Why Marketing Should Own the Price-Setting Function: A Strategic Shift
Price is one of the most critical elements of the marketing mix, alongside product, place, and promotion. It plays a significant role in shaping customer perceptions and driving purchase decisions. Traditionally, price setting has been the domain of finance and operations departments, who base their decisions on costs, margins, and market conditions. However, in leading companies another school of thought suggests a shift, advocating for the marketing department to take ownership of this function.
Understanding the Marketing Perspective
The marketing department has a consumer-focused outlook, developed through continuous market research, customer interaction, and trend analysis. They are adept at understanding consumer needs, wants, and perceptions, which are vital factors in setting the right price. The aim is not just to cover costs and generate profits, but also to deliver value to customers, keeping the brand competitive and attractive in the market.
Incorporating Customer Value Perception
Marketing departments are acutely aware of customer value perception, which plays a crucial role in price setting. A product or service's price often reflects its perceived value. Price too low, and customers may question the quality; price too high, and it becomes inaccessible, thereby losing potential market share.
Marketing, with its finger on the pulse of the customer, can balance these factors more effectively. It can determine a price point that maximizes profit, not by merely covering costs, but by aligning with the perceived value in the minds of customers. Therefore, integrating pricing into the marketing function can ensure that pricing strategies are customer-oriented, which can enhance satisfaction and loyalty.
Aligning Price with Brand Positioning
Brand positioning is a key marketing responsibility. The price of a product or service significantly impacts how a brand is perceived by customers. Luxury brands, for instance, use high prices as a tool to enhance their exclusive image, whereas budget brands use low prices to attract price-conscious consumers.
If the marketing department controls the price-setting function, it can ensure that prices align perfectly with brand positioning. This seamless alignment can help maintain brand consistency, drive targeted marketing campaigns, and attract the right customer segments.
Leveraging Market Segmentation
Marketing teams regularly engage in market segmentation—dividing the market into distinct groups of customers based on various factors like demographics, behavior, and needs. Segmentation enables more targeted and effective marketing.
When the marketing team takes charge of price setting, they can leverage these segments to create differential pricing strategies. Such strategies can cater to different customer groups, maximizing market penetration and profitability. This approach also allows for effective price discrimination, which can further boost revenue.
Reacting Swiftly to Market Changes
The marketing department is often the first to identify shifts in market trends, thanks to its close relationship with customers and continuous market monitoring. If pricing is under their jurisdiction, they can quickly adjust prices in response to market changes.
Reacting swiftly to competitor price changes, fluctuations in demand, or shifts in consumer behavior can be a competitive advantage. It can ensure that the brand remains competitive and appealing to customers, enhancing market share and profitability.
Enhancing Promotional Strategies
Promotional strategies and pricing are closely interlinked. Sales, discounts, and special offers are all pricing decisions that can drive customer behavior. Marketing teams, with their deep understanding of customer psychology, can use price as a powerful tool to drive promotional strategies.
When marketing controls pricing, they can design and implement promotional tactics like penetration pricing, price skimming, or psychological pricing, enhancing the effectiveness of promotional campaigns.
Driving Revenue Management
Revenue management—maximizing profit by managing price, demand, and capacity—has become a significant strategic tool, especially in industries like airlines and hotels. It involves dynamic pricing, where prices fluctuate based on demand, time, and customer segment.
Marketing, with its understanding of market dynamics and customer behavior, is ideally suited to drive revenue management. If they own the price-setting function, they can leverage dynamic pricing effectively, optimizing revenue and profitability.
Price as a Communication Tool
Price communicates value. It signals to consumers the quality, exclusivity, or affordability of a product or service. If marketing takes charge of pricing, they can use price as a communication tool, subtly reinforcing brand messaging and value proposition.
Moreover, marketing can manage the price-value relationship, ensuring that any changes in price are communicated effectively to customers, thereby managing their expectations and perceptions.
Encouraging Cross-Functional Collaboration
While advocating for marketing to own the price-setting function, it is crucial to remember the importance of cross-functional collaboration. Although marketing may lead the charge, inputs from revenue growth, finance, operations, and sales are invaluable. These departments provide insights into cost structures, operational capabilities, and sales forecasts, which are essential for effective pricing.
Given the strategic importance of price in influencing customer behavior and driving business success, it is becoming increasingly beneficial for marketing to own the price-setting function. Their understanding of customer value perception, brand positioning, market segmentation, and market trends equips them to set prices that not only cover costs and generate profits, but also deliver value to customers, enhancing satisfaction and loyalty.
However, this shift requires a cultural change in organizations, where traditionally, pricing has been viewed as a financial or operational function. Businesses need to recognize and embrace the strategic role of pricing and the benefits of integrating it into the marketing function.
While marketing can take the lead in setting prices, effective pricing requires a collaborative approach, with inputs from various departments. This collaborative approach can ensure that pricing decisions are not only customer-oriented but also align with the business's operational capabilities and financial objectives.
The integration of the price-setting function into marketing represents a strategic shift that can drive customer-centricity, enhance brand positioning, and boost profitability. As businesses operate in increasingly competitive and dynamic markets, such a shift may not just be beneficial—it may be essential.