11-1

Chapter Eleven

Pricing Strategy

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Role of Price in
Positioning Strategy

Signal to
the
Buyer

Marketing Instrument
Program of
Considerations Competition

Improving
Financial
Performance
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Pricing Strategy for New

and Existing Products

Set Pricing
Objectives

Analyze the
Pricing Situation

Select Pricing
Strategy

Determine Specific
Prices and Policies
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1. Pricing Objectives

 Gain market position

 Achieve financial
performance
 Product positioning
 Stimulate demand
 Influence competition
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2. ANALYZING THE
PRICING SITUATION

Customer Price
Sensitivity

Pricing Analyzing the

Objectives Pricing Product
Situation Costs

Competitors’
Likely
Responses
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Customer Price
Sensitivity
Price sensitivity is the reaction of
customers to different price.
Customers are more price sensitive to
products that cost a lot and are bought
frequently. They are less price sensitive
to low cost items or items they buy
infrequently.
 11-7
Customer Price
Sensitivity
Factors associated with lower price
sensitivity:
The product is more distinctive
Buyers are less aware of the
substitutes
Buyers cannot easily compare the
quality of the substitutes
The expenditure is a smaller part of
the buyer’s total income
Part of the cost is borne by another
party
The product is used in conjunction
with assets previously bought
The product is assumed to have
more quality, prestige, or
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Cost Analysis

A
Determine the component of cost
of the product

B
Analyze cost and
volume relationships

C
Analyze the cost
competitive
advantage
D
Estimate the effect
of experience on costs
E
Determine the extent
of control over costs

Figure: Guide to Cost Analysis

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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
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3. SELECTING THE
PRICING STRATEGY

 How much flexibility

exists?
 How to position price
relative to costs?
 How visible to make the
price of the product?
 Legal and Ethical
Considerations in pricing
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Determinants of Pricing
Flexibility

Demand

Pricing
Competition Demand-Cost Gap objectives

Costs
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How Much Flexibility

Exists?
Price too high;
little or no
demand

Price Ceiling
 Nature of demand in target
Range of feasible prices

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

Price Floor

Price too low; no profit possible

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Price Positioning
Above Skim strategy
Competition

Neutral strategy
(same as
competition)

Below Penetration strategy

Competition
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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
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Legal and Ethical

Considerations
 Price Fixing: A conspiracy
among firms to set prices for a
product.
 Price Discrimination: The
practice of charging different
prices to different buyers for
goods of like grade or quality.
 Predatory pricing: Charging a
very low price for a product with
the intent of driving competitors
out of business. Once competitors
have been driven out, the firm
raises its price.
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Legal and Ethical

Considerations
 Deceptive pricing: This occurs
when a firm offers a very low
price on a product to attract
customers to a store. Once in
the store, the customer is
persuaded to purchase high-
priced item using a variety of
tricks, including -1) degrading
the promoted item, 2) not
having the promised item in
stock, or 3) refusing to take
orders for it
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4. DETERMINING
SPECIFIC PRICES
AND POLICIES

 Determining Specific
Prices
 Policies to Manage
Pricing Strategy
 Special Pricing Issues
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Basis of Determining
Specific Prices

Cost Competition
Demand
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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