Core Concepts of Marketing by John Burnett - HTML preview

CHAPTER9

PRICING THE PRODUCT

LEARNING OBJECTIVES

Aft e r yo u have read th i s

develop an understand-

ing o f the follow i ng key p oints related to pricing:

T he m ea nin g of pricing from the perspective of the buyer, seller,

and society.

T he sel l ers' o b jectives in making pricing decisions.

T he a lte rn ative pri c i n g approaches available to the manager .

THE MCDONALD'S EFFECT

McDonald's is one humongous company.

restaurants in 101

tries, it is everywhere-which is why the glotal economy is sometimes called McWorld.

But back home in America, the execs that run this vast e.mpire aren't feeling very lordly.

More than ever they fi nd they have to kowtow to the price demands of ordinary folks

like Alonso Reyes, a 19-year-old Chicagoan who works at a local car dealership. Never

mind that Chicago is Micky D's world headquarters-he splits his fast-food patronage

between McDonald's and its arCh-rival, Burger King, and counts every pennyworth of

beef when deciding where to eat. So Reyes perked up when he heard that McDonald's

had announced "an unprecedented value offering" -a 55-cent Big Mac that the company

boasted was bad news for their competition. "Cool," said Reyes, "Coupons, specials, sales. I' ll take whatever I can get."

For McDonald's top management, this pricing strategy made perfect sense. After

all , declining same-store sales in the U.S.

the

most glaring weakness. What

better way to put some sizzle in the top line than a bold pocketbook appeal?

Well , McDonald' s executives should have realized that there is, in fact, a better

way. But apparently they took no notice of the fallout when Phillip Morris announced

deep cuts on "Marlboro Friday," or of "Grape Nuts Monday," when the Post unit of Kraft Foods kicked off a cereal price war. Predictably, "Hamburger Wednesday" sent investors on a Big Mac attack, slicing 9% off McDonald's share price in three days and dragging

rival fast-food issues down with it. "It looks almost desperate," says Piper Jaffray, Inc.

anal yst Allan Hickok of the 55-cent come-on. Adds Damon Brundage of NatWest Secu-

rities Corp .; "They have transformed one of the great brands in American business into a

commodi ty."

In theory, McDonald' s plan will payoff, because customers only get the discount

if they buy a drink and french-fries, too. Yet that gimrnick-within-a-gimmick threatens to

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PRICE DEFINED:THREE DIFFERENT PERSPECTIVES

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undermine pricier "Extra Value Meals," one of the

most successful marketing ini-

tiatives. Consumers expecting cut-rate combos won' t go back to paying full price, espe-

cially if other fast-feeders discount their package deals.

Sources: Greg BUllls, "McDonald 's: Now, It 's Just Another Burger Joint," Business Week, Marc h 17, 1997, pp. 3-8; Bill McDowell , "McDonald 's Falls Back to Price-Cutting Tacti cs," Advertising Age,

3, 1997, pp. 5-7; Michael Hirsch,

''The Price is Right," Time, February 10, 1997, p. 83; Louise Kramer, "More-Nimble McDonald's is Getting Back on Track,"

Advertising Age, January 18, 1999, p.

David Leonhardt, "Getting Off Their McButts," Business Week, February 22, 1999, pp.

84-85; Bruce Horovitz, "Fast-Food Facilities Face Sales Slowdown," USA

Wednesday, February 21 , 2001, p. 3B.

INTRODUCTION

From a customer's point of view, value is the sole justification for price, Many times cus-

tomers lack an understanding of the cost of mateliais and other costs that go into the mak-

ing of a product. But those customers can understand what that product does for them in

the way of providing value. It is on this basis that customers make decisions about the pur-

chase of a product.

Effective pricing meets the needs of consumers and facilitates the exchange process.

It requires that marketers understand that not all buyers want to pay the same price for prod-

ucts, just as they do not all want the same product, the

distribution outlets, or the same

promotional messages. Therefore, in order to effectively price products, markets must dis-

tinguish among various market segments.

key to effective pricing is the same as the

key to effective product, distribution, and promotion strategies. Marketers must understand

buyers and price their products according to buyer needs if exchanges are to occur, How-

ever, one cannot overlook the fact that the price must be sufficient to support the plans of

the organization, including satisfying stockholders. Price charged remains the primary source

of revenue for most businesses,

PRICE DEFINED: THREE DI FFERENT PERSPECTIVES

Although making the pricing decision is usually a marketing decision, making it correctly

requires an understanding of both the customer and society 's view of price as well. In some

respects, price setting is

most important decision made by a business. A price set too

low may result in a deficiency in revenues and the demise of the business. A price set too

high may result in poor response from customers and, unsurprisingly, the demise of the busi-

ness. The consequences of a poor pricing decision, therefore, can be dire. We begin our

discussion of pricing by considering the perspective of the customer.

The Customer's View of Price

As discussed in an earlier chapter, a customer can be either the ultimate user of the finished

product or a

that purchases components of the finished product. It is the customer

that seeks to satisfy a need or set of needs through the purchase of a particular product or

set of products. Consequently, the customer uses several criteria to determine how much they

are willing to expend in order to satisfy these needs. Ideally, the customer would like to pay

as little as possible to satisfy these needs.

perspective is summarized in Figure 9.1.

Therefore, for the business to increase value (i.e., create the competitive advantage),

it can either increase the perceived benefits or reduce the perceived costs, Both of these

elements should be considered elements of price,

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