Pricing in Marketing

Pricing in marketing is one of the most important decisions for marketers and businesses in general. It is the 2nd element in the marketing mix within the customers value-driven marketing program (the 3rd step in the marketing process). If marketers price their products very highly, they risk losing their customers. On the other hand, if marketers price the products low, they might incur losses or harm the reputation and positioning of their brands and their value in the minds of customers. As we discussed in the previous session of Marketing Strategy & Products, value proposition strategies are based on two dimensions: the benefits and the price. Thus, a reduction in one side might give an indication of reduction in the other. That is, reducing value might indicate reducing benefits in the minds of customers. Pricing is not only important for marketers and businesses, but also for all of us. Understanding pricing and its strategies helps us evaluate prices of products/services that we intend to purchase. Besides, it assists us to assign fair and acceptable prices for any goods or services that we need to offer, such as selling our old or used electronics, furniture, and so forth. This session discusses pricing, which is the focus of chapters 10 & 11 in Part 3 (Strategy & Mix) of Marketing 2018 Book of Kotler and Armstrong, as per the figure below. The book is the 1st one in the 2nd Year Program within the service of Global English Management & Leadership Books in your channel Management with Merits – Manage to Prosper. To download the associated presentation (PDF), kindly go to the video at our YouTube Channel and click on the appropriate link in the description section below the video.

Pricing Strategies at Apple
Chapters 10 & 11 in Part 3 of Marketing 2018 Book Focus on Pricing in Marketing
Chapters 10 & 11 in Part 3 of Marketing 2018 Book Focus on Pricing in Marketing

Pricing in Marketing : AirPods Max Headphones from Apple

As shown in the first below figure, Apple introduced its most recent over-ears headphones, namely AirPods Max, last Tuesday (Dec 8, 2020). The headphones will be available from Tues, Dec 15, 2020. Apple priced the headphones at $549. This exaggerated amount was shocking for the market. The average price of modern headphones from Apple’s direct competitors like Sony and Bose is $350. To make the matter worse, if I added $150 to this amount of money, I would be able to purchase the most recent mobile from Xiaomi Chinese Company (Mi10T Pro) which was released on Oct 20, 2020 (2nd Below Figure). It is true that AirPods Max Headphones have plenty of unique features, especially the stainless steal frame, as shown in the 3rd below figure. However, why did Apple choose to put such phenomenal price for the headphones? Besides, will customers perceive high value for the headphones and accept paying such a high price for it?

Apple priced its most recent headphones (AirPods Max) at $549
Apple’s AirPods Max Over-Ear Headphones – $549
The price of Xiaomi's most recent phone (Mi 10T Pro) is only $150 more than Apple's AirPods Max Headphones.
Xiaomi’s Mi 10T Pro Phone is worth $699
Do the unique features of Apple's AirPods Max Headphones justify the phenomenal price of $549?
Unique Features for Apple’s AirPods Max Headphones

Apple Sells (Value), Not (Products) – The Concept of Price

The history of customers’ behavior with previous Apple’s products at launch provides a strong indication to answer the above question. Despite the high prices that Apple charges, you always find millions of customers all around the world who wait eagerly to get Apple’s newly launched products. They never mind the high prices that they pay for Apple’s products and value. Thus, for the headphones, customers will be willing to pay the high price to get the unique “ultimate personal listening experience” of AirPods Max, as shown in the below figure. Thus, the focus of Apple of customers’ outstanding experience indicates that the company sells (value) not (products). Based on that, Apple prices its products depending on the value they offer and the prestige of Apple brand.

Pricing in Marketing is based on the value that the products offer, not the products themselves or their features.
Ultimate Personal Listening Experience : The Value that AirPods Max Headphones Provide

Therefore, price is not simply the amount of money that you pay to get a product or service. This is the traditional view of price. On the contrary, the contemporary approach to price is the exchange of value between customers and value providers in the form of products or services. Customers’ value includes the monetary price, as well as all the time and effort spent to know about the product, reach it, buy it, use it, and get rid of it. On the other hand, companies and brands value is presented in a unique market offering (product/service) that satisfied customers needs and wants, as explained in our previous session (i.e., the Product).

Pricing in Marketing : Borders and Considerations

As I said in the introduction, pricing decisions are extremely difficult for marketers and businesses. One reason is that the price element in the marketing mix is the only element that brings profit to the company, especially monetary profits. Besides, pricing is a mutual decision that must be taken to ensure the benefits and well-being of the customers and the business. For example, in the case of Apple’s AirPods Max Headphones, the price can’t go low to be $100 or $200 because this will be less than the costs incurred in manufacturing, producing and selling the headphones. Besides, the price can’t go high to $1000 or $1500 because this will be much more than the customers perceived value of the headphones and the price that they attach to this value. In the case of costs, there are plenty of accounting methods to calculate costs. However, the problem is in the customers’ perceived value and deserved price for that value. How can the company know the value that customers perceive and the price they believe is fair? It is the job of understanding customers behavior as explained before in the strategy session. The below figure shows the two limits or borders of prices. Besides, it explains that companies move through this continuum in deciding the prices depending on many factors and conditions that concern the company, market, business, and the external environment. For example, Apple puts high prices to its products because the nature of materials, security features and other unique characteristics of their products are only available at Apple. Competitors can’t copy or replicate such features that make out Apple’s competitive advantage.

Pricing at marketing should be within two limits or borders: costs and customers perceived value, and the decided price depends on various factors and considerations.
Marketing Border and Considerations

Pricing Strategies in Marketing:

The traditional and modern approaches to marketing, as well as the two borders of it, reflect the two dominant pricing strategies as shown in the first below figure. The first strategy is the cost-based strategy, which reflects the traditional approach and the first pricing border. In this case, companies focus on producing a superb product/service without considering whether it fulfills customers needs and wants or whether customers have the will to pay the price that the company sets for its offering. Thus, the company may incur huge costs to produce an amazing product, assuming that customers will be willing to compensate by paying the for the costs and an extra markup that presents the company’s profit margin. After that, the company works hard to convince the customers to buy the product and to justify the price that compensates for the costs.

Pricing at marketing follows either cost-based approach or value-based approach.
Pricing Strategies

Unlike cost-based pricing, value-based pricing depends on customers needs and wants, as well as the customers perception towards the value that the company intends to offer. As a result, the company works hard to get insights on the price the customers are willing to pay for the value of the company’s offerings, depending on customers perceived value of this offering. Consequently, companies decide the costs within the customers perceived price and then control their costs during manufacturing and selling the product. Thus, the price becomes a component that companies think of and decide as a holistic or cumulative procedure, along with the other elements of the marketing mix (product, place and promotion). Definitely, the marketers must work closely with financial and production department to agree on the costs and financing for the market offering (i.e., product/service).

Pricing at Apple : iPhone 12 Pro Case Study

Apple introduced its most recent mobile within its iPhone series, namely the iPhone 12 Pro, last month (Nov 12, 2020). Currently, the minimum retail price (MRP) for the phone is $999, as shown in the below figure. Does this price reflect the costs incurred in producing and selling the phone? If we follow the traditional accounting approach towards costs, we will divide the iPhone 12 Pro’s costs to manufacturing and non-manufacturing costs. Manufacturing costs include direct materials (Bill of Materials or BoM), direct labor and manufacturing overhead. Non-manufacturing costs include selling, general and administrative expenses, as well as other costs like taxes. In our case, the highest cost is in the materials. As shown in the below figure, the Japanese Company (Fomalhaut), in collaboration with the Nikkei Asia (Japan) issued the BoM for the phone, which was $406 only. This amount makes only 40% of the phone’s price.

The bill of materials (BoM) of iPhone 12 Pro is only $460, which is just 40% of its price.
Bill of Materials (BoM) of iPhone 12 Pro is $406 (40% of its Price)

Talking about the direct labor costs, I don’t believe that the direct labor costs form a big share of the phone’s costs because Apple produces this phone (and all its iPhone products) at the factories of Foxconn Taiwanese Company in China. Cheap labor is one of the famous characteristics of Chinese factories, which include Foxconn labor that produces iPhone 12 Pro, as shown in the below figure. Definitely, this lowers the labor cost of production, which lowers the overall production costs. Therefore, I personally argue that the overall costs of iPhone 12 Pro (manufacturing and non-manufacturing) do not exceed two thirds of the phone’s price. That is, I personally estimate the overall costs for one phone to be maximum $600. Therefore, if we take the cost-based pricing approach, we will note that Apple has at least one third profit margin (33.3%) or markup compared to the total costs. However, as I explained before, Apple doesn’t depend on costs when setting the prices. It relies primarily on customer’s experience, which is the value that the products offer. This approach reflects value-based pricing.

Pricing at marketing takes into account the costs, especially labor costs, which is the primary reason for Apple's decision in manufacturing its iPhones in the Chinese factories of Foxconn Taiwanese Company.
Foxconn Taiwanese Company Manufactures iPhones in its China Factories

Pricing in Marketing : Adjustments and Reactions to Competitors

After a year from now, definitely iPhone 12 Pro’s price will not be $1000. It will be much less. Thus, Apple’s prices do change depending on many factors, such as the product’s life cycle; the company’s conditions; customers needs, wants and value perceptions; and other market, business and environmental factors. Not only for Apple, continuous price analysis and adjustments is the norm for pricing in marketing at all companies. An important determinant of price changes is the competitors strategies, including their price changes, as shown in the 1st below figure. For example, Xiaomi Chinese Company, one of the strong and direct competitors of Apple, put a high price for its latest mobile phone (Mi 10T Pro) that the company released in Oct 2020 as shown in the introduction of this post. Charging almost $700 for the phone is considered high compared to Xiaomi’s mission and strategy, as well as the purchase power of the average Chinese consumer. As per the 2nd below figure, Xiaomi strives to make technology available to everybody in the world with honest prices. Despite that, Xiaomi had to partially depart from this mission to face the intense competition of outstanding value and quality from competitors like Apple and its price raise strategies. Thus, as per the 3rd below figure, Xiaomi responded by increasing the quality, features and price of the phone, as well as the customers’ perception towards the phone’s new value to justify the higher price.

Competitors pricing strategies are one of the important determinants of price adjustment strategies.
Reaction to Competitors’ Pricing Strategies
Xiaomi's mission focuses on making technology available worldwide by providing honest prices.
Xiaomi Strives to Provide Honest Prices to Make Technology Available Worldwide
Xiaomi had to practice careful pricing in marketing by responding to Apple's high quality and price (competitor) and manufacturing a high quality and expensive phone (Mi 10T Pro - $698).
Xiaomi Increased the Quality, Price and Customers Perceived Value

Pricing in Marketing – End of Session

Pricing in marketing is a key issue that marketers and companies face continuously whether in launching their products or within their products’ life cycles. Pricing indicates the value exchange, which is not limited to the monetary amount of money paid. Understanding marketing is important for all of us because it helps us evaluate the prices of the goods and service that we intent to buy, as well as take careful choices in pricing any product or service that we intend to provide or sell.

That was our session for today, guys. Thank you so much for being with us. Next English session, we will finish discussing the remaining elements of the marketing mix (i.e., place and promotion) in chapters 12, 13 & 14 in Part 3 of the book. Please support the channel strongly so we can continue our glorious mission. Our production is every Thursday. Please subscribe to the channel at YouTube and activate the notifications bell there. Please stay with us, follow us, participate with us, and widely share the channel and all its electronic contact platforms.

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