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Price; Marketing's Most Delicate "P"

Keith Levy

Image by Jodiepedia via Flickr

Anyone recall your marketing 101 course in college? If you went to school anytime over the last five decades, you learned about the universally accepted and always debated four P’s of marketing: Product, Price, Promotion, and Place. In 1948, James Culliton defined the role of the marketing manager as a “mixer of ingredients”. I like that metaphor because it suggests that the right combination and mixture of these ingredients will determine a product’s ultimate success in the marketplace. It also suggests that this balance must be adjusted or re-mixed from time to time based on consumer trends, industry dynamics and many other variables too exhaustive to list. Let’s focus up on a key ingredient and what’s referred to as the second “P”, Price. Price, as defined by Wikipedia, is (drumroll please) “the amount a customer pays for a product or service". Wow!! Is that insightful or what? Certainly seems overly simplistic but here’s the thing: It’s really important to understand what that optimum price for your product is because where you price it will define its place in the category and determine its viability in the marketplace when compared to other alternatives. It’s a critical and delicate part of the marketing mix.

Image via Wikipedia

Beyond starting with a quality product, it may be the single most important factor and often the most abused lever on the mixing machine. Price too low, and it impacts the quality perception of the product. Too high, and it impacts the sales velocity based on a consumer’s willingness or ability to pay the specified price. With respect to fast moving consumer goods, excessive discounting (pricing too low) can effectively train consumers to look for a certain sale price and wait for that price before they buy. The soda companies are famous for this. For many years, they could not charge more than $0.99 cents for a 2 liter soda. Coke and Pepsi have been fighting their cola wars in order to rent volume and play ping pong with market share ultimately leading to consumers and retailers insistence on the $0.99 2 liter and essentially a zero sum game for the big CSD guys. They seem to be moving past that recently. What have they done? They’ve created 1.5 liter bottles and have priced those at 5 for $5 at retail. They provided the familiar price point, put it in a familiar looking plastic bottle, but made it just a little smaller giving consumers less liquid while allowing them to raise price on the 2 liter package. They also now have 6 packs of 7.5 oz cans and various other package configurations all with the intent of trying to move price north so they can expand profit margins.

If you explore the freezer section at your local supermarket and look at ice cream, you’ll see something similar. Is it just me or does it bother anyone else that while we weren’t paying close attention, about half a quart has disappeared from the ice cream container? When I was a kid, my mom would go to the store to pick up a half gallon of ice cream. Anybody able to find more than 1.5 quarts on a name brand of ice cream lately? If you look at private label ice cream you might find 1.75 quarts or 1.89. I’m sure someone out there can find an obscure example where I’m wrong but the point is, it’s a perpetually shrinking container size and the price keeps moving up steadily.

I understand this approach. I just wonder how the consumer feels about it? Do they feel like the brands are trying to execute slight of hand tricks in hopes a time devout consumer: A. Won’t notice, B. Won’t care or perhaps C. Will just grudgingly accept? I vote “D”, all of the above.

Let's examine FMCGs.  They operate in a volume business and have tried to increase profits by increasing volume while dealing with margin compression. In some CPG categories, it’s well known that price is a much easier lever to pull. Volume is hard to predict however, price increases, once accepted at retail, are pretty predictable and easier to depend on to deliver a business plan. For example: In some categories, without a price increase, you would need to increase volume 8% to accomplish the same thing that a 4% increase in price would accomplish with flat volume. The safe bet is to raise price and hope volume remains stable. If volume grows, your profits accelerate above plan and now you’re a genius!

In men’s apparel, Jos. A Bank is notorious for running sensational sales. But are they really so sensational? A month ago, they were advertising 70% off everything in the store. A $799 suit could be purchased for $239. A month later, they’re running sales that advertise $299 for any suit in the store. Did they sell all of the $799 suits selling for $239 or did they just re-price them to $299? Since it’s Cyberweek this week, they ran a promotion that advertises 50% off everything bought online (60% if you buy three or more) extended through the Thanksgiving weekend and ending midweek. As a consumer, I get more and more confused trying to zero in on answering the question; am I getting a good deal if I buy today or should I wait for a better sale?

The fundamental issue I have with most of these tactics (and they are tactics, not strategies) is that they tend to irritate consumers and at times insult their intelligence. Providing less product and charging the same or more hoping consumers won’t notice, helter skelter perpetual sales promotions that are confusing and potentially damaging to the brand, might be considered an abuse of the pricing lever within the marketing mixer.

So why do companies do these things? Most smart business people understand the damaging and confusing effects of “price abuse” but they tend to succumb to the short term pressures of things like delivering quarterly or yearly targets, dealing with annoying competitors, reducing inventories…and many other real issues. Price becomes heroin for companies and they become addicted...feeling the need to inject that needle. The only real methadone comes in the form of mixing a healthier cocktail comprised of long term thinking, a desire to preserve the essence of the brand, and a deep understanding of the longer term consequences of shorter term price actions. Making the right pricing choices is a lot like making the right lifestyle choices providing fuel for a healthy mind and body. Weaning your brands from years of poor pricing choices that feel good in the heat of the moment is a painful process and at times, fatal. As a parent I tell my child as he leaves the house to “make good choices”. Managers dealing with price should follow the same advice.