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Marketing, whether online or onground, is the only activity that generates revenue for most small businesses, and the price element in the marketing mix accounts for that. PriceThe amount of money charged for a product or a service. It is the sum of all values that buyers exchange for the benefits of having or using a good or a service. can be defined very narrowly as the amount of money charged for a product or a service. However, price is really more than that. It is “the sum of all values (such as money, time, energy, and psychic cost) that buyers exchange for the benefits of having or using a good or service.”Judy Strauss and Raymond Frost, E-Marketing (Upper Saddle River, NJ: Pearson Prentice Hall, 2009), 233. Ultimately, the meaning of price will depend on the viewpoints of the buyer and the seller.Judy Strauss and Raymond Frost, E-Marketing (Upper Saddle River, NJ: Pearson Prentice Hall, 2009), 233.
Deciding on a price for its products or services is one of the most important decisions that a small business will make. The price of a product or a service must be a price that the company’s target market is willing to pay and a price that generates a profit for the company. If this is not the case, the business will not be around for long.“Pricing a Product or Service,” Small Business Notes, accessed June 1, 2012, http://www.smallbusinessnotes.com/marketing-your-business/pricing-a-product-or-service.html.
Choosing the right pricing strategy is not an easy thing to do because there are so many factors involved. For example, competition, suppliers, the availability of substitute products or services, the target market, the image and reputation of a business, cost and profit objectives, operating costs, government regulation, and differentiation and positioning decisions will all impact price. Pricing is a complex activity, often seen as an art rather than a science. For small businesses that are marketing or want to market online, pricing strategies are even more complicated. For example, online buyers have increasing power that leads to control over pricing in some instances (e.g., online bidding on eBay). There is also price transparencyWhere buyers and sellers can view and compare prices for products sold online. where buyers and sellers can easily and quickly view and compare prices for products sold online, and some companies use dynamic pricingPrices are varied for individual consumers. by varying prices for individual customers.Judy Strauss and Raymond Frost, E-Marketing (Upper Saddle River, NJ: Pearson Prentice Hall, 2009), 233.
There are several pricing strategies available to the small business owner. However, having the lowest price is not typically a strong position for small businesses because larger competitors can easily destroy any small business that is trying to compete on price alone.Darrell Zahorsky, “Pricing Strategies for Small Business,” About.com, accessed December 1, 2011, sbinformation.about.com/cs/bestpractices/a/aa112402a.htm. Think Walmart. The best choice for a small business will be the strategy that helps the business reach its sales and profit objectives, enhances the reputation of the company, satisfies the target market, and sends the correct price-quality signal. Price-quality signalingWhen the cost of a good or a service reflects the perceived quality of that product or service. occurs when the cost of a good or a service reflects the perceived quality of that product or service.Dana Griffin, “Pricing Strategy Theory,” Chron.com, accessed December 1, 2011, smallbusiness.chron.com/pricing-strategy-theory-1106.html. However, pricing objectives must be formulated before a pricing strategy can be selected.
Pricing objectivesWhat a company wants to accomplish with its pricing strategy. (i.e., what the company wants to accomplish with its pricing strategy) should be related to a company’s objectives and should follow the decision about where a company wants to position its products or services.Philip Kotler and Kevin Lane Keller, Marketing Management (Upper Saddle River, NJ: Pearson Prentice Hall, 2009), 383. Different small businesses in the same industry may have different pricing objectives based on size of the business; in-house capabilities; and whether the focus is on profit, sales, or government action.Dana-Nicoleta Lascu and Kenneth E. Clow, Essentials of Marketing (Mason, OH: Atomic Dog Publishing, 2007), 358–59.
Once the pricing objectives are set, a small business must determine a pricing strategy. The small business owner can consider a variety of approaches. Discount pricing, cost-based pricing, prestige pricing, even-odd pricing, and geographic pricing are discussed here. In general, traditional pricing strategies can also be applied to the online environment.Judy Strauss and Raymond Frost, E-Marketing (Upper Saddle River, NJ: Pearson Prentice Hall, 2009), 247. How goods and services are priced tells consumers a lot about what to expect from a small business.
A small business might choose a discount pricingOffering quantity discounts to customers who buy in large quantities. strategyDiane Watkins, “What Is Discount Pricing Strategy?,” Chron.com, accessed December 1, 2011, smallbusiness.chron.com/discount-pricing-strategy-794.html. if it is looking to drive traffic and sales short term or if it wants to be permanently seen as the value leader in an industry.Rick Suttle, “Industry Pricing Strategy,” Chron.com, accessed December 1, 2011, smallbusiness.chron.com/industry-pricing-strategy-4684.html. Discount pricing is used with customers who buy in large quantities, customers who buy during off-peak times (seasonal), promotions used to increase traffic, and loss leadersA product that is discounted to get customers in the door in the hope that they will also buy more profitable products. (products that are discounted to get customers in the door in the hope that they will also buy more profitable products). Discount pricing can be used in the online environment in ways similar to brick-and-mortar stores. If the discounting is short term, inventory can be reduced, and revenues are increased temporarily.Diane Watkins, “What Is Discount Pricing Strategy?,” Chron.com, accessed December 1, 2011, smallbusiness.chron.com/discount-pricing-strategy-794.html. An important disadvantage, however, is that customers often associate low price with low quality, particularly if a brand name is unfamiliar. A discount pricing strategy could lead to a product or a service being perceived as low quality. Also, price reductions can be easily matched by the competition, eliminating any but the earliest advantage.Diane Watkins, “What Is Discount Pricing Strategy?,” Chron.com, accessed December 1, 2011, smallbusiness.chron.com/discount-pricing-strategy-794.html.
Cost-based pricingA company figures out how much it costs to make a product or deliver a service and then sets the price by adding a profit to the cost. is a very simple approach. A company figures out how much it costs to make a product or deliver a service and then sets the price by adding a profit to the cost.Karen Collins, Exploring Business (Irvington, NY: Flat World Knowledge, 2009), 237. For example, if it costs a small toy manufacturer $10 to make its signature stuffed animal (taking into account fixed and variable costs) and the company wants a 20 percent profit per unit, the price to the retailer will be $12.“Cost-Based Pricing,” Small Business Notes, accessed December 1, 2011, www.smallbusinessnotes.com/marketing-your-business/cost-based-pricing.html.
Cost-based pricing is very easy to use. It is flexible (allowing different profit percentages to be added to different product lines), allows for easy price adjustments if costs go up or down, and is simple to calculate. On the downside, cost-based pricing ignores product demand, what the competition is doing with pricing, and positioning, and it provides no incentive for cost efficiencies.“The Highs And Lows of Cost-Based Pricing,” Fiona Mackenzie, August 26, 2009, December 1, 2011, fionamackenzie.com.au/pricing-strategy/the-highs-and-lows-of -cost-based-pricing.html.
Prestige pricing (or premium pricing)Based on the premise that consumers will feel that products below a particular price will have inferior quality and will not convey a desired status and image. taps into the belief that a high price means high quality. Although this relationship exists in many instances, it is not true in all cases. Nonetheless, prestige pricing is “a strategy based on the premise that consumers will feel that products below a particular price will have inferior quality and will not convey a desired status and image.”Dana-Nicoleta Lascu and Kenneth E. Clow, Essentials of Marketing (Mason, OH: Atomic Dog Publishing), 358–59. A small children’s clothing store that carries only top-of-the-line merchandise would use a prestige pricing strategy. Clothing from this store would be seen as having a higher perceived value than clothing from Macy’s but perhaps comparable in value to clothing from Bloomingdale’s, Nordstrom, or Neiman-Marcus.
Prestige pricing can be very effective at improving brand identity in a particular market. However, it is not typically used when there is direct competition because such competition tends to have a downward effect on pricing. Unique products usually have the best chance of succeeding with prestige pricing.Lisa Magloff, “What Is Premium Pricing Strategy?,” Chron.com, accessed December 1, 2011, smallbusiness.chron.com/premium-pricing-strategy-1107.html.
Also known as the “nine and zero effect,”Ivana Taylor, “8 Pricing Strategies You Can Implement Right Now,” August 19, 2008, accessed December 1, 2011, Small Business Trends, smallbiztrends.com/2008/08/8-pricing-strategies-you-can-implement-right-now.html. even-odd pricingUsed to communicate quality (even-numbered price) or value (odd-numbered price). can be used to communicate quality or value. It assumes that consumers are not perfectly rational, which is true. Emotion plays a much larger role in consumer behavior than rationality.
Even-numbered pricing, or setting selling prices in whole numbers (e.g., $20), conveys a higher-quality image. A small, high-end gift shop, for example, would use even pricing for most if not all its products, with odd-numbered prices (e.g., $18.97) used for products that are on sale. Odd-numbered prices give consumers the impression that they are getting a great value. It is a psychological effect with no basis in logic. But it does work in practice.
Some small companies will use a geographic pricingA pricing strategy that takes the geographic location of a customer into consideration. strategy. This pricing strategy takes the geographic location of a customer into consideration, the rationale being that distribution can increase product delivery costs and thus the cost of the product.Dana-Nicoleta Lascu and Kenneth E. Clow, Essentials of Marketing (Mason, OH: Atomic Dog Publishing), 369. Taxes, the cost of advertising, competitors who benefit from government subsidies, consumer demand, differences in costs of living, and the general cost of doing business are other factors that enter into the decision to use geographic pricing. Small businesses that sell outside the United States would likely encounter the need for geographic pricing. This strategy might also be appropriate when selling in different states.