CRAVENS

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

PRICING STRATEGY
AND MANAGEMENT

Strategic Role of
Price
Analyzing the
Pricing Situation
Selecting the
Pricing Strategy
Determining
Specific Prices and
Policies
 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

STRATEGIC ROLE OF
PRICE

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
T.Nagle, Marketing News, 11/9/98, 4.

can.
 11-6

Pricing Strategically
…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 theMarketing
T. Nagle, value they
News, have the
11/9/98, 4.

potential to create.
 11-7

How Price Fits into the

Positioning Strategy

Target
market and
objectives

Positioning Strategy
Product Value-Chain
strategy 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

Marketing Instrument
Program of
Consideratio Competitio
ns n

Improving
Financial
Performance
 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

 Achievefinancial
performance
 Product positioning
 Stimulate demand
 Influence competition
 11-12

ANALYZING THE
PRICING SITUATION

Customer
Price
Sensitivity

Legal and Analyzing

Ethical the Pricing Product
Constraints Situation Costs

Competitors’
Likely
Responses
 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 Superior Value Zone

D A

B
E

Inferior Value Zone

Perceived Price
 11-15

Guide to Cost
Analysis

A
Determine cost
structure

B
Analyze cost and
volume relationships

C
Analyze competitive
advantage
D
Estimate the effect
of experience on costs
E
Determine the extent
of control over costs
 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 3rd Quarter 2003. A
major competitive hurdle for H-P is
Dell’s low-cost direct-sales business
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.
model.
 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

Legal and
Competiti Demand-Cost Ethical
on Gap Influences

Costs
 11-21

How Much
Flexibility Exists?
Price too high;
little or no
demand

Price
Ceiling
Range of feasible prices

 Nature of demand in target

market
 Business and marketing
strategy
 Product differentiation
 Competitors’ prices
 Prices of substitutes
 Product costs
Price Floor

Price too low; no profit

 11-22

Price Positioning
Above Skim strategy
Competition

Neutral strategy
(same as
competition)

Below Penetration strategy

Competition
 11-23

Diplomacy
rather than force

Select
Competitiv Target
segments
competitive e Pricing instead of
confrontations Issues volume

Signaling

Source: Thomas T. Nagle, “Price Competition,” Marketing Management, Vol. 2, No. 1, 38-45.
 11-24

Illustrative Price
Strategies
Active
strategy

Low- High-
active active
strategy strategy
Low High
relative relative
price price
Low- High-
passive passive
strategy strategy

Passive
strategy
 11-25

DETERMINING
SPECIFIC PRICES
AND POLICIES

 Determining Specific
Prices
 Policies to Manage
Pricing Strategy
 Special Pricing Issues
 11-26

Pricing in Action

Basis of Determining
Specific Prices

Cost Competition
Demand
 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