Explain the relationship between price, quality, and demand
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Transcript Explain the relationship between price, quality, and demand
7. Price
After carefully studying this chapter, you should
be able to:
Define and explain price and value;
Explain the relationship between price, quality, and
demand,;
Explain the use of pricing within the marketing mix.
A low price will not sell a bad product.
A high price will not kill an excellent product.
7.1 Price and value
People normally say that they buy buy the
cheapest. This is not true.
People normally buy on value, not price.
So, what’s the difference between price and value?
Price
The money or other consideration for which a thing is
bought or sold.
(Source: Concise Oxford Dictionary)
Value
The intangible package of benefit that the decisionmaking unit believes attached to the product offer.
(Source: Worsam)
Simply speaking, good value means matching
consumer needs. See p.126
7.2 Value
A person was surprised to find a defect in a product bought
from M&S.
His reaction – ‘I am surprised, they are always so reliable.’
His action – Took the product back to the store.
Store action – immediate apology and exchange.
His reaction – ‘I always knew they were good to deal with.’
His belief – Became an even more loyal customer of M&S.
Another person wanted a computer. He found that:
– The HP and Lemel were identical except the different badges.
– Both had the same guarantees.
– Spare parts for each cost the same.
– Both were serviced in the home by the same engineers.
– The HP cost NT 35,000. The Lemel cost NT 25,000.
– He bought the HP.
The computer purchase had little to do with price.
It was driven by the belief that HP has a higher
status.
For the buyer, the HP brand has more value.
Remember
value is within the perception of the individual.
It is what he or she believes.
It is not necessarily what is true; not even what is logic.
7.2.1 Value factors
Value is made up of a range of factor. Some of the
most important and most common ones are:
Status
Product in use
Life
Price and value
Status
We all place a value on status to some degree.
We all have a sense of status.
Napoleon: ‘Give me enough medals and I will conquer
the world.’
Why do people choose a brand over anther, even there
is no difference in performance and quality?
To display one’s taste, wealth, or fashion sense – all
status factors.
Product in use
A product offer has to meet user needs.
A DMU would do pre- and post- purchase estimations.
Some examples of the features of a product in use:
Delivery; installation; guarantee; instructions; service; spares
Which washing machine would you buy?
A - $400 – in-store price. Carry away yourself.
B - $500 – Delivered and installed. Checked. User Instructed.
What would you consider about the product in use.
Life
A product’s long life may be a product benefit – but not
necessarily a consumer benefit.
Consumers want a product offer to work well for as
long as they need it.
Why pay for an expensive, top-quality briefcase that you will
only use a few times a year?
Why pay for a long-term insurance when making a short trip?
People like new things, follow the trends and want
changes.
Price as value
When buying, people often ask: ‘Is if value for money?’
But they actually mean: ‘Is it value for my money?’
The buying behavior changes when people are not
spending their own basic money.
Think about this: how would you spend money that
Has been given you as a present?
You have won in a lottery?
Belongs to your boss?
7.2.2 Price, quality, and demand
People would balance what price they think is reasonable
for the quality of what they buy.
Demand is usually associated with a season or a stage in a
person’s life cycle.
Toys are normally in great demand in the month before Christmas.
Push chairs would be in demand when a family’s first baby is a
few month old.
Hairdressers…
It is the marketers job to estimate demand.
7.3 Price
Price determines the revenue, which is expected to
meet costs.
There are five key factors of price:
The only P to provide income
Reflects corporate objectives
Supports image
Helps achieve profits
Provides cash for research and development
The only P to provide income
The 7Ps:
Product
Price
Place
Promotion
Physical evidence
People
Process
Only price can provide income.
Reflects corporate objectives
Pricing strategy must follow the overall image of the
organization.
If a corporate aims to establish itself in the top-end
market, then the price of its product must reflect this.
Rolls Royce and Rolex must be priced highly to support their
brand image.
Supports image
Promote as ‘quality’, and price at a quality level.
Promote as ‘exclusive’, and the price must help
maintain the exclusivity.
Promote as ‘economy’, and the price has to be low.
Helps achieve profits
Let’s see how price can affect profits.
Think about this, which of the following is better?
To sell 100 units at $20 at 20% profit
or
To sell 1,000 units at $10 at 10% profit
100 x $20 = $2,000 at 20% profit = $400
1,000 x $10 = $10,000 at 10% profit = $1,000
Or perhaps we could sell 500 at at $15 at 15% profit?
500 x $15
= $7,500 at 15% profit = $1,125
In fact, which is better can only be decided in line with
corporate and marketing long-term objectives.
Perhaps we want to build the market? Then we might need to
lower the price to build the volume.
Provides cash for research and development
R&D is vital to long-term success. We’ve seen in the
PLC that everything will be replaced some day.
But R&D normally costs a lot.
So, it is important to price correctly so that enough profit
can be generated to support the R&D of other new
product offers.
7.3.1 Pricing strategies and tactics
The most common pricing strategies are:
Cost plus
Psychological
Opportunity
Penetration
Skimming
Cost Plus
First, total all costs. Then add up a profit margin.
The added margin varies with the type of product.
FMCG like bread have lower profit margins to encourage sales.
Luxury products will have very high margins.
Psychological
To price at the edge of a price point.
Don’t put the price up from $2.99 to $3.02.
$2.99 seems far less than $3.00; $999 seems far less than
$1,000
Go up to $3.09 or even $3.19. They feels the same as $3.02.
But $3.10 or $3.20 seems a lot more expensive.
On reductions, use real numbers rather than percentages.
$19.99 now $18.99 seems more generous than offering a 5%
discount.
Opportunity
Managers and first-line sales staff have to be sensitive
about the market conditions, and be authorized to make
decisions.
Eg. You are a sales at a car rental company:
Business is good. Most cars are out. Your competitors are also
short of vehicles. A customer asks a price. You quote the
highest on your list.
Business is bad. Most cars are in. Competitors also have cars.
You offer a discount, or even offer an upgrade to a higher
standard car for the same price.
Penetration
In order to penetrate a market, the initial price is kept
deliberately low. The aim is to encourage purchase, and
so get into the market.
However, it can be difficult to increase prices later. So a
penetration policy is often set up as a special offer.
‘Normally $500, special price $299 –s short time only!’
Price skimming
Price level
PLC stage
Very high
Launch
Growth 1
Growth 2
Growth 3
Maturity
Very low
Decline
Sales volume
7.3.2 Price negotiation
The most common pricing strategies are:
Bonus
Discount
Sale or return
Special offer
Bonus
A bonus is a reward paid for some action.
Introductory bonuses are a regular way of encouraging
a retailer to handle a new product.
Discount
A bonus is a price reduction made for a special reason.
Sales or return
Goods will be taken back if they don not sell.
This encourages the stockist to handle a new product offer, but
it gives no incentive for the stockist to feature the product offer.
It is better to negotiate a partial return (ie. Up to 50% will be
taken back if it doesn’t sell.)
Special offer
A sales promotional tool that is valid for a time.