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McGraw-Hill/Irwin

McGraw-Hill/Irwin. © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Eleven Pricing Strategy and Management. McGraw-Hill/Irwin. © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. PRICING STRATEGY AND MANAGEMENT. Strategic Role of Price

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McGraw-Hill/Irwin

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

  2. Chapter ElevenPricing StrategyandManagement McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

  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.

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

  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 potential to create. T. Nagle, Marketing News, 11/9/98, 4.

  7. Target market and objectives Positioning Strategy Product strategy Value-Chain strategy Pricing strategy Promotion strategy How Price Fits into the Positioning Strategy

  8. Pricing Situations • New product pricing • Life cycle pricing • Positioning strategy change • Countering competitive threats

  9. Signal to the Buyer Marketing Program Considerations Instrument of Competition Improving Financial Performance Role of Price in Positioning Strategy

  10. Set Pricing Objectives Analyze the Pricing Situation Select Pricing Strategy Determine Specific Prices and Policies Pricing Strategy for New and Existing Products

  11. Examples of Pricing Objectives • Gain market position • Achieve financial performance • Product positioning • Stimulate demand • Influence competition

  12. Customer Price Sensitivity Analyzing the Pricing Situation Legal and Ethical Constraints Product Costs Competitors’ Likely Responses ANALYZING THE PRICING SITUATION

  13. Customer Price Sensitivity • How large is the product-market in terms of buying potential? • What are the market segments and what market target strategy is to be used? • How sensitive is demand in the segment(s) to changes in price? • How important are nonprice factors, such as features and performance? • What are the estimated sales at different price levels?

  14. Buyers’ Perceptions of Value Offeringsof Brands A-E Perceived Value Superior Value Zone A D B E C Inferior Value Zone Perceived Price

  15. 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 Guide to Cost Analysis

  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

  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 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.

  18. Legal and Ethical Considerations What are the legal and ethical factors that may affect the choice of a price strategy?

  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?

  20. Demand Legal and Ethical Influences Competition Demand-Cost Gap Costs Determinants of Pricing Flexibility

  21. Price Ceiling Price Floor How Much Flexibility Exists? Price too high; little or no demand • Nature of demand in target market • Business and marketing strategy • Product differentiation • Competitors’ prices • Prices of substitutes • Product costs Range of feasible prices Price too low; no profit possible

  22. Price Positioning Skim strategy Neutral strategy (same as competition) Penetration strategy Above Competition Below Competition

  23. Diplomacy rather than force Competitive Pricing Issues Target segments instead of volume Select competitive confrontations Signaling Source: Thomas T. Nagle, “Price Competition,” Marketing Management, Vol. 2, No. 1, 38-45.

  24. Illustrative Price Strategies Active strategy Low- active strategy High- active strategy Low relative price High relative price Low- passive strategy High- passive strategy Passive strategy

  25. DETERMINING SPECIFIC PRICES AND POLICIES • Determining Specific Prices • Policies to Manage Pricing Strategy • Special Pricing Issues

  26. Pricing in Action Basis of Determining Specific Prices Cost Competition Demand

  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

  28. Special Pricing Situations • Price Segmentation • Value Chain (Distribution) Channel Pricing • Price Flexibility • Product Life Cycle Pricing • Counterfeit Products

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