The Importance of Price in the 4 P’s of the Marketing Mix

Price is one important part of every business’s effort to convey the value of what it offers for sale, there areother critical components of that effort. Collectively, these components are known as the “4 P’s” of the marketing mix:

P roduct: The product or service delivered to the buyer

P romotion: The means of communication between buyer and seller

P lace: The location or means of delivering the product or service to be sold

P rice: What is given up in exchange for the product or service

 

Despite some criticism that the 4 P’s are overly simplistic and that they may apply better to the exchange of products than to services, the 4 P’s do address buyer-related questions of great importance:

P roduct: What is the product or service offered?

P romotion: How will the seller’s value proposition be communicated?

P lace: If accepted, where will the value exchange take place?

P rice: What will be the fi ancial terms of the exchange?

 

Those managers who believe they are not free to charge what they wish question whether sellers do indeed have the freedom to set their own prices. For example, some managers believe that, to a large degree, the laws of supply and demand will dictate a seller’s price. Alternatively, a good number of hospitality professionals fi rmly believe that it is the

costs incurred by a seller in producing their products and services that must dictate the prices to be charged.

Both observations seem reasonable, but neither observation is valid. Actually, in the hospitality industry, RMs must understand the two alternative observations that are valid:

1. Supply and demand should not be a major determinate of price.

2. Costs should not be allowed to be a major determinate of price.

Despite their truth, these two observations are likely to be viewed by some with initial skepticism. Because these two statements may appear to be counterintuitive, especially to those who have studied economics and accounting, it is important that RMs understand them well. When the reasons these two concepts cannot be allowed to dictate a seller’s price have been explained, it will then be possible to consider those important factors that should in fact affect the determination of selling prices.

 

The Role of Supply and Demand in Pricing

Economists and others who study how people spend their money have consistently observed several interesting phenomena related to the value buyers place on a seller’s goods, as well as the prices they are willing to pay for them. Those who have studied introductory economics are likely familiar with two of these time-tested buyer/ seller realities that have come to be known as the laws of supply and demand.

 

Supply (law of): The higher the demand for product, the more of it will be produced by sellers.

Demand (law of): The higher the price of a product, the less of it will be wanted by buyers.

 

These two age-old truths or laws were fi rst combined graphically in the late 1800s by Alfred Marshall, a Cambridge University economics professor. His visual depiction of supply (how much of a product is available) and the level of buyer interest in purchasing it looked somewhat like a pair of scissors, with oneblade (S) representing the available supply of a product and theother blade (D) representing buyer demand for it.

Marshall was most interested in the point at which the twoscissor blades would naturally intersect. It was at this natural

intersection that Marshall felt the optimum price of a product (P o)on the price (P) line would match the optimum quantity suppliedof it (Q o) on the quantity (Q) line. To better understand thesignifi cance of Marshall’s natural price (which has now come to be better known as the equilibrium price), consider that if the price of a product is lower than the equilibrium price (represented by shaded area A), demand for the product, at that price, would exceed its supply, and a shortage would soon exist.

Equilibrium price: The point at which the amount of a product supplied and the amount of it demanded are in balance.

Conversely, if the price of a product is higher than the equilibrium price (represented by area B), demand for the product, at that price, would be less than the supply of it and a surplus would soon exist.

It is extremely unlikely that the average RM in the hospitality industry will create a supply and demand curve to actually

determine the specifi c prices they will charge. This is true for two important reasons that RMs must understand:

1. The supply of a product is fairly easy to measure; the demand for hospitality products is not. The number

of seats in a restaurant, hotel rooms in a city, or rental cars available at an airport can be readily counted. Knowing the supply of a product in a market is an important concept. Knowing the amount of available supply can bevery helpful in evaluating the effectiveness of an RM’s pricing strategies. An accurate measurement of demand for hospitality

products, however, would require the consideration of three separate factors affecting buyers:

_ Desire

_ Ability to pay

_ Willingness to pay

2. An equilibrium price does not establish the value of a product. Only buyers can do that. RMs know that the price buyers are willing to pay for a product is subjective and constantly changing.

Finally, when assessing the supply of, and demand for, hospitality products RMs should be careful not to assume that “greater scarcity equals greater value” and thus increased selling prices. That may be true for ancient sculptures and many fine wines, but if it were universally true, the pictures you drew in third grade would now be worth tremendous sums. They were, after all, certainly one-of-a kind and are now scarce.