Pricing is a key element of the marketing mix. It is so important that large organisations such as GE have whole departments managing it. Price a product too high, and you may kill it; price it too low, and you leave money on the table. But pricing decisions impact on other variables, in addition to direct revenue.
In early 2008, Tesco slashed the price of a whole chicken from £3.30 to £1.99. This price reduction might have fit perfectly with Tesco’s strategy of offering good value to its customers, as embodied in the brand promise ‘Every Little Helps’. However, it attracted the wrath of animal welfare groups and generated intense public debate.
Apple, too, attracted considerable negative attention when it cut the price of the 8Gb iPhone from $599 to $399, in 2007. Even Steve Wozniak, co-founder of Apple, weighted in on the issue saying that the $200 price cut had been “too soon, too harsh“.
And while some authors say that price is the easiest element of the marketing mix to adjust, it is still far from simple. In an era of decreasing inflation and increasing visibility of firms’ actions (such as price lists published on the company’s website, or price comparison services), any change is likely to be noticed. It is, thus, crucial for firms to get their pricing strategy right.
The key to pricing is to focus on the value of the product on offer, not its cost. In turn, this means, taking an outside-in approach that 1) focuses on the customer and 2) takes into account the marketing eco-system[1], as discussed next.
Focusing on the customer means valuing what the product does for the customer, not what the product is, as discussed here. Take water, for instance. Technically, there isn’t much difference between water in a plastic cup and water in a plastic bottle: essentially, it is H20 in a PET container. Yet, the little piece of plastic on top of the water bottle dramatically changes the value proposition for the customer, over and above the additional cost. The lid (or cap) on the bottle offers portability as well as storage capability. In my (admittedly limited and non-scientific) straw poll of MBA programme members, the portability / storage proposition is worth four times more than the H20 itself. No surprise, then, that the world market for bottled water is worth a staggering $80bn / year.
Does this mean that performing a search on Google, reading a pdf document or using open-source software have no value in the eyes of the customer? Far from it. The answer is in understanding the marketing eco-system.
The importance of the marketing eco-system in pricing decisions is well illustrated by Seth Godin’s reflections on the price of news and biographies. His point is that value propositions need to be assessed in broad terms (though he did not use these exact words, of course). We need to consider the availability of substitutes[2], that is product offerings that deliver similar value even if they have very distinct features. Another aspect of the eco-system to consider is the firm’s relative market power, represented by the set of actions available to each firm and the expected (re)actions of competitors. Moreover, pricing decisions need to take into account the whole product portfolio – individual web searches aggregated become a new product that search engines can sell to businesses and advertisers; while using the Adobe Reader software acts as a taster to Adobe’s other products, a bit like car dealers offering test drives.
Price, in its many forms and guises such as rents and fees, is a key element of the marketing mix. Adopting an inward-looking and narrow focus is likely to be costly for the firms, particularly in an environment of low inflation and easily accessible information. I believe that firms need to focus on the perceived value for the customer, and honestly assess the extent and range of competitive offers, their actual market power, and the impact of the individual pricing decision on the overall product portfolio strategy.
If you would like to discuss any of these issues, feel free to contact me.
[1] I say ‘eco-system’, instead of ‘environment’, to emphasise the co-dependencies between the various elements
[2] Naturally, substitutes in terms of the value proposition, not the product features
Ana Canhoto 