M1L13 Pricing strategies I: Price as a marketing tool
- Marketing mix 4Ps
- Marketing mix 7Ps
- Product/service pricing method
- Difference between fixed and variable costs
Good day and welcome to our lecture today in the area of pricing strategies, the topic we will deal with today is Price as a marketing tool.
They say that starting a business is a big undertaking for each of us, but ensuring business sustainability is a big success. Today we will talk about price and how to look at price from a marketing perspective and why we say that price is a marketing tool.
When we talk about price, what is price?
Price refers to the value we pay in exchange for the product and services a company offers, the amount of money which customers pay for your product service
Determining the price of a product plays an important role in determining the success of a company and is one of the more challenging tasks is how to calculate the price and whether we are too expensive or too cheap.
Price is one of the tools we use in marketing to position ourselves on the market. Price is considered a vital element of the marketing mix because it dictates the company’s survival and profits.
What is a marketing mix?
The marketing mix dictates the sustainability and profitability of the company we use for positioning products and services. In the simplest terms:
Marketing mix is the set of actions a company takes to build and market its product or service to its customers.
What do we get by using this tool?
The benefits that the marketing mix allows us are knowledge of market trends, we set price strategies more precisely regardless of the size of the company; whether it is a medium-sized, small business or you are a freelancer, it gives us insights for clearer promotional strategies and insights about the customer and his habits, needs, which is extremely important for better planning of sales strategies
We will get to know 2 types of marketing mix
We differentiate Marketing mix 4Ps and Marketing mix 7Ps
When we talk about Marketing mix in 4P – this the tool includes 4p ELEMENTS.
We will briefly explain each element
Marketing mix 4Ps consist of: Product, Price, Place, Promotion
Marketing mix 4P refers to a set of actions for marketing a product, while Marketing mix 7ps refers to a set of actions for marketing a service
Marketing Mix 4Ps
Product (produkt) is our product or service that we offer
A question we can ask ourselves regarding the first “P”
How a product or service that we offer meets the needs of our customer?
Just by using our products, i.e. services, the customer satisfies his needs. It is really important for us to have the most precise answer to this question
We can also ask ourselves these questions:
What the customer gets product / service?
How does the product/service meet the customer’s needs?
The second “P” refers to Price – the monetary value that the customer pays for the product
What I want to emphasize today when we market i.e. we sell our product or service, and what I will emphasize and in subsequent lectures is that customers do not buy our product or service they already buy the value of our product or service i.e. they pay the value of the product or service we offer
Prices of products or services the most important is an aspect of the customer’s point of view. Everything starts with the price
The cost component of the product must be determined according to the buyer’s ability to pay for the selected service or product.
We need a customer who wants our product or service but needs to have the purchasing power to buy that product or service.
That is why it is important that we know our market niche very well.
It is important to maintain the customer’s willingness to pay for the product or service.
We can ask ourselves several questions regarding this “P”
How do customers perceive our product/service?
How much are customers willing to pay for a product/service?
What is our price compared to the competition’s prices
These are questions that can give us some assumptions that we will then test with our potential customers, potential users. We will mention that again
Then we have another “P”
This P refers to Promotion
When we talk about promotion, promotion refers to the methods a company uses to draw customers’ attention to product. This includes sales promotions, customer service, public relations, advertising and all sales and promotional activities.
When creating a promotion strategy, consider the tactics used by your competitors, the channels that are most effective in reaching your potential customers.
A question we can ask ourselves :
Which promotional channels do our customers use the most?
It is important that our promotional channels aligned with our customers, clients, users. However, we will not deal with that, what is important for us is price and pricing strategies.
We have another “P”
Place – these are the channels and methods used to deliver the product/service to the customer
Here we can ask ourselves a very simple question.
Where can a customer find / get acquainted to buy a product, service?
This is the basic marketing mix. As we do not only sell a product but also a service, there is an upgrade for this marketing mix. We are actually adding 3 additional elements.
Marketing mix 7Ps – service
People refers to people – your customers and employees who are directly related to the product or service.
It is important to determine whether there is a need for the service you offer, and we must also have the competencies, expertise that
we would deliver quality service.
Who is responsible for creating, selling, delivering products / services?
Do the team members have all the necessary skills
There comes another element; physical evidence. We need to have evidence that potential clients we can provide evidence of our work and evidence of positive experience of other clients which we can do through articles, testimonials and so on
Now that we are familiar with it, let’s add another element, which is processes.
When we talk about processes; these are internal systems and processes that play an important role in building and providing quality service to your clients.
The service is intangible, we cannot mass-produce it, it is unique, we cannot store it or reproduce the same service.
It is important that we check if there is a bottleneck that prevents us from providing the highest quality service possible.
We can repeat that we have a marketing mix 4 p – PRODUCT, PRICE, PROMOTION, PLACE, to these four elements we add three more when it comes to service: PEOPLE PHYSICAL EVIDENCE, PROCESS.
Market positioning is what we want and the goal is that each of us, regardless of our size, wants to position ourselves. The price affects our profitability, sustainability and how many products and services we will sell on the market
Sometimes when we use the marketing mix tool, we wonder where to start, sometimes we start with the element of promotion, we think through which channels we will promote the product or service, and we ignore the price. However, the price is extremely important.
Factors that we need to take into account when positioning, i.e. when determining prices, is knowledge of the market niche or as we call it the target group, or customer segment. We must know well the problems and needs of our customers, clients, users.
We can say that our product or service solves his functional problems, but in addition problems our the client has social and emotional needs that should be taken into account.
Next, what is important is understanding the costs. Because with every business along with sources of income there are also certain costs. It is important for us to understand the difference between fixed and variable costs, and the third thing that is also important for us is to know our competition.
When we talk about understood fixed and variable costs we will see that on this slide.
So what is the difference between fixed and variable cost.
Fixed costs they do not change with the increase in production, while the variable cost changes with the increase in production.
What exactly does that mean; if you produce 10 ceramic dishes or if you produce 25 or 150 of them, the fixed cost will not change, however the variable cost will change with the increase in production.
When it comes to variable cost if you have produced 10 ceramic tiles or 50 ceramic tiles Or of unique jewelry or dresses that you have designed the variable cost will change.
When we talk about fixed and variable cost, in the simplest terms, if we have production growth, the total fixed cost remains the same, and the total variable cost increases.
If I have a drop in production, the total fixed cost remains the same, and when it comes to variable cost, the total variable cost falls.
Now the question arises as to what are fixed and what are variable costs.
It is best to consult with the people who manage your finances because they know it best.
Some framework we can provide: fixed costs – rental costs, utilities regardless of how many bracelets you sell, for example, if you in renting space regardless for sale, the rental cost is the same, sold do you want 50 or 150 bracelets.
This is where heating, utility services, various insurances come in.
Our variable cost changes with the change in business volume.
If you design clothes then the material you used for sewing, if production increases and the cost of materials will increase if you have a decline in production and the cost of materials will decrease.
When we calculate the price, it is very important to distinguish between fixed and variable costs.
Fixed and variable costs affect our price calculation, so it is important to understand this.
When we talk about competition analysis, it is not necessary that we should have large and complicated tables with a lot of elements.
We are going to determine the 3 main competitors on the market. We compare with those competitors who are our size, not big companies.
If we have 10 competitors, we determine the 3, in addition to the 3 leaders, it is good to follow potential competitors who are not our competition at the moment, but could become.
There are also substitutes that offer products and services which our customers use as substitutes for ours. They are not same as ours but ours however our potential customers use them.
When we determine the 3 main competitors on the market we compare with them, we do an analysis. We will determine analysis parameters. let’s start with the price. Price is the first but not the only parameter. One of the parameters is the quality of marketing and sales activities.
If these parameters are not important to you, specify those parameters that you consider important to you.
If you have nothing but the price, stick to the price. It is always recommended to monitor other parameters as well.
It is recommended to follow the discounts offered by the competition and when and seasonally when the product or service is cheaper or more expensive.
When we did the analysis we make small main conclusions from of which we can gain insights what are our advantages and strengths and what are the weaknesses compared to the competition.
This will give us insights that are important to us when forming our price and pricing strategy
When we want to enter the market with competitive strategy frame of reference is the price of competition . In relation to the price of the competition we determine if we go with a lower price the same or slightly higher than the competition.
We will deal with this strategy in one of our modules
Thus, competitive analysis includes:
1. 3 main competitors on the market
2. Potential competitors, substitutes
Determining the parameter we use in the analysis:
Price, quality, marketing, sales activities
Main conclusions: advantages and strengths compared to the competition and our weaknesses in relation to the competition.
Pricing guidelines are one element to consider.
Which factors to take into account when determining prices?
- Customer orientation – monitoring the behavior and habits of customers
- Ultimate benefit – the value that the customer wants and gets from your product or service
Difference >>> compared to the competition:
- special features or services that differentiate us than others on the market
- Substitutes: availability of alternatives
- Expected price: prices for this type of service/product so far
Customer orientation it is important when we form the price. Oriented we are on the customer’s side, we monitor the customer’s behavior because we want to determine what is the value that a customer willing to pay for our product or service. We get the best insights if we interact directly with our potential customers through interviews, surveys in order to get a clear and deeper insight.
The third thing that is important to us is difference in relation to the competition; we follow 3 main competitors, what is the difference, what are we better at, and what are our weaknesses. When we talk about substitutes, we talk about the competition, we monitor whether there is availability of alternatives for our product or service.
If you make handmade items, the replacement can be the import of similar items from, say, China, one of our indirect competitors.
Expected price means that we follow the history of those prices, what was the price for that or a similar product that we offer.
The expected price is the price that our customer expects in relation to the current prices of the product or service on the market.
Finally, something more about static and dynamic price models.
Static method is when we give fixed price in advance let’s say HRK 500. You left with that price and you don’t change it regardless of changes in the market. It can bring you profitability but it doesn’t have to.
There is also a dynamic method when we monitor the behavior and habits of customers and change the price according to the change in the market depending on the demand. If the demand is increased, we can raise the price, if the demand is decreased, we can lower the price.
Such an approach is used more and more regardless of whether it is about creative industries Dynamic approach we can consider when we have certain discounts in certain seasons, because the decrease in demand is accompanied by a decrease in price.
We are slowly finishing this lecture in which we wanted to give insight that the price is also part of marketing, and that we take care that the price follows the habits and behavior of customers and that it is aligned with market opportunities, by which I mean our competition.
At the next lecture, we will deal with an interesting topic, which is the business model canvas.
Thank you for now and see you at our next lecture.