Price Isn't Everything

This week in class we discussed pricing and its importance in the marketing mix. The key to designing a successful pricing strategy is that it simultaneously creates a consumer incentive to buy while also creating a firm's incentive to sell their product. The firm's that capture the most value in the marketing mix are in a position to charge premiums for their products based on the consumer perceived value. As we know from our studies the highest priced product doesn't necessarily bring in the most profits and firm's are constantly fighting a pricing battle between the objective value of their product and the consumer perceived value of the product.

Price is a variable that is constantly being manipulated and has a strong impact on the bottom line for firm's. For example take a situation in which a firm cuts prices by 5% while generating a 10% increase in demand. On the surface the price cut looks like a bad thing due to decreased margins but the increased demand could have the potential for greater profitability. This seems to be simple economics at work but the issue of price is indeed a more complex issue due to the competitive nature of businesses today amongst other things. Another reason price is such a big deal is due to the multiplier effect. A 5 cent price increase might not appear to be a big deal but if a firm's annual sales volume is in the millions the residual effect could be in the hundreds of thousands to millions of added revenue (again this is dependent on the size of the firm's annual sales volume).

There is no doubt that price strongly effects the bottom lines of firms but I also feel that it is an overused promotion method. In my opinion, it is better for a firm to be cost-effective and compete based on reduced COGS rather than constantly focusing on increasing the very arbitrary consumer perceived value (which allows for a premium price). Don't get me wrong and think that I don't believe that price matters because it does. I simply feel that some managers have a narrowed perspective and focus too much on price when there are so many other factors that can be manipulated to increase the overall profitability of a firm.