Price

Pricing can and should be every bit as creative as any other part of the marketing mix.

What is price? The answer may not be as obvious as one may think. Price is not just the shelf price or the price invoiced. It is much deeper than this. For example, payment terms are integral. If you can have 30 days to pay for a purchase or as we often hear in commercials for household furniture, "nothing down, no interest, four years to pay!". Another example of innovative pricing was Xerox's strategy to "loan" customers copying machines and to charge them only 5ў per copy.

As a product moves through the distribution channels, e.g. from manufacturer to distributor to dealer to customer, there are price points set along the way. The manufacturer's selling price to the distributor becomes the distributor's cost. Is that "cost" in line with competing products, which the distributor might carry instead? Is the cost low enough so that dealers will have enough margin in order to want to carry the product? Obviously, it is important to understand pricing and margins along the distribution chain.

Ultimately, the price to the consumer or last purchaser in the chain must be such that it is competitive. Who sets this price? Does the manufacturer or the dealer have the final say? Can the manufacturer in any way control the price of his product when it hits the street (i.e. retail level)? Most importantly, can the manufacturer make (or sub-contract) the product for a cost to him, which allows him to meet his profit objectives given the retail price target?

How do you price a very innovative, one-of-a-kind product? How do you price a "commodity" product? Are you pricing too low and leaving money on the table? Or, are you pricing yourself out of the market. There is very strong demand for Harley-Davidson motorcycles (partly because of the strength of brand name), delivery times are running over six months. Since only the Harley Company makes a Harley, should it raise prices and take advantage of the strong demand? If demand for your product is lagging, should you drop price - especially if the product life cycle has peaked?

There are various pricing strategies in practice. For example, mark-up pricing is the setting of a price based on one's cost. This may be appropriate when reselling a product used in providing a service. For example, an optician may mark up his cost of spectacles by 50%. This may be a simple way for him to determine selling price and from his experience, this is in line with what other opticians are doing. However, it may be totally inappropriate to set pricing based on cost in the case of a near-commodity item. It should be noted that if you are constrained by both your pricing and costs, then unless you are a particularly efficient operator, you should probably look for another market

Another pricing strategy is that of market "skimming". In this case, you start with fairly high prices (especially in the absence of competition) and you lower your prices over time as you start to keep up with the demand or as competition begins to move in. What is your product "worth" to the buyer? Perhaps her perception of what it is worth is very high. Ideally, you could start lowering prices until you reach an optimal sales volume without oversupplying your market.

For so-called commodity products, a going-rate pricing approach is often followed. If you were selling petrol to motorists, it would be very difficult to charge a price per litre, which is noticeably more than that, charged by service stations nearby. So unless you're the only station on a 200 km stretch of highway, you would likely charge the going-rate prices. There are many business and marketing theories on pricing. The important thing to remember is that this, perhaps next to the product itself, is one of the most important P's of marketing. And you set it.