How can marketing help lower prices

One of the most complicated and most often misunderstood parts of economy is the concept of value. One of the big problems is the large number of different types of values that seem to exist, such as exchange value, surplus value, and use value.

But then remember that it took economists more than a hundred years to figure it out: something is worth whatever you think it is worth. This statement needs some explanation. Take as an example two companies that are thinking of buying a new copying machine.

One company does not think they will use a copying machine that much, but the other knows it will copy a lot of papers. This second company will be prepared to pay more for a copying machine than the first one. They find a greater utility in the object. The companies also have a choice of models. The first company knows that many of the papers will need to be copied on both sides. The second company knows that very few of the papers it copies will need double- sided copying.

Of course, the second company will not pay much more for this feature, while the first company will. In this example, we see that a buyer will be prepared to pay more for the increase in utility compared to alternative products.

So we can summarize this with the statement that the economic value of an item is set by the increase in utility for customers. This increase in utility is called marginal utility, and this is all known as the marginal theory of value. But how does the seller value things? Well, in pretty much the same way. Of course, most sellers today do not intend to use the object he sells himself.

The utility for the seller is not as an object of usage, but as a source of income. And here again it is marginal utility that comes in. For what price can you sell the object?

If you put in some more work, can you get a higher price? Here we also get into the utility for resellers. Somebody who deals in trading will look at an object, and the utility for him is to be able to sell it again. How much work will it take, and what margins are possible? Not only do the two different buyers have a different value on an object, the salesman puts his value on it, and the original manufacturer may have put yet another value on it.

The value depends on the person who does the valuation—it is subjective. Relative value in the marketing context is attractiveness measured in terms of utility of one product relative to another. In term of pricing, prices of valued items undergo questionable fluctuations. For example, even though housing provides the same utility to the individual over time, and supply and demand are relatively constant and stable, the relative price of housing fluctuates, even more so than with stocks, oil, and gold.

This price volatility appears to occur in cycles and is caused by a myriad of factors. Figure 1 is an attempt to overlay the prices of housing, stocks, oil, and gold by normalizing the price streams.

Normalizing is achieved by applying a discounting formula which converts a price to the price it would be at a certain date, given a certain discount rate. This would normally be used to cancel the effects of inflation, in which case the inflation rate would be used.

Value or Price : This chart shows that commonly valued items of constant utility tend to vary in price over time. Privacy Policy. You can also combine pricing with other elements to make your product or service look attractive. For example, you can price higher and make sure you offer very good customer service or add exclusive features to the product.

These are forms of value addition, and they justify the high price that you are charging for your product or service. Assuming your costs remain the same, lowering prices to increase sales also lowers the profit margin you make on each unit that you sell. On the other hand, much of the time lower prices will lead to higher sales volumes , which may make up for the lower profit margin. Sometimes, raising the price of your product or service will lead to higher profit margins but will lower your sales volumes.

A good practice is to test the elasticity of demand for your products in different regions before you alter prices. You can do this by carrying surveys or by testing the new prices on a new target market. This will tell you what price is just right for your product or service.

The price you set for your products can have a lot of impact on how well you compete against other businesses in the industry. It can also affect how other businesses in the industry are able to compete with you. In that case, your sales volumes are so large and your costs so low that you can probably survive lower profit margins, which makes it easy for you to lower prices and still stay in the game. If your competitors are significantly smaller than you, this will make it very hard for them to compete as they will be unable to make a profit.

Such tactics will also raise the barriers to entry in that market, making startup costs increase since new companies will have to lower their prices despite having higher overheads they do not enjoy the same economies of scale as you.

You can see here that it is quite possible for a large company to unfairly use this strategy, lowering prices to eliminate competition, only to raise the prices back when the competition is gone.

This is known as predatory pricing and has legal consequences if it is viewed as a breach of antitrust laws. Businesses today rarely go to such extremes. You can complicate the picture by changing both value and price simultaneously.

For instance, a grocer could raise prices on Cokes but include a free insulated can holder with every purchase of two or more cases. Changing value and price simultaneously may confuse customers, so it's a good idea to figure out which element is most important-the value of the can holder or the extra prices on Cokes, to continue the example-and stress that in promoting the offering to the marketplace.

Many businesses get the best long-term results from increasing price and value. Others find that they can cut their own costs while increasing value and thereby offer an almost irresistible proposition to customers-a powerful recipe for growth, indeed. But the key lesson about value and price is that these elements can be adjusted to move demand and increase sales without changing what it actually costs you to make a product.

Careful attention to what happens when you move pricing and value points can show you the way to pain-free, profitable growth. Excerpted from Growing Your Business. Max Palmer. Sean Sechler. Daniel Scott. Howie Jones. Entrepreneur Store. Skip to content Profile Avatar. Subscribe to Entrepreneur. Magazine Subscriptions. Opinions expressed by Entrepreneur contributors are their own.

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