Ch. 11


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Ch. 11

  1. 1. 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
  2. 2. <ul><li>Strategic Role of Price </li></ul><ul><li>Analyzing the Pricing Situation </li></ul><ul><li>Selecting the Pricing Strategy </li></ul><ul><li>Determining Specific Prices and Policies </li></ul>CHAPTER 11 PRICING STRATEGY McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
  3. 3. Pricing Decisions are Creating Major Challenges for Many Companies <ul><li>Examples Include: </li></ul><ul><li>Threats to major airlines by discount carriers. </li></ul><ul><li>Pressures on drug companies to reduce prices. </li></ul><ul><li>Intense price competition on supermarket chains by Wal-Mart and Costco. </li></ul><ul><li>Aggressive discounting by U.S. automobile producers to retain market share. </li></ul><ul><li>Threats to strong brands by counterfeit products. </li></ul>
  4. 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
  5. 5. Price in the Positioning Strategy Positioning Strategy Product strategy Target market and objectives Value-Chain strategy Pricing strategy Promotion strategy
  6. 6. Pricing Situations <ul><li>New product pricing </li></ul><ul><li>Life cycle pricing </li></ul><ul><li>Changing positioning strategy </li></ul><ul><li>Countering competitive threats </li></ul>
  7. 7. Examples of Pricing Objectives <ul><li>Gain market position </li></ul><ul><li>Achieve financial performance </li></ul><ul><li>Product positioning </li></ul><ul><li>Stimulate demand </li></ul><ul><li>Influence competition </li></ul>
  8. 8. ANALYZING THE PRICING SITUATION Customer Price Sensitivity Pricing Objectives Competitors’ Likely Responses Analyzing the Pricing Situation Product Costs
  9. 9. Customer Price Sensitivity <ul><li>How large is the product-market in terms of buying potential? </li></ul><ul><li>What are the market segments and what market target strategy is to be used? </li></ul><ul><li>How sensitive is demand in the segment(s) to changes in price? </li></ul><ul><li>How important are nonprice factors, such as features and performance? </li></ul><ul><li>What are the estimated sales at different price levels? </li></ul>
  10. 10. Buyers’ Perceptions of Value Offerings of Brands A-E Perceived Value Perceived Price Superior Value Zone D A C E B Inferior Value Zone
  11. 11. Cost Analysis for Pricing Decisions <ul><li>Determine the components </li></ul><ul><li>of the cost of the product. </li></ul><ul><li>Estimate how cost varies with </li></ul><ul><li>the volume of sales. </li></ul><ul><li>Analyze the cost competitive </li></ul><ul><li>advantage of the product. </li></ul><ul><li>Decide how experience in </li></ul><ul><li>producing the product affects </li></ul><ul><li>costs. </li></ul><ul><li>Estimate how much control </li></ul><ul><li>management has over costs. </li></ul>
  12. 12. Competitor Analysis <ul><li>Which firms represent the most direct competition </li></ul><ul><li>Competitor’s positioning on a relative price basis </li></ul><ul><li>Competitors’ success with their pricing strategies </li></ul><ul><li>Competitors’ probable responses to alternative price strategies </li></ul>
  13. 13. SELECTING THE PRICING STRATEGY <ul><li>How much flexibility exists? </li></ul><ul><li>How to position price relative to costs? </li></ul><ul><li>How visible to make the price of the product? </li></ul>
  14. 14. Slide 13-66 <ul><ul><li>Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service. </li></ul></ul>
  15. 15. FIGURE 13-3 Steps in setting price Slide 13-12
  16. 16. Slide 13-14 FIGURE 13-4 Where each dollar of your movie ticket goes
  17. 17. Slide 13-70 What are the elements that make up a profit equation?
  18. 18. Slide 13-70 <ul><ul><li>A firm’s profit equation is as follows: Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold) − Total cost. </li></ul></ul>
  19. 19. STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS Slide 13-15 <ul><li>Identifying Pricing Objectives </li></ul><ul><li>Sales </li></ul><ul><li>Market Share </li></ul><ul><li>Unit Volume </li></ul><ul><li>Survival </li></ul><ul><li>Social Responsibility </li></ul>
  20. 20. STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS Slide 13-17 <ul><li>Identifying Pricing Constraints </li></ul><ul><li>Demand for the Product Class, Product, and Brand </li></ul><ul><li>Single Product versus a Product Line </li></ul><ul><li>Newness of the Product: Stage in the Product Life Cycle </li></ul>
  21. 21. STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS Slide 13-19 <ul><li>Identifying Pricing Constraints </li></ul><ul><li>Cost of Changing Prices and Time Period They Apply </li></ul><ul><li>Cost of Producing and Marketing the Product </li></ul>
  22. 22. STEP 2: ESTIMATE DEMAND AND REVENUE Slide 13-26 <ul><li>Fundamentals of Estimating Demand </li></ul><ul><li>The Demand Curve </li></ul><ul><li>Consumer Tastes </li></ul><ul><li>Price and Availability of Similar Products </li></ul><ul><li>Consumer Income </li></ul><ul><li>Demand Factors </li></ul><ul><li>Movement Along versus Shift of a Demand Curve </li></ul>
  23. 23. STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS Slide 13-40 <ul><li>Importance of Controlling Costs </li></ul><ul><li>Total Cost (TC) </li></ul><ul><li>Fixed Cost (FC) </li></ul><ul><li>Variable Cost (VC) </li></ul><ul><li>Unit Variable Cost (UVC) </li></ul><ul><li>Marginal Cost (MC) </li></ul>
  24. 24. Slide 14-7 FIGURE 14-2 Four approaches for selecting an approximate price level
  25. 25. Slide 14-8 <ul><li>Demand-Oriented Approaches </li></ul><ul><li>Skimming Pricing </li></ul><ul><li>Penetration Pricing </li></ul><ul><li>Prestige Pricing </li></ul>STEP 4: SELECT AN APPROPRIATE PRICE LEVEL <ul><li>Price Lining </li></ul>
  26. 26. Slide 14-11 <ul><li>Demand-Oriented Approaches </li></ul><ul><li>Odd-Even Pricing </li></ul><ul><li>Target Pricing </li></ul><ul><li>Bundle Pricing </li></ul>STEP 4: SELECT AN APPROPRIATE PRICE LEVEL <ul><li>Yield Management Pricing </li></ul>
  27. 27. Slide 14-12 What are the circumstances in pricing a new product that might support skimming or penetration pricing ?
  28. 28. Slide 14-12 What are the circumstances in pricing a new product that might support skimming or penetration pricing ? <ul><ul><li>A firm introducing a new product can use either skimming pricing to set the highest initial price that customers desiring the product are willing to pay or penetration pricing to set a low initial price to appeal immediately to the mass market. </li></ul></ul>
  29. 29. Slide 14-13 What is odd-even pricing?
  30. 30. Slide 14-13 <ul><ul><li>Odd-even pricing involves setting prices a few dollars or cents under an even number. Psychologically, a $499.99 price feels lower than $500.00, even though the difference is 1¢. </li></ul></ul>
  31. 31. Determinants of Pricing Flexibility Demand Costs Demand-Cost Gap Competition Pricing Objectives
  32. 32. Price too high; little or no demand <ul><li>Nature of demand in target market </li></ul><ul><li>Business and marketing strategy </li></ul><ul><li>Product differentiation </li></ul><ul><li>Competitors’ prices </li></ul><ul><li>Prices of substitutes </li></ul><ul><li>Product costs </li></ul>Range of feasible prices Price too low; no profit possible Determining Feasible Prices Price Floor Price Ceiling
  33. 33. Above Competition Below Competition Skim strategy Neutral strategy (same as competition) Penetration strategy
  34. 34. 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.
  35. 35. DETERMINING SPECIFIC PRICES AND POLICIES <ul><li>Selecting Specific Prices </li></ul><ul><li>Policies to Manage Pricing Strategy </li></ul><ul><li>Special Pricing Issues </li></ul>
  36. 36. Basis of Determining Specific Prices Cost Competition Demand
  37. 37. Establishing Pricing Policy and Structure <ul><li>Policy </li></ul><ul><ul><li>Discounts, allowances, returns, and other operating guidelines </li></ul></ul><ul><li>Pricing Structure </li></ul><ul><ul><li>Product mix and line pricing relationships </li></ul></ul><ul><ul><ul><li>How individual items in the line are priced in relation to one another </li></ul></ul></ul>
  38. 38. Slide 14-14 <ul><li>Cost-Oriented Approaches </li></ul><ul><li>Standard Markup Pricing </li></ul><ul><li>Cost-Plus Pricing </li></ul>STEP 4: SELECT AN APPROPRIATE PRICE LEVEL <ul><li>Cost-Plus Percentage-of-Cost Pricing </li></ul><ul><li>Cost-Plus Fixed-Fee Pricing </li></ul><ul><li>Experience Curve Pricing </li></ul><ul><li>Markup on Cost </li></ul><ul><li>Markup on Selling Price </li></ul>
  39. 39. Slide 14-16 <ul><li>Profit-Oriented Approaches </li></ul><ul><li>Target Profit Pricing </li></ul><ul><li>Target Return-On-Sales Pricing </li></ul>STEP 4: SELECT AN APPROPRIATE PRICE LEVEL <ul><li>Target Return-On-Investment Pricing </li></ul>
  40. 40. Slide 14-18 <ul><li>Competition-Oriented Approaches </li></ul><ul><li>Customary Pricing </li></ul><ul><li>Above-, At-, or Below-Market Pricing </li></ul>STEP 4: SELECT AN APPROPRIATE PRICE LEVEL <ul><li>Loss-Leader Pricing </li></ul>
  41. 41. Slide 14-22 <ul><li>One-Price versus Flexible-Price Policy </li></ul><ul><li>One-Price Policy (Fixed Pricing) </li></ul><ul><li>Flexible-Price Policy (Dynamic Pricing) </li></ul>STEP 5: SET THE LIST OR QUOTED PRICE <ul><li>Clickstream </li></ul>
  42. 42. <ul><li>Company, Customer, and Competitive Effects on Pricing </li></ul><ul><li>Customer Effects </li></ul><ul><li>Company Effects </li></ul>STEP 5: SET THE LIST OR QUOTED PRICE <ul><li>Product Line Pricing </li></ul><ul><li>Competitive Effects </li></ul><ul><li>Price War </li></ul>Slide 14-25
  43. 43. Slide 14-29 FIGURE 14-6 Three special adjustments to list or quoted price
  44. 44. Slide 14-30 <ul><li>Seasonal Discounts </li></ul><ul><li>Quantity Discounts </li></ul>STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE <ul><li>Trade (Functional) Discounts </li></ul><ul><li>Cash Discounts </li></ul><ul><li>Discounts </li></ul><ul><li>Noncumulative Quantity Discounts </li></ul><ul><li>Cumulative Quantity Discounts </li></ul>
  45. 45. Slide 14-32 FIGURE 14-7 The structure of trade discounts
  46. 46. Slide 14-34 <ul><li>Promotional Allowances </li></ul><ul><li>Trade-In Allowances </li></ul>STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE <ul><li>Allowances </li></ul><ul><li>Everyday Low Pricing </li></ul>
  47. 47. Slide 14-38 <ul><li>Price Fixing </li></ul>STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE <ul><li>Legal and Regulatory Aspects of Pricing </li></ul><ul><li>Horizontal Price Fixing </li></ul><ul><li>Vertical Price Fixing </li></ul><ul><li>(Resale Price Maintenance) </li></ul><ul><li>Rule of Reason </li></ul>
  48. 48. Slide 14-40 <ul><li>Price Discrimination </li></ul>STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE <ul><li>Legal and Regulatory Aspects of Pricing </li></ul><ul><li>Cost Justification Defense </li></ul><ul><li>Meet-The-Competition Defense </li></ul><ul><li>Deceptive Pricing </li></ul><ul><li>Geographical Pricing </li></ul><ul><li>Predatory Pricing </li></ul>