Running head: PRICING STRATEGIES
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Pricing Strategies and Value Creation in the Marketing Mix
Carmen W. Brittain
Ashford University
BUS 620 Managerial Marketing
Mary Wright
PRICING STRATEGIES
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Pricing Strategies and Value Creation in the Marketing Mix
Pricing is one of the most important things a company does and is an important
component of the marketing mix. Good pricing strategies can increase profits, and poor
strategies can destroy them or invoke a competitive response that creates a pricing war. Pricing is
developed in the mix and through product development, positioning, and promotion. To
effectively price products companies must understand its customers (Finch, 2012). Companies
must create value to set adequate pricing because over time buyer learning behavior and
competition drive prices down (Curry & Riesz, 1988). Price is defined by that which is given in
return for a product (Schindler, 2011). Product, distribution and promotion all create value in
which consumers pay for products. Pricing products must work in harmony with these strategies
(Richards, 2015). The question remains how companies can effectively get customers to pay
more for their products. Customers prefer spending less, but it is certainly not feasible to set
prices so low that there is not a turn in a profit. A products best price is determined by, creating
value for the customer, the costs that the seller is paying to provide the product, and the
customers sensitivity to the price changes (Gould, 2015).
Several pricing strategies exist when setting the price. Skim pricing sets a high price to
hit the top buyers and implies that the product is unique and has a small segment. Penetration
pricing is pricing set below the market price, and it seeks to establish a framework to gain market
recognition. However using this strategy discourages price increases because the price has been
diluted below price promotions (Paley, 2005). Psychological pricing is the level that is perceived
and priced in alignment with the constant dollar value. For example, pricing a product and
$28,995 instead of $29,000 creates a psychological price break for consumers. Follow pricing is
a strategy used about pricing to the industry leaders. However this approach often leads to
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pricing wars and should be avoided by small to medium business who cannot afford the market
fluctuation (Gould, 2015). Cost-plus pricing is price plus service and has added benefits or adds
a service to the product. This strategy places emphasis on value and is easy to fluctuate in price
(Paley, 2005). All the above approaches are used in the marketing mix when determining the
price. It is important to know the above strategies if companies want to raise prices and make
more profit.
Price promotions exist within the scope of most strategies. Companies often discount
their products through markdowns, promotions and coupons (Ailawadi & Farris, 2013).
However, research supports that slashing prices decreases revenue for companies and can also
damage the brand’s reputation (Farris & Albion, 1980).Companies should resist the urge to cut
promotions (Ailawadi & Farris, 2013) even though direct price reduction makes it easy for
customers to justify the price (Zoellner & Schaefers, 2015). It is easy to be seduced by the rapid
highs of sales growth from using price promotions, but it fails to recognize long-term
consequences (Nagle, 2011). When companies reduce prices by 20% at most, they get 10% more
business. If there are 100 transactions at $1000.00 each to start with, and the price is reduced to
$800.00 revenue is reduced from $100,000 to $88,000 (Hahn, 2003). While retail giants use this
strategy to get people in the door to present more products, this is not a solution for a small or
medium size operation seeking to increase profits.
To successfully raise the price of a product value must be created, and companies must be
able to sell that value to the consumer (D’Andrea, 2005). The key to business success is to satisfy
the customer’s needs. Identifying what customers want and what they are willing to pay for is
crucial in understanding how pricing is involved in the marketing mix. The best price for a
product also rests in the differentiation between market segments (Nagle, 2011). Value pricing
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stems from whether or not the product is easier to buy, the speed in which businesses can provide
the product or the level of customer service. Customer value pricing is standard in most
industries and involves pricing and competitive levels (Noble & Gruca, 1999). Customers judge
products based on the experience they receive (Thompson, Rindfleisch, & Arsel, 2006). If a
customer goes to store A and receives poor customer service and then proceeds to Store B with
superior customer service and knowledge, they will most likely pay more for service
(Rockbridge, 2013). In another example Papa John’s offers “better ingredients better pizza”
(Schindler, 2011). By creating the value of quality, they can price above the competition by
meeting the aesthetic needs of the customer. Creating value in the eyes of the consumer takes
their eyes off the price tag and puts them one the value that they are getting. By creating value,
there is a tradeoff in price. If a customer thinks that a price is tied to profit or hidden motives
they will consider it unfair (Ailawadi & Farris, 2013). To create a value message companies need
to recognize the most valuable assets to the product and sell those, not just the product itself
(Nagle, 2011). Bundling is always an excellent tactic in profit-enhancing and to create more
value for products (Schindler, 2011). For instance, when gyms offer free trial memberships or
free classes with purchase, the perceived value is enhanced. Also, the value can be established by
providing a 30-day satisfaction guarantee that the customer sees as an added value without
obligation. Another prime example is when auto manufacturers offer the “sports package” that
adds more features and benefits to the vehicle.
Brand price elasticity is the market’s response to a price change (Schindler, 2011). The
extent of the effect of the price change is usually subjective to the price of the product and the
consumers wealth. Creating value is the most important strategy in raising prices. Customers
already have a reasonably accurate awareness of price (Gould, 2015) Market leaders need to be
aware of what consumers want and why they want a product. Once this has been established
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value creation and a solid pricing strategy can help a company determine the right price and
adjust the amount needed for profit. Utilizing the pricing strategy within the marketing mix from
the beginning with thorough market research can help to eliminate the need to raise prices as
little as possible. Marketing managers need to be aware that pricing is one of the most
fundamental pieces of the marketing mix when involved in product development. Pricing can
change significantly throughout the product life cycle, and awareness of market trends and
fluctuations is necessary for marketing managers to make pricing decisions. Getting customers to
pay more for products requires intensive research into all the strategies available and giving the
best value for the product.
References
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Curry, D. J., & Riesz, P. C. (1988). Prices and price/ quality relationships: A longitudinal
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Farris, P. W., & Albion, M. S. (1980). The impact of advertising on the price of consumer
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Finch, J. (2012). Managerial marketing. San Diego, CA: Bridgepoint Education, Inc.
Gould, M. (2015). Pricing strategies: Salem Press.
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Rockbridge. (2013, 2013-12-09). Pricing your product or service? Understand how price can
affect quality perceptions and product positioning – rockbridge associates, inc. Retrieved
from http://rockresearch.com/pricing-your-product-or-service-understand-how-price-canaffect-quality-perceptions-and-product-positioning/
Schindler, R. M. (2011). Pricing strategies: A marketing approach. Thousand Oaks, CA: SAGE
Publications, Inc.
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Zoellner, F., & Schaefers, T. (2015). Do price promotions help or hurt premium-product brands?
Journal of Advertising Research, 55(3), 270-283. doi:10.2501/JAR-2015-008
