STRATEGY (Chapter 6)

Exhibit 6.1 Steps to More Profitable Pricing

1. 2. 3.
Data Cost Customer Competitor
Collection Measurement Identification Identification

4. 5. 6.
Strategic Financial Segment Competitive
Analysis Analysis Analysis Analysis

7.
Strategy Final Strategy
Formulation
1. Cost measurement: What are the incremental, avoidable costs relevant to this particular pricing
decision?
What is the incremental (not average) variable cost of sales, including manufacturing, customer
service, and technical support?
At what levels of output will additional expenditures on semi-fixed costs be required, and how
much will they be?
What are the avoidable (not yet sunk) fixed costs involved to offer this product at the proposed
price?

2. Customer identification: Who are the potential customers, and why would they buy this product?
What is the economic value of this product or service to customers?
What other factors (such as difficulty in comparing alternatives, prestige associated with the
purchase, budget constraints, the ability to shift all or part of the cost to someone else) influence the
customers sensitivity to price?
How do differences in both perceived value and nonvalue factors influencing price sensitivity
divide customers into market segments?
How could an effective marketing and positioning strategy influence the customers willingness to
pay?

3. Competitor identification: Who are the current and potential competitors whose behavior may
constrain the profitability in this market?
Who are the key current and potential competitors?
If competitors are currently in this market, what actual transaction prices (as opposed to list prices)
do they charge?
Given competitors past behavior, personalities, and organizational structures, what is their goal in
pricing? Do they seek to maximize profitability or sales?
What are competitors strengths and weaknesses relative to the firm? Do they have higher or lower
contribution margins, better or poorer reputations, superior or inferior products, more or less
diversified product lines?
4. Financial analysis: What volume trade-offs are necessary for potential price, product, or promotional
changes to increase profits? For new products or new markets, what sales volume is required to justify
the incremental fixed expenditures?
What is the contribution margin for the product at the initial baseline price?
How much additional sales volume is required to make a lower price generate more contribution?
What is the maximum tolerable loss of sales before a higher price fails to generate more
contribution?
How much additional sales volume is necessary to cover any incremental fixed costs (such as
advertising, regulatory approvals) associated with the decision?

5. Segmentation analysis and implementation: How can the firm price differently to customer
segments to reflect differences (a) in price sensitivity, and (b) in the incremental cost of serving them?
How can the firm most effectively communicate value to these customer segments, given their different
purchase motivations?
How can members of different segments be identified prior to purchase?
How can fences between segments be established so that low-price sales do not undermine value
in high-price markets?
How can the firm avoid violating legal constraints on price segmentations?

6. Competitive analysis: How might competitors react to the firms proposed pricing moves, and what
moves are they likely to initiate? How will competitors actions and reactions affect the profitability and
long-term viability of the firms proposed strategy?
What goals can the firm profitably achieve, given its competitors capabilities and intentions?
How might the firm use information to influence its competitors behavior in ways that would
make its goals more achievable or profitable?
How can the firm insulate its profitability from competitive threats by targeting segments where it
can achieve a competitive advantage?
From what markets should the firm strategically withdraw resources when it cannot profit from
the inevitable competitive confrontations?
 Making Pricing Decisions: The Procedure
1. Identify incremental, avoidable costs applicable to sales changes
caused by price changes

2. Calculate CM ($ or %) and the breakeven sales change (% or

units) corresponding to the price changes

3. Evaluate price sensitivity of buyers and incorporate into cost

analysis & profit projections

4. Identify competitors and evaluate their responses

5. Identify buyer segments in terms of above factors; consider

generic pricing strategies; do an economic value analysis

6. Do a final profit analysis under various sales scenarios

7. Do a managerial analysis of the proposed price changes--this

time consider all costs and benefits--including non-price factors
and other elements of the marketing mix
 Three Generic Pricing Strategies
1. Skim Pricing
- Capture full economic value
- Price insensitive buyers
- Market niche(s) are present
- High contribution margins/profit
- Mktg. Emphasis is (differentiation) v.
- No economies of scale
- Competitive threat is low
- Short-term viability
- Adaptable for sequential use
2. Penetration Pricing
- Capture partial economic value
- Price sensitive buyers
- Mass market possibilities
- Sales volume/market share
- Mktg. emphasis is (low cost) value
- Economies of scale/experience
- Competitive threat is high
- Long-term orientation
3. Neutral Pricing
Segmented Pricing (combinations of the above)
 Exhibit 6.8 Price-Segmentation Model

High

PRICE VALUE
Perceived Pain of Expenditure

SEGMENT SEGMENT

CONVENIENCE LOYAL
SEGMENT SEGMENT

Low

Low High
Perceived Value of Differentiation

Source: Richard Harmer, Boston University