7.1.2 The Language of Pricing¶
In this discussion, we delve into the critical concepts associated with pricing in marketing. Pricing plays a pivotal role in determining a product's success, balancing the cost of production, perceived value, and market strategy. Below is a breakdown of these concepts with clear explanations.
Key Terms in Pricing¶
1. Cost of Goods Sold (COGS)¶
- Definition: The total cost of manufacturing a product, including raw materials, packaging, and distribution expenses.
- Example:
- Manufacturing a bottle of Coca-Cola costs ₹1.
- Adding packaging and distribution, the COGS becomes ₹1.50.
- Implication: The product price is typically set higher than the COGS to ensure profitability.
2. Product Price¶
- Definition: The price at which the product is sold to the consumer.
- Relationship to COGS:
- Product price is generally set above the COGS to cover manufacturing, distribution, and marketing expenses.
- Example: A Coca-Cola bottle might be sold at ₹10, far exceeding the COGS of ₹1.50.
3. Perceived Value¶
- Definition: The value that consumers believe a product holds based on its benefits, marketing, and brand association.
- Factors Influencing Perceived Value:
- Marketing Campaigns: Celebrity endorsements or event associations enhance perceived value.
- Example: Coca-Cola campaigns featuring celebrities or festive themes.
- Consumer Perspective: If the consumer perceives the value of a Coca-Cola bottle to be ₹20 but it's priced at ₹10, the consumer feels they are getting a good deal.
- Consumer Incentive: Consumers are motivated to purchase a product when the perceived value exceeds the product price.
4. Balancing Price and Value¶
- Consumers will purchase a product if:
- Perceived Value > Product Price: They feel they are getting a good deal.
- Firms must ensure:
- Product Price > COGS: To avoid losses and achieve profitability.
Exceptions: When COGS > Product Price¶
There are cases where the cost of goods sold exceeds the product price, leading to an intentional loss. This strategy is often used by companies to acquire customers. Examples include: - E-commerce Platforms: Amazon, Flipkart, Myntra. - Quick Commerce: Big Basket, Swiggy Instamart, Blinkit. - Rationale: These companies often run on discounts or sales, prioritizing customer acquisition over immediate profitability. - Long-Term Objective: Achieve economies of scale and eventually increase prices or reduce costs to become profitable.
Concept of True Economic Value (TEV)¶
Definition:¶
The True Economic Value is the sum of: 1. The cost of the next best alternative. 2. The value of the performance differential between the product and the alternative.
Example: Air vs. Train Travel¶
- Traveling from Bangalore to Delhi:
- Next Best Alternative: Train (lower cost but takes 36–40 hours).
- Performance Differential: Flight takes 2 hours, saving significant time.
- Assessment:
- If time is not a concern (e.g., vacation), the true economic value of the train is higher.
- If time is critical (e.g., business meeting), the true economic value of the flight is higher.
Implication:¶
- Marketers use TEV to position their product as saving time, money, or resources compared to alternatives.
- Ideally, the TEV should be higher than the perceived value to demonstrate tangible benefits to the customer.
Summary of Pricing Concepts¶
- COGS: Represents the baseline cost of manufacturing a product.
- Product Price: Should typically be higher than COGS to ensure profitability.
- Perceived Value: Drives consumer purchase decisions when it exceeds the product price.
- True Economic Value (TEV): Highlights the comparative advantage of the product over alternatives.
- Strategic Pricing Exceptions:
- Some businesses deliberately price below COGS to acquire customers, aiming for long-term profitability through economies of scale.
Next Topic: Price Setting Policies¶
The next discussion will explore how businesses determine the optimal price for their products and services, balancing costs, perceived value, and market conditions.
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