Download Chapter 6: Developing Product and Brand Strategy

Chapter 7: Developing
Pricing Strategy
The Marketing Plan Handbook
Fourth Edition
Marian Burk Wood
7-1
Unique Aspects of Pricing
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Pricing directly produces revenues.
Most pricing decisions can be
implemented relatively quickly.
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Value
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Need to research and analyze value.
Consider how the product’s value will be
communicated.
Customers’ perceptions of value and price
sensitivity can be used to deal with
imbalances in supply and demand.
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Weighing Benefits vs. Total
Price
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Different Types of Pricing
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Fixed Pricing: customers in the targeted segment pay
the price set (fixed) by the marketer.
Dynamic Pricing: Prices vary from customer to
customer or situation to situation.
Negotiated Pricing (B2B): Buyer and seller negotiate
the price.
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Price Elasticity
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Price elasticity is the level of demand for a product at
different price points.
Calculation: Dividing the percentage change in unit
sales demanded by the percentage change in price.
“Elastic”: When a small price change significantly
increases or decreases demand.
“Inelastic”: When a price change does not
significantly change the number of units demanded.
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Price Elasticity (cont’d)
Change in Price
Inelastic Demand
Elastic Demand
Small Increase
Demand drops
slightly
Demand drops
significantly
Small Reduction
Demand rises slightly
Demand rises
Significantly
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Factors Impacting Elasticity
Customers are less sensitive to price when:
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It is a relatively small amount of product.
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Comparisons to possible substitutes are not easy.
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Switching costs are involved.
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The product’s quality, status, or another benefit
justifies the price.
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The cost is shared with others.
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Perceive the price as fair.
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Products are bundled.
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Cost-Based Pricing/
Value-Based Pricing
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Cost-based pricing:
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Start with the product and its cost.
Set a price that covers the cost.
Communicate value to customers.
Value-based pricing:
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Research customers’ perceptions of value and the
price they are willing to pay.
Find a way to make the product at a reasonable
cost (target costing) to return a reasonable profit
or achieve other objectives.
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Cost-Based Pricing/
Value-Based Pricing
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Planning Pricing Decisions
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Pricing decisions must be:
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Value-based.
Objectives-driven .
Proactive.
When planning pricing, marketers
must examine:
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Objectives.
External influences.
Internal influences.
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Pricing to Meet the Firm’s
Objectives
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The pricing strategy must be consistent with
the firm’s overall goals and objectives.
Due to market realities, organizations may
have to trade off market share growth with
profitability.
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Samples of Pricing Objectives
Type of Objective
Sample Pricing Objective
Financial
For profitability:
Set prices to achieve gross margin of 40%.
Marketing
For higher market share:
Set prices to achieve a market share increase of
5% within 6 months.
Societal
For philanthropy:
Set prices to raise $10,000 for charity during the
second quarter of the year.
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External Pricing Influences
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Customers.
Competitors.
Channel Members.
Legal, Regulatory and Ethical Concerns.
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Customers
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Consumers
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Perceptions of value, behavior, and attitudes all
affect consumers’ reaction to pricing.
Business Customers
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Globalization has increased range of choices.
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Customers frequently search for the lowest price.
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Emphasis on building relationships, thereby
increasing switching costs.
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Competitors
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By analyzing the pricing strategies of
competing products, a company can get a
better sense of:
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The alternatives available to customers, and
Competitors’ pricing objectives and strategies.
Pricing is often highly visible
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Often exerting downward pressure on profits and
limiting pricing options.
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Channel Members
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Companies must consider the pricing
expectations of their distribution partners.
Impact of the Internet = downward price
pressure due to:
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More efficient transaction capabilities,
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Convenient price comparisons, and

More intense competition – sometimes from
unexpected sources.
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Sample of Consumer Pricing in
the Retail Channel
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Legal and Regulatory Concerns
Companies need to comply with a
variety of pricing laws and
regulations. Some of these include:
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No price collusion.
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No price discrimination.
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No predatory pricing.
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Price limits.
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Ethical Concerns
Some examples of ethical decisions in
pricing:
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Is it ethical to raise prices during an emergency,
when products may be scarce or particularly
valuable?
Should a company set a high price for an
indispensable product, knowing that some customers
will be unable to pay?
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External Pricing Influences
Key external influences on pricing
strategy include:
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Costs and break-even objectives.
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Targeting and positioning strategy.
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Product strategy.
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Other marketing decisions.
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Costs and Break-Even Objectives
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Costs typically establish the theoretical
“floor” of the pricing range.
Break-even point: the sales level at which
revenues cover costs.
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Total, Fixed and Variable Costs
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The total cost consists of both fixed and
variable cost.
Fixed costs: Overhead expenses such as
rent and payroll, which do not vary with
volume.
Variable costs: Expenses such as raw
materials, which do vary with volume.
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Average Cost/Unit
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Equals total costs divided by total
number of units.
Computed at various output levels.
Insight into how the price could be set at
each level of demand to recover total
costs, or earn a targeted level of profit.
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Break-Even Example
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Break-even volume = fixed cost/pricevariable cost.
Example:
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Given:
 Fixed cost = $40,550
 Variable cost = $45 per unit
 Price = $995 per unit
Therefore:
 Breakeven = $40,550/$995 - $45
 Breakeven = $40,550/$950
 Breakeven = 42.6 units (roundup to 43 units)
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Targeting and Positioning
Strategy
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Target Market
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Price–sensitive customers would likely require
lower price points.
Affluent customers would likely tolerate higher
price points.
Positioning
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A product positioned as being a “good value” will
likely require a lower price point,
A product positioned as a luxury good, or as a
status symbol would best be supported by a higher
price point.
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Product Strategy
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Introduction: Decision between skim and penetration
pricing.
Growth: Pricing used to stimulate demand, drive
toward break-even point.
Maturity: Pricing used to defend market share, retain
customers, pursue profitability and expand into
additional channels.
Decline: Pricing can be used to stimulate demand and
“clear out” old products, or to “milk” existing
products for profitability at end of life.
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Skim Pricing
Favorable conditions:
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Considerable differentiation.
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Quality-sensitive customers.
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Sustainable advantage.
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Few competitors.
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Few substitutes.
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Difficult competitor entry.
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Penetration Pricing
More appropriate when business is focused on
building unit volume.
Most likely to occur at the early stages of the
Product Life Cycle.
Favorable conditions:
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No/Limited differentiation.
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Price-sensitive customers.
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No sustainable advantage.
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Many competitors.
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Many substitutes.
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Easy competitor entry.
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Skim and Penetration Pricing
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Pricing for Special Situations
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For survival: Price to cover costs at very
least.
For bankruptcy: Price to liquidate stock and
raise money quickly.
For aggressive growth: Set prices to return
slim or no profit margins in the short run.
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Impact of Other
Marketing Mix Variables
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Channel members, suppliers and logistics
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Each independent business partner has its own
business objectives.
Promotion strategy
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Higher-priced products often promoted differently.
Personal selling: Customers expect to negotiate
prices with salespeople.
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Adapting Prices
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Modifying and fine-tuning prices within an
acceptable range.
Sometimes prompted by changes in
customer behavior.
The chosen adaptation depends on the
company’s:
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Resources and capabilities
Goals and strategic direction
Marketing plan objectives.
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Pricing Adaptations
Some typical pricing adaptations include:
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Discounts.
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Allowances.
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Bundling or Unbundling.
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Product Enhancement.
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Segment Pricing.
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permission of the publisher. Printed in the United States of America.
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Publishing as Prentice Hall
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