Chap 011

CRAVENS PIERCY

8/e McGraw-Hill/Irwin

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

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Chapter Eleven Pricing Strategy and Management

McGraw-Hill/Irwin

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

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PRICING STRATEGY AND MANAGEMENT Strategic Role of Price Analyzing the Pricing Situation Selecting the Pricing Strategy

Determining Specific Prices and Policies

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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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STRATEGIC ROLE OF PRICE 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 T.Nagle, Marketing News, 11/9/98, 4. can.

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Pricing Strategically …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 theMarketing value they have the T. Nagle, News, 11/9/98, 4. potential to create.

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How Price Fits into the Positioning Strategy Target market and objectives

Positioning Strategy Product strategy

Value-Chain strategy

Pricing strategy

Promotion strategy

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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 Marketing Program Consideratio ns

Instrument of Competitio n

Improving Financial Performance

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Pricing Strategy for New and Existing Products Set Pricing Objectives

Analyze the Pricing Situation

Select Pricing Strategy

Determine Specific Prices 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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ANALYZING THE PRICING SITUATION Customer Price Sensitivity Legal and Ethical Constraints

Analyzing the Pricing Situation

Competitors’ Likely Responses

Product Costs

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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 Offerings of Brands A-E

Perceived Value

Superior Value Zone A

D

B E

C Inferior Value Zone

Perceived Price

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Guide to Cost Analysis Determine cost structure

A

B

Analyze cost and volume relationships

Analyze competitive advantage

C

D Estimate the effect of experience on costs

E Determine the extent of control over costs

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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 Market The 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 HewlettPackard 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 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, Dell’s low-cost direct-sales business August 21, 2003, B1 and B7. model.

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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

Competiti on

Demand-Cost Gap

Costs

Legal and Ethical Influences

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How Much Flexibility Exists? Price too high; little or no demand

Range of feasible prices

Price Ceiling



Nature of demand in target market



Business and marketing strategy



Product differentiation



Competitors’ prices



Prices of substitutes



Product costs

Price Floor

Price too low; no profit

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Price Positioning Above Competition

Skim strategy

Neutral strategy (same as competition)

Below Competition

Penetration strategy

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Diplomacy rather than force

Select competitive confrontations

Competitiv e Pricing Issues

Target segments instead of volume

Signaling

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

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Illustrative Price Strategies Active strategy

Lowactive strategy

Highactive strategy

Low relative price

High relative price Lowpassive strategy

Highpassive strategy

Passive strategy

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DETERMINING SPECIFIC PRICES AND POLICIES 

Determining Specific Prices



Policies to Manage Pricing Strategy



Special Pricing Issues

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Pricing in Action

Basis of Determining Specific Prices

Cost

Demand

Competition

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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) Pricing

Channel

• Price Flexibility • Product Life Cycle Pricing • Counterfeit Products