Strategic Marketing 1 Imperatives for MarketDriven Strategy 2

Strategic Marketing 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

CHAPTER 11 PRICING STRATEGY Strategic Role of Price Analyzing the Pricing Situation Selecting the Pricing Strategy Determining Specific Prices and Policies Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Pricing Decisions are Creating Major Challenges for Many Companies Examples Include: q Threats to major airlines by discount carriers. q Pressures on drug companies to reduce prices. q Intense price competition on supermarket chains by Wal-Mart and Costco. q Aggressive discounting by U. S. automobile producers to retain market share. q Threats to strong brands by counterfeit products. 11 -3

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. 11 -4

Price in the Positioning Strategy Target market and objectives Product strategy Positioning Strategy Value-Chain strategy Pricing strategy Promotion strategy 11 -5

Pricing Situations New product pricing Life cycle pricing Changing positioning strategy Countering competitive threats 11 -6

Various Roles of Pricing Signal to the Buyer Marketing Program Considerations Instrument of Competition Improving Financial Performance 11 -7

Pricing Strategy for New and Existing Products Set Pricing Objectives Analyze the Pricing Situation Select Pricing Strategy Determine Specific Prices and Policies 11 -8

Examples of Pricing Objectives Gain market position Achieve financial performance Product positioning Stimulate demand Influence competition 11 -9

ANALYZING THE PRICING SITUATION Customer Price Sensitivity Pricing Objectives Analyzing the Pricing Situation Product Costs Competitors’ Likely Responses 11 -10

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 -11

Buyers’ Perceptions of Value Offerings of Brands A-E Perceived Value Superior Value Zone D A B E C Inferior Value Zone Perceived Price 11 -12

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. 11 -13

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 -14

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 -15

Determinants of Pricing Flexibility Demand Competition Demand-Cost Gap Pricing Objectives Costs 11 -16

Determining Feasible Prices Range of feasible prices Price too high; little or no demand Price Ceiling Price Floor n Nature of demand in target market n Business and marketing strategy n Product differentiation n Competitors’ prices n Prices of substitutes n Product costs Price too low; no profit possible 11 -17

Above Competition Skim strategy Neutral strategy (same as competition) Below Competition Penetration strategy 11 -18

Diplomacy rather than force Select competitive confrontations Competitive Pricing Issues Target segments instead of volume Signaling Source: Thomas T. Nagle, “Price Competition, ” Marketing Management, Vol. 2, No. 1, 38 -45. 11 -19

Illustrative Price Strategies Active strategy Low relative price Lowactive strategy Highactive strategy Lowpassive strategy High relative price Passive strategy 11 -20

DETERMINING SPECIFIC PRICES AND POLICIES n Selecting Specific Prices n Policies to Manage Pricing Strategy n Special Pricing Issues 11 -21

Basis of Determining Specific Prices Cost Demand Competition 11 -22

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 11 -23

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, 3 rd ed. (Burr Ridge, IL. : Mc. Graw-Hill/Irwin, 2003) 624 -6. 11 -24

Managing Pricing Strategy 5. 6. 7. 8. 9. 10. Prices should be set according to customers’ perceptions of value. Pricing for new products should start as soon as product development begins. The relevant costs for pricing are the incremental avoidable costs. 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. Generally, it is better to avoid letting salespeople set price, especially without access to profitability information and specific training in pricing and revenue management. Pricing management should be viewed as a process and price setting as a daily management activity, not a once-ayear activity. 11 -25

Special Pricing Situations Price Segmentation Value Chain (Distribution Channel) Pricing Price Flexibility Product Life Cycle Pricing 11 -26