal constraints). The marketing team should find out if there are any legal restraints on pricing. For example, offering different prices to different consumers can lead to cases of price discrimination. There may be legislation that dictates how high the price can go. Also, there are laws that prevent predatory pricing, especially in the international trade market.
Set pricing objectives. There are a variety of ways to set the pricing objectives. Some of the most popular objectives include:
- Profit Maximization By taking into consideration revenue and costs, this objective seeks to maximize current profits.
- Revenue Maximization This objective does not take profit margins into consideration when attempting to maximize current revenue.
- Maximize Quantity This objective tries to increase the amount of units or...
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