The 4 P’s of Product
Also known as “the marketing mix”.
Product
The obvious one, clearly the product (or business idea) needs to be right, the idea has to be what people want. It needs to satisfy an unmet need and do it sufficiently well to be of interest to potential customers. And a strong product obviously makes everything else easier. So start with the product, how can you make it as appealing as possible.
There are many different approaches to think about when designing a product, some that you might find helpful are:
Is it aspirational? Will the best people in an industry use this and so everyone else will want to get it so that they can be like them? Products often try to invoke this image by saying things like “professional” on them. “Chef’s knives” or other similarly marked kitchen equipment is a simple example. Racing cars are another, only a handful of people in the world ever drive F1 cars. But the success of an F1 car manufacturer is reflected in improved sales of their road cars.
Is it educational? At perhaps the opposite end of the spectrum to aspirational products, is this a product for beginners? Is this something that helps the first time user or is more forgiving of mistakes? Sometimes this is just seen as a better more user-centric design, other times it can actually put people off as it’s design can be limiting or without as much potential (even if I never reach it).
Is it single-function? Sometimes people prefer products that do only one thing… the assumption is that it must do that one thing very well.
Is it multi-function? For similar but opposite reasons, sometimes people do not like products that do more than one thing… the assumption being that it can’t do all of them well, even if it’s much more useful having a product that do more things.
But even great products can fail if any of the other 3 P’s are wrong…
Place
How will the product be delivered to the market and where is it to be sold?
Do you go direct to consumers and have all the hassle of managing those relationships and communications? Or do you go through conventional retail channels and incur the expense of distributors and wholesalers? Or do you do some combination of the two?
There are many ways to reach customers and they all had advantages and disadvantages, some are even illegal! In several US states it is illegal for car companies (targeting Tesla) to sell direct to consumers. Laws were passed so they have to, by law, use a third party middle man (the classic car salesman). As a result, Tesla don’t sell cars in some states. Rather than go through a middleman, they encourage US customers to cross the state boarder to a place where they can.
Position
Sometimes also called Promotion, position is your communication approach to customers. How do you pitch the offering and how do you present it. Some questions to think about:
Who is the audience and how will they relate to your offering?
Where, when and how can you get your marketing messages across to your target market?
When is the best time to promote? Is there seasonality in the market? Are there any wider environmental issues that suggest or dictate the timing of your market launch or subsequent promotions?
How do your competitors do their promotions? And how does that influence your choice of promotional activity?
Price
Other than developing a good product, pricing is probably the hardest P to figure out. There’s a lot of uncertainty and a lot of different things to consider. The most common starting point is by looking at competitors and adjusting your price higher or lower based on how you feel your offering adds or lacks value by comparison.
Below are a few different ways to consider pricing how to work out your approach:
Price Minus or Cost Plus Analysis
There are two classic ways of working out the correct pricing for products or services and these are still very commonly used today for a number of things. The first is to find the ‘right’ price for the customer, this might be based on the value your offering provides, and then deducting the cost of delivering the offering. Is the difference large enough (or even positive!) to make the idea worthwhile. If not, then how can you increase the price by increasing the value to the customer?
The second method is to work out the cost of product and then add a margin that makes it worthwhile. For a service offering this might be say 20%. So the price the customer pays is the cost plus a 20% profit margin.
Elon Musk claimed the business model idea behind SpaceX was to be the only rocket company that worked on a Price - strategy. All the established (defence) companies that were involved with NASA building rockets always worked on a Cost + model, charging the US government whatever it cost them plus a profit margin. This made them commercially lazy and lacking incentives to innovate on price. SpaceX came along and completely changed the game by being aggressive on how to get prices down… thus was born the idea of reusable rockets.
Another example comes from classic British motoring when the Mini car was released on a Price - approach. The marketing department had worked out the perfect price point to make this car a best seller. The problem was the manufacturing department couldn’t make it that cheaply. So the company actually lost money on every sale.
Lower price is not always best:
When Sara Blakely (of Spanx fame) started out, her first job was as a cold caller, selling fax machines for a small US brand… her competition was a company everyone had heard of Canon. Her comparatively unknown brand was cheaper but no one bought it because they had never heard of them, they trusted the brand they knew. Then she counter-intuitively increased the price above the competitor product and when she would cold call prospective clients they would be stunned that she was selling an unknown make more expensively than the Canon and this would start a conversation, why are you more expensive? What are we missing? Who is this company? And she started getting sales.
“Low price is the last refuge of the marketer with nothing left to say”
- Seth Godin
Premium products encourage customers to ask questions and engage more with the product story. An authentic story and genuine message is important to make the product pitch credible.
“Lowmium” (low cost premium products) is a relatively new phenonium (but the word I’ve just made up because I couldn’t find a nice term for it) is when products that should have a premium price are sold at a low cost. Most often by "‘cutting out the middle man’ and selling direct from factories to customers (often referred to as a “direct to consumer” model). These cheap (supposedly) premium products are often facilitated by something like kickstarter. An authentic and relatable origin story but with a price that encourages customers to take a chance and be a little more forgiving if products are slow to arrive or the packaging isn’t quite the premium experience people have come to expect.
Value Pricing vs Cost Pricing:
Setting a price based on what the product is ‘worth’ not what it cost. Sometimes this is not a problem to the customer… “a horse, a horse, my kingdom for a horse!” but sometimes it can be done unethically. Such as the example where a pharmaceutical drug had it’s price increased by 5,000% overnight purely because the new drug owner knew the customer had no where else to go. But apart from the obvious (and thankfully few) horrible examples like this, value pricing is very common and completely acceptable to the customer.
Apple’s iphone 12 cost around $430 to make, but sells for $1000+, yes I’d love it if it was cheaper, but I’m happy to pay the price because I gain at least $1000 in savings and productivity improvements elsewhere… not needing a nice camera anymore, not needing a laptop, being able to communicate with others faster etc… also I’d like Apple to produce new exciting products so I’m happy they are making profit as I believe they will put this to good use. A dodgy car salesman however I want to squeeze them on price as much as I can because I don’t trust them, it’s a one-off purchase and hopefully I won’t have to deal with them ever again and they don’t seem like nice people so why would I want to give them money at all? Lots of reasons why you might or might not be able to price your product according to value rather than cost.
Michelin Star restaurants are another good example. Food should not cost that much. But the value in the meal prepared in this way is far more to some customers than just the nutrients of the contents.
So each to their own.
A simple way of working out what your value price could be is through comparison of other products or services that compete for a similar thing.
Look at all the competing and alternative products and score them against a list of relevant factors, for a car this might be speed, handling, comfort, etc… and then plot a graph of value against price. Apart from a few outliers you will likely discover it follows a predictable pattern.
Then score your own offering on the same system and see what price you should be charging that would be ‘fair’ compared to the others. Now of course for this price to make sense compared to the other alternatives it relies on humans being rational (which we are not) but it’s certainly a good starting point.
Pricing Rules of Thumb & Things to be Aware of:
Middlemen… For a classic retail product, going through the usual wholesale distribution channels, the price to the customer needs to be at least 5 times the manufacturing cost (with packaging) or there won’t be enough margin in the system to leave you with a profit. Why is this the case? Well each person who handles the product on its way to the customer might double the price. So the factory that makes it might sell it for £20, the wholesaler who buys it off the factory then sells it to the retailer for £40 who in turn finally sells it to the consumer for £80. Now whilst it’s easy to assume you’re being ripped off here as the consumer, each of these people in the chain has increased costs and the likelihood is that none of them make large profit margins. Hence the rise of “direct to consumer” business models.
Price integrity… preserve the brand quality and brand values. Don’t be forced into sales and cheap promotions. Superdry (the fake Japanese British designed brand) was famous for never having sales, they didn’t need to, a relatively small selection, wearable all year round. If you wanted their clothing you had to pay full price. And so their shops were busy all year round, there was never a quite period because you knew a sale was just around the corner.
“Superdry is a British phenomenon who’s growth has been nothing short of miraculous”
But then following the 2008 financial crash the high street took a huge hit and all the clothing shops started doing huge sales, 60%, 70%, 80% off… and Superdry cracked. They did a sale and it shook apart one of their guiding principles and damaged their brand from something special to being just another high street fashion store.
Sale or Return Risk… in the early days, no one knows you and no one wants to take a risk. They’ll always try to pass the risk back to you. In the early days of Spanx, Sara Blakely managed to get an opportunity to sell her product on QVC. They gave her a shot and ordered 5,000 pairs of Spanx. But they would only pay for what they sell… So she has to make 5,000 of them, get them to the QVC warehouse and then if they don’t sell, take them all back. That’s a huge cost and a huge risk.
”Value Signalling” careful that your low price doesn’t signify a poor product or a cheap person. English wines long suffered this problem… wine is for many an occasion purchase. Giving wine as a gift, taking it round to a dinner party or opening a bottle to entertain guests may not signal a positive image if it’s cheap, no matter how good it tastes. When they increased their prices the whole English wine market took off.
Designed for Cost
Once you’ve worked out what price the ‘market can afford’ you’ll probably want to revisit your product to see what you can do to improve your profit margins or adjust the design to provide more or less value. There are some clever ways of designing cost out of a product and a few of them are described for you here:
Platforms:
One base, adjustable model, with thousands of possible variations. VW groups are experts in this approach. Their PQ35 platform costs billions to develop and build, but once they have it they can make an almost infinite number of car varieties from it, at much less cost and in a much faster time. Be warned… it’s a high risk method since so much needs to be paid upfront to cover the building of the initial platform that you need to have deep pockets or be supremely confident the platform has the right long term potential.
Economies of Scale:
The term ‘economies of scale’ means that when you do or make a lot of something you should get better at it, find better ways of doing it and be a more valuable customer to your suppliers. As a result the prices of things often comes down, sometimes by a lot. A product I’m working on at the moment costs £1000 to make 1 of, but £2000 if I get 10 made, £200 each rather than £1000.
The dangerous temptation here for any new product is to think “I’d be stupid not to buy 10 at that price” but when they arrive you immediately spot something wrong and they are all scrapped. So it actually cost me £2000 rather than £1000 to see that.
Modular and Interchangeable Parts:
Riding on the back of economies of scale. If your product can contain standard parts. Such as making every bolt a 40mm M8 size, you only need to order 1 type. It gets easier to manage and assemble and you will hopefully experience an economy of scale benefit with that single part. Repeat that throughout your product and the savings should build up.
Low cost manufacturing (without cutting quality):
Obviously cutting corners or using poor quality material or workmanship will save money, but are there ways of using low cost processes very cleverly for high quality products… In the video below the Glock pistol did just this. Low cost and poor quality pressed metal parts are made to fit the very high tolerance workings of the gun by greasing them with a corrosive compound. Using the gun repeatedly in the early stages makes the parts fit better and thus work better. An ingenuous method of cutting cost without cutting quality or performance as the customer performs a stage of bedding in the parts to work perfectly. The corrosive grease is then replaced with a non-corrosive lubricant (as expected).