CRAVENS

PIERCY

8/e
McGraw-Hill/Irwin

2006 The McGraw-Hill Companies, Inc., All

11-2

Chapter Eleven
Pricing Strategy
and
Management

McGraw-Hill/Irwin

2006 The McGraw-Hill Companies, Inc., All

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

11-3

Pricing Decisions are

Creating Major
Challenges for Many
Companies

11-4

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
the value they have the
T. Nagle, Marketing News, 11/9/98, 4.
potential to create.

11-7

How Price Fits into the

Positioning Strategy
Target
market and
objectives

Positioning Strategy
Product
strategy

Value-Chain
strategy

Pricing
strategy

Promotion
strategy

11-8

Pricing Situations

New product
pricing

Life cycle pricing

Positioning
strategy change

Countering
competitive
threats

Role of Price in
Positioning Strategy
Signal
to the
Buyer
Marketing
Program
Consideratio
ns

Instrument
of
Competitio
n

Improving
Financial
Performance

11-9

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

ANALYZING THE
PRICING SITUATION
Customer
Price
Sensitivity
Legal and
Ethical
Constraints

Analyzing
the Pricing
Situation

Competitors
Likely
Responses

Product
Costs

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

A

B
E

C
Inferior Value Zone

Perceived Price

11-15

Guide to Cost
Analysis
Determine cost
structure

Analyze cost and

volume relationships

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

Competitors 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 HewlettPackard 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-Ps PC unit
reporting a loss in 3rd Quarter 2003. A
major competitive hurdle for H-P is
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
Dells
low-cost
direct-sales
business
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?

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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

Competiti
on

Demand-Cost
Gap

Costs

Legal and
Ethical
Influences

11-21

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

Range of feasible prices

Price
Ceiling

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
Competition

Skim strategy

Neutral strategy
(same as
competition)

Below
Competition

Penetration strategy

11-23

Diplomacy
rather than force

Select
competitive
confrontations

Competitiv
e Pricing
Issues

Target
segments
instead of
volume

Signaling

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

11-24

Illustrative Price
Strategies
Active
strategy

Lowactive
strategy

Highactive
strategy

Low
relative
price

High
relative
price
Lowpassive
strategy

Highpassive
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

Demand

Competition

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)
Pricing

Channel

Price Flexibility
Product Life Cycle
Pricing
Counterfeit Products