Using the following resources, answer the below question: Marketing Made Simple.
ID: 403749 • Letter: U
Question
Using the following resources, answer the below question:
Marketing Made Simple. (n.d.). Available March 7, 2013 at.
http://www.marketing-made-simple.com/
Christ, Paul (2011). Principles of Marketing. KnowThis.com.
Read the following chapters:
Pricing Decisions
Setting Price
http://www.knowthis.com/principles-of-marketing-tutorials/
CASE ASSIGNMENT
Write a paper of no more than four pages in which you complete the following assignment:
Using the teaching materials and any additional research explain what you think would be the most appropriate pricing method and why for TWO branded products selected from the following list. In doing so compare and contrast the two pricing methods explaining why you think they would be similar or different.:
MEDIA DISTRIBUTOR, (e.g. Netflix)
CANNED VEGETABLES
ASPIRIN
The following will be assessed in particular:
Explanation / Answer
The price you charge for your products or services is a major way you communicate your firm's value in the marketplace. Yet many small business owners set prices arbitrarily or sheepishly follow the crowd. Jerry Bernstein, a pricing expert and founder of St. Louis-based Price Improvement Team, says getting prices right is not only important, it can make or break your firm's profitability. He spoke recently with Smart Answers columnist Karen E. Klein about mistakes entrepreneurs make in their pricing strategies.
What's the most important point you make with clients about pricing?
Believe that pricing is important and that it can be managed. For example, a 1% gain in price will give you the largest percentage increase possible in your operating profit. Reducing variable or fixed costs by 1% doesn't do as much, but an increase in price goes right to the bottom line. Yet you'd be surprised by how few even large businesses, with huge corporate staffs, pay attention to their pricing%u2014let alone small and medium-size firms.
What constitutes "paying attention" to pricing?
Doing more than setting prices in an offhand manner. Taking time to understand who your competitors are, what they're charging, and what you should be charging. Of course, you don't want to solely use price as a means of getting business, but you do want to be aware of how you stack up against the competition. And you want to find ways to structure your prices that will enhance your profit.
How do you recommend doing that?
Segment your business and look at the various chunks. For instance, some products or services will be more price-sensitive than others. Let's say you run a postal center. You don't want to institute a big increase in your price for stamps, because your customers will immediately compare those prices with what they'd get going to the U.S. Post Office.
So, you'd structure your price on stamps to get customers in the door. But what will you charge for the add-ons%u2014things like boxes, tape, labels, markers, and copies? Your customers are there, they want to get their packages mailed, you're providing a convenience for them. They probably won't feel gouged if you do a small price increase on those items, but that's where you'll make your profit.
Here's another way to think about pricing. Let's say your company does expert data-room management for other companies. Look at the various revenue streams you might have and how you should price them. If you do 24-hour emergency calls, that might differentiate you from your competitors. That means you can charge more for that service.
Then, you can establish a relationship with those emergency clients and maybe sell them a one-year maintenance contract, and products to support that, so they'll have fewer emergencies in the future. You'd charge a different price for that. Finally, you could offer them things like training seminars. That would again present a different perception of value to your clients that will drive what you can charge.
A lot of small companies may be reluctant or even afraid to raise prices. Is this justified?
I encourage them to just think about increasing their prices by as little as 2% or 3%. Sometimes they find that their customers don't even notice. Some clients of mine have increased prices by as much as 15% and their clients don't notice!
What's another problem pricing area?
Discounting. A lot of companies sell at list price sometimes but give arbitrary 5% or 10% discounts to regular customers or for a certain volume order. They need to understand and control what they're doing because a lot of times this area is under the radar and they may be discounting unnecessarily or without an awareness of what it's doing to profitability. Rather than 5%, why not discount 4% or 3% instead? That 1% or 2% will do a lot to your profitability over the years.
Another area is customer mix. Certain customers are generally better for your business than others. You need to identify them and figure out what you're doing right with them, and what you're doing wrong with the others. Then you have to figure out whether you want the business from certain customers, especially if you're not making money, or even losing money on their business. At the very least, you need to consider increasing the prices that those customers pay.
How do most small companies set their prices in the first place?
They tend to price in a "cost-up" fashion, which means that they look at their cost of materials, add a markup, and arrive at a sales price. Unfortunately, your direct costs are often very hard to determine, and many companies arrive at the wrong figure on them. The other problem is that this pricing strategy has no relevance to the value that you're putting into the marketplace.
What pricing method do you recommend?
I do a lot of research and then I charge what I perceive my customers see as my value to them. You have to have a good feeling for how your customers perceive, use, and apply your product or service, and then you have to communicate that value in your sales process, your marketing promotions, and your conversations with key customers. Certainly you want your prices to have some relationship to the marketplace, but you also want to optimize profitability and use price to do that.
If your customers don't compare notes, by the way, there's no reason you can't charge them different rates. If a customer calls me, for instance, I can drive a higher perception of value%u2014and thus charge more%u2014than if I'm beating the bushes for clients.
What do entrepreneurs not understand about pricing?
It's flexible. Time and urgency affect pricing a lot. The price you offer is one of the strongest ways you're communicating the value of your product or service.
Another key message is that price is the strongest lever a company has in terms of losing or gaining profitability. Entrepreneurs need to analyze who they are pricing their goods for, whether they're leaving money on the table by undercutting the price, or if they're pricing too high to attract a wide customer base.
Sometimes, it's as easy as having your accountant crunch some numbers to show you how much you earned in various years, at what prices, and what expense levels the company faced. If your prices are staying the same, but your expenses are going up and your earnings are going down, you need to increase prices.
For service businesses, I highly recommend that they charge a per-package rate. Get away from charging based on an hourly rate or a materials basis where a customer sees your prices at the line-item level.
If I charge a fee per consulting project, for instance, clients don't know how long it might take me to do certain things, and they can't break it down and look at what I earn per hour and compare it to what they earn. If I did that, they might say, "Hey, you're making $300 an hour. I don't earn that much!" The thing is they're not buying my time, they're buying my 20 years of experience.
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