Video Transcript: Marketing Mix - Price - Part 1

So in this particular module, we're going to look at a single element of something that we call the marketing mix. And the marketing mix is really a collection of  four different specific topics. At least in my world, there were four specific topics  of marketing that every marketer needs to be paying attention to, that's product  pricing, promotion and distribution. And in this particular module, we're going to  spend some time unpacking the whole issue of how marketing people determine pricing, price ranges for a particular product or a particular service, and we'll  spend some time going through that whole issue. What and part of the  questions that are going to be answered in this particular module are, what is  meant by a pricing strategy? What is a pricing strategy, identifying the key  determinants for how you develop a pricing decision making, policy, decision  making process, identifying the different methods that are available for pricing  products and services. You think you just put numbers on a dart board and you  throw darts at it. Well, that may be one method, but might not be the most  effective. There are multiple different methods that marketing people use for  pricing products and services, and one of the other things that we'll spend some  time looking at is exploring how product strategy fits in with the other elements  of the marketing mix that I just mentioned. Little bit of an introduction. Marketing  is defined, as we've talked about before, the management process that's  responsible for identifying, anticipating and satisfying customer demand,  customer requirements at a profitable level. And the key words in that definition  in relation to pricing policy, are customer requirements and profitability, the  prices that a customer our company sets for its products and its services really  have to strike a very careful balance between getting acceptance with the target  customers, and if you don't, they ignore you and making a profit for the  organization. The first thing that we really need to define here is what is meant  by price. Price is defined as the amount of money for which something or an  object or a service is offered for sale a pricing strategy, then the definition of a  pricing strategy is a plan which determines the best at the time that it's made  pricing decision, the planning of peace, planning of prices, including the setting  of discounts, and Considering items such as the price of competitive products,  manufacturing and distribution costs, the firm's growth and profitability,  objectives, customer wants and needs in the elasticity of demand. In other  words, is there high demand, low demand? Does that fluctuate throughout? Is it  seasonal? Whatever? So pricing strategy, when setting prices, you need to  consider a number of different things, whether you're going to ever will need or  want to discount these products at any given time. So maybe, if it's a seasonal  product, maybe at the end of the season, you might want to discount the  products without having necessarily to take a huge loss on them the price that  the competition charges. What kind of pricing strategy are they doing based on  their own set of circumstances? You're going to want to look at the cost of  providing the product or the service. In other words, you have a cost of all the 

overhead of your organization. You have the cost of the raw materials. You're  paying people to manufacture the pieces, assemble the pieces, package it up.  You're going to have freight costs, which, frankly, have really gotten expensive,  the logistics. And you're going to want to add all that stuff up and figure out, well, what do you need to charge in order for you to make a profit and enable your  resellers, like your retailers, your distributors, enable them to mark it up and sell  at a profit as well. You're going to want to consider your market position. Are you a market leader? Are you a leader as a luxury item, as a low cost provider,  you're going to want to look at the type and the nature of the customer demand,  if an increase or a decrease in the price might affect the quantities of this  product or services that are being purchased. And then last, you want to take a  look at the pricing strategy relative to the market segments that you're looking to attract. You know, there's so many variables here, but the younger age groups,  for example, like 20 years 20 year olds may have a fairly significant amount of  disposable income, especially if they're living at home with mom and dad, for  example, whereas 30 year olds are typically in a point in life where they have a  mortgage and four kids and three car payments, and you know, all that financial  responsibility, and it may have a very big impact if you decide that you want to  raise your prices by 20% so you need to pay attention to how your pricing  strategy interacts with the target market segments that you're chasing. Pricing  strategy, the price is really a key element in the whole marketing mix, because  for a profit motivated company, it relates directly to the total revenue and  ultimately to the profit of the business. And the two boxes that you see here  really kind of lays it out. Profits are equal to your total revenue, to your total  incoming cash, minus your total cost of making the products of the payroll that  you got to pay. But then you also got what the accounting people, CPAs, will  refer to as general and administrative expenses, the cost of the building, the  cost of the electricity to light the lights in the office, the cost of the receptionist  that you have at the front door. You know, those kinds of things. Or you can take and relate all that to in the second box down below, it says profits is equal to  prices times the quantity sold minus your total cost. So those are two ways that  you can define profit. And this is something that if you know, if you're not, if  you're relatively new to the business world. This could be a couple of concepts  here that you might want to pay attention to make note of that key determinants. How do you determine what kind of when you need to deal with a different type  of pricing strategy? What goes into determining what kind of pricing strategy you want to work with? Here's a list of a couple of the key ones, organizations and  marketing objectives that you your organization might have. Pricing objectives.  Do you want to be, again, be the luxury item? Do you want to be middle of the  road, part of the pack, or do you want to be the low cost provider? Pricing  strategy is very heavily dependent on costs. And key costs that would be  included here is the shipping cost of putting the product in a box and shipping it 

out by the post office or by UPS. Another item would be other marketing mix  variables, like maybe you have a huge promotion going on where you're  sponsoring a sports team in town, for example, one of the pro professional  sports team, and you're running up a lot of costs, or you could be hiring  someone like a key celebrity, to serve as an influencer, to talk about your  product and play it up and try to get a following amongst his followers for your  products and services. That's expensive stuff. You've got to bury that, include  that cost in to the cost of doing business in order to make a profit, right? You  can't ignore it. It's there legal and regulatory issues. There are some businesses  where you need to pay a lot of attention to regulatory issues, and I'm thinking  again, of utilities, but also you get into some of the things where you talk about  minimum advertised pricing issues for products. So those all come into play with that legal and regulatory issues, healthcare would be a big issue, big, big item  here, competition. What are they doing for pricing strategy? How are they what  kind of pricing terms are they offering? Do they have monthly payments? Do  they attract cash up front? Do they take credit cards, they want checks, they  want cash. How do they do it? Buyers, perceptions of pricing strategy. This,  again, is where you get into the luxury item versus versus a low cost provider,  product or service. And then the other thing, like, other key element here that  you really need to be aware of relative to your whole, you know, the pricing  strategy versus your whole marketing mix is, how are you going to sell this? Do  you have different channels that you're going to work with, like retailers or  wholesalers, or are you going to be selling your product direct to the end user  via an online channel of some sort like Amazon or eBay or your own e commerce website. So these are all, well, not all of them, but these are some of  the more key things that we'll pay attention to as we're trying to answer the  question of how much are we going to charge for this stuff. Here's a nice little  chart here about how factors influence the pricing selection. You got marketing  demand. You got competitors, pricing behavior and type, legal, regulatory  requirements. And then up on the top you got the overall objectives, marketing,  sales objectives, marketing costs, product costs, pricing strategies. Okay, we  mentioned that there were several different pricing strategies that marketing  people and business senior business people work with, strategies that you have  here, quantity or trade discounts. So a lot of times, you're familiar that if you buy  one, you pay a certain price, but if you buy three of them, you might get a price  that's 10% off or or even, you know, bigger price discounts, or bigger quantities  trade discounts. That's kind of interesting, because every once in a while, you  will get discounts, if you're in the trade, like you're an interior designer, for  example, and you go recommend stuff to a carpeting from a specific source to  one of your clients, and that carpet store will provide that interior designer with  either a commission or a discount to buy to buy that Carpet to put in that client's  home, cash discounts. There are places sometimes that if you pay by cash, you 

can get your product or your service for less money. It may cost more if you use  a credit card or a debit card. For example, freight costs. How much is it going to  cost to ship this stuff? Do you want that overnight? You want to have it on your  desk tomorrow morning? Or can you wait a week for it and again, that will very  much excuse me play a part in the cost of that you're going to want to price your product at if it's going to be separate or if it's going to be added on freight.  Costs, to me, are surprisingly expensive. And maybe some people might look at  that and say, well, it's just sort of, you know, kind of like life. But to me, you  know, you can buy stuff for, you buy an item for seven bucks. And I've seen  people repeatedly pay 10, 12, $15 to ship it. And it's like, you know, sometimes it just doesn't make sense, but maybe it does different, different topic for a  different day, flexible pricing, price lining, leader, pricing, leader, I don't think we'll get into much in the flexible pricing of the price lining part, but the leader pricing, to me, has always been very prevalent in the grocery industry. You will very  often see a grocery chain advertise ketchup or some sort of a vegetable at a  very, very low price. Let's say ketchup, for example. The reason they do that is  because if you're going in there to buy ketchup, they know that you probably  want hot dogs, hot dog buns. You want pickles, and, who knows, maybe potato  salad or macaroni and cheese or something to go along with it, to make the  complete meal. And not everything in that group of menu items that I just gave  you is being priced at a loss leader, pricing, quantity discounts or trade  discounts. And again, we kind of covered this a little bit, but we'll quick run  through this again, deductions from a seller's list price that are offered to  encourage customers to buy in bulk. And if you buy, an example of that, again, is if you buy a specific resort package, children, flat fly, free trade discounts,  reductions in the list price that are offered to buyers, and payment for marketing  functions that they're going to perform. So you know, I gave you a few examples of that a little while ago, trade discounts of the interior designer so on cash  discounts, a deduction that's granted to buyers for showing up with cash or  buying within a specific period of time, usually calculated on a net amount due  after first deducting the Trade and the quantity discounts from the base price,  flexible pricing strategy, with a flexible pricing strategy, similar customers might  each pay a different price when buying similar quantities of a product. This could be. Probably there are some business cases here where I am aware of where  certain customers, based on the amount of product, the amount of stuff that  they'll do with a certain business may be at pricing level one, a bigger company  might be coming in as a level three, and they will get appropriate discounts  based on that, essentially, is kind of a sophisticated version of quantity pricing.  Price lining involves selecting a limited number of prices at which a business will sell related products. And the great example of that is a shoe shop, which sells  several different styles of shoes at $69.95 but then they serve have another  whole group of shoes that they're selling at the $89.95 price level, leader pricing.

Again, I was using the analogy of going to a grocery store buying ketchup to  track customers. And the reason is they know that you didn't just show up to buy ketchup. You showed up to buy a lot of other stuff, but as long as ketchup is on  sale, you're going to go there, right? So that's why they do it. So here's an  activity I'd like you to take a minute here and give this a little bit of thought. If you owned a fast food restaurant chain, let's just imagine that you're independently  wealthy and maybe not, but you still own a fast food chain restaurant, and you're considering selling one of your products at below cost for, let's say, two, three  days. Take a minute, just a minute. And I want you to think about why you would  do something like that. Just kind of formulate some ideas in your mind. Why  would you cut one of your product costs below or product prices below cost. So  just a little bit of feedback to answer that help you answer that question. This is  actually known as something that we would call a tactical price reduction, and it  can be introduced for a short period of time, even if it doesn't cover the cost. And again, this is probably not something that you would want to do long term. It  would be just simply a tactic that you would use to just drive more business over a short time period. Restaurants are especially adept at doing this. Or they  might take a local direct mail outlet and they might put a coupon in there for buy  one, get one free. For example, that's a great example of a tactical price  reduction. And temporarily. They might do it temporarily just to match a  competitor's price. They might want to generate, maybe not a substantial cash  flow, but it might drive more business. It might create new customers. It might  help them to increase market share. So that's why they do this.