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8/e8/eMcGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All

Rights Reserved.

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Chapter Eleven

Pricing Strategyand

Management

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Strategic Role of Price

Analyzing the Pricing Situation

Selecting the Pricing Strategy

Determining Specific Prices and Policies

PRICING STRATEGY AND MANAGEMENT

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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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Part of the reason that

pricing is misused and poorly

understood is the common

practice of making it the last

marketing decision. We

think that we must design

products, communications

plans, and a method of

distribution before we have

something to price. We then

use pricing tactically to

capture whatever value we

can.T.Nagle, Marketing News, 11/9/98, 4.

STRATEGIC ROLE OF PRICE

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…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.

Pricing Strategically

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How Price Fits into the Positioning Strategy

Positioning StrategyProductstrategy

Targetmarket andobjectives

Value-Chainstrategy

Pricingstrategy

Promotionstrategy

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Pricing Situations

New product pricing

Life cycle pricing

Positioning strategy change

Countering competitive threats

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Role of Price in Positioning Strategy

Signal to the Buyer

Instrument of

Competition

Improving Financial

Performance

Marketing Program

Considerations

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Pricing Strategy for New and Existing

Products

Set PricingObjectives

Analyze thePricing Situation

Select PricingStrategy

Determine SpecificPrices and Policies

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Examples of Pricing Objectives

Gain market position

Achieve financial performance

Product positioning

Stimulate demand

Influence competition

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Customer Price

Sensitivity

Legal and Ethical

Constraints

Competitors’ Likely

Responses

Analyzing the Pricing Situation

Product Costs

ANALYZING THE PRICING SITUATION

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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?

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Buyers’ Perceptions of Value Offeringsof Brands A-E

PerceivedValue

Perceived Price

Superior Value Zone

D A

C

E

B

Inferior Value Zone

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Guide to Cost Analysis

Determine coststructure

A

Analyze cost andvolume relationships

B

Analyze competitiveadvantage

C

Estimate the effectof experience on costs

D

Determine the extentof control over costs

E

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Competitor Analysis

Which firms represent the most direct competition

Competitor’s positioning on a relative price basis

How active is price in their marketing strategies

Competitors’ success with their pricing strategies

Competitors’ probable responses to alternative price strategies

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Pricing Pressures in the Personal

Computer MarketThe 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.

Sources: “A Nasty Surprise from HP,” Business Week, September 1, 2003; Gary McWilliams and Pui-Wing Tam, “Dell Price Cuts Put a Squeeze on Rival H-P,” The Wall Street Journal, August 21, 2003, B1 and B7.

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Legal and Ethical Considerations

What are the legal and

ethical factors that may

affect the choice of a

price strategy?

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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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Determinants of Pricing Flexibility

Demand

Costs

Demand-Cost Gap

Competition

Legal and Ethical Influences

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Price too high; little or no

demand

Price Floor

Price Ceiling

Nature of demand in target market

Business and marketing strategy

Product differentiation

Competitors’ prices

Prices of substitutes

Product costsRange o

f fe

asi

ble

pri

ces

Price too low; no profit possible

How Much Flexibility Exists?

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AboveCompetition

BelowCompetition

Skim strategy

Neutral strategy(same as competition)

Penetration strategy

Price Positioning

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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.

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Low-active

strategy

High-active

strategy

Low-passivestrategy

High-passivestrategy

Activestrategy

Passivestrategy

Highrelativeprice

Lowrelativeprice

Illustrative Price Strategies

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DETERMINING SPECIFIC PRICES

AND POLICIES

Determining Specific Prices

Policies to Manage Pricing Strategy

Special Pricing Issues

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Basis of DeterminingSpecific Prices

Cost CompetitionDemand

Pricing in Action

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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

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Special Pricing Situations

Price Segmentation

Value Chain (Distribution) Channel Pricing

Price Flexibility

Product Life Cycle Pricing

Counterfeit Products