Post #7: The Price Is Right

In the early stages of building a business, one of the most crucial and controllable factors of the marketing mix is price, the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service. The “right” price means that customers are willing to pay it. It determines all other business decisions, and thus must be set prior to deciding on further actions. The “right” price should generate enough sales dollars to maintain an efficient business operation (e.g. development, production, and marketing of the product), not to mention, earn a profit for the company. Depending on the firm’s pricing objectives—specifying the role of price in an organization’s marketing and strategic plans—they may hope to penetrate the market rapidly or slowly. Once established in the market, a company may decide to raise the price of their product if they have effectively created a demand for it. Kerin, Hartley, and Rudelius claim on page 318 of their textbook, Marketing, that “Research on 1,000 large U.S. companies show that a 1 percent price increase translates to a 12 percent increase in profitability, other factors remaining the same”. Again, a price increase must occur after a brand has successfully defined itself in the market.

Proper utilization of the Global Marketplace can reduce the production costs of a firm. Firstly, once a business has grown to the extent that it feels it can expand outside of its home of origin, it may hope to become a multinational corporation (MNC) and engage in international trade. In doing this, often times a company cannot afford to simply ship their product from the country of origin to new markets in other countries. Instead, they tend to have to set up new production facilities in these new markets so as to expedite the distribution process in terms of time, in addition to dramatically cutting costs. Selecting a new country to market towards often involves searching for suppliers whose efficiencies and lower hourly wages can reduce the costs of production. With a lower production cost, a company can maintain or raise their prices and make an even greater profit. With several growing economies eager to expand their job markets MNCs have lush opportunities to invest in cheaper labor via mass production facilities.



The world’s leading technology companies—including big names such as Apple, Microsoft, Samsung, and Intel—have taken advantage of these cheap labor markets in order to increase sales revenue and decrease production costs, resulting in vast amounts of profit. However, a company should not be too ambitious when setting a price, especially if they have lowered their production costs, as too high an increase of unit price outside the customer’s price range can deter them from purchasing the product. This segues us nicely into our next topic which revolves around the concept of value and the way in which it correlates with price.

Value is the ratio of perceived benefits to price, exemplified through the following equation:

For the consumer, price indicates the value of a product. This equation is one method in which the consumer can quantify the value of a product through a simple ratio of “perceived benefits” over “price”. As perceived benefits increase, value increases as well. Hence, the success of “BUY 1, GET 1 FREE” sales. Jos. A Bank is an example of a company that often advertises such sales, such as “BUY 1 SUIT, GET 3 FREE”, which incentivizes the purchase of a suit so as to obtain further suits. The sale attracts buyers as they see it as more valuable. Rather than spend $500 on one suit alone at a competitor like Men’s Wearhouse (which actually recently acquired Jos. A Bank in the summer of 2014), why not pay the same amount for multiple substitute products? Any customer would jump on a deal like that, and so, many companies promote their products through such value-adding sales.

Demand factors, the factors that determine consumers’ willingness and ability to pay for products and services, include three key causes: (1) Consumer tastes; (2) Price and availability of similar products; and (3) Consumer income. These three aspects influence the consumers want to buy, and their ability to buy. Vitamin Water is a current example of an everyday product in the global marketplace which has suffered in popularity in recent years. As a fad product, it is very much in the ‘decline stage’ of the product life cycle with shrinking consumer interest and loyalty to the energy drink. The consumer has not become unable to pay for the product, but due to changing consumer tastes and the availability of similar drinks, the number of brand loyal Vitamin Water customers has dwindled. The consumer has become less willing to purchase the product when many other competitors exist in the sports drink market.

Price is a highly important aspect of marketing product. The right price can either set your business up for success, or for failure. Too high, and your product will never effectively penetrate the market and establish your brand. Too low, and you may never turn a sustainable profit. Understanding the importance of value and recognizing, from the consumer’s perspective, how valuable your product is, will help you and your business effectively create and market your product. In addition, demand factors aid in establishing the consumer’s willingness and ability to buy a product. After reading this blog, I hope you feel confident and comfortable enough go out into the real world and apply these teaching to your life and professional career!

Until next time,

Adam