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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