The 4 P’s of Marketing – Price

Hi everyone, it’s Michael Miller with Mindwhirl with a new episode of marketing Monday. Every Monday, we teach you the process marketing your business, and making a lot more money.

Today’s episode is the second of four, and it’s entitled the 4P’s – price. It’s a critical piece, and a lot of people get stuck on it.

There’s a lot to talk about, so let’s get going.

There are three primary topics to consider when discussing price:

• The effect price has on the profitability of your business.
• How much you charge for your products and services
• The psychological ramifications of price

So, let’s delve into each one of these little deeper.

The effect price has on the profitability of your business

It’s important to understand how changes in price affect your breakeven point, your profitability and profit margin. In order to fully understand, however, you will have to get out a calculator and some paper, or get out your spreadsheet if you’re familiar with Excel, and start creating scenarios.

That said, let’s look at a simple scenario. Let’s say that you sell a product for $100, and you have a 20% net profit. So, and other words, you make $20 every time you sell a $100 product.

If you raised the price of your product by $10, or 10%, that $10 would be all profit. Even though it only raised the price of the product by 10%, it raised your profit by 33%.

Using the same example, if we discounted the product by $10, it would only be a 10% reduction in price, which isn’t that appealing, but we would lose 50% of our profit.

Small changes to price have potentially enormous effect on your ability to be profitable in business. Remember, the purpose of business is to buy low and sell high and make a profit off the transaction. The more profit you can make, the better.

How much you charge for your products and services

When most business owners start their business they look around at the competition to see how much they are charging for their products and services, and then set their prices to match the competition.

This is a mistake, and can sometimes be fatal. I’m not advocating that you shouldn’t know what your competitors charge, but I am saying that it doesn’t matter what they charge.

Here’s why:

Every business owner is in a unique situation. Their overhead costs are different, their product costs are different, the service they provide is different, and their ability to sell those products and services is different than their competition.

Therefore, your price has to be different than your competitors.

Most new business owners use a lower price as their main incentive for customers to do business with them. The problem with this becomes apparent if their overhead is more than their competition. Also, new businesses generally don’t have favorable terms with their suppliers yet, or had time to work out their inevitable supply chain issues, minimize costs and perfect inventory levels.

We haven’t even begun to talk about the costs for marketing. When you get out a piece of paper, a pencil, and a calculator and start running the numbers and seeing how much it actually costs you in time, money, and energy to sell and deliver a product, then you will have a really good idea of how much you have to charge for your products or services in order to make a profit.

Just remember, your price has to be different than your competitors. If your price is higher, you need to deliver more value, but that’s easy to do. The mistake would be to realize how much it costs you to deliver your product or service to the customer, and then price it at the same level as your competition.
You can’t assume that they are making a living and growing their business by selling at that price level.

Why?

Because never in the history of mankind have consumers forced business owners to lower their price.

Commoditization occurs because business owners think there is marketing advantage in having a lower price. That thinking starts a race to the bottom and sucks all of the profit from the marketplace.

You need to identify your price based upon your overhead, the difficulty of selling it, and the profit level you want to make in return.

The psychological ramifications of price

So far we’ve talked about how price effects your profitability, and I warned you about pricing your products and services based on your competitors prices.

Next, I want to talk about the psychological ramifications of price. Irregardless of the information that economic textbooks have regarding supply and demand’s effects on price; the price of a product influences our willingness, or unwillingness to purchase it.

There is a phenomenon that I like to call the “value halo effect” that makes products appear more valuable when you change the price and the packaging.

There are many examples. Look at any luxury brand and identify the specific differences that make those brands worth the increase in price. Sure you can say that a Ferrari has a bigger engine, with more horsepower, better breaks, and a better suspension than a Toyota, but is it 10 times better?

You can say that the design of a Fendi purse is more attractive, and has better quality leather than a coach purse, but is it 10 times better?

You can say that Ben & Jerry’s ice cream has better ingredients and tastes better than Breyers ice cream, but is it four times better?

Brand evangelists will absolutely agree that these products are worth much more than the competition. They might even go so far as to say that a Ferrari is worth more than a $300,000 asking price.

The thing to remember, is that the real value is in the mind of the consumer.

The more expensive something is, the more value that product appears to have.

We can choose to raise the price of a single product, or If we have several products that perform the same function, we can juxtapose them against each other, like popcorn sizes at a movie theater, and affect buying patterns.

Obviously, the purpose of changing the price of a product is to make it more profitable, but that creates fear in business owners. They fear that if they raise their prices, their sales will go down. This is understandable, but it rarely happens.

Besides, take that first example where you sell a product for $100 and make $20 profit. If you raise your price by 10%, you could lose 30% of your business, and still be making more money than you were before. However, in truth, marginally raising your prices has very little, if any, effect on your sales volume.

Well, that’s my time for this week. Thanks for watching!

We appreciate your time investment and aim to give you great educational content and huge value in exchange. And remember… If you need help with marketing your business, we have a range of coaching, training, and done for you marketing services to meet the needs of most business owners, and best of all we offer guaranteed marketing results!

About Michael Miller

Michael Miller is the owner of Mindwhirl.com, a sales and marketing coaching and training company in Atlanta, Georgia.

Michael’s mission is helping small business owners understand, and organize their marketing so they can make money and grow.

Mindwhirl helps business owners plan and implement effective, profitable marketing campaigns and sales programs.

If you need more sales, we know how to get leads and grow businesses. Call us today at (404) 858-3105, or email me at mmiller@mindwhirl.com.

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