CRAVENS PIERCY PIERCY 8/e McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

11-2 Chapter Eleven Pricing Strategy and Management McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

11-3  Strategic Role of Price  Analyzing the Pricing Situation  Selecting the Pricing Strategy  Determining Specific Prices and Policies PRICING STRATEGY AND MANAGEMENT

11-4 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.

11-5 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

11-6 … 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

11-7 How Price Fits into the Positioning Strategy Product strategy Target market and objectives Value-Chain strategy Pricing strategy Promotion strategy

11-8 Pricing Situations  New product pricing  Life cycle pricing  Positioning strategy change  Countering competitive threats

11-9 Role of Price in Positioning Strategy Signal to the Buyer Instrument of Competition Improving Financial Performance Marketing Program Considerations

11-10 Pricing Strategy for New and Existing Products Set Pricing Objectives Analyze the Pricing Situation Select Pricing Strategy Determine Specific Prices and Policies

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

11-12 Customer Price Sensitivity Legal and Ethical Constraints Competitors’ Likely Responses Analyzing the Pricing Situation Product Costs ANALYZING THE PRICING SITUATION

11-13 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?

11-14 Buyers’ Perceptions of Value Offerings of Brands A-E Perceived Value Perceived Price Superior Value Zone D A C E B Inferior Value Zone

11-15 Guide to Cost Analysis Determine cost structure A Analyze cost and volume relationships B Analyze competitive advantage C Estimate the effect of experience on costs D Determine the extent of control over costs E

11-16 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

11-17 Pricing Pressures in the Personal Computer Market The 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 3 rd Quarter 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.

11-18 Legal and Ethical Considerations What are the legal and ethical factors that may affect the choice of a price strategy?

11-19 SELECTING THE PRICING STRATEGY  How much flexibility exists?  How to position price relative to costs?  How visible to make the price of the product?

11-20 Determinants of Pricing Flexibility Demand Costs Demand-Cost GapCompetition Legal and Ethical Influences

11-21 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 costs Range of feasible prices Price too low; no profit possible How Much Flexibility Exists?

11-22 Above Competition Below Competition Skim strategy Neutral strategy (same as competition) Penetration strategy Price Positioning

11-23 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,

11-24 Low- active strategy High- active strategy Low- passive strategy High- passive strategy Active strategy Passive strategy High relative price Low relative price Illustrative Price Strategies

11-25 DETERMINING SPECIFIC PRICES AND POLICIES Determining Specific Prices Policies to Manage Pricing Strategy Special Pricing Issues

11-26 Basis of Determining Specific Prices Cost Competition Demand Pricing in Action

11-27 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

11-28 Special Pricing Situations Price Segmentation Value Chain (Distribution) Channel Pricing Price Flexibility Product Life Cycle Pricing Counterfeit Products