Pricing Strategy

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.