Pricing as a Marketing Tool
By: Ed Newman
Tags: Ideas, Marketing, Business, Pricing, Marketing Strategies

MARKETING

Pricing as a Marketing Tool

“Pricing is branding.” — Richie Norton

Photo by Anne Preble on Unsplash

In his book The Archaeology of Knowledge, French philosopher Michel Foucault discusses the idea that everything has origins and begins at a certain point in time. It’s an intriguing thought because it prompts one to consider how new ideas emerge at various moments in history that previously did not exist. Foucault’s proposition came to mind when I learned how recent the popular concept of the marketing mix came into being.

In the 1940s Neil Borden, a Harvard professor who taught advertising, began contemplating the notion that a marketing manager was “a mixer of ingredients.” The ingredients included the product, planning, pricing, branding, distribution channels, advertising, packaging, display and other aspects of the marketing machinery. It didn’t become a widespread buzzword though until his 1964 article “The Concept of the Marketing Mix” was published.

The 4 P’s of marketing actually first appeared four years earlier in E. Jerome McCarthy’s book titled Basic Marketing: A Managerial Approach. Today the four P’s concept — Product, Price, Place, Promotion — is one of the most well-known concepts in marketing, the four key pillars of the marketing mix. *

Pricing is something that applies to everyone in business, from moonlighting freelancers to multinational corporations. The aim of this article is to outline several pricing strategies and challenge you to think more deeply about the prices you set for your goods and services.

An 1833 Example

Tim Wu opens his insightful book The Attention Merchants with a story about a young entrepreneur named Benjamin Day. In 1833 the leading newspaper in New York was The Morning Courier and New York Inquirer, a four page daily with a circulation of roughly 2600 at a time when the population of the Big Apple was 300,000. (OK, it was still a little apple, but growing.)

Why weren’t more people reading the paper? It wasn’t because they were all illiterate. Rather, it was the price. The Courier/Inquirer cost six cents and was thus perceived as a luxury item.

The 23-year-old Day, owner of a struggling printshop, understood enough about the processes involved to throw his hat in the ring as a newspaper publisher himself. He wasn’t doing it for vanity, nor was he striving to become a civic reformer. Instead, it was a business venture, and he saw the lack of an affordable newspaper as an opportunity. Pricing was key. He sold his newspaper for a penny, which was less than what it cost to produce it.

His paper, The New York Sun, wasn’t really about selling news. It was about capturing eyeballs. To accomplish this he hired someone to go to court every day who would gather stories, both serious and humorous, to share with the public. Before long the readership was double the leading newspaper, which set in motion his real revenue stream, selling advertising.

What started as a mechanism for making a little money for himself became a prototype for newspapers and other media from then to this day. What’s television all about? Delivering eyeballs to advertisers. And Facebook? You bet.

Google became one of the largest companies in history by delivering accurate, fast search results free. There were dozens of search engines when Google entered the arena. How Google grew to become a 900-pound gorilla is itself a remarkable story.

Typical Pricing Strategies

There are numerous approaches to setting prices. Here are a few of the most common.

Cost-Plus Pricing

Figure out what it costs you to produce your product and add a markup.

One challenge here is determining your real cost, including overhead, returns and other hidden expenses. Another shortcoming is that it doesn’t factor in the value you bring to the customer.

Competitive Pricing

Setting prices based on what the competition is charging.

Once again, what are your competitors basing their price decisions on? Maybe they have lower overhead than you and they can undercut their competition while still making good money. Maybe they have a backdoor operation that helps subsidize the low-cost business they’re doing out the front door.

Value-Based Pricing

Setting prices based on perceived value by the customer.

Intentionally or unintentionally, your pricing will say something about your value. Smirnoff considered itself a premium vodka, but being timid about becoming too high priced they based their pricing on other vodkas. It wasn’t until they raised their prices that sales took off.

Penetration Pricing

Setting a low price to gain market share, then raising it later.

This strategy has a pair of risks to consider. First, will the low price be perceived as a signal of lower quality? Second, will the consumers you capture bail when you raise the price later for optimal profitability?

Freemium Pricing

Making your product or service free for a trial period, then charging full price.

We see this all the time in the digital age. Numerous successful gaming apps use this hook. America Online and other internet portals used to do this before the advent of the World Wide Web. It’s a useful way to introduce something so new that it’s difficult to explain, but easy to experience. The downside here is because people have been burned by services that require a credit card in advance, many are reluctant to sign up if it requires giving their credit card or too much other personal information.

A Chromaline Story

Around 1990 when I was at the Duluth-based Chromaline Corporation (now Ikonics) we introduced a new photostencil emulsion that we wanted to position as a higher end product. To enhance the perception of value we printed the labels on gold foil. The label cost 15 cents more than our regular ten cent labels. The price tag we set was 10 dollars more than our regular emulsion. This perception of value, both in the packaging and the price, garnered it rapid attention, ready acceptance and a second-place award as a best new product in the screen printing industry.

The 5th P

I began by noting the origins of the Four Ps of Marketing. Based on research gathered and analyzed by the Gallup organization I would like to suggest that there’s a fifth P equally as important to achieving your marketing aims, and that’s your People.

In his most excellent book Creativity, Inc., Pixar co-founder Ed Catmull wrote, “Give a good idea to a mediocre team, and they will screw it up. Give a mediocre idea to a great team, and the will either fix it or come up with something better. If you get the team right, chances are that they’ll get the ideas right.” I think that’s sound advice for all of us.