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.

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

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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.

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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 valuebased 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.

How Price Fits into the Positioning Strategy

Target market and objectives

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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

Role of Price in Positioning Strategy

Signal to the Buyer Marketing Program Considerations Instrument of Competition

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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
demand competition

Stimulate Influence

ANALYZING THE PRICING SITUATION

Customer Price Sensitivity

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Legal and Ethical Constraints

Analyzing the Pricing Situation

Product Costs

Competitors Likely Responses

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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 D A B E

C Inferior Value Zone

Perceived Price

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Guide to Cost Analysis

A
Determine cost structure Analyze cost and volume relationships

C
Analyze competitive advantage

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 Competitors 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

Pricing Pressures in the Personal Computer Market

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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 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-Ps PC unit reporting a loss in 3rd Quarter 2003. A major competitive hurdle for H-P is Dells 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?

Determinants of Pricing Flexibility

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Demand

Competition

Demand-Cost Gap

Legal and Ethical Influences

Costs

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How Much Flexibility Exists?

Price too high; little or no demand

Price Ceiling

Range of feasible prices

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 possible

Price Positioning
Above Competition

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Skim strategy

Neutral strategy (same as competition)

Below Competition

Penetration strategy

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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.

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Illustrative Price Strategies

Active strategy

Lowactive strategy

Highactive strategy

Low relative price

Lowpassive strategy Highpassive strategy

High relative price

Passive strategy

DETERMINING SPECIFIC PRICES AND POLICIES

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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

Establishing Pricing Policy and Structure

Policy

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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

Special Pricing Situations

Price Segmentation Value Chain (Distribution) Channel Pricing

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Price Flexibility
Product Life Cycle Pricing Counterfeit Products