CHAPTER 11

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

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

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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.

1-2
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* STRATEGIC ROLE OF PRICE
…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. 1-3
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* Price in the Positioning Strategy
Target
market and
objectives

Positioning Strategy
Product Value-Chain
strategy strategy

Pricing
strategy

Promotion
strategy

1-4
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* Pricing Situations
 New product pricing
 Life cycle pricing
 Changing positioning
strategy
 Countering competitive
threats 1-5
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* Various Roles of Pricing
Signal to the
Buyer

Marketing Program Instrument of

Considerations Competition

Improving Financial
Performance

1-6
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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

1-7
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* Examples of Pricing
Objectives
 Gain market position
 Achieve financial
performance
 Product positioning
 Stimulate demand
1-8
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* ANALYZING THE PRICING
SITUATION
Customer Price
Sensitivity

Pricing Analyzing the

Pricing Situation Product
Objectives Costs

Competitors’ Likely
Responses

1-9
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* Customer Price
1. How large is the product-market in terms of buying
potential? Sensitivity
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?

1-10
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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

1-11
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* Cost Analysis for Pricing
• Determine the components
Decisions
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.
1-12
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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

1-13
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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? 1-14
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* Determinants of Pricing
Flexibility
Demand

Pricing
Competition Demand-Cost Gap Objectives

Costs

1-15
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* Determining Feasible Prices
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

1-16
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* Above
Competition
Skim strategy

Neutral strategy
(same as competition)

Below Penetration strategy

Competition
1-17
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*
Diplomacy rather than
force

Select competitive Competitive Target

segments
confrontations Pricing Issues instead of
volume

Signaling

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

1-18
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* Illustrative Price
Active
Strategies
strategy

Low- High-
active active
Low strategy strategy High
relative relative
price price
Low- High-
passive passive
strategy strategy

Passive
strategy
1-19
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* DETERMINING SPECIFIC PRICES AND POLICIES

 Selecting Specific Prices

 Policies to Manage Pricing
Strategy
 Special Pricing Issues

1-20
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*

Basis of Determining
Specific Prices

Cost Competition
Demand

1-21
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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

1-22
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* Managing Pricing Strategy
1. The more that the competitors and customers know about your
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.

2. In highly competitive markets, the focus should be on those market

segments that provide opportunities to gain competitive advantage.
Such a focus leads to a value-oriented pricing approach.

3. Pricing decisions should be made within the context of an overall

marketing strategy that is embedded within a business or corporate
strategy.

4. Successful pricing decisions are profit oriented, not sales volume or

market share oriented.

Source: Adapted from Kent B. Monroe, Pricing, 3rd ed. (Burr Ridge, IL.: McGraw-Hill/Irwin, 2003) 624-6.
1-23
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* Managing Pricing Strategy
5. Prices should be set according to customers’ perceptions
of value.
6. Pricing for new products should start as soon as product
development begins.
7. The relevant costs for pricing are the incremental avoidable
costs.
8. A price may be profitable when it provides for incremental
revenues in excess of incremental costs.
9. A central organizing unit should administer the pricing
function. Generally, it is better to avoid letting salespeople
set price, especially without access to profitability
information and specific training in pricing and revenue
management.
10. Pricing management should be viewed as a process and
price setting as a daily management activity, not a once-a-
year activity.

1-24
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* Special Pricing Situations
Price Segmentation

Value Chain (Distribution Channel) Pricing

Price Flexibility

Product Life Cycle Pricing

1-25