The Four PS of Marketing: Price

Price pertains to how much consumers are willing to pay for a product or service.

This is often determined through surveys, interviews, focus groups, or by looking at comparable products or services already available to the market. Marketers need to connect a product’s perceived value with what customers will realistically pay for it. Considerations must also be provided toward creation costs, discounts, and its role within the broader product portfolio (i.e., up-sells and cross-sells with other products).

Charlie Munger

A great business at a fair price is superior to a fair business at a great price.

Some firms, such as luxury goods providers, will price high to create a brand prided on scarcity, which can create allure and appeal to customers’ desire to increase their personal status. Some companies will price a product lower to help spread brand awareness and allow more customers to try their product. This can help facilitate an uptake of market share, which can help lead to long-term benefits such as greater pricing power down the line.

Once you have a good or service in place, you must determine how to appropriately price it not just from a product-level perspective but rather how it fits into your broader business strategy. There are various ways of going about this. Some companies will look to maximize revenue while others will look to maximize profit. Some will choose to maximize another operating metric, such as EBITDA or EBIT. Regardless of the approach, almost all business owners will be driven by the desire to allocate capital and resources as efficiently as possible.

Maximizing Revenue

Revenue maximization is predominantly a strategy designed to uptake market share. Margins, profit, and cash flow take a backseat in this scenario. This is popular among startup firms or those entering into new markets or product lines. Companies who are targeting consumers in markets who are more price sensitive will often employ this strategy as well.

For example, Amazon’s current approach is centered around maximizing market share. The company has thin profit margins and invests nearly all of its would-be earnings back into the business to expand its market power further. It prioritizes this approach to disrupt incumbents, such as apparel brick-and-mortar retailers. To Amazon, this will ideally diminish these traditional retailers’ influence or drive them out of the market entirely over the long-term as many become increasingly uncompetitive.

Many Chinese companies are also centered around this approach. China’s government backs many firms in relation to their perceived importance to the domestic economy. For instance, technology companies are commonly prioritized because it’s believed that the country that’s the most technologically advanced in relation to its global peers will be more advanced in most other ways. This is different from most US companies, which are supported predominantly by private investors. These entities may be less willing to see a company take a long-term approach like revenue maximization, particularly for more mature, established businesses.

Maximizing Profit

Profit, or net income, maximization makes the most strategic sense on the surface. The value of a business is the amount of cash it produces over its life discounted back to the present.

Nevertheless, companies that focus only on profit maximization may not adequately push themselves into markets that can help expand their market share. Such opportunities generally don’t yield immediate results, with thin or negative profit margins. But long-term, if companies successfully take up share in their targeted markets, this helps to yield pricing power and margin expansion in the future.

How Companies Maximize Revenue

Maximizing revenue generally entails pricing products under those of competitors. Firms also trying to compete on quality will also consider raising costs and taking a loss if they have the appropriate funding and believe it will yield long-term benefits.

Companies with ample amounts of operating leverage – or the ability to spread fixed costs over a large number of units sold – and low variable costs tied to each sale may also be best suited to competing on price. This is most common in markets where consumers price sensitive, such as fast-casual dining and entry-level vehicle production.

How Companies Maximize Profit

Companies trying to maximize profit will generally look to price as high as possible without depressing demand in a suboptimal way. Moreover, they will attempt to rein in their cost structure as much as possible to increase their profitability. At some point, firms that cut costs may find that product quality is decreasing to the point where customers are no longer willing to pay as high a price point for the good or service provided.

Luxury goods producers, who set the price of goods high and appeal to customers who are less sensitive to price, will employ this strategy. In these cases, the target market is affluent consumers, who may find appeal in either the quality of the product, its style or design, and/or its scarcity.

Attorneys in certain price-insensitive parts of the market, such as anti-trust, mergers and acquisitions, restructuring, and corporate taxation, will also use this strategy, often by charging $1,500-$3,000 per hour to a select group of clients.

Conclusion

Price refers to what customers are willing to pay for a product or service. Marketers will work to link the product’s intrinsic price with its perceived value through its various outreach efforts.

As customers have additional retail channels and more information at their disposal, pricing strategies are more dynamic than they ever have been. Moreover, with additional advances, such as e-commerce and the ability for manufacturers to sell directly to consumers while cutting out middlemen retailers, consumers as a whole have become increasingly price sensitive to the products they’re interested in purchasing.