>> Hi. Let's talk about price. The last of the four piece is price. This aspect of the marketing mix focuses on the amount that a customer pays for a product. Price is different from the other three elements of the marketing mix. Product, promotion, and placement all create value for a customer. Instead price captures this value and brings it back in to the firm. Thus having a good pricing strategy is critical for your firm's profitability and basic survival. The development of a pricing strategy is a complex decision that entails lots of considerations, including a product's cost of production, what customers are willing to pay, and also the prices of competing products. For example, Coke has traditionally employed a competitive based pricing strategy. Over the years it has faced intense competition from Pepsi and other cola manufacturers. Thus Coke has tried to match the price of its competitors. Today a can of coke is less than a dollar in the U.S. and also many other countries. Thus it is very affordable for most consumers. Let's discuss a few key concepts. The price portion of the marketing mix has lots of interesting concepts such as break even analysis, price elasticity, and reference prices. In this module we'll focus on two fundamental concepts, pricing strategy by firms and price knowledge among customers. First let's discuss pricing strategy. A pricing strategy is a firm's basic approach to how it prices its products. Firms can employ a broad range of pricing strategies. Three of the most common are cost based pricing, competitor based pricing, and value based pricing. Let me explain each briefly. Cost based pricing is a technique in which the price of a product is based upon the cost of manufacturing or acquiring this product plus a commonly accepted markup percentage. For example, in the U.S. most car dealers price their cars at the invoice price plus a margin somewhere between 5 to 10%. Competitor based pricing is a strategy in which the price of a product is based on closely matching the price of relevant competitors. For example, if the price of a gas station, the price of gas at a gas station, is lowered by one station, nearby stations will typically lower the gas prices to match its price. Finally, value based pricing is a strategy in which the focus is on the added value that a product provides to its customers. And pricing that value appropriately. For example, a cold soda on a hot day during a sporting event is priced higher and also provides more value than a soda sitting on a store shelf a mile down the road. Now let's discuss price knowledge. Knowledge about prices is important because this knowledge helps set price expectations and also gives customers more power in the marketplace. After all, knowledge is power. Academic research on this topic suggests that for many product categories most consumers have a pretty low level of knowledge about the prices they pay. For example, one famous study about consumer price knowledge found that less than half of all supermarket shoppers know the price of items they place in their shopping carts. Subsequent research has found that although most customers don't have very accurate recall of exact prices in short term memory, they are pretty good at recognition of appropriate prices in long term memory. In other words, although most consumers can't say how much they pay for something when asked to name its price, they can tell if the price of a product is close to what they typically pay in their normal shopping experience. Now let's talk about what's changing. For most of the products we purchase the price has been set by the firm that either makes it or sells it. And we often don't know the exact price until we see it on the shelf. Let me give an example. I bought this bottle of Coke at my local grocery store for the price of $1.29. I didn't know the exact price until I entered the store, and this price certainly wasn't negotiable. I actually asked if they would sell it to me for $1.00 and the store clerk looked at me rather strangely and said, "No. That's not how it works." This firm centered approach is starting to break down due to the rise of digital tools. For example, if you walked in to an electronics store looking to buy a new television, you don't have to pay the price that was listed on the shelf. Thus if a television was priced at $1,000 you couldn't tell the manager that you only wanted to pay $900 for it. However if you used your smart phone to show the manager that you could buy the same TV from Amazon.com for $900, he or she might be very likely to agree to this price. Indeed several large retailers have price matching strategies in which they will match the price of competing retailers. These price matching strategies are not completely new. However before the rise of digital tools such as the internet and the smart phone, it was quite difficult for customers to engage in this price search, this price matching activity. In the past a cost conscious customer who wanted to ask for a matching price had to search a variety of newspapers, cut out the portion that showed a competing retailer's price, and then bring this clipping to the store. Today this process is much, much easier. Armed with just a smart phone and a price search app such as Price Grabber or Red Laser, a customer can instantly compare prices on a physical retailer's shelf with the prices for the exact same product at Amazon.com and a large number of other online retailers. All you really need to do is to show this price on your phone to a store manager who is very likely to match this price in order to get your business. Indeed in the U.S. several large retailers such as Walmart, Target, and Best Buy, have an explicit policy to match the price of online competitors. Thus in this new digital marketing environment we are moving from prices revealed at the point of purchase to prices negotiated at the point of consideration. In this module we'll discuss how these new digital tools are changing this element of the marketing mix and altering how we think about price.
