When marketers talk about what they do as part of their responsibilities for marketing products, the tasks associated with setting price are often not at the top of the list. Marketers are much more likely to discuss their activities related to promotion, product development, market research and other tasks that are viewed as the more interesting and exciting parts of the job. Yet pricing decisions can have important consequences for the marketing organization and the attention given by the marketer to pricing is just as important as the attention given to more recognizable marketing activities. Some reasons why attention to pricing is critical include:
Most Flexible Marketing Decision
For marketers, price is the most adjustable of all marketing decisions. Unlike product and distribution decisions, which can take months or years to change, or some forms of promotion which can be time-consuming to alter (e.g., television advertisement), price can be changed very rapidly. The flexibility of pricing decisions is particularly important in times when the marketer seeks a quick way to stimulate demand or to respond to competitor price actions. For instance, a marketer can agree to a field salesperson’s request to lower price for a potential buyer during a phone conversation. Likewise, a marketer in charge of online operations can raise prices on hot selling products with the click of a few on-screen buttons.
Need for Setting the Right Price
Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can lead the marketing organization to lose revenue. Prices set too low may mean the company is missing out on additional profits that could be earned if the target market is willing to spend more to acquire the product. Additionally, attempts to raise an initially low-priced product to a higher price may be met by customer resistance as they may feel the marketer is attempting to take advantage of its customers. Prices set too high can also impact revenue as it prevents interested customers from purchasing the product. Setting the right price level often takes considerable market knowledge and, especially with new products, testing of different pricing options.
Trigger of First Impressions
Often times, customers’ perception of a product is formed as soon as they learn the price, such as when a product is first seen in a store with the price tag attached. While the final decision to make a purchase may be based on the value offered by the entire marketing offering (i.e., actual and augmented product), it is possible the customer will not evaluate a marketer’s product at all based on price alone. It is necessary for marketers to know if customers are more likely to dismiss a product when all they know is its price. If so, pricing may become the most important of all marketing decisions if it can be shown that customers are avoiding learning more about the product because of the price.
Important Part of Sales Promotion
Many times price adjustments are part of sales promotions that lower price for a short term to stimulate interest in the product. However, as we noted in our discussion of promotional pricing in the Sales Promotion Tutorial, marketers must guard against the temptation to adjust prices too frequently. Continually increasing and decreasing price can lead customers to be conditioned to anticipate price reductions and, consequently, withhold purchase until the price reduction occurs again.
Affects Demand for Other Products
How a company prices one product can affect the overall demand for other products. This is especially the case where the demand for other products is directly tied to the demand for a main product. In particular, marketers making the bulk of their profits from the sale of goods and services used to support the main product must take this into consideration. For example, operators of gambling casinos often entice customers by offering very low hotel room rates knowing they can generate higher revenue in other ways when customers visit the casino (e.g., revenue from gaming, food, special shows, etc.). The hotel must be mindful of increasing hotel room rates as doing so could have an impact on revenue that comes from these other sources.