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Chapter Eleven

Pricing Strategyand

Management

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Strategic Role of Price

Analyzing the Pricing Situation

Selecting the Pricing Strategy

Determining Specific Prices and Policies

PRICING STRATEGY AND MANAGEMENT

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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.

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Part of the reason that pricing is misused and poorly understood is the common practice of making it the last marketing decision. We think that we must design products, communications plans, and a method of distribution before we have something to price. We then use pricing tactically to capture whatever value we can.T.Nagle, Marketing News, 11/9/98, 4.

STRATEGIC ROLE OF PRICE

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…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.

Pricing Strategically

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How Price Fits into the Positioning Strategy

Positioning StrategyProductstrategy

Targetmarket andobjectives

Value-Chainstrategy

Pricingstrategy

Promotionstrategy

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Pricing Situations

New product pricing

Life cycle pricing Positioning

strategy change Countering

competitive threats

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Role of Price in Positioning Strategy

Signal to the Buyer

Instrument of

Competition

Improving Financial

Performance

Marketing Program

Considerations

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Pricing Strategy for New and Existing

ProductsSet PricingObjectives

Analyze thePricing Situation

Select PricingStrategy

Determine SpecificPrices and Policies

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Examples of Pricing Objectives

Gain market position Achieve financial

performance Product positioning Stimulate demand Influence competition

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Customer Price

Sensitivity

Legal and Ethical

Constraints

Competitors’ Likely

Responses

Analyzing the Pricing Situation

Product Costs

ANALYZING THE PRICING SITUATION

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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?

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Buyers’ Perceptions of Value Offeringsof Brands A-E

PerceivedValue

Perceived Price

Superior Value Zone

D A

C

EB

Inferior Value Zone

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Guide to Cost Analysis

Determine coststructure

A

Analyze cost andvolume relationships

B

Analyze competitiveadvantage

C

Estimate the effectof experience on costs

D

Determine the extentof control over costs

E

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Competitor Analysis

Which firms represent the most direct competition

Competitor’s positioning on a relative price basis

How active is price in their marketing strategies

Competitors’ success with their pricing strategies

Competitors’ probable responses to alternative price strategies

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Pricing Pressures in the Personal

Computer MarketThe personal computer market offers an interesting look at the effects of intense competition. Dell, Inc. continually looks to lower its operating expenses in an effort to pass savings to customers. The result over time has enabled Dell to profitably grow at a multiple of the industry, which has had a negative effect on companies such as Hewlett-Packard Co. The pricing pressure on rivals is one of the reasons that led to the merger between Compaq Computer and H-P. The aggressive price competition resulted in H-P’s PC unit reporting a loss in 3rd Quarter 2003. A major competitive hurdle for H-P is Dell’s low-cost direct-sales business model.Sources: “A Nasty Surprise from HP,” Business Week, September 1, 2003; Gary McWilliams and Pui-Wing Tam, “Dell Price Cuts Put a Squeeze on Rival H-P,” The Wall Street Journal, August 21, 2003, B1 and B7.

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Legal and Ethical Considerations

What are the legal and

ethical factors that may

affect the choice of a

price strategy?

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SELECTING THE PRICING STRATEGY

How much flexibility exists?

How to position price relative to costs?

How visible to make the price of the product?

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Determinants of Pricing Flexibility

Demand

Costs

Demand-Cost Gap

Competition

Legal and Ethical Influences

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Price too high; little or no

demand

Price Floor

Price Ceiling

Nature of demand in target market

Business and marketing strategy

Product differentiation Competitors’ prices Prices of substitutes Product costsRa

nge

of fe

asib

le p

rices

Price too low; no profit possible

How Much Flexibility Exists?

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AboveCompetition

BelowCompetition

Skim strategy

Neutral strategy(same as competition)

Penetration strategy

Price Positioning

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Diplomacy rather than force

Select competitive

confrontations

Signaling

Competitive Pricing

Issues

Target segments instead of

volume

Source: Thomas T. Nagle, “Price Competition,” Marketing Management, Vol. 2, No. 1, 38-45.

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Low-active

strategy

High-active

strategy

Low-passivestrategy

High-passivestrategy

Activestrategy

Passivestrategy

Highrelativeprice

Lowrelativeprice

Illustrative Price Strategies

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DETERMINING SPECIFIC PRICES

AND POLICIES

Determining Specific Prices

Policies to Manage Pricing Strategy

Special Pricing Issues

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Basis of DeterminingSpecific Prices

Cost CompetitionDemand

Pricing in Action

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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

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Special Pricing Situations

Price Segmentation

Value Chain (Distribution) Channel Pricing

Price Flexibility

Product Life Cycle Pricing

Counterfeit Products