The Marketing Mix (Essay Sample)

The Marketing Mix-Price
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The Marketing Mix-Price
Creating product prices is a difficult choice for a company. Available alternatives include offering the product free of charge, pricing based on input costs plus a profit margin, or premium pricing based on consumer’s propensity to spend. The model a company chooses will depend on its brand image, available capital, or its growth prospects (Narayandas, 2005). Therefore, the chosen model should reflect how a company implements its business strategy to attain financial objectives. The model will take into consideration characteristics of the market and consumers, models of competitors, and goals of the company with respect to the volume it wants to drive in the long-term.
Pricing Models
Canned Vegetables
The most appropriate pricing model for canned vegetables is a cost-based model. This model uses the unit cost of production, which includes direct and indirect costs when setting price. The company will add a profit margin that is a percentage of the total cost of production to the final price (Narayandas, 2005). Characteristics of cost-based pricing include:
It is easy to adjust price when costs increase.
It is ideal for those products that have a specified quantity of raw materials.
It suits manufacturer who can scale production relative to the product’s demand.
It does not consider competitor pricing models, as long as it covers unit costs.
It ignores the effect of pricing on the product demand.
It does not give an incentive to improve efficiency.
Companies that produce canned vegetables incorporate various ingredients to make the food nutritious. When pricing, first they will add the cost of inputs then include a profit margin to come up with the final price. This means that many companies within the same industry may have different prices for the same product if the cost of inputs is different (Agriculture, Food and Rural Development, 1999).
Aspirin
Aspirin is a drug people consume when they are sick and the most appropriate model is value based pricing. Its manufacturers use different ingredients in varying combinations during production. Therefore, they will set a price depending on the value consumers attach to the product (Anand, & Khanna, 2000). The company does not rely on prices of competitors since people will consume this drug based on its effectiveness to cure maladies. The demand for the product is pegged on the number of sick people meaning that if the company were to add more ingredients to the drug to make it more useful and charge more, people would still buy it. Gale and Swire (2006) say that the characteristics of value based pricing include the following:
Has ability to maximize revenue given that the model is based on how much customers are willing to pay for the value they will pull from the product.
It focuses the product on customer expectations.
It ignores pricing of competitors.
It is suitable where a company can grade its brand value relative to competitor brands.
It does not rely on cost of production.
A company using value-based pricing will charge customers based on the perceived value of the product. The company will produce similar categories of product with different ingredients and charge each group a different price (PWC, 2014).
Similarities between Cost-Based and Value-Based Models
Hinterhuber (2004) says that both methods use other attributes besides product demand when setting price. Cost based model uses unit cost of production while value based model uses the perceived value to determine the price.
Both models focus on a profit margin though cost based model has a lower margin than value based model. This is because the cost-based model considers the market floor and ceiling when determining the right price while value based method looks at how much clients are willing to pay for its product.
Both methods allow the company to cluster clients and charge them differently depending on what they consume. This is because the price depends on the cost of production or the intrinsic value of the product
Differences
Simon and Butscher (2001) give the differences in the two models as follows:
Focus: Cost-based pricing looks at how much profit the company wants to make while value based pricing takes into consideration the value clients will get after consuming the product.
Price: With cost-based pricing, market conditions determine the price a company will charge for its products while in value based model, the company looks at consumer’s ability to pay for the product.
Benefits: Cost-based pricing transfer benefits to consume...