Principles of Marketing

# 12.1Pricing and Its Role in the Marketing Mix

Principles of Marketing12.1 Pricing and Its Role in the Marketing Mix

### Learning Outcomes

By the end of this section, you will be able to:

• 1 Define pricing.
• 2 Explain pricing and its role in the marketing mix.
• 3 Explain the psychology of pricing.

### Pricing Defined

Anytime anything is sold, a price is involved. Recall that during the exchange process, a seller is offering something of value to a buyer in exchange for also something of value. This value to the seller is often referred to as price. The practice of pricing is not a new concept. Some of the oldest records of prices ever discovered were found on clay tablets with symbols in Uruk, located in modern-day Iraq. The records are written receipts of exchanges of sheep, beer, and barley and date back to 3300 BCE!5

You may recall that price is one of the 4Ps of marketing, or one element in the marketing mix. Once a product has been developed, marketers must determine at which price the product or service will be offered to the target market. Today, pricing is one of the more difficult decisions that marketers must make in the marketing mix because it directly impacts the perception of value from the customer as well as the company’s bottom line. Poor decisions in pricing can have immediate and catastrophic effects on profits that are difficult for companies to recover from. Price decisions must be linked to a product or service’s real and perceived value while also considering competition, supply costs, and when discounts should be offered.

Simply put, price refers to the exchange of something of value between a buyer and a seller. The price determines how much revenue the company will earn and drives the financial health of the organization. However, marketers cannot simply price products and services based on the expected revenue of the organization. The price must be set so that the buyer sees value in the product offering and the price they will pay for it. In other words, marketers must put the perception of value in the product’s price at the forefront while also considering the financial impact to the organization.

While price is what is referred to when discussing most goods and services, price can take on many terms depending on the exchange that is taking place. In higher education, you are paying tuition—the price—in exchange for your education. If you need an attorney, you are likely going to pay a fee—the price—for services rendered. When you are traveling and have to pay a toll, it is the price you pay for using the road or bridge. Regardless of the exact terminology used, pricing of goods and services have the same basic elements.

### Elements of Pricing

While a marketer is determining the price of goods and services, they must keep in mind that pricing must benefit both parties involved in the exchange process: the seller (company) and the buyer (customer). Both parties must see value in the product process through pricing for the exchange process to be successful. We’ll first discuss how price is an indicator of value to the buyer and then turn our attention to the seller.

#### Price as an Indicator of Value

When a buyer purchases a product or service, they seek to satisfy a need through the purchase. The customer will, consciously or not, use several criteria to determine the amount they are willing to spend to satisfy that need. These criteria ultimately lead to the value that the customer sees in the product.

The price-value equation is a subjective assessment by a consumer about what they deem as a value. The price-value equation states that as a customer’s expectations are met at what they consider an acceptable price, value is realized. Value is related to the quality and price of the product, and the formula is

$Value=QualityPriceValue=QualityPrice$

The concept of price anchoring relies on the first piece of information that a buyer sees. This acts as an anchor, or a frame of reference for what the buyer expects a price to be. Steve Jobs used this concept in his introduction of the iPad. The anchor price he quoted was $999. This immediately made buyers believe the product should be priced around$999. However, when Jobs showed the actual price, starting at $499, the buyers immediately believed, psychologically, that it was a great deal. Viewers did not know what the worth of the iPad was; they just believed they were saving nearly$500 by having the initial anchor of $999. #### Artificial Time Constraints Marketers—particularly retailers—often use the psychological strategy of artificial time constraints. These trigger a sense of urgency in the buyer; if they don’t buy today, they’ll miss out on a great deal. Whereas a consumer may have been on the fence about spending money, these artificial time constraints act as a catalyst for consumers to spend money right now. And there is a lot of power in artificial constraints: consumers are afraid of missing out and don’t want to later regret not buying. But consumers can often find the same prices many times throughout the year because retailers use this tactic frequently. #### Price Appearance A study on the effects of auditory representation in pricing showed that buyers believed$1,555.83 was a very complicated price and difficult to comprehend quickly. The study further outlined that a price of $1,555 (no cents) was better but that buyers were able to more easily and quickly comprehend a price of$1555 (no commas) and thus more likely to pause and consider the product.7

If you’ve ever gone to a fancy restaurant, you may have noticed the prices on the menu are in a small font and don’t have zeros at the end. The price will be listed as $29 instead of$29.00. Psychologically, longer prices appear to be more expensive because they take longer to read. This effect is augmented by the use of a dollar sign. Similarly, the use of prices with multiple syllables seems more expensive because consumers pronounce the prices in their head. In short, the longer it takes to read and pronounce, the more impact the buyer believes it has on their wallet,8 which is explained by price appearance.9

#### Price Gouging

Price gouging is when companies or individuals take advantage of a situation, typically an emergency or natural disaster, and charge exceptionally high prices for products or services. In some states, like New York, it’s illegal for businesses to price gouge during a state of emergency.10 In fact, New York was the first state to enact a price gouging law. In 1978, when there was a shortage of oil for heating in the winter and the lives of young and elderly people were threatened, the state created a law where companies could not sell goods or services at excessive prices.11

Can you think of recent examples where price gouging was a potential concern? During the COVID-19 pandemic, several states posted on their government websites lists of items that couldn’t be subject to price gouging. Currently, the US Department of Justice provides a list of items that can’t be hoarded or subject to price gouging due to COVID-19 precautions, including masks and other personal protective equipment (PPE), respirators, ventilators, and medical gowns.12 There have been other instances where price gouging was an issue. According to AccuWeather, “some of the most rampant examples of price gouging came during the most destructive storms in recent years, such as Hurricane Katrina, Hurricane Sandy, Hurricane Harvey, and Hurricane Irma.”13 After Hurricane Katrina, a hotel manager boosted room prices and was sentence to five years in jail.14

### Careers In Marketing

#### Pricing Analyst

A pricing analyst studies the market and analyzes data to determine the best pricing for products. This article from Zippia provides helpful information about the job role, including qualifications, career paths, salary, education, resume templates, and online courses to improve skills. Indeed.com also provides a thorough job description that outlines top duties and qualifications.

The best way to understand the core of any job is to learn from people who have done the job. Watch this video from a pricing analyst where he discusses his career.

Also check out this article on what makes a great pricing analyst. Some people wonder how a pricing analyst and a data analyst differ. Learn the answer to that question in this article.

Once you’ve determined this may be the career for you, prepare for an interview by watching this video.

### Knowledge Check

It’s time to check your knowledge on the concepts presented in this section. Refer to the Answer Key at the end of the book for feedback.

1.
You receive an email from your favorite clothing store. It is having a one-day sale where everything is 50 percent off. The retailer is using a form of psychology known as ________.
1. artificial time constraint
2. price appearance
3. profit
4. fixed costs
2.
Which of the following best describes the profit equation?
1. Profit = Fixed Costs – Variable Costs
2. Profit = Total Costs – Total Revenue
3. Profit = Total Revenue – Total Costs
4. Profit = Fixed Costs + Variable Costs
3.
Marquis has decided to purchase a new kitchen table. He looks at various brands online and decides to purchase one that is $500 more than the others because it is a brand his parents had when he was growing up and they offer free delivery. These factors indicate Marquis has perceived ________ in the higher-priced table. 1. value 2. artificial time constraints 3. costs 4. profit 4. Kilee sees an advertisement for a new computer. The advertisement portrays an initial price of$699 that has a large red “X” through it with a new price of \$499. The advertisement is utilizing which pricing concept?
1. Artificial time constraints
2. Price appearance
3. Price gouging
4. Price anchoring
5.
The perception of a buyer’s value includes which of the following?
1. Profit a company can expect from sales
2. Perceived benefits less the perceived costs associated with a purchase
3. Revenue expected from a sale
4. Costs of manufacturing the product