Adam Davidson, in a September 8th article in the New York Times, writes about the cost of attending college. In doing so, he makes a distinction between select private schools, public schools, and for-profit schools. He points out that each operates in their own competitive sphere and prices their offerings accordingly.
This is one example of the difference in pricing facing both established vendors and someone trying to break into a market or increase market share. Numerous factors are involved with reaching and defining a final price point regardless of industry or service; detailed below are a few key ones.
The Market
As shown in the Davidson article, the market often is composed of many sub-markets. A vendor must determine which is his target market and gain as much information about it as possible, i.e., emerging, mature, shrinking, number and size of competitors, distinctive competency of each vendor’s product/service, role of the product/service, etc.
How the Market is Serves
The path from the vendor to the end user varies. It may be direct, it may be though a one-step distribution or multiple distribution steps. Emerging today is a combination of direct and channel with on-line, which in turn can be both direct and through a third party (Amazon). There needs to be enough margin built into the final end user price point to accommodate the chosen channel(s) of distribution.
Distinctive Competence
If a vendor’s product/service is truly different, a truly disruptive technology, that can be shown to save time and money, as well as fulfill some of Maslow’s needs2, then computing a selling price can be done through focus groups by asking them how much they would pay.
Unfortunately, very few products fit into this category. Most products are incremental steps ahead of an established competitor. Others are just as good or slightly inferior, but the vendor has discovered that the dominant supplier has created a price umbrella, or the vendor has the ability to supply it at a lower cost, both of which generate margin dollars for the follow-on vendor.
Other vendors offer products in order to fill out a product line, assuming that by offering a “me-too” product they will get additional revenue and protect their key products.
The perceived “value add” or distinctive competence that a vendor provides, when viewed from the buyer’s point of view, and in relation to the competition, helps determine the selling price.
Returning to Davidson’s article, which BTW is an interesting read for anyone following the cost of higher education in America, he notes that the select private schools use pricing both as a way to convey image and brand, as well as to show how much student aid they are offering, which, of course, are marketing tactics. He goes on to say that the actual cost of education at these schools is significantly higher than the cost paid by the students.3 In the case of the select schools, the buyer is willing to pay the established price to obtain the perceived “value add.”
One of the worst ways to price a product or service is to build up the selling price based on cost, as there may always be someone who is willing to take a lower margin or has access to lower costs. Unfortunately, public or state schools generally operate in this fashion, as they are driven by state charter or mandate to provide low-cost education to residents of that state. Graduating high school students, recognizing that there may be a potential bargain in some state schools, push to get into U Cal – Berkeley, Univ. of Va, Univ. of Vt and other similar schools.
For the prestigious public schools, demand is throttled by giving admission preference to in-state students and by charging out-of-state students a premium, illustrating that outside forces are helping set the selling price.
The for-profit schools charges what the market will pay for their offering. Davidson, among others, notes that many of these for-profit schools take advantage of those wishing to further themselves, by providing false claims of jobs and/or certifications. Since a large percentage of the tuition charged by these for-profit schools is paid by student loans, those who feel they have been cheated or for whom the school was not appropriate to have defaulted on their loans.
Bottom Line
The role of a Marketing Manager, charged with the responsibility of a product/service, is to balance the classic 4 P’s (Product, Place, Promotion, Price) along with a 5th P, (Profit). Understanding where a product fits vs. competition in filling the needs of the target market is part of this balancing. Defining the price point, which is part of the product positioning, helps drive how the product/service is promoted to the market, and the resulting margin and profit.
This applies to all product and services whether they are educational diplomas, tires, pharmaceuticals or canned peaches.
Once the position and price point are defined, the next step is to have a reaction plan for when your chief competitor either raises or lowers his price.
What do you think U Mass would do if Harvard cut its tuition in half?
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