3 Jan 2013
By Angelica Moreno
As outlined in the original article in this series, marketing is centered around the 4Ps . These are the levers used by marketers to drive growth on their brands and any business owner can use them. So far, we have explored Product and Place. The third P is Price and it is just as critical to a successful business not just because it impacts revenue and profit, but also because it is key in the positioning of any brand or business.
In this article, we will start with the bigger picture and in the next article we will examine more detailed aspects of setting price.
First of all, think of the type of business you have and consider where it stands relative to Product and Place. For example, if you own a bakery, how have you defined your product compared to the competition? Have you specialized in vegan or organic based items?
Is your business located in a prestigious area because of its proximity to a specific consumer? Place and Product are key factors in determining Price. The three work together to establish your position in the market.
If your business is located in a premium area, and your offerings are also clearly differentiated from competitors, then your price can and should reflect this by being higher than competitors. However, be wary with overconfidence in your product or business. One of the dangers of setting price is assuming that your products are so unique that customers will absolutely pay more for the quality. This is a dangerous assumption to make especially without doing your homework. Consider where your closest competitors are and whether or not they are easily accessible to your consumers. Bear in mind that consumers make the final purchase decision at the cash register and your product or business is only worth what the market is willing to pay. Not one cent more.
There are two types of prices; everyday (or regular) price and sale price. Balancing the two is a very important exercise in managing your business. Everyday price is just what it sounds like; it’s the regular price of a product or service. If regular price is set too low, you will be leaving money on the table but if it is set too high then you will need frequent sales to move merchandise and sale prices will have to be set lower and lower to achieve the sales volume required to stay afloat.
To clarify, the impact on consumers when everyday price is set too high can be:
Consumers will learn to only buy when there is a sale on. They will hold off on buying anything until they see that sale sign again.
After seeing the sales prices drop further and further, consumers continue to hold off purchases until the next price drop takes effect.
Ongoing sales, over time, will impact the overall perception of your business. Any unique point of differentiation and particular value attached to your location will be eroded in the minds of consumers. These will no longer be enough to convince anyone to buy an item at regular price. What’s most concerning is how quickly this can occur which is why it’s important to get it right from the start.
These are the business challenges that Brand Managers working on Coke, Kit Kat or Colgate also face, whether it is the price of a new product or the price of the entire product line. Several years ago, Dove raised everyday prices across most of the portfolio. The brand was popular and the thinking was that consumers would be willing to pay a little bit more. However, when the product prices went up, everyday sales went down by more that was originally anticipated. As a result, the profitability of the business declined. This is often the risk in increasing the price; a good amount of people will and do choose something else. They will just buy something else especially when the item is something small like shampoo or soap. Consumers noted the price increase and decided to wait for a sale when they would load up on enough products to last until the next sale.
In the end, the everyday price dropped back to the original level but it was an expensive mistake that negatively impacted anticipated annual sales, and profit. Without a large corporation offsetting any declines to your business, this is a mistake you can’t afford to make.
Angelica Moreno is a marketing professional who has managed the well-known household brands Becel, Hellmann’s and Sensodyne.