Download pricing strategy

Strategic Marketing
1. Imperatives for Market-Driven Strategy
2. Markets and Competitive Space
3. Strategic Market Segmentation
4. Strategic Customer Relationship Management
5. Capabilities for Learning about Customers and Markets
6. Market Targeting and Strategic Positioning
7. Strategic Relationships
8. Innovation and New Product Strategy
9. Strategic Brand Management
10. Value Chain Strategy
11. Pricing Strategy
12. Promotion, Advertising and Sales Promotion
Strategies
13. Sales Force, Internet, and Direct Marketing Strategies
14. Designing Market-Driven Organizations
15. Marketing Strategy Implementation And Control
CHAPTER 11
PRICING STRATEGY
 Strategic Role of Price
 Analyzing the Pricing Situation
 Selecting the Pricing Strategy
 Determining Specific Prices and Policies
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Pricing Decisions are Creating Major Challenges for
Many Companies
Examples Include:
 Threats to major airlines by discount carriers.
 Pressures on drug companies to reduce prices.
 Intense price competition on supermarket chains
by Wal-Mart and Costco.
 Aggressive discounting by U.S. automobile
producers to retain market share.
 Threats to strong brands by counterfeit products.
11-3
STRATEGIC ROLE OF PRICE
…requires that we put pricing at the beginning of the
process. For example, a multi-part marketing
strategy usually is required in value-based pricing.
Airlines’ complicated service packages with arcane
restrictions, and their multiple channels of
distribution must support pricing that reflects
different values of the service to different segments.
Without such a strategy, airlines would capture a
much smaller portion of the value they have the
potential to create.
T. Nagle, Marketing News, 11/9/98, 4.
11-4
Price in the Positioning Strategy
Target
market and
objectives
Product
strategy
Positioning Strategy
Value-Chain
strategy
Pricing
strategy
Promotion
strategy
11-5
Pricing Situations

New product pricing

Life cycle pricing

Changing positioning strategy

Countering competitive threats
11-6
Various Roles of Pricing
Signal to the
Buyer
Marketing Program
Considerations
Instrument of
Competition
Improving Financial
Performance
11-7
Pricing Strategy for New and Existing Products
Set Pricing
Objectives
Analyze the
Pricing Situation
Select Pricing
Strategy
Determine Specific
Prices and Policies
11-8
Examples of Pricing Objectives

Gain market position

Achieve financial performance

Product positioning

Stimulate demand

Influence competition
11-9
ANALYZING THE PRICING SITUATION
Customer Price
Sensitivity
Pricing
Objectives
Analyzing the
Pricing Situation
Product
Costs
Competitors’ Likely
Responses
11-10
Customer Price Sensitivity
1. How large is the product-market in terms of buying
potential?
2. What are the market segments and what market target
strategy is to be used?
3. How sensitive is demand in the segment(s) to
changes in price?
4. How important are nonprice factors, such as features
and performance?
5. What are the estimated sales at different price levels?
11-11
Buyers’ Perceptions of Value Offerings of Brands A-E
Perceived
Value
Superior Value Zone
D
A
B
E
C
Inferior Value Zone
Perceived Price
11-12
Cost Analysis for Pricing Decisions
• Determine the components
of the cost of the product.
• Estimate how cost varies with
the volume of sales.
• Analyze the cost competitive
advantage of the product.
• Decide how experience in
producing the product affects
costs.
• Estimate how much control
management has over costs.
11-13
Competitor Analysis

Which firms represent the most direct
competition

Competitor’s positioning on a relative price
basis

Competitors’ success with their pricing
strategies

Competitors’ probable responses to
alternative price strategies
11-14
SELECTING THE PRICING STRATEGY

How much flexibility exists?

How to position price relative to
costs?

How visible to make the price of
the product?
11-15
Determinants of Pricing Flexibility
Demand
Competition
Demand-Cost Gap
Pricing
Objectives
Costs
11-16
Determining Feasible Prices
Range of feasible prices
Price too high; little or
no demand
Price Ceiling
Price Floor

Nature of demand in target market

Business and marketing strategy

Product differentiation

Competitors’ prices

Prices of substitutes

Product costs
Price too low; no profit possible
11-17
Above
Competition
Skim strategy
Neutral strategy
(same as competition)
Below
Competition
Penetration strategy
11-18
Diplomacy rather than
force
Select competitive
confrontations
Competitive
Pricing Issues
Target
segments
instead of
volume
Signaling
Source: Thomas T. Nagle, “Price Competition,” Marketing Management, Vol. 2, No. 1, 38-45.
11-19
Illustrative Price Strategies
Active
strategy
Low
relative
price
Lowactive
strategy
Highactive
strategy
Lowpassive
strategy
Highpassive
strategy
High
relative
price
Passive
strategy
11-20
DETERMINING SPECIFIC PRICES AND POLICIES

Selecting Specific Prices

Policies to Manage Pricing Strategy

Special Pricing Issues
11-21
Basis of Determining
Specific Prices
Cost
Demand
Competition
11-22
Establishing Pricing Policy and Structure
Policy
Discounts, allowances, returns, and other
operating guidelines
Pricing Structure
Product mix and line pricing relationships
How individual items in the line are priced
in relation to one another
11-23
Managing Pricing Strategy
1.
The more that the competitors and customers know about your
pricing, the better off you are. In an information age, it is necessary to
be transparent about prices and the value of a firm’s offerings.
2.
In highly competitive markets, the focus should be on those market
segments that provide opportunities to gain competitive advantage.
Such a focus leads to a value-oriented pricing approach.
3.
Pricing decisions should be made within the context of an overall
marketing strategy that is embedded within a business or corporate
strategy.
4.
Successful pricing decisions are profit oriented, not sales volume or
market share oriented.
Source: Adapted from Kent B. Monroe, Pricing, 3rd ed. (Burr Ridge, IL.: McGraw-Hill/Irwin, 2003) 624-6.
11-24
Managing Pricing Strategy
5.
6.
7.
8.
9.
10.
Prices should be set according to customers’ perceptions
of value.
Pricing for new products should start as soon as product
development begins.
The relevant costs for pricing are the incremental avoidable
costs.
A price may be profitable when it provides for incremental
revenues in excess of incremental costs.
A central organizing unit should administer the pricing
function. Generally, it is better to avoid letting salespeople
set price, especially without access to profitability
information and specific training in pricing and revenue
management.
Pricing management should be viewed as a process and
price setting as a daily management activity, not a once-ayear activity.
11-25
Special Pricing Situations
Price Segmentation
Value Chain (Distribution Channel) Pricing
Price Flexibility
Product Life Cycle Pricing
11-26