A similar example, if we think about a company like Wal-Mart.
Why is it that you might find some Tide
detergent there for $4.73 or another product for $2.81,
these weird kind of a endings?
So in the US at least, most prices end in either a nine or a five,
and the idea that Walmart here is ending their prices in fours and threes and ones
and sevens, is they're trying to send you
a message that they've squeezed out every possible
cent that they can to deliver the best possible value to you as an in consumer.
So that's another example of using the product price
to send a signal.
The final one I'll share is a very interesting study done by a friend of
mine from New Zealand who teachers at the Sloan management school up there at MIT.
And my friend Duncan did an experiment where he sent
out shoe catalogs to people all over the United States.
Half the people received a catalog and a picture
of a pair of shoes and the price was $44.
The other half of the people, this is thousands of peopl,e received
an identical catalog except the price of the shoes was $49.
Now economics 101 tells us that as the price goes up
demand should go down right, but Duncan found exactly the opposite.
More shoes were sold at $49 then at $44.
And why is that?
Because when you see $44 the way you encode it psychologically is,
gee, that's kind of a weird price, I don't normally see 44.
Thats like 10% more than 40.
But when you see 49, you feel like that's a discount from 50.
And so what I'm trying to indicate through these examples is the price
is more than just a number that indicates what you have to pay.
It sends all kinds of other signals, and that's
going to be one of our themes as we go through.
So how do we set prices and what's the right framework?
There are four inputs to pricing.
First of all we need to think about the marginal
cost of the product I'm going to call that the floor.
Obviously we don't want a price below the floor or at least not for too long.
Then we need to think about the ceiling which is the customer willingness to pay.
So number one is the floor, number two
is the ceiling, the customer willingness to pay.
But you can't always charge people their absolute maximum willingness to pay.
Why is that?
Because of competition.
So competition is going to be the third factor that will drop
the possible ceiling.
If my customer is willing to pay $10 but he can get that product from
a competitor for six, then that's going to drop my price from ten down to six.
And then number four is the amount by which prices have to be raised from
marginal cost to give some money to distributors
or re-sellers to motivate them to sell it.
So those are the four key inputs to pricing
that we're going to go through by way of example.
I'm also going to show you a couple
of examples of something called economic value to the customer.
This is a very, very important concept.
And first example, well the only one I'm going to show is something that
might be useful for you, those of you who like to eat chicken wings.
There's a product called the wing dipper.
And the wing dipper is a place where you can put the
dip within what you want to, to dip your chicken, chicken wings.
I guess it turns out when people eat
chicken wings, I don't eat it a lot myself.
I guess they spray the dip
around, or they make a mess.
And so therefore the restaurants are losing a lot of money whereas if
they had these wing dippers, the wing dipper controls the amount and based on
the size of your restaurant and the amount of wings that get eaten
you can calculate as a restaurant what the economic value of this product is.
So many times in your communication you're thinking about the economic value to
the customer and trying to say that in a persuasive or informative way.
Okay, so now let's think about this pricing framework
of the cost the customer willingness to pay the amount
that collaborates sorry competitors will bring the price down
and collaborators will bring the price up through some examples.
Let's relate the five C's of marketing: customers,
company, collaborators, competitors, and context, to the pricing decision.
So first of all from a company point of view
when your setting a price you might need to think
about financial considerations what's my required internal rate of return.
You certainly need to think about consistency in the product line
so sometimes you might have a good better and best product.
So the price that I'm going to charge for the Toyota Camry is somehow
going to be related to the price that I'm charging for the Toyota Corolla.
So you need to think about spacing out the prices in a way that's consistent.
And then thirdly you need to think about your own existing image so it may be
very very difficult for Walmart who has a
low price image to sell really really expensive stuff.
Similarly it may be very very difficult for Sak's 5th Avenue to
sell things very very cheaply because
that's also inconsistent with their overall image.
So those are three things that are very important
to think about from a company point of view.
From a competitor point
of view there's a whole raft of things, but here's the three most important.
The first thing you need to think about is that
when you set your price, how will your competitor respond?
Will your competitor respond extremely aggressively and take
whatever your price is and cut below it?
Is the competitor going to do things that are rational,
does the competitor have a deep pockets and so on.
So the first thing is how aggressive is this competitor.
The second thing you need to think about is when
you do something in the market with your
price how is that competitor going to respond?
Are they going to respond by improving their advertising,
their product or their distribution, the other 3 P's,
or are they going to respond on the basis of
price that's the second thing you need to think about.
And then thirdly you need to think
about your position and the competitors position.
So if you're the market leader, in some sense you
have a responsibility to try and keep your prices high.
If you're a follower you might have a different kind of strategy.
So those are three important things with respect to competitors
that dictate what you want to do with your pricing.
When it comes to collaborators, collaborators or distributors,
they care a lot about margin, but they also
care about their return on assets, and we'll
be talking about that a little bit later on.
So are you pricing in such a way that allows the collaborator
or distributor who's selling your product to turn the product frequently enough?
And finally we come to the customer.
The customer issues are probably the most important.
So this is where I'm going to spend the most
time, and the key idea is customer price sensitivity.
In terms of economics, this is sometimes referred to as a price elasticity.
You might remember this from your high school or college education days.
In economics, price elasticity just means the following: if I
raise the price by 1% by how much does demand drop?
So if I raise the price of my product by one percent and demand drops five
percent that means that the product is highly
elastic, there's a lot of stretch to the price.
If I raise the price one percent and demand only drops 0.2 of
a percent, that means that the product is very inelastic, very very little stretch.
If I have an inelastic product, I might be able to raise price.
If I have an elastic product I might want to drop price.
So we're
going to get into how as marketers we actually
measure that beyond the economic concept of price elasticity.
