Pricing a Product explained by Professor Ken

Summary

The video script discusses the importance of pricing as a sensitive aspect of the marketing mix. It introduces two key pricing strategies: penetration pricing, starting below market price and gradually increasing, and skimming, starting above market price and then lowering. The discussion emphasizes the need to consider product positioning, competition, costs, and consumer perception. It also highlights the importance of understanding costs to set prices and the role of market research in validating pricing assumptions for a marketing plan.

Takeaways

• 🔑 Pricing is the most sensitive element of the marketing mix.
• 🐬 Penetration pricing involves starting below market price and gradually increasing it.
• 🌊 Skimming pricing starts with a higher price than the market and then decreases over time.
• 🔄 Pricing strategy should consider the product life cycle and innovation.
• 📈 The three C's of pricing are Cost, Competition, and Consumer.
• 💰 Understanding Cost of Goods Sold (COGS) is crucial for setting prices.
• 🆚 Competition dictates how your product is priced in relation to similar products in the market.
• 👥 Consumer perception and acceptance ultimately validate your pricing strategy.
• 📊 Revenue can be forecasted by multiplying the estimated market size by units and price.
• 🔍 For new businesses, pricing assumptions should be based on research rather than intuition.
• 📈 A well-researched marketing plan is necessary to support pricing decisions.

Q & A

What are the four dials of the marketing mix mentioned in the transcript?

The four dials of the marketing mix mentioned are Product, Promotion, Place, and Price.

Why is the price dial considered sensitive in the marketing mix?

The price dial is sensitive because adjusting it can significantly affect the entire value chain. If the price is set too low, it can devalue the product; if it's set too high, it can reduce sales volume and potentially disrupt the company's operations.

What is penetration pricing and how does it work?

Penetration pricing involves setting the product's price below the standard market price to penetrate the market. The idea is to gain market share initially and then gradually increase the price over time, possibly reaching or exceeding the market price.

What is skimming pricing and how does it differ from penetration pricing?

Skimming pricing involves setting the product's price above the market price initially and then lowering it over time. This strategy is the opposite of penetration pricing, which starts with a lower price and increases it.

How often should a company review its pricing strategy according to the transcript?

A company should review its pricing strategy regularly, potentially every six months or every year, to adjust to market conditions and consumer feedback.

What are the three C's of pricing mentioned in the transcript?

The three C's of pricing are Competition, Cost, and Consumer. These factors influence how a company sets its prices and how those prices are perceived in the market.

Why is understanding cost of goods sold (COGS) important for pricing?

Understanding COGS is crucial for pricing because it helps a company determine its break-even point and profit margins. It ensures that the company covers its costs and makes a profit while remaining competitive.

How does competition affect a company's pricing strategy?

Competition affects pricing strategy because it influences how a company positions its product in the market. If competitors offer similar products at lower prices, a company may need to adjust its pricing to remain competitive.

What role does the consumer play in determining if a price is right?

The consumer ultimately decides if a price is right based on their perception of value, quality, and their willingness to pay. Sales figures and market feedback from consumers can indicate whether a company's pricing strategy is effective.

How can a company forecast its revenue based on its pricing strategy?

A company can forecast its revenue by understanding its target market size, estimating the number of units it expects to sell, and multiplying that by the price per unit. This provides a projected revenue figure that can guide business planning.

Why is it important for a new business to base its pricing assumptions on research rather than gut feelings?

It's important for a new business to base its pricing assumptions on research to ensure that its pricing strategy is grounded in market realities and consumer behavior. This helps to validate assumptions and increase the likelihood of success.

Outlines

00:00

💹 Pricing Strategies in Marketing Mix

The paragraph discusses the importance of the pricing component in the marketing mix, alongside product, promotion, and place. It highlights that adjusting the price can significantly impact the entire value chain and the company's performance. Two main pricing strategies are explained: penetration pricing, where the product is initially priced below the market standard and then gradually increased, and skimming, where the product starts at a high price above market standard and then decreases over time. The paragraph also mentions the three C's of pricing: competition, cost, and consumer, emphasizing the need to understand these factors to set the right price. The speaker advises basing pricing decisions on research rather than intuition.

Keywords

💡Pricing

Pricing refers to the strategy of setting a product's price. It is one of the four critical elements of the marketing mix (product, promotion, place, price) and is described as the most sensitive 'dial' to adjust. In the video, it is emphasized that changing the price affects the entire value chain, making it a crucial and delicate decision.

💡Marketing Mix

The marketing mix consists of four key elements: product, promotion, place, and price. These are the fundamental components that marketers manipulate to position a product in the market. The video discusses the importance of balancing these elements, with pricing being the final and most impactful dial to adjust.

💡Penetration Pricing

Penetration pricing is a strategy where a product is introduced at a price lower than the market standard to capture market share. Over time, as demand increases, the price gradually rises to the market level. The video explains this using the metaphor of a dolphin breaking the water line, representing the gradual rise in price.

💡Skimming

Skimming is a pricing strategy where a product is initially introduced at a high price and is gradually lowered over time. This allows companies to maximize profits early in the product lifecycle. In the video, this is compared to throwing a rock into water, with the price dipping below the surface after some time.

💡Product Positioning

Product positioning involves determining where a product stands in the market in terms of quality and price relative to competitors. The video emphasizes that pricing should align with the product’s perceived value, whether it is high quality with a high price or low quality with a lower price.

💡Three Cs of Pricing

The Three Cs of pricing are Competition, Cost, and Consumer. These factors help businesses determine the right price for a product. The video discusses the importance of understanding these elements, such as the cost of goods sold (COGS), competitive pricing, and consumer demand when setting a price.

💡Cost of Goods Sold (COGS)

COGS refers to the direct costs associated with producing a product, such as materials and labor. In the video, it is highlighted that knowing your COGS is essential for setting a price that ensures profitability, as it determines how much you need to charge to cover production costs and earn a profit.

💡Revenue Forecasting

Revenue forecasting is the process of estimating future revenue based on factors like target market size, units sold, and price per unit. The video outlines how understanding pricing, consumer demand, and market competition allows businesses to predict their revenue more accurately.

💡Target Market

The target market refers to the specific group of consumers a business aims to reach with its product. In the video, knowing your target market is stressed as critical for setting a price that appeals to that demographic while staying competitive and profitable.

💡Product Lifecycle

The product lifecycle is the progression of a product through different stages: introduction, growth, maturity, and decline. The video mentions that pricing strategies like penetration and skimming may be influenced by the product’s current lifecycle stage, affecting how prices are set over time.

Highlights

Price is the last dial to touch in the marketing mix

Changing price affects the entire value chain

Pricing strategy can be sensitive and impactful

Penetration pricing involves starting below market price

Penetration pricing aims to increase market share over time

Skimming involves starting above market price and then lowering

Skimming is suitable for innovative or premium products

Product life cycle and innovation influence pricing strategy

Product positioning determines high or low price strategy

Three C's of pricing: Competition, Cost, and Consumer

Understanding costs of goods sold (COGS) is crucial for pricing

Competition dictates whether your pricing is competitive

Consumer perception ultimately determines if the price is right

Revenue can be forecasted by understanding target market size and price

For new businesses, pricing assumptions should be based on research

Pricing decisions should be data-driven, not based on intuition

A marketing plan should validate pricing assumptions with research

Transcripts

let's talk about pricing remember

i i try to explain there's four dials

the four ps there's

product which is number one right

there's promotion

there's place and now we have price

price is a big dial

that's the one i always like to touch

the last one

when you have to fix that marketing mix

you can you can

create new product you can adapt your

existing product

you can even change your method of

distribution

through place and you can even alter

your promotions

uh but when you touch the pricing dial

that's like the sensitive dial because

if you go too lower price

it affects everything the entire value

chain gets affected

if you go to higher price the value

chain gets affected right you could sell

less you can

really turn your company upside down so

you got to be very

careful with that when it comes to price

there's a couple of basic

strategies that i like to uh

employ one number one imagine a water

line

being here and when you if you're

if you're a dolphin and you're swimming

underwater eventually

you're going to break the water line

you're going to come up right

you'll penetrate the marketplace so

that's what i call penetration pricing

you want to price your product below

the standard price you're going up maybe

every year

every six months you're determining what

you're going up by

and then eventually you're going to be

at market price

and in some cases you might go above

market price

if you get the quality there the

opposite of that would

be skimming so again remember um that

that water line is straight

and you take a rock and you throw it on

the water line and it bounces right

after it stops bouncing what happens it

dips into the water

so now it goes down into the water so

you could price

above the market price

and then lower that price every six

months or every one year

whatever you decide to do eventually

you'll be at market price

but then soon you'll be below price now

that could be based on the product life

cycle that could be based on

your innovation there's a lot of

different factors that go into that

but that's sort of two ways that you

could put together

a pricing strategy there are a few more

but

i think those are the two main ones are

you above market price or below market

price

and that also is based on your product

positioning right where your product is

if your high quality high price low

quality

low price and then remember when it

comes when it comes to pricing

there's three c's that we talked about

what are the three c's when it comes to

pricing

competition is one cost right cogs are

another one

and consumer is the other one so if you

know your cogs if you know your costs

let's say you buy something for 50 cents

you want to sell for a dollar great you

make 50 cents

uh profit or top profit you know have a

good margin there

but then your competition is out there

and if you're lower quality than your

competition and your competition is

cheaper

it's not priced right and then the

consumer ultimately says

what's right and what's wrong so the

consumer will make up the mind and tell

you if your price is right

based upon the sales that you get right

that's sort of

how that would work so you have to

understand your cost

in order to understand your price you

have to understand your target market

your consumers

and you have to understand you know how

you uh

are facing the competition what you and

the competition look like

that's important now when you come up

with all the pricing now you can figure

out what your revenue is because you

know what your target market is you know

your estimated

size is you can multiply your estimated

size by the units and the units by price

and now you have a forecasted number

that you can use for everything else if

you're a new business

you have to make some assumptions based

on

research not assumptions based upon what

your gut is telling you or how good you

feel

or things like that you really have to

have some basic

research or or background research that

can validate your assumptions

when you make a marketing plan