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STRATEGIC MARKETING
by Cravens and Piercy (9/e)

Chap-11
Pricing Strategy and Management
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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
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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
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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

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
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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
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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
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Price in the Positioning Strategy

Target
market and
objectives

Positioning Strategy
Product Value-Chain
strategy strategy

Pricing
strategy

Promotion
strategy
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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)
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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
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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
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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
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Pricing Situations

New product or product line pricing


Product life cycle (PLC) pricing
Changing positioning strategy
Countering competitive threats
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Pricing Situations

Pricing strategy requires continuous monitoring


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

Signal to the
Buyer

A Substitute for Instrument of


Marketing Program Competition
Functions (Promotional
Pricing)
Improving Financial
Performance
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PRICING STRATEGY

Set Pricing
Objectives

Analyze the
Pricing Situation

Select Pricing
Strategy

Determine Specific
Prices and Policies
Fig: Steps in selecting a pricing strategy
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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
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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
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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
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Analyzing The Pricing Situation

Customer Price
Sensitivity

Pricing Analyzing the


Product Costs
Objectives Pricing Situation

Competitors’ Likely
Responses
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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?
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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
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Price Elasticity
One Price Low to High High to Low

50
Estimated Use (%)

40
30
20
10
0

$2 $4 $6 $8 $10 $12 $14


Price
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
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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
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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 firm’s brand instead of competitors’ brands
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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 CVM (Price/Benefit Ratio)


Your Product: Your Product:
$15,000- $6,000= $9,000 $6,000/$15,000= 0.40
Competitors’ Products: Competitors’ Products:
$10,000- $3,000= $7,000 $3,000/$10,000= 0.30
Your product offers higher value Competitors’ products offer the
than competitors’ most favorable price/benefit
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Non-price Factors

Perceived
Value
Superior Value Zone
D A
B
E

C
Inferior Value Zone
Perceived Price

Buyers’ Perceptions of Value Offerings of Brands A-E


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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
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Cost Analysis
A
• Determine the Determine cost
components of the cost structure
of the product.
B
• Estimate how cost varies with Analyze cost and
the volume of sales. volume relationships

C
• Analyze the cost competitive Analyze competitive
advantage of the product. advantage

D
• Decide how experience in
Estimate the effect
producing the product affects of experience on costs
costs.
E
• Estimate how much control Determine the extent
management has over costs. of control over costs
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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 firm’s price strategy has been
The key competitors’ probable responses to
alternative price strategies
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Competitor Analysis

The success of competitor’s 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 firm’s price is


viewed as threatening (low) or greedy (high)
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Management’s Pricing Objectives

Management’s 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
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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-P’s PC unit
reporting a loss in 3rd Quarter 2003. A major
competitive hurdle for H-P is Dell’s low-cost direct-
sales business model.
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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?
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How Much Flexibility Exists?

Demand

Pricing
Competition Demand-Cost Gap Objectives

Costs

Determinants of Pricing Flexibility


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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


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Price Positioning and Visibility

Above
Competition Skim strategy Two key decisions
How far above cost
to price a new
Neutral strategy product?
(same as
competition) How visible price to
make in the
promotion of the new
Penetration product?
Below strategy
Competition
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Price Positioning and Visibility

Diplomacy rather than


force

Competitive Pricing Target segments


Select competitive
instead of
confrontations Issues volume

Signaling
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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
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Illustrative Price Strategies

Active
strategy

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

Passive
strategy
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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
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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
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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
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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
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Pricing Management: Ten Principles

Successful pricing decisions are profit oriented,


not sales volume or market share oriented

Prices should be set according to customer’s


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
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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
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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