Video Transcript: Marketing Mix - Price - Part 2

So in this module, in this video, we're going to continue our discussion of the  marketing mix specifically related to price. We're going to pick up where we left  off on our previous video here. So buyers perceptions, one of the things that any marketer has got to consider is the importance of price and the perceptions that  creates with customers in the target market segments when you're setting  prices. And let's try. We're going to lay out an activity for you here to kind of  illustrate this whole process. So let's assume that someone, your boss, gave  you the job of pricing two new products in the following fashion. Product A  happens to be a budget hotel room, and the target that you're going after. Here  are families, little or lower, middle to low income families. Now, Product B  happens to be luxury hotel rooms. And target here is going to be business  people who might be attending conferences. In other words, it might be a luxury  hotel that's doing a lot of business with high end conferences, for example, that  are targeting CEOs or senior managers, and you're going after the high to  middle income people here, take a minute and consider how important pricing is going to be to each of these customer or target customers for product A and for  product B. So I'll give you just a minute to think that through. so the answer that  we're looking for here is marketing, is that actually pricing, the very candid is  going to be very important for both of these products in both of these markets.  And let's talk about the reason for that with product A the price for product A to  the low to middle income area, the pricing has got to be reasonable or cheap.  Actually, marketers have a total aversion to the word cheap, so we should get rid of cheap and just say inexpensive to reflect the nature of the product that's on  offer. In other words, the lower cost budget hotel rooms, the price is often going  to be the first consideration of this specific target customer. Value for money is  just a key characteristic for them, even if a $400 in length hotel room offered  great value. I mean, they could have a whole palace for $400 a night. They're  likely still going to go for the one that goes for $75 a night. On the other hand, in  product B, with the luxury hotel rooms that's being catered to CEOs or senior  managers of different businesses attending a conference, prices here are going  to be much higher. But price is just as important to the business traveler. Mean,  they may be on a per diem budget, for example, mean meaning that they have  X amount of dollars that the business can reimburse them for travel, for a hotel,  or so many dollars a day for meals, kind of a thing. So they may very well be on  a budget there. But on the other hand, in this case, the price has to be high  enough to give this group of people a quality impression. You're not going out  looking for a high end hotel room at $75 a night. Are you? You probably looking  at some of the lower budget hotels at that price range. So you've got to have  price, the price high enough to create a quality or a perception of quality, but still  competitive in relation to other luxury hotels that are in that immediate area.  Prices of products and services are key in both the budget and in the luxury  markets, it's possible overpriced or under price in both of these examples in the 

eyes of the customer, and neither case is good. It's also really important that the  price reflects all of the other elements of your marketing mix. In other words, it  resonates, that works well. It's relevant to the promotional aspects to the  product, to the quality of the product that you're offering, so and even in the  place where it's at. So you know, if you're in a small town in northern US, for  example, in the wintertime, it may be a totally different price range than if you're  in some of the resort areas of Colorado or in some of the warmer climates, like  in Arizona or southern Texas or Alabama or Florida. Competition, some of the  companies who are selling products and services in competitive markets try to  win customers over from rival companies. And this is achieved in one of two  ways, price competition and non price competition. And the first one here, price  competition is probably universally known. In fact, it's probably almost to a fault,  actually, that it's known, and it's just simply a process of competing as a basis of  low price. One one gas station lowers the price of their gas a nickel, and pretty  soon the gas station across the streets got to lower their price, or at least match  it. And marketing people will tend to look at that pricing strategy of having the  lowest price is simply a race to the bottom. Who's going to get the lowest price  and make no money, no profit and go out of business first? So what we tend to  do, there's a number of tactics that we will use to help people compete on non  price competition, but let's talk about price competition for a moment, offering  the product or service at a lower price than all of its competitors. Products or  services, non price competition is trying to increase market share of a product or service by leaving the price of its product or service on change, but adding more value, more value for the money being charged in persuading your target  customers of the superior benefits and features of your enhanced product.  Always try to predict what the competition is going to do when you change  prices. An example of this is, if you're in charge of pricing hotel rooms in a highly competitive market, you're considering a tactical price reduction in attempt to  gain some market share. And guess what the competition is going to do to  respond to that? Anything that you're going to do, they could respond to your  tactical price reduction in a number of ways. Actually, one of them, which is  highly unlikely, is doing nothing. They're probably at least going to match  whatever offer you're coming up with. If you stay three nights, you get the fourth  one free. Well, guess what? They may very well make the same offer, reducing  their prices to the same level as yours, or even lower yet, and then trying to  stress the advantages of that their facility, their resort hotel, might have in that  specific market, market area, competitive pricing strategy, their reaction to  whatever changes that you want to make in pricing is going to depend on the  position they're in, particularly in relation to their cost structure and to their  market power, if they haven't. So in the case of a hotel, for example, one of the  things that could be a very big constraint on their ability to keep compete on  price is the debt load they may have. Of you know, they have mortgage 

payments, just like you have a mortgage payment on your house. And the issue  here is, if they have real big mortgage payments, because they had to borrow a  lot of money to build that facility, they don't have a lot of money to promote their  hotel. They don't have a whole lot of money to compete on price. And that if you  are aware of that, you can use that to your strategic advantage. It's important,  

however, that you predict what the outcome of your temporary price reductions  are going to be for whatever product or service that you're dealing with here.  Kind of know who these players are, what kind of debt load they have for their  hotel resort, for example, and you can start to figure out what other people are  able to do to react to that. And it gets to a level where its almost becomes a  chess game. If the competition is very responsive, it may do little to your overall  long term position. In other words, maybe they have kind of the same cost  structure that you have, and they can just match you offer for offer on whatever  you do, they'll immediately just match it. They may publish advertising that says, We'll match any customers offer. Just bring the coupon and bring the ad and  we'll match it. But again, it might merely generate some extra short term cash  flow for you, if you get people come in and buy a discounted hotel room, and  pretty soon you got people paying you for parking. You got people who are  buying meals at the restaurant, that kind of thing. So some legal and regulatory  issues. There's cases where some of these prices can be regulated by legal  issues, regulatory stuff, government intervention, price controls. Healthcare is  one area you got, utilities. You have any place where you have monopolies, for  example, will be regulated by. Either the federal government or the state  government here in the United States, legal restrictions on price fixing and  collusion, that's a real big Act, a big deal, customer legislation. And another one  that's not mentioned down here is the a lot of time, a number of times, if you  have a company like Apple, for example, or Motorola, or some of these big  companies, will have brands. They'll have products that they don't want people  discounting the new products. So what they'll do is they'll have their price list,  and they'll say the minimum that you're allowed to sell this product for is this  price. You can charge whatever you want, as long as just more than this  minimum advertised pricing. So you get to be aware of that issue as well  different methods of pricing, the different the way in which prices are determined depends on the company's pricing policy, and the pricing policy is a guiding  philosophy or course of action that's designed specifically to influence and  determine pricing decisions. And once a company has really kind of decided on  what their pricing policy is going to be, then it's got to choose a pricing method.  And a pricing method is a mechanical procedure for setting prices on a regular  basis. So a lot of times, you take cost, just add a percent in the energy price.  But, and that's what we call cost oriented pricing, you take a product, it costs  you $10 to manufacture the product and actually ship it to a customer, and you  decide that you're going to charge $20 you know, again, to charge 100% you're 

going to just double it. So you charge sell it for $20 demand oriented pricing, you have competition oriented pricing. So we're going to talk about all three of these  here a little bit more detail. Cost oriented pricing is the price of a product or  service that's calculated and a specific margin is applied to derive a specific salt, derive the selling price. And this is probably the most common method of pricing and is often used by companies for calculating the prices of their products, their  services. It does have the disadvantage of not taking into account the different  economic aspects of supply and demand, and it often doesn't relate to pricing  objectives. So what happens is, companies can issue a price list for 2018 for  example, and all of a sudden the price of lumber just goes up like crazy in  March, and you either need to publish a new price list or you just bite the bullet  and you end up taking less profit than what you thought you were going to do  back in January. So that's one of the drawbacks that you have here with cost  oriented pricing. Demand oriented pricing does allow for higher prices when  demand is high, and lower prices when the demand is low, regardless of the  cost of the products or services. And again, lumber would be a great example of  that. Earlier, in 2017 we had a number of major hurricanes that went through the Caribbean into Texas, Louisiana area, caused heavy damage, and the price of  lumber throughout the United States just escalated very quickly in a very short  period of time during the fall months of 2017 that's an Example of demand  oriented pricing. It allows you to make higher profits as long as the buyers value  the products above the cost, the cost price. Competition oriented pricing, the  firm fixes the prices the products and services in relation to what the competition is charging. It has the advantage of giving the firm the opportunity to increase  sales at market share. You're almost comparing Apple apples to apples. But  then again, you got to be kind of convinced they have the same cost structure,  they have the same business model that you have, so that you're kind of doing  that. You know what they're doing. They know what you're doing, and you're just using competition oriented pricing to buy more customers.