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Author: James Howard

This lesson explains the Price "P" of the 4 P's.

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Hello there, and welcome to this tutorial on price. As always with these tutorials, please feel free to fast forward, pause, or rewind as many times as you need in order to get the most out of the time that you'll spend here.

So let me ask a question right off the bat-- what is the right price for a product? Now, we know price is important-- too high, and people won't buy it, too low, and I don't make any money. So what is it about the marketing mix and price where we can help determine what the right price is?

Well, during this lesson, we're going to be looking at price as it relates to the marketing mix. We're also going to be looking at skimming or penetration pricing and the difference between those two. Lastly, we're going to be looking at pricing by product classification. How does the classification of a product affect price? The key terms for this lesson are going to be skimming pricing and penetration pricing.

So pricing in the mix, in the marketing mix. As we know, pricing is part of the four P's, the four P's being price, promotion, place, and product. And pricing in this instance is merely determining what the retail price is, that price that I'm going to sell it to the final consumer for. So why would something have a higher price than other goods like it?

Well, some examples may be sourcing expenses, things like the cost it takes to market, or the R&D that went into it, or the workers, for instance. A great example of this is a Chevrolet Volt. You may think, hey, that's $41,000-- man, that's an awful lot of money for a Chevrolet. Well, what Chevrolet has had to do, even though they're not making as much money as they'd like selling each car, is they're having to pay for the R&D that it took to develop that car, which is one of the reasons why you're seeing the price really high early and slowly coming down over time as more cars are sold. Also, the cost of manufacturing may be high. And other non-cost things, like brand positioning-- putting it in the right spot in the market may cost more than other products.

Well, what happens with a lower price item? Why would something be lower priced than other things in its category or its spot in the market? Well, one thing could be the quantity purchased. You see, manufacturers and wholesalers will sell large bulk items to clear stock off of their shelves, and they'll offer this at a lower price. When the retail stores, like the shop here, buy that product at a lower price, they're able to sell it to the consumer for a lower price and still maintain their margin or their markup on the product.

Sourcing could be an issue. I find, hey, these people are able to give me a much better price, and therefore, I as a retailer am able to sell it at a cheaper price than my old wholesaler. Other expenses like worker salary, or rent, or utilities, or taxes can play a big issue, because the retail store has to cover its expenses. Also, cost of manufacturing may be high, and the cost of non-production-- choices like, again, brand positioning may not be as high. It may have a very good and efficient way of manufacturing this. That way, I'm able to offer this at a lower price and offer it to the consumer at a lower price at the very end.

Why might something be on par, or on average with everything else on the market in that particular sector? What reason is perfect competition? If you remember back to perfect competition, that's when you have a lot of competition with very, very similar, or almost identical products. One of the things about perfect competition is the other competition that you're dealing with reacts to any price change you do very, very quickly. So even if you lower your price or raise your price a little bit, the other competitors will react to that in order to get an advantage for themselves against what your pricing scheme is.

So what's skimming pricing? We mentioned this in the overview. Skimming pricing is setting up a steep introductory price with the intent of generating consumer interest. If you remember, again, the Chevrolet Volt, that was a pretty steep introductory price. And typically, what you'll see with this are early adopters, people who were really excited by the technology will be the people who will want to buy it, and price isn't so much of an option. Also, setting a high price in this instance sets a sort of exclusivity to the product. And because it's exclusive, and because it's new and it's neat, this will help to generate consumer interest in that product down the road.

Now, penetration pricing, that's exactly the opposite. That's setting a low price so the organization can enter the market and gain traction within the market. So here you're looking at on par pricing or even lower pricing than the other products within that market sector and the competition. Now, new products can be kind of a challenge. Which one of these do I choose? Do I try to skim price it and generate interest later down the road and not sell as many upfront, or do I try to penetrate early on?

I mentioned the Chevrolet Volt earlier, and that was an example of skimming pricing early on, primarily because they had to make up for their R&D costs. When Toyota introduced the Prius, they did exactly the opposite. They purposely lost money on the car in order to push the car out to the consumer, getting more people actually behind the wheel and generating marketing traction that way.

Next, we're going to look at pricing and how it relates to product classification. Now, if you remember, convenience goods-- those things that we don't buy with much thought-- here, pricing is going to vary mainly by place and cost of living and what that particular neighborhood or that particular small market is willing to pay for that. So it will still be on par with everything else, but it will vary depending on where it is sold. Shopping goods, on the other hand, we have to watch out for substitution pricing. How is my competition pricing their product? And if the consumer can get a reasonable substitute for my product somewhere else at a better price, they're going to go there. So I have to watch for how my competition is pricing their product and react accordingly.

Lastly, we're going to look at specialty goods. Now, specialty goods brand positioning pricing, and these things are highly varied. If you remember specialty goods, price isn't as big an issue with these consumers. It's more about where the brand positioned. So I might offer a larger price in order to get it into this rarefied air of a luxury good or something highly desirable in order to generate interest there. And this is highly varied depending on the market that you're in.

So what did we cover during this lesson? We looked at price in the marketing mix, its place, and the four P's. We also looked at skimming or penetration pricing, and how that affects a product as a company is trying to introduce it into the market. And lastly, we looked at pricing by product classification. What are water pricing variables as far as convenience goods, shopping goods, or specialty goods?

As always, folks, I hope you had a good time here. I know I did. And you guys have a great day.

Terms to Know
Penetration Pricing

Setting a low price so the organization can enter the market and gain traction within the market.

Skimming Pricing

Setting a steep introductory price with the intent of generating consumer interest.