Core Concepts of Marketing by John Burnett - HTML preview

CHAPTER 9

PRICING THE PRODUCT

Irrational Man Pricing: Freedom Rules

There are simply too many examples to the contrary to believe that the economic assulop-

tions posited under the rational man model are valid. Prices go up and people buy more.

Prices go down and people become suspicious and buy less. Sometimes we simply behave

in an irrational manner. Clearly, as noted in our earlier

on consumers, there are

other factors operating in the marketplace. The ability of paying a price few others can afford

may be irrational, but it provides important personal status. There are even people who refuse

to buy anything on sale. Or, others who buy everything on sale. Often businesses are will-

ing to hire a $10,000 consultant, who does no more than a $5,000 consultant, simply to

show the world they 're successful.

In many societies, an additional irrational phenomenon may exist-support of

that cannot pay. In the U. S., there are literally thousands of not-for-profit organizations that provide goods and services to individuals for very little cost or free. There are also government agencies that do even more. Imagine what giving away surplus food to the needy

does to the believers of the economic model.

Pricing planners must be aware of both the rational as well as the irrational model ,

since, at some level, both are likely operating in a society. Choosing one over the other is

neither wise nor necessary.

The Marketer's View of Price

Price is important to marketers, because it represents marketers' assessment of the value

customers see in the product or service and are willing to pay fo r a product or service. A

number of factors have changed the way marketers undertake the pricing of their products

and services. I

1. Foreign competition has put considerable pressure on U.S. fi rms ' pricing strate-

gies. Many foreign-made products are high in quality and compete in U.S. mar-

kets on the basis of lower price for good val ue.

2. Competitors often try to gain market share by reducing

prices. The pnce reduc-

tion is intended to increase demand from customers

are judged to be

tive to changes in price.

3. New products are far more prevalent today than in the past. Pricing a new prod-

uct can represent a challenge, as there is often no historical basis for pricing new

products. If a new product is priced incorrectly, the marketplace will react unfa-

vorably and the "wrong" price can do long-term damage to a product's chances

for marketplace success .

4. Technology has led to existing products having shorter marketplace lives . New

products are introduced to the market more frequently, reducing the "shelf life"

of existing products. As a result, marketers face pressures to price products to

recover costs more quickly. Prices must be set for early successes inCluding fast

sales growth, quick market penetration, and fast recovery of research and devel-

opment costs.

PRICING OBJECTIVES

Firms rely on price to cover the cost of production, to pay expenses, and to provide the

profit incentive necessary to continue to operate the

We might think of these fac-

DEVELOPING A PRICING STRATEGY

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MARKETING CAPSULE

Price should be viewed from three perspectives:

c. Sales

a. The customer

d. Market share

b. The marketer

e. Image

c. Society

2. Pricing objectives:

a. Survival

b. Profit

tors as helping organizations to: (1) survive, (2) earn a profit, (3) generate sales, (4) secure an adequate share of the market, and (5) gain an appropriate image.

1. Survival: It is apparent that most managers wish to pursue strategies that enable

their organizations to continue in operation for the long term. So survival is one

major objective pursued by most executives. For a commercial firm, the price paid

by the buyer generates the firn1's revenue. If revenue falls below cost for a long

period of time, the firm cannot survive.

2. Profit: Survival is closely linked to profitability. Making a $500,000 profit dur-

ing the next year might be a pricing objective for a firm. Anything less will ensure

failure. All business enterprises must earn a long-term profit. For many businesses,

long-term profitability also allows the business to satisfy their most important

constituents-stockholders. Lower-than-expected or no profits will drive down stock

prices and may prove disastrous for the company.

3. Sales: Just as survival requires a long-term profit for a business enterprise, profit requires sales. As you will recall from earlier in the text, the task of marketing

management relates to managing demand. Demand must be managed in order to

regulate exchanges or sales. Thus marketing management's aim is to alter sales

patterns in some desirable way.

4. Market Share: If the sales of Safeway Supermarkets in the Dallas-Fort Worth met-ropolitan area account for 30% of all food sales in that area, we say that Safeway

has a 30% market share. Management of all firms, large and small, are concerned

with maintaining an adequate share of the market so that their sales volume will

enable the firm to survive and prosper. Again, pricing strategy is one of the tools

that is significant in creating and sustaining market share. Prices must be

to

attract the appropriate market segment in significant numbers.

5. Image: Price policies play an important role in affecting a firm's position of respect and esteem in its community. Price is a highly visible communicator. It must convey the message to the community that the firm offers good value, that it is fair

in its dealings with the public, that it is a reliable place to patronize, and that it

stands behind its products and services.

DEVELOPING A PRICING STRATEGY

While pricing a product or service may seem to be a simple process, it is not. As an illus-

tration of the typical pricing process, consider the following quote: "Pricing is guesswork.

It is usually assumed that marketers use scientific methods to determine the price of their

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