1-1

STRATEGIC MARKETING by Cravens and Piercy (9/e)

Chap-11 Pricing Strategy and Management

1-2

AGENDA
Introduction of pricing strategy Strategic role of price
Price in the positioning strategy Pricing situations Roles of pricing Pricing strategy Pricing objectives Analyzing pricing situation Selecting pricing strategy Determine specific prices and policies

1-3

INTRODUCTION
Determining pricing strategies is challenging For many firms it is dynamic due to:
Deregulation Informed buyers Intense global competition Slow growth in many markets The opportunity for firms to strengthen market position

Price impacts both financial performance and buyers perception Price is a proxy measure for product quality

Pricing Decisions are Creating Major Challenges for Many Companies

1-4

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.

1-5

STRATEGIC ROLE OF PRICE

Traditionally, we make pricing decision at the last and then use it tactically to capture whatever value we can
If strategic role of price is ignored, pricing myopia is likely to happen

Price may play a dominant or passive role in marketing strategy

Set price, before you design other 3 Ps
A multi-part marketing strategy is required in value-based pricing

1-6

STRATEGIC ROLE OF PRICE

Pricing strategically requires:

Setting price at the beginning of the process
Price strategies should be guided by strategic choices about market targets, positioning, product and distribution strategies Feasible price range will be set by product attributes, types of channels, end-users served, and functions performed by chain members

1-7

Price in the Positioning Strategy

Price is an important part of positioning

Pricing decisions need to be coordinated with decisions for all of the positioning components

For pricing marketer must know how pricing is viewed and understood by customers

1-8

Price in the Positioning Strategy

Target market and objectives

Product strategy

Positioning Strategy

Value-Chain strategy

Pricing strategy

Promotion strategy

1-9

Product Strategy
Product mix, branding strategy, and product quality and features can affect price strategy In a single product, pricing is simplified, but the prices of products in a line do not correspond to the cost of each item Price strategies:
Price the main product at competitive level and set high margin for supplies Set high price to establish a prestige position Price competitively to obtain sales (Wal-Mart)

1-10

Distribution Strategy
Pricing decisions are influenced by:
Type of channel, distribution intensity and channel configuration
The functions performed and the motivation of intermediaries

Value-added resellers need price margins to pay for their activities and provide incentive to obtain intermediaries cooperation Pricing is important when distribution is performed by the producer

1-11

Distribution Strategy
Intensive distribution calls for more competitive pricing than selective or exclusive distribution In multi-channel situations, pricing may pose more challenge
If website offers low price than conventional channels, then channel members will react

1-12

Responsibility for Pricing Decisions?

Responsibility for pricing decision varies across organizations and pricing is done by:
Marketing executives

Chief executive officers

Manufacturing and engineering executives

Cross-functional participation is necessary for pricing decision

Operations, engineering, finance, and marketing executives can participate

1-13

Pricing Situations

New product or product line pricing Product life cycle (PLC) pricing

Changing positioning strategy

Countering competitive threats

1-14

Pricing Situations

Pricing strategy requires continuous monitoring

Changing external conditions
The actions of competitors The opportunities to gain competitive edge through pricing actions

1-15

Pricing Situations

Current product pricing involves increasing, decreasing, or holding price

Altering price needs understanding the competitive situation, possible actions of competitors New product pricing needs demand and cost information, and competing substitutes

1-16

Role of Pricing

Signal to the Buyer Instrument of A Substitute for Competition Marketing Program Functions (Promotional Pricing) Improving Financial Performance

1-17

PRICING STRATEGY
Set Pricing Objectives Analyze the Pricing Situation Select Pricing Strategy Determine Specific Prices and Policies
Fig: Steps in selecting a pricing strategy

1-18

Pricing Objectives
Specific pricing objectives
Gain market position
Achieve financial performance Product positioning (image, use, awareness)

Stimulate demand
Influence competition

When more than one pricing objective, the conflict may likely to occur

1-19

Pricing Objectives

Pricing objectives vary according to intensity of competition, economic conditions, management preferences
A high price may be set to recover investment
A low price may used to gain market position, discourage new competition, attract new buyers

1-20

Analyzing The Pricing Situation

Pricing analysis is essential in:
Evaluating new product concepts Developing test marketing Designing a new product introduction strategy

Pricing analysis is also important for existing products because of:

Changes in the competitive environment Unsatisfactory market performance Modification of marketing strategy over PLC

1-21

Analyzing The Pricing Situation

Customer Price Sensitivity Pricing Objectives

Analyzing the Pricing Situation

Competitors Likely Responses

Product Costs

1-22

Customer Price Sensitivity

How buyers will respond to different prices Buyers price sensitivity answers:
How large is the product-market in terms of buying potential? What are the market segments and what market target strategy is to be used? How sensitive is demand in the segment(s) to changes in price? How important are nonprice factors, such as features and performance? What are the estimated sales at different price levels?

1-23

Price Elasticity
The % change in the quantity sold when the price changes, divided by the % change in price
People may buy more at higher prices (upward sloping), if price is seen a measure of quality

Method of estimating demand curve

Test marketing Study of historical price

End-user evaluation of price

1-24

Price Elasticity
One Price Low to High High to Low 50

Estimated Use (%)

0 $2

10

20

30

40

$4

$6

Price

$8

$10

$12

$14

When buyers know that we are estimating demand curve, they give information that is reflected in traditional demand curve, where price is presented as a cost But price should be presented as an attribute, where other product information should be presented to the respondents Substantial differences in the estimates were found while presented one price or multiple prices (low to high or high to low) to buyers

1-25

Non-price Factors

Buyers are willing to pay a premium or low price to gain or forgo certain advantage Important non-price factors:
Quality Uniqueness Availability Convenience Service and warranty

1-26

Non-price Factors
Value offered to a buyer by a brand is relevant information in setting price and determining pricing strategy
CVM (CV mapping) estimates value as the perceived quality a buyer obtains per unit of price

EVM (EV modeling) consists of economic savings and gains provided to customers due to purchase of the firms brand instead of competitors brands

1-27

Non-price Factors
Suppose your product provides $15,000 in value for customers and costs $6,000, whereas competitors products offer $10,000 in value and cost $3,000

EVM Value
Your Product: $15,000- $6,000= $9,000 Competitors Products: $10,000- $3,000= $7,000

CVM (Price/Benefit Ratio)

Your Product: $6,000/$15,000= 0.40 Competitors Products: $3,000/$10,000= 0.30

Your product offers higher value Competitors products offer the than competitors most favorable price/benefit

1-28

Non-price Factors

Perceived Value

Superior Value Zone D

A B E

Inferior Value Zone

Perceived Price

Buyers Perceptions of Value Offerings of Brands A-E

1-29

Forecasts

Management considers forecasts of sales and corresponding costs at alternative prices

To see the financial impact of different strategies

Controlled tests can be used to forecast the effects of price changes on demand

1-30

Cost Analysis
Determine the components of the cost of the product. A
Determine cost structure

Estimate how cost varies with Analyze cost and volume relationships 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.

C
Analyze competitive advantage

D
Estimate the effect of experience on costs

E
Determine the extent of control over costs

1-31

Competitor Analysis
We need to determine:
Which firms represent the most direct or potential competition for buyers How competing firms are positioned on a relative price basis and the extent to which price is used as an active part of their marketing strategies How successful each firms price strategy has been The key competitors probable responses to alternative price strategies

1-32

Competitor Analysis

The success of competitors pricing strategy is gauged by financial performance

It is difficult to predict what rivals will do in response to alternative price actions No changes are likely unless one firms price is viewed as threatening (low) or greedy (high)

1-33

Managements Pricing Objectives

Managements objectives may affect the extent of pricing flexibility

If objective is gaining market share, low price is used If any pricing objective is not achieved based on price sensitivity, costs, and competitors likely responses, the feasibility of the objectives needs to be evaluated

1-34

Pricing Pressures in the PC Market: An Example

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 directsales business model.

1-35

Selecting The Pricing Strategy

How much flexibility exists? How to position price relative to costs? How visible to make the price of the product?

1-36

How Much Flexibility Exists?

Demand

Competition

Demand-Cost Gap

Pricing Objectives

Costs
Determinants of Pricing Flexibility

1-37

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 possible

1-38

Price Positioning and Visibility

Above Competition

Skim strategy

Two key decisions

How far above cost to price a new product? How visible price to make in the promotion of the new product?

Neutral strategy (same as competition)

Below Competition

Penetration strategy

1-39

Price Positioning and Visibility

Diplomacy rather than force

Select competitive confrontations

Competitive Pricing Issues

Target segments instead of volume

Signaling

1-40

Illustrative Price Strategies

The pricing strategy depends on

How management decides to position the product
Whether price will perform an active or passive role in the marketing program

1-41

Illustrative Price Strategies

Active strategy Lowactive strategy Lowpassive strategy Highactive strategy Highpassive strategy

Low relative price

High relative price

Passive strategy

1-42

Legal and Ethical Considerations

Price fixing (a conspiracy among firms to set price)

Price discrimination
Deceptive pricing

Predatory pricing
Although subjective, these issues should be evaluated

1-43

Determining Specific Prices

Price determination is usually based on cost, demand, competition or a mix of these Cost-oriented methods use the cost of producing and marketing the product as the basis of price Demand-oriented methods consider estimated market response to alternative prices Competition-oriented methods use competitors prices as a reference point in setting price

1-44

Establishing Pricing Policy and Structure

Pricing Policy Provides operating guidelines for managing and implementing the pricing strategy
This includes discounts, allowances, returns, and other operating guidelines

Pricing Structure Concerns how individual items in the line are priced in relation to one another

1-45

Pricing Management: Ten Principles

The more that competitors and customers know about your pricing, the better off you are (be transparent). In highly competitive markets, the focus should be on those market segments that provide opportunities to gain competitive advantage Pricing strategy should be made within the context of an overall marketing strategy

1-46

Pricing Management: Ten Principles

Successful pricing decisions are profit oriented, not sales volume or market share oriented Prices should be set according to customers perceptions of value Pricing for new products should start as soon as product development begins The relevant cost for pricing are the incremental avoidable costs

1-47

Pricing Management: Ten Principles

A price may be profitable when it provides for incremental revenues in excess of incremental costs A central organizing unit should administer the pricing function

Pricing management should be viewed as a process and pricing setting as a daily management activity

1-48

Pricing Management

Special pricing situations:

Price Segmentation (appeal to different markets) Value Chain Pricing (cost at different value chain)

Price Flexibility (fixed or negotiated)

Product Life Cycle Pricing (varying price of PLC) Counterfeit Products