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

Strategic Marketing

Strategic Role of Price

Analyzing the Pricing Situation

Selecting the Pricing Strategy

Determining Specific Prices and Policies

CHAPTER 11PRICING STRATEGY

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

11-3

Pricing Decisions are Creating Major Challenges for Many

CompaniesExamples 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.

11-4

…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.

STRATEGIC ROLE OF PRICE

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Price in the Positioning Strategy

Positioning StrategyProductstrategy

Targetmarket andobjectives

Value-Chainstrategy

Pricingstrategy

Promotionstrategy

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Pricing Situations

New product pricing

Life cycle pricing

Changing positioning strategy

Countering competitive threats

11-7

Various Roles of Pricing

Signal to the Buyer

Instrument of Competition

Improving Financial

Performance

Marketing Program

Considerations

11-8

Pricing Strategy for New and Existing Products

Set PricingObjectives

Analyze thePricing Situation

Select PricingStrategy

Determine SpecificPrices and Policies

11-9

Examples of Pricing Objectives

Gain market position

Achieve financial performance

Product positioning

Stimulate demand

Influence competition

11-10

Customer Price Sensitivity

Pricing

Objectives

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?

11-12

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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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.

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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

11-15

SELECTING THE PRICING STRATEGY

How much flexibility exists?

How to position price relative to costs?

How visible to make the price of the product?

11-16

Determinants of Pricing Flexibility

Demand

Costs

Demand-Cost GapCompetitionPricing Objectives

11-17

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 costs

Range o

f fe

asi

ble

pri

ces

Price too low; no profit possible

Determining Feasible Prices

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AboveCompetition

BelowCompetition

Skim strategy

Neutral strategy(same as competition)

Penetration strategy

11-19

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

11-21

DETERMINING SPECIFIC PRICES AND POLICIES

Selecting Specific Prices

Policies to Manage Pricing Strategy

Special Pricing Issues

11-22

Basis of DeterminingSpecific Prices

Cost CompetitionDemand

11-23

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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Managing Pricing StrategyManaging Pricing Strategy

1.1. The more that the competitors and customers know about your The more that the competitors and customers know about your pricing, the better off you are. In an information age, it is necessary to 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.be transparent about prices and the value of a firm’s offerings.

2.2. In highly competitive markets, the focus should be on those market In highly competitive markets, the focus should be on those market segments that provide opportunities to gain competitive advantage. segments that provide opportunities to gain competitive advantage. Such a focus leads to a value-oriented pricing approach.Such a focus leads to a value-oriented pricing approach.

3.3. Pricing decisions should be made within the context of an overall Pricing decisions should be made within the context of an overall marketing strategy that is embedded within a business or corporate marketing strategy that is embedded within a business or corporate strategy.strategy.

4.4. Successful pricing decisions are profit oriented, not sales volume or Successful pricing decisions are profit oriented, not sales volume or market share oriented.market share oriented.

Source: Adapted from Kent B. Monroe, Pricing, 3rd ed. (Burr Ridge, IL.: McGraw-Hill/Irwin, 2003) 624-6.

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5.5. Prices should be set according to customers’ perceptions Prices should be set according to customers’ perceptions of value.of value.

6.6. Pricing for new products should start as soon as product Pricing for new products should start as soon as product development begins.development begins.

7.7. The relevant costs for pricing are the incremental avoidable The relevant costs for pricing are the incremental avoidable costs.costs.

8.8. A price may be profitable when it provides for incremental A price may be profitable when it provides for incremental revenues in excess of incremental costs.revenues in excess of incremental costs.

9.9. A central organizing unit should administer the pricing A central organizing unit should administer the pricing function. Generally, it is better to avoid letting salespeople function. Generally, it is better to avoid letting salespeople set price, especially without access to profitability set price, especially without access to profitability information and specific training in pricing and revenue information and specific training in pricing and revenue management.management.

10.10. Pricing management should be viewed as a process and Pricing management should be viewed as a process and price setting as a daily management activity, not a once-a-price setting as a daily management activity, not a once-a-year activity.year activity.

Managing Pricing StrategyManaging Pricing Strategy

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Special Pricing Situations

Price Segmentation

Value Chain (Distribution Channel) Pricing

Price Flexibility

Product Life Cycle Pricing