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11-1
Chapter Eleven
Pricing Strategyand
Management
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
11-2
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.
11-3
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
11-4
How Price Fits into the Positioning Strategy
Positioning StrategyProductstrategy
Targetmarket andobjectives
Value-Chainstrategy
Pricingstrategy
Promotionstrategy
11-5
Pricing Situations
New product pricing
Life cycle pricing
Positioning strategy change
Countering competitive threats
11-6
Role of Price in Positioning Strategy
Signal to the Buyer
Instrument of
Competition
Improving Financial
Performance
Marketing Program
Considerations
11-7
Examples of Pricing Objectives
Gain market position
Achieve financial performance
Product positioning
Stimulate demand
Influence competition
11-8
Customer Price
Sensitivity
Legal and Ethical
Constraints
Competitors’ Likely
Responses
Analyzing the Pricing Situation
Product Costs
ANALYZING THE PRICING SITUATION
11-9
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?
11-10
Buyers’ Perceptions of Value Offeringsof Brands A-E
PerceivedValue
Perceived Price
Superior Value Zone
D A
C
E
B
Inferior Value Zone
11-11
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
11-12
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
11-13
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.
11-14
Legal and Ethical Considerations
What are the legal and
ethical factors that may
affect the choice of a
price strategy?
11-15
SELECTING THE PRICING STRATEGY
How much flexibility exists?
How to position price relative to costs?
How visible to make the price of the product?
11-16
Determinants of Pricing Flexibility
Demand
Costs
Demand-Cost Gap
Competition
Legal and Ethical Influences
11-17
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?
11-18
AboveCompetition
BelowCompetition
Skim strategy
Neutral strategy(same as competition)
Penetration strategy
Price Positioning
11-19
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.
11-20
Basis of DeterminingSpecific Prices
Cost CompetitionDemand
Pricing in Action
11-21
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
11-22
Special Pricing Situations
Price Segmentation
Value Chain (Distribution) Channel Pricing
Price Flexibility
Product Life Cycle Pricing
Counterfeit Products
11-23
Chapter Twelve
Promotion, Advertising, and Sales Promotion
Strategies
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
11-24
Promotion, Advertising, and Sales Promotion
Strategies
Promotion Strategy
Advertising Strategy
Sales Promotion Strategy
11-25
PromotionComponent
s
PublicRelations
DirectMarketing
SalesPromotion
PersonalSelling
Advertising
Interactive/Internet Marketing
Composition of Promotion Strategy
11-26
COMMUNICATIONOBJECTIVES
ROLE OF PROMOTIONCOMPONENTS
PROMOTIONBUDGET
PROMOTION COMPONENTSTRATEGIES
Coordinationwith Product,Distribution,and PriceStrategies
DEVELOPING THE PROMOTION STRATEGY
Advertising Sales Promotion
Public Relations
Personal Selling
Direct Marketing
Interactive/ Internet Marketing
MARKET TARGETING AND POSITIONING STRATEGIES
INTEGRATE AND IMPLEMENT PROMOTION COMPONENT
STRATEGIES
EVALUATE EFFECTIVENESS OF
PROMOTION STRATEGY
11-27
Percent of Sales Fixed percent of sales,
often based on past expenditure patterns.
Comparative Parity Budget is based largely
upon what competition is doing.
Objective and Task Set objectives and then
determine tasks (and costs) necessary to meet the objectives.
Percent of Sales The method is very
arbitrary. Budget may be too high when sales are high and too low when sales are low.
Comparative Parity Differences in marketing
strategy may require different budget levels.
Objective and Task The major issue in using
this method is deciding the right objectives so measurement of results is important.
Features Limitations
Budgeting Methods
11-28
Illustrative Influences on Promotions
Strategy
Number and dispersion of buyers
Buyers’ information needs
Size and importance of purchase
Distribution
Product Complexity
Post-purchase contact required
Small
High
Large
Direct
High
Yes
Large
Low
Small
Channel
Low
No
Advertising/ sales promotion driven
Balanced Personal selling driven
11-29
Increasing UncertaintyAbout Impact onPurchasing Behavior
Increasing Difficultyof Measurement
Type of Objective
• Exposure
• Awareness
• Attitude Change
• Sales
• Profit
Alternative Levels for Setting Advertising
Objectives
11-30
Determining Advertising Objectives1. Does the advertising aim at immediate
sales?
2. Does the advertising aim at near-term sales?
3. Does the advertising aim at building a long-range consumer franchise?
4. Does the advertising aim at helping increase sales?
5. Does the advertising aim at some specific step that leads to a sale?
6. How important are supplementary benefits of advertising?
7. Should the advertising impart information needed to consummate sales and build customer satisfaction?
8. Should advertising build confidence and goodwill for the corporation?
9. What kind of images does the company wish to build?
Source: from Exhibit 12-5.
11-31
Budget Determination
OBJECTIVE AND TASK METHOD HAS A
STRONGER SUPPORTING LOGIC THAH THE OTHER
METHODS.
Media/ Scheduling
Creative Strategy
Budget Determination
11-32
Product Distribution
Price Promotion
Advertising
(How to communicate intended positioning to buyers and others influencing the purchase.)
Creative Strategy
CREATIVE STRATEGYThe creative strategy is guided by the market target and the positioning strategy.
Provide a unifying concept that binds together the various parts of the advertising campaign.
11-33SPREADING the Word on the NetOnline advertising is growing at a sizzling 29% rate, to $9.3 billion this year. Here’s why:
SEARCH WORKSGoogle and Yahoo! have demonstrated the power of the Web by using customers’ search queries to connect them with advertisers. This combination fuels a search industry expected to hit $3.9 billion this year.CUSTOMERS ARE ONLINEMore than half of American households have always-on Net connections. And the Web reaches millions at the office. The Big Three portals-Yahoo, AOL, and MSN-reach a combined 50 million a day-twice the TV audience of a World Series game.VIDEO ROCKSThe adoption of broadband, which can handle video, lets advertisers put TV-like ads online. Longer spots by BMW and Adidas have reached cult status. As demand for video soars, portals sell choice slots in advance, much like TV’s up-front sales.FEEDBACK IS INSTANTMarketers and online publishers have tools to track an ad’s performance in real time, allowing them to make quick adjustments if customers aren’t clicking. This turns the Net into a vast marketing lab. And as video grows, it becomes a test bed for TV ads.CUSTOMERS LEAVE TRAILSIt was an empty promise during the dot-com days, but now advertisers have the technology to follow customers, click by click, and to hit them with relevant ads. The upshot? No wasted money peddling dog food to cat owners.Source: Stephen Baker, “The Online Ad Surge,” Business Week, November 22, 2004, 79.
11-34
Access to the target audience
Cost of reaching the target group(s)
Favorable access to cost
Unfavorable access to cost
Factors Influencing Media Decisions
11-35
MEASURINGADVERTISING
EFFECTIVENESS
RatingServices
Sales andExpense Analysis
TestMarketing
ControlledTests
RecallTests
11-36
SALES PROMOTION consists of
various incentives, mostly
short term, intended to
stimulate quicker and/or
greater purchase of particular
goods/services by end-user
consumers or value chain
organizations.
The strategy process is
similar to the design of
advertising strategy.
SALES PROMOTION STRATEGY
11-37
SALESPROMOTION
TARGETS
ConsumerBuyers
Salespeople
BusinessBuyers
Value Chain
Sales Promotion Activities and
TargetsActivities include trade
shows, specialty advertising, contests, displays, coupons, recognition programs, and
free samples.