Strategic Role of Price Analyzing the Pricing Situation Selecting the Pricing Strategy Determining Specific Prices and Policies

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Reginald Glenn
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1 Chapter 11 PRICING STRATEGY AND MANAGEMENT Strategic Role of Price Analyzing the Pricing Situation Selecting the Pricing Strategy Determining Specific Prices and Policies 1 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. 2 1

2 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 can. T.Nagle, Marketing News, 11/9/98, 4. 3 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 the value they have the potential to create. T. Nagle, Marketing News, 11/9/98,

3 How Price Fits into the Positioning Strategy Target market and objectives Product strategy Positioning Strategy Value-Chain strategy Pricing strategy Promotion strategy 5 Pricing Situations New product pricing Product Life cycle pricing Positioning strategy change Countering competitive threats 6 3

4 Role of Price in Positioning Strategy Signal to the Buyer Marketing Program Considerations Instrument of Competition Improving Financial Performance 7 Steps in selecting a Pricing Strategy Set Pricing Objectives Analyze the Pricing Situation Select Pricing Strategy Determine Specific Prices and Policies 8 4

5 Pricing Objectives Gain market position Achieve financial performance Product positioning Stimulate demand Influence competition 9 ANALYZING THE PRICING SITUATION Factors impacting the pricing situation Customer Price Sensitivity Legal and Ethical Constraints Analyzing the Pricing Situation Product Costs Competitors Likely Responses 10 5

6 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 Buyers Perceptions of Value Offerings of Brands A-E Perceived Value Superior Value Zone D A E B C Inferior Value Zone Perceived Price 12 6

7 Guide to Cost Analysis Determine cost structure A Analyze cost and volume relationships Analyze competitive advantage B C Estimate the effect of experience on costs D Determine the extent of control over costs E 13 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 14 7

8 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 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 P s PC unit reporting a loss in 3 rd Quarter 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. 15 SELECTING THE PRICING STRATEGY How much flexibility exists? How to position price relative to costs? How visible to make the price of the product? 16 8

9 Determinants of Pricing Flexibility Demand Competition Demand-Cost Gap Pricing objectives Costs 17 How Much Flexibility Exists? Price too high; little or no demand feasible prices Range of f 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 18 9

10 Above Competition Price Positioning Skim strategy Neutral strategy (same as competition) Below Competition Penetration strategy 19 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,

11 DETERMINING SPECIFIC PRICES AND POLICIES Determining Specific Prices Policies to Manage Pricing Strategy Special Pricing Issues 21 Pricing in Action Basis of Determining Specific Prices Cost Competition Demand 22 11

12 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 (i.e cars) 23 Special Pricing Situations Price Segmentation (i.e. airlines) Value Chain (Distribution) Channel Pricing Price Flexibility Product Life Cycle Pricing Review Question Discuss the strategic role of pricing and explain the role of pricing in positioning strategy

MIDTERM EXAMINATION Spring 2010 MKT501- Marketing Management

MIDTERM EXAMINATION Spring 2010 MKT501- Marketing Management http://www.vustudents.net Question No: 1 ( Marks: 1 ) - Please choose one The skimming, penetration, bargaining and discounts are included in