Chapter 8 Pricing Strategy - sherman 3 5 Competitor-Oriented Pricing 1. Where firms follow the prices charged by leading competitors 2. Where producers take the going-rate price 3.

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Chapter 8

Pricing Strategy

2

Pricing Methods

Cost

Competition Marketing

Pricing

methods

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Cost-based Pricing

Direct Costs (per unit) =£2

Fixed Costs = £200,000

Expected Sales = £100,000

Costs per Unit

Direct Costs = £2

Fixed Costs (200K/100K) = £2

Full Costs = £4

Mark-up (10%) = £0.40

Price (costs + mark-up) = £4.40

Expected Sales = £50,000

Cost per unit

Direct costs = £2

Fixed costs (200,000/50,000) = £4

Full cost = £6

Mark-up (10%) £0.60

Price (cost plus mark-up) = £6.60

Year 1 Year 2

4

Losses

Break even point

Fixed costs

Total revenue

Total variable costs

Total cost

Profits

Units of Production

Mo

ne

y (

£)

Determining the Break-Even Point

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Competitor-Oriented Pricing

1. Where firms follow the prices charged by leading competitors

2. Where producers take the going-rate price

3. Where contracts are awarded through a competitive bidding process

This type of pricing may take one of 3 forms:

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Market-led Pricing

A key marketing consideration when pricing is estimating value to the customer. 3 useful techniques for determining customers' perception of value are:

1. Trade-off analysis

2. Experimentation

3. Economic value to the customer analysis

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Key Factors Influencing Price-setting Decisions:

Positioning strategy

New product launch strategy

Product-line strategy

Channel management strategy

Competitive marketing strategy

International marketing strategy

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Positioning Strategy Marketing management must decide upon the target market and the creation of a differential advantage.

Price perceptions are so important to customers, many companies engage in what is called psychological pricing – that is, the careful manipulation of the reference prices that consumers carry in their heads.

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New Product Launch Strategy

Rapid

skimming High

Slow

skimming

Rapid

penetration

Slow

penetration

Price

Low

Promotion

High Low

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Initiating Price Changes

Circumstances

Tactics

Estimating

competitor

reaction

Increases Cuts

Value greater than price

Rising costs

Excess demand

Harvest objective

Value less than price

Excess supply

Build objective

Price war unlikely

Pre-empt competitive price

entry

Price jump

Staged price increases

Escalator clauses

Price unbundling

Lower discounts

Price fall

Staged price reductions

Fighter brands

Price bundling

Higher discounts

Strategic objectives

Self-interest

Competitive situation

Past experience

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One of The World's Most Valuable

Companies by Market Value

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The Largest Grocery Retailer

in the U.S.

Headquarters in Bentonville,

Arkansas, United States

Slogan:

Save Money. Live Better.

Background

Founded: July 2, 1962

Founder: Sam Walton

By the end of 2015

Number of locations: 11,620

Revenue: US$485.651 billion

Operating income: US$27.147 billion

Net income: US$16.363 billion

Total assets US$203.490 billion

Total equity US$81.394 billion

Owner: Walton family (52%)

Number of employees:

2.2 million in the World,

1.4 million in U.S.

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Founder of Walmart and

Sam's Club

Walmart is a family-owned

business, controlled by

the Walton family.

Sam Walton's heirs own

over 50 percent of Walmart

through their holding

company, Walton

Enterprises, and through

their individual holdings.

Walmart’s Vision Statement:

“To be the best retailer in the hearts and minds of

consumers and employees.”

Walmart’s Mission Statement:

“Saving people money so they can live better.”

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Walmart:

Brand Evolution

1964

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1981

1991

2008

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Walmart:

Rebrand

Before

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Before

After

brand book

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After

New store exterior

After store interiors with detail view

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Walmart:

Brand Center

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Brand – Core Identity

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Brand

Personality Traits

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Walmart:

Advertisement

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Walmart:

Marketing Mix

Product

Retail Service: Convenience and Effectiveness

Convenience: Walmart’s offers a wide array of goods in its

stores

Effectiveness: Walmart’s sales personnel are trained to

effectively assist shoppers in finding the goods they need,

which directly influence how customers feel when they enter

the stores.

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Pricing - main contributor to Walmart’s competitiveness

Everyday Low Price (EDLP) pricing strategy

The objective of this pricing strategy is to attract large

populations of customers.

The company has low costs and low prices. However, the

large sales volume enables Walmart to generate profits.

Promotion - improve the company’s ability to attract

customers to its stores and helps build brand recall

Advertisements - newspapers, websites, outdoor

Sales promotions - special deals and discounts

Personal selling - sales personnel persuade customers to

try new products or package deals at Walmart stores

Public relations - uses press releases to inform customers

and investors about policies, programs and strategies, also

occasionally sponsors charity programs.

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Place

Have 11,620 locations by the end of 2015, which is

spread across 28 countries.

Sells both by traditional stores and e-commerce

formats.

• Walmart discount stores

• Walmart super centers

• Walmart neighborhood markets

• Walmart express stores

Place - helps attract customers by making shopping

convenient in terms of location

Intensive distribution strategy

Offer the same variety of goods, while the same employee

roles and responsibilities apply to each store.

Continues to open new stores to reach more customers.

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Chapter Summary There are 3 bases for setting prices: cost, competition and market-value.

Pricing levels may be influenced by many marketing strategy variables: positioning, new product launch, product-line, competitive marketing, channel management and international marketing strategies.

Prices are dynamic and marketers should be ready to respond to price changes by competitors.

There are key issues surrounding the ethics of price

setting, some of which illegal and others unethical.