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.
PRICING STRATEGY
AND MANAGEMENT
 Strategic Role of
Price
 Analyzing the Pricing
Situation
 Selecting the Pricing
Strategy
 Determining Specific
Prices and Policies
11-3
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.
STRATEGIC ROLE OF
PRICE
11-5
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.
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 valuebased 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.
How Price Fits into the
Positioning Strategy
11-7
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
Considerations
Instrument
of
Competition
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
ANALYZING THE
PRICING SITUATION
Customer Price
Sensitivity
Legal and
Ethical
Constraints
Analyzing the
Pricing
Situation
Competitors’
Likely
Responses
Product
Costs
11-12
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
D
B
E
C
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
Pricing Pressures in the
Personal Computer
Market
11-17
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.
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?
Determinants of
Pricing Flexibility
11-20
Demand
Competition
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 possible
Price Positioning
Above
Competition
Skim strategy
Neutral strategy
(same as
competition)
Below
Competition
Penetration strategy
11-22
11-23
Diplomacy
rather than force
Select
competitive
confrontations
Competitive
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
DETERMINING
SPECIFIC PRICES
AND POLICIES

Determining Specific
Prices

Policies to Manage
Pricing Strategy

Special Pricing Issues
11-25
11-26
Pricing in Action
Basis of Determining
Specific Prices
Cost
Competition
Demand
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
11-27
Special Pricing
Situations
Price Segmentation
Value Chain (Distribution)
Channel Pricing
Price Flexibility
Product Life Cycle Pricing
Counterfeit Products
11-28