Think Pricing Lives in a Vacuum? Think Again.

• December 7, 2020

I recall reading on LinkedIn, no more than a couple of years ago, a comment that was made by a well-known speaker and author who works in the price-consulting sector. He’s a renowned “thought-leader,” and he commented, “Why do pricing projects so often fail?” I was astonished by his remarks, but I soon realized what was problematic with what he wrote. He believed, like many of the consulting firms (which there are actually very few of) who help companies with their pricing strategy, that pricing is a separate activity conducted without any relation to a company’s “other” activities. There is a mistaken belief that companies can arbitrarily change their pricing at will. This can be true for “some” companies but for the vast majority, it is not a true reflection, and that’s the reason “pricing projects” fail. But why does this happen?

There are four Ps in marketing—pricing being just one of them. Product, Place, and Promotion make up the other three Ps; all the four Ps interact with each other. Edmund Jerome McCarthy, an American professor of marketing and author, wrote about the concept of the four Ps in his book Basis Marketing: A Managerial Approach. This book was published in 1960 and since that time, McCarthy’s four Ps concept remains an integral component in marketing literature, especially as a way for any company to look at an example of the “marketing mix” for their products and/or services.

The main component of a better pricing strategy is the fluid interaction between the four Ps. When a company takes a fully holistic approach to its marketing and pricing strategies, it will not experience pricing projects that will fail. But how can this be assured? Let me explain in more detail:

Product: The product need not be just a product, but it can be a service, too. However, a product or service contains three components: features, functions, and benefits to the customer. Within these, they can also include its quality, what product family it belongs to, branding, packaging as well as warranties. Also, it can include services that are added to a product and vice versa.

Place: This is where customers gain access to a company’s product or service. The place includes the selection of sales and distribution strategies and how they are used; it also shows the type of customers that an individual company targets as its main focus group. For consumer goods and services, customer focus attributes can include location, interest area, demographics, etc. Although, for business-to-business products or services the attributes differ (size, industry, location, buyer title, etc.).

Promotion: In a nutshell, this is all concerned with the “how” and “where” the company’s marketing should be concentrated on. Promotion can include numerous attributes such as the channels a company uses or what marketing messages will best promote their product or service. Also, the company’s media strategy and setting the frequency of any promotions given to their customers are further attributes. It can also include a mixture of various promotional activities.

Price: The last of the four Ps. Price is concerned with a set price for a specific product or service, but also, the pricing strategy used by a company as well as discounts and payment terms. What is vital to our discussion is to recognize what the theory says about price (being the sole “P” that can affect revenue) and recognize a “different” school of thought. Let’s continue.

So, does McCarthy’s theory make sense? Actually, it doesn’t. But why? For this reason, theories that are generally crafted out of academia and dispersed worldwide through their teaching can be wrong or flawed in some respect. This theory is no exception. It’s wrong, but not completely. Let me explain why that is. Its main flaw is twofold. It does not recognize the interaction between the four Ps and how they affect each other, as well as denies that the other three Ps (Product, Place, Promotion) also affect revenue. Price is not the sole factor here. 

Products and services (Product) can have unique features and benefits over a similar product or service. This uniqueness can be missed when the customer focus (Place) may be different; the company is targeting the wrong customers through its marketing channels and messages (Promotion) by not adequately crafting them to reach the customers they are focusing on. Specificity of features, benefits, targeted messages, certain marketing, and sales channels will all generate higher sales volume as well as higher revenue than those that are non-specific. This means that the theory’s statement that Price only affects revenue is clearly way off the mark. The other three Ps affect revenue, too.

So, if any company wants to outshine the competition, then they need to recognize that the four Ps interact with each other. There is synergy going on here. Thus, a company needs to know (exactly) what features and benefits will generate for them higher sales than other features and benefits. The company needs to have an excellent awareness of the specific marketing channels and messages as well as the sales methods and channels that will contribute to generating higher sales than other marketing channels, messages, and sales channels and methods. Knowing the correct customer profile to focus on and target will help generate higher sales over other non-specific customer profiles. Ultimately, the company needs to grasp the importance of how all these aspects of Product, Place, and Promotion affect what Price should be set for each product and service.

I hope that you will be in agreement with me in understanding the importance of the interrelationship between the four Ps and how it is essential to not see each P as separate from the other Ps. Do companies really see this interrelationship between the four Ps? More importantly, do they recognize the impact that this interrelationship has between the different attributes of a specific product or service, that in turn, affects the success (or failure) of a product or service?

 Over the many years that I have been working in this field, I have talked to thousands of companies. There is always a willingness to try and understand the principles behind the four Ps, but to be honest, not willing to “fully” understand. They like to talk to their customers. That’s good, but there’s a problem with that approach—customers don’t always tell the truth, they lie. This customer tactic makes it harder for the company to really “understand” their customers’ wants. Customers withhold valuable information, so as to gain more benefits, a lower price, and features from a company’s product or service (this is a topic for another article), the next time they purchase it. Some companies look to the competition but there’s a problem with this approach as well, as the competition is invariable using the same “flawed” method to try to understand what its customers want, so nothing is learned in the long run. Still, other companies just guess, okay, it may be an “educated” guess but it’s still a guess all the same. There seem to be so few companies who are willing to understand the interrelationship between the four Ps and the correlation this interrelationship has on the affective influences on sales volume and revenue at different prices. Some believe that it can’t be done, while others (mistakenly) think the process will be too “involved” in gaining this understanding.

Yes, it may take some time, to gather this information but this information regarding the interrelation of the four Ps and how they affect sales volume and revenue across various price ranges can be found, and with great accuracy, too. Other precise information gathered will reveal what product and features drive the highest sales volume as well as at what price this can be achieved, the specific customer profile (persona) that can be targeted through a company’s marketing and sales strategies that will generate the highest sale volume, finding out what marketing channels and messages will generate the highest sales volume and revenue, minimizing sales friction and generating the highest sales volume by optimizing the sales methods and channels used, and finally, but not least, ensuring you have the “right” set price for your products and services that is going to provide the highest sales volume and revenue for your company.

So, what are you going to do about it? 

Per Sjöfors
Founder
Sjöfors & Partners
www.sjofors.com