A useful framework for evaluating the marketing strategy for a product
THE Four P’s consists of:
The pricing strategy employed by a firm for a particular good or service will have a significant effect on profit.
There are many different pricing strategies that can be employed in different combinations, including:
- Price differentiation – setting a different price for the same product in different segments of the market. First degree price discrimination involves charging each customer a different price. To do this, the seller must be able to observe each customers willingness to pay, this is very difficult to do in practice. Second degree price discrimination involves varying the price according to quantity sold. Third degree price discrimination involves varying the price by location or market segment. For example, charging discounted prices for students.
- Dynamic pricing – a form of first degree price discrimination, dynamic pricing is a flexible pricing mechanism that allows online companies to adjust the price of identical goods to correspond to a customer’s willingness to pay. This is made possible by using data gathered from a customer including where they live, what they buy, and how much they have spent on past purchases.
- Predatory pricing – aggressive pricing intended to undercut competitors and drive them out of the market.
- Limit pricing – a low price charged by a monopolist in order to discourage entry into the market by other firms.
- Using a loss leader – a loss leader is a product sold at a low price to stimulate other profitable sales. For example, the 30 cent soft serve cone at McDonalds.
- Penetration pricing – the price is set low in order to gain market share.
- Marginal cost pricing – the practice of setting the price of a product equal to the cost of producing one extra unit of output.
- Market-orientated pricing – setting a price based upon analysis of the targeted market.
- Psychological pricing – pricing designed to have a positive psychological impact. For example, selling a product at $3.95 instead of $4.
- Skimming – charging a high price to gain a high profit, at the expense of achieving high sales volume. This strategy is usually employed to recoup the initial investment cost in research and development, commonly used in electronic markets when a new product range is released.
- Premium pricing – involves keeping the price of a good or service artificially high in order to encourage a favorable perception among buyers.
- Target pricing – a method of pricing whereby the selling price of a product is calculated to produce a particular rate of return on investment.
- Seasonal pricing – adjusting the price depending on seasonal demand.
- Cost-plus pricing – a very basic pricing strategy where a firm sets price equal to unit cost of production plus a margin for profit.
Product differentiation is a source of competitive advantage. Product differentiation is the process of describing the differences between a good or service in order to demonstrate the unique aspects of the good or service and create an impression of value in the mind of the consumer.
The major sources of product differentiation include:
- Vertical differentiation –where products differ in their quality. For example, BMW and Hyundai.
- Horizontal differentiation – where products differ in features that cannot be ordered. For example, different flavours of ice-cream.
- Availability – where products are available at different times (e.g. seasonal fruits) and locations (e.g. location of an ice-cream store near the beach). See section 3, “Position/Place”.
- Perception – branding, sales, and promotion can be used to distinguish a product in the market. See section 4, “Promotion”.
Successful product differentiation leads to monopolistic competition. In a monopolistically competitive market consumers perceive that there are non-price differences between products. As a result, even though there are a large number of producers, each producer has a degree of control over price.
The physical location of a good or service can be a source of competitive advantage. For example, imagine we have two ice-cream stores. One ice-cream store (Store A) opens next to a popular tourist beach, and one ice-cream store opens in the backstreets of a quiet suburb (Store B). We expect that Store A will be able to charge a higher price and sell more ice-cream than Store B, other things being equal.
Promotion is used to enhance the perception of a good or service in the minds of consumers. A promotion will draw peoples attention to any features of a product that people might find attractive including its quality, specialised features, availability, brand name, or image.
Promotion can be carried out in various ways including:
- advertising (developing brand awareness);
- publicity (sponsoring a sports team);
- public relations (donating to charity);
- celebrity appearances;
- door to door sales;
- price discounting (see section 1, “Price”); and
- quantity discounting (two for one offers, bundling).
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