Pricing Should be Focused on “Payment”
Marketing is a discipline of four coequal elements: (1) the product, (2) its promotion, (3) its distribution, and (4) its pricing. The role pricing plays in marketing strategy differs essentially from the roles of the other elements, and it is the element most often poorly managed. The first three elements-product, promotion, and distribution-are a firm’s attempt to create value in the marketplace. Pricing is the firm’s attempt to capture some of that value in the profits it eams. If effective product development, promotion, and distribution sow the seeds of business success, effective pricing is the harvest. While effective pricing can never compensate for poor execution of the first three elements, ineffective pricing can surely prevent those efforts from resulting in financial success. Regrettably, that is a common occurrence.
Why pricing is often ineffective
It is quite interesting and puzzling why many companies fail to price effectively, even when they otherwise employ very effective marketing strategies. The reason: They do not apply to their pricing decision the same fundamental principle of marketing that they apply to other marketing decisions. That fundamental principle is that success in marketing comes from understanding how customers evaluate your marketing decisions, since the customer’s response to those decisions will ultimately determine their success or failure.
Many managers correctly reason that by creating exceptional value through careful attention to their customers, they can reduce the importance of price in the buying decision. They also reason that price is of primary importance to their companies. They conclude, therefore, that it is quite appropriate to evaluate product, promotion, and distribution strategies from their customer’s perspective while evaluating pricing from the company’s perspective. They forget about the customer when pricing, focusing instead on the company’s need to cover costs, to maintain cash flow, or to achieve a target rate of return. That is a serious strategic mistake.