Changing trends of marketing: From Price Communication to Value Communication
Posted in Marketing & Strategy Articles, Total Reads: 1872
, Published on 03 September 2014
This article is the 3rd Prize Winner in the Article Contest August 2014
Marketing has always been an evolving subject and what makes it is the changing nature of products, customers and even the environment. Evolved from simple trade through sales marketing, today marketing has become one of the most evolved and researched subject. Marketing of a company can make or break it and hence it is important for a company to be updated with its marketing toolkit.
Of the 4Ps in marketing (viz. product, price, position and place) which a marketing campaign should effectively convey, we believe that now the focus of campaign should be changed from price to value and hence it can be 3P and 1V of marketing.
This is because there is always a fundamental flaw with marketing based on price which can be understood as below:
While determining the price of a product, one always uses the cost of the product as a benchmark and that sounds logical considering the fact that if your price is below your cost you will not be able to make profits. However let us extend this concept bit further. All of us are well aware that any cost consists of two parts viz. fixed cost and the variable cost, now cost per unit is fixed cost component plus the variable cost component. However the fixed cost per unit would depend upon the number of units sold which in turn depends upon demand of product, however if we plot price against demand, at each price level we have a certain demand which exists, in effect pricing a product at first place and communicating the price has landed us in a vicious circle.
This can be summarized with the help of the below diagram:
So the question drills down to: How to break this loop? In other words how to determine the price of the product (which in turn will lead to determination of other parts of the loop). The answer is through value determination! Value is defined as nothing but a measure of relative satisfaction which the customer derives from a product. Hence, pricing should be done considering the value of product in mind.
So the next question arises is: how to determine value?
The determination of value is not an easy task and what makes it more difficult is that it depends not only on our company offering but also on presence of substitutes with which a customer can compare our product to. To add more to the complexity of the problem it is worth to mention here that different types of customer derives different levels of satisfaction from same product and hence, again the segmentation which should be done again should be based on how relative satisfaction (“value”) the customers derive from a given offering. To explain with an example: consider two people with different style of living say a rich vs a poor man, if both are given a loaf of bread to eat, the amount of satisfaction derived from eating the loaf of bread may be totally different for both of them, primarily because the rich man may have access to better variety of food and may also not be feeling hungry while the poor man who might not have got anything to eat for days would be happy to find just a loaf of bread!
Hence, while doing segmentation based on value, it is quite intuitive that if two customers derive similar relative satisfaction they could be put into one segment. It is important to understand here that the satisfaction of customer is measured with the help of proxy variables and questionnaire (a whole lot of statistical toolkit which one learns during his course on Business Research Methods) which only gives a ‘best guess’ to customer satisfaction and not an exact value and it is this aspect of marketing which makes it interesting!
The value based segmentation also helps us to decide on pricing policy about a product in a much different way, it seems logical that it is easy to price more to people who derive more satisfaction (in other words value a product more) out of a given product than those who do not. This is because since they are able to value something more, there tendency to move towards substitute would be less. However how high a price one could charge would again be determined by the price of the substitute available and demand supply economics.
In this way, a focus on value has shifted the efforts of marketing from communicating the price to communicating the value. But this does not discount the fact that the price charged could be less as compared to cost, that should not happen till the organization has a different focus other than profit making (like capturing market share or driving away competition). It just helps one to understand and improve one’s thinking about pricing mechanics which is a wide source of debate between different functional levels of an organization viz. Finance and marketing and thereby providing a solution which could cater to needs of both the departments.
This article has been authored by Hardik Shah and Nikhil Singhal from IIM Shillong