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Pricing is a very sensitive issue in the field of Marketing. This lecture examines 10 current topics in the area of pricing, and how they are having an impact in contemporary Marketing. The effects of these issues are observed at the consumer level, at the trade level (i.e., wholesalers and/or retailers), or at both levels simultaneously. Of the four Marketing Program Variables (i.e., price, product, promotion, and placement), price is the one that most easily elicits a response from consumers and the trade, for it is felt directly in the pocketbook. Several of these issues might also be classified as "placement" problems, because they do appear in the distribution literature. But, because their primary impact is in prices charged, they are included in this lecture. Some of the following issues raise ethical questions, while others are merely examples of current Marketing strategies. In either regard, the reader should analyze the issues and seek to determine the appropriateness of the activity being discussed. Before proceeding with these discussions, though, we must consider the central issue, which is whether to engage in price or non-price competition. The former involves using price as the chief competitive variable, while the latter relies on other variables not associated with price. There can be serious fallout from engaging in price-based competition, because, while it certainly benefits consumers, it hits hardest in the company's bottom line. Thus, when two very similar stores launch a price war, it actually can hurt the companies, while simultaneously being of great benefit to consumers. Yet price competition is perhaps the first move made by marketers when faced with similar competitors in their trade area. Rather than think through a logical response, firms will just initiate a price break, thinking this will keep the competition at bay. Naturally, this only causes the other firm(s) to respond in kind, thereby setting the stage for a long, expensive war. Consumers can only stand by and soak up the good deals. Unless a firm has a unique cost advantage over their competitors, then price competition should be avoided! This does not preclude having sales or promotions; it simply means that price should not be relied upon as the chief Marketing variable, because it comes at great cost. So what about non-price competition? It is the moral high road. Rather than forgoing profit margins, companies seek to differentiate themselves by other means, such as service, product selection, delivery, credit, expertise, etc. Unfortunately, this advice is hard to take, and even harder to implement. A price cut is often just an example of stimulus-response behavior. With this in mind, we can now proceed to examine our ten issues.
EDLP, or Every Day Low Prices, is a concept that has been pioneered and fine-tuned by Wal-Mart. With over 2600 stores (including their Sam's Club stores) embracing this concept, the practice of EDLP has become as mainstream as coupons were several decades ago.  Wal-Mart initiated the EDLP concept, and has now been imitated by many. The idea behind EDLP is to depend less and less on sales for individual items, and more and more on regular low prices every day. In other words, everything is "on sale," or so the thinking goes. EDLP has become so prevalent that it has been copied by many retail formats, including other discount mass merchandisers, but also book stores, office supplies, electronics, music, and home improvement supplies. For example:
Secondly, EDLP can cause consumers to have a false sense of economic savings. Wal-Mart in particular has come under fire for this strategy, with their in-store signage that led people to believe that theirs was always the lowest price anywhere. Their current signs have been modified slightly to read "Always the Low Price," which makes no claims that cannot be supported. What is "the low price?" Once consumers accept this slogan as truth, they are likely to assume that all prices in Wal-Mart are low, and perhaps the lowest available. Third, there is the potential for misleading advertising. When stores that use EDLP publish advertising flyers, they picture items and give prices much like any other advertising flyer. In small print they will say something to this effect: "This is our every day low price." But consumers can easily mistake this for a sale, and then run out to buy the item. The retailer is merely "featuring" certain items in its flyer, akin to reminding consumers that they carry the product. Consumers, however, may misinterpret this communication as meaning the items are on sale, when in fact they are not. In spite of these problems, the EDLP format has gained widespread acceptance by consumers, who have come to expect discounted prices on frequently-purchased items. This helps explain the success of Wal-Mart, as well as the imitators who have also adopted this pricing policy.
With the rapid pace of technological change currently gripping modern society, the price of high-tech items has caused much controversy and consternation among consumers as well as the trade. Examine the table below for a summary
of some of the more common high-tech products introduced in recent years.
Note how the price of these products has dropped considerably in just
a short period of time:
Consumer concerns mount over the following issues:
Is the pace likely to change? Should Marketers try to slow the pace so that obsolescence and price decreases do not occur so rapidly? The answer to both of these questions is "No." If anything, the pace of technological change is likely to increase. Furthermore, to try to put the brakes on this change is no different than telling people to change their lifestyles, have more children, and slow down. As the Taco Bell folks said not too long ago in their TV ads, "Change is good." The fast food industry will never be the same, thanks to Taco Bell, who launched their value priced menu in 1989. (To view their website at its fullest, you will need to download the Shockwave plug-in. It is free, and easy to install--just follow the directions. Or, you can view it in its basic form without the plug-in.) At a time when fast food meals were becoming expensive, Taco Bell lowered the price on many of its menu items, and assigned them to price categories: 59 cents, 69 cents, and 79 cents. While some of the prices have risen, no one can argue that Taco Bell did not rock the industry.
 Taco Bell launched the value pricing concept, catapulting it into fast food prominence. How much did they rock it? Taco Bell's strategy was so effective that it caused industry giant McDonald's to blink. The venerable McD's was forced to respond, first by lowering the price on its basic hamburgers and cheeseburgers, and then by putting their own spin on things, the value meal (a combination of sandwich, fries, and drink). The effect today is that every fast food restaurant has some kind of "value" deal, be it individual menu items, or entire meals. But the biggest effect has been the incredible growth of Taco Bell, which went from small-time Tex-Mex food stand to premier fast food provider. They are now recognized as a leader in the industry. Taco Bell's actions in 1989 were predictable, given the stage in the PLC, as well as aging baby boomer's growing propensity to seek out a sit-down restaurant. But, because Taco Bell enjoyed such low costs in food preparation, they were able to implement this strategy and not lose any money. Whatever margins they lost, they more than made up for with volume. The fact that all food is prepared on demand, as opposed to in advance (like at McDonald's) lowered the cost of spoilage and waste, and allowed Taco Bell to use an assembly line approach to "manufacturing" very effectively. At present, Taco Bell has borrowed some of McDonald's strategy by also offering value meals, but everyone in the industry knows who struck first. With the availability of credit card purchasing, as well as speedy delivery via FedEx, UPS, and others, consumers are warming up quickly to the idea of buying things through mail order. While customers may shy away from buying certain items through the mail, they are quick to snatch bargains on other products that do not require a fitting or a test drive. Why? Because mail order companies are often able to offer substantial price savings to consumers, even after shipping and handling charges are added. Aside from the ability to offer unique and hard-to-find merchandise to rather specific target markets, mail order firms enjoy certain key cost advantages over their traditional retail competitors. They are as follows:
These cost advantages have not gone unnoticed by traditional retailers. In fact, it has caused great controversy as well as conflict. Retail groups have petitioned lawmakers to pass legislation requiring mail order firms to collect sales taxes from all customers, regardless of their state of residence. Furthermore, traditional retailers have tried to exert pressure on their suppliers to not sell product to mail order firms, with the implicit threat that they (the retailer) will discontinue selling the supplier's products if they are also sold to mail order companies. This amounts to nothing more than a power play, with the hope being that the traditional retailers have enough power to exact this outcome from their suppliers. In some cases, the retailers have succeeded in keeping mail order firms from having access to certain key products. In other cases, some manufacturers have willingly decided to support their traditional channels of distributions, as well as solidify their own product image by not allowing discount mail order firms to sell their products. The reality, though, is that there will always be manufacturers who want to increase the availability of their products, and they will gladly sell to mail order firms. While the mail order houses may see some of their suppliers pull the plug on them, there are always more waiting to establish a relationship. As long as there are quality products to be sold to the mail order houses, and consumers want a bargain, the mail order firms will continue to prosper. Check out the following mail order firms on the web: How much are people willing to spend for prestigious products? Plenty. One of the bigger paradoxes in the world of Marketing is that consumers, who often demand low prices on commodities and frequently-purchased items, will then buy other products with prices far greater proportionately than any added quality attached to the product. I call this the Prestige Effect. Otherwise frugal consumers will, in certain instances, willingly pay an enormous amount (at the margin) for incrementally small product benefits. In other words, the Price/Benefit Curve is nonlinear, with price increasing more rapidly than product benefits. Examples abound of marketers who fully understand the propensity of consumers to exhibit such buyer behavior. For example, look at Toyota and Lexus, Toyota's upscale line of cars. Many of the Lexus cars are built on the same platform as Toyota models. For $20,000 to $40,000 additional price, buyers can now purchase a car with leather seats and other fine appointments unavailable on the Toyota models. But are they really getting their money's worth? Would they not be better off with two Toyotas instead of one Lexus? This practice is prevalent in consumer marketing. Those additional "bells and whistles" can cost an incredible amount at the margin, and with dubious benefit to the consumer (other than the prestige of owning it). The sporting goods industry has recognized this opportunity, and capitalized on it. The difference between titanium and other less glamorous building materials (carbon fiber, aluminum, cromoly steel) can be hundreds of dollars. The difference between component parts may also be many hundreds of dollars. While it is not arguable that quality does increase with each jump in price, one must question whether the marginal quality enhancement is indeed worth the often enormous marginal expense. But the purpose of this discussion is not to consider the ethics of such Marketing practice; rather, the purpose is to understand and recognize the phenomenon, and be able to capitalize on it. So, we are left with the pressing question once more: Why would consumers spend more for less? The answer is really very simple: prestige and quality are often in the eyes of the beholder, and consumers are prone to making otherwise irrational decisions. But is it always irrational? If you were a marathon runner and could shave three minutes from your time in Boston with a $200 pair of shoes, would you do it? Probably. If you could sink every putt with a $600 putter and become the next Tiger Woods, would you buy it? Definitely. But what if you are just a "serious amateur," or really take your driving seriously? Can one justify spending such huge sums? Again, the answer is yes. As Marketers realized long ago, products fill needs of consumers, and if consumers have the need to look good as well as perform well, then we can justify this pricing practice. This type of pricing policy works best with products that are highly personal and/or highly visible. In other words, a serious golfer (if even just an amateur) wants to look and play his best, so investing in expensive equipment is justifiable. Someone who needs to look like a lawyer or doctor "needs" a Lexus. It is thus up to the Marketer to first have an intimate understanding of the product market, and then exploit the opportunities. Knowing that people are willing to buy along this nonlinear curve presents new options for the contemporary Marketer. |