12.2 The Five Critical Cs of Pricing

Cost

What should you charge for a product or service? As you’ve probably discovered by now, pricing is not something that marketers approach without a lot of research. Using the five critical Cs of pricing can help to determine the best price—one that provides optimal value to the buyer and profit maximization for the company. Figure 12.3 illustrates the five critical Cs to consider when pricing: cost, customers, channels of distribution, competition, and compatibility.

Figure 12.3 The Five Critical Cs of Pricing (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

Cost is the most obvious element of the pricing decisions. As we’ve already discussed, you must know the cost of doing business—both fixed and variable—before you can set an adequate price. However, cost alone cannot be the only basis on which a pricing decision made. After all, buyers never know (and don’t care) how much it costs a business to produce its goods and services.

Customers

Customers are another key element to pricing decisions, as you’ve learned already in this chapter. Marketers must determine not only what customers expect a product or service to be priced at but also what those customers are willing to pay. Toyota manufactures cars and markets them toward the middle class. Through research, it has determined what its target market is willing and able to pay for a particular vehicle. Alternatively, Lexus, which is marketed as more of a luxury car, has a higher price point and is marketed to a different market than that of Toyota.

Channels of Distribution

Many products are sold through channels of distribution—intermediaries who move products from manufacturer to end users. Intermediaries affect the prices of products because they also need to maximize their profits. Therefore, pricing decisions must consider profits, expenses, and the value they are adding to the product or service.

IKEA began as a mail-order catalog in 1953 in Älmhult, Sweden. Today, it is a global home furnishings brand that focuses on sustainability.¹⁵ Its distribution channel consists of the manufacturer, dealer, wholesaler, and retailer. Each of these channel members are in business to make a profit. Therefore, the price strategy that IKEA utilizes must help to ensure that each member is financially satisfied while making a profit itself and keeping the price that is of value to the end user. If any of the channel members (or the end user) does not find value in the price set by IKEA, the entire channel becomes weak and unsustainable.

Competition

Every company and product faces competition. Even the most unique products are competing for buyer dollars. Buyers’ perception of one product in comparison to that of alternatives has an important impact on pricing decisions. Gazelle Bikes is a top-tier manufacturer of bicycles. The bikes offered by Gazelle have a starting price point of $1,499.¹⁶ One of Gazelle’s competitors, Giant, has a starting price point of $1,720.¹⁷ For bicycle enthusiasts, these price points are important when comparing one brand with another; an enthusiast who comes across a new brand of bicycles with a starting price of just $200 would not position it with Gazelle and Giant bicycles.

Compatibility

Panama City Beach has been one of the most popular spring break destinations of college students for decades. In fact, it is considered the “Spring Break Capital of the World.”¹⁸ It is well-known for its late-night parties, concerts, and celebrity sightings. Hotels and clubs along the beach of Panama City drive their marketing efforts toward this segment of the market: college-aged spring break–goers. The prices they set for the weeks of spring break are compatible with both this segment of the market’s ability to pay and the businesses’ profitability. Conversely, hotels in areas of Florida that are more family-friendly set prices that are considered a value for families and promote the hotels toward families rather than college-aged partygoers.

Pricing decisions are not made in a vacuum. When marketers set a price for a good or service, it must be consistent with the other marketing objectives. Imagine if McDonald’s starting offering a $20.00 ribeye steak. This decision would be inconsistent with the marketing of the company’s low-priced fast food, would be confusing to customers, and thus would not be successful.¹⁹