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Pricing Strategy
- 1. 11-1 Chapter Eleven Pricing Strategy and Management McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
- 2. 11-2 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.
- 3. 11-3 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. STRATEGIC ROLE OF PRICE
- 4. 11-4 How Price Fits into the Positioning Strategy Positioning Strategy Product strategy Target market and objectives Value-Chain strategy Pricing strategy Promotion strategy
- 5. 11-5 Pricing Situations New product pricing Life cycle pricing Positioning strategy change Countering competitive threats
- 6. 11-6 Role of Price in Positioning Strategy Signal to the Buyer Instrument of Competition Improving Financial Performance Marketing Program Consideration s
- 7. 11-7 Examples of Pricing Objectives Gain market position Achieve financial performance Product positioning Stimulate demand Influence competition
- 8. 11-8 Customer Price Sensitivity Legal and Ethical Constraints Competitors’ Likely Responses Analyzing the Pricing Situation Product Costs ANALYZING THE PRICING SITUATION
- 9. 11-9 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?
- 10. 11-10 Buyers’ Perceptions of Value Offerings of Brands A-E Perceived Value Perceived Price Superior Value Zone D A C E B Inferior Value Zone
- 11. 11-11 Guide to Cost Analysis Determine cost structure A Analyze cost and volume relationships B Analyze competitive advantage C Estimate the effect of experience on costs D Determine the extent of control over costs E
- 12. 11-12 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
- 13. 11-13 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.
- 14. 11-14 Legal and Ethical Considerations What are the legal and ethical factors that may affect the choice of a price strategy?
- 15. 11-15 SELECTING THE PRICING STRATEGY How much flexibility exists? How to position price relative to costs? How visible to make the price of the product?
- 16. 11-16 Determinants of Pricing Flexibility Demand Costs Demand-Cost Gap Competition Legal and Ethical Influences
- 17. 11-17 Price too high; little or no demand Price Floor Price Ceiling Nature of demand in target market Business and marketing strategy Product differentiation Competitors’ prices Prices of substitutes Product costs Rangeoffeasibleprices Price too low; no profit possible How Much Flexibility Exists?
- 18. 11-18 Above Competition Below Competition Skim strategy Neutral strategy (same as competition) Penetration strategy Price Positioning
- 19. 11-19 Diplomacy rather than force Select competitive confrontations Signaling Competitive Pricing Issues Target segments instead of volume Source: Thomas T. Nagle, “Price Competition,” Marketing Management, Vol. 2, No. 1, 38-45.
- 20. 11-20 Basis of Determining Specific Prices Cost Competition Demand Pricing in Action
- 21. 11-21 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
- 22. 11-22 Special Pricing Situations Price Segmentation Value Chain (Distribution) Channel Pricing Price Flexibility Product Life Cycle Pricing Counterfeit Products
- 23. 11-23 Chapter Twelve Promotion, Advertising, and Sales Promotion Strategies McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
- 24. 11-24 Promotion, Advertising, and Sales Promotion Strategies Promotion Strategy Advertising Strategy Sales Promotion Strategy
- 26. 11-26 COMMUNICATION OBJECTIVES ROLE OF PROMOTION COMPONENTS PROMOTION BUDGET PROMOTION COMPONENT STRATEGIES Coordination with Product, Distribution, and Price Strategies DEVELOPING THE PROMOTION STRATEGY Advertising Sales Promotion Public Relations Personal Selling Direct Marketing Interactive/ Internet Marketing MARKET TARGETING AND POSITIONING STRATEGIES INTEGRATE AND IMPLEMENT PROMOTION COMPONENT STRATEGIES EVALUATE EFFECTIVENESS OF PROMOTION STRATEGY
- 27. 11-27 Percent of Sales Fixed percent of sales, often based on past expenditure patterns. Comparative Parity Budget is based largely upon what competition is doing. Objective and Task Set objectives and then determine tasks (and costs) necessary to meet the objectives. Percent of Sales The method is very arbitrary. Budget may be too high when sales are high and too low when sales are low. Comparative Parity Differences in marketing strategy may require different budget levels. Objective and Task The major issue in using this method is deciding the right objectives so measurement of results is important. Features Limitations Budgeting Methods
- 28. 11-28 Illustrative Influences on Promotions Strategy Number and dispersion of buyers Buyers’ information needs Size and importance of purchase Distribution Product Complexity Post-purchase contact required Small High Large Direct High Yes Large Low Small Channel Low No Advertising/ sales promotion driven Balanced Personal selling driven
- 29. 11-29 Increasing Uncertainty About Impact on Purchasing Behavior Increasing Difficulty of Measurement Type of Objective • Exposure • Awareness • Attitude Change • Sales • Profit Alternative Levels for Setting Advertising Objectives
- 30. 11-30 Determining Advertising Objectives 1. Does the advertising aim at immediate sales? 2. Does the advertising aim at near-term sales? 3. Does the advertising aim at building a long- range consumer franchise? 4. Does the advertising aim at helping increase sales? 5. Does the advertising aim at some specific step that leads to a sale? 6. How important are supplementary benefits of advertising? 7. Should the advertising impart information needed to consummate sales and build customer satisfaction? 8. Should advertising build confidence and goodwill for the corporation? 9. What kind of images does the company wish to build? Source: from Exhibit 12-5.
- 31. 11-31 Budget Determination OBJECTIVE AND TASK METHOD HAS A STRONGER SUPPORTING LOGIC THAH THE OTHER METHODS. Media/ Scheduling Creative Strategy Budget Determination
- 32. 11-32 Product Distribution Price Promotion Advertising (How to communicate intended positioning to buyers and others influencing the purchase.) Creative Strategy CREATIVE STRATEGYThe creative strategy is guided by the market target and the positioning strategy. Provide a unifying concept that binds together the various parts of the advertising campaign.
- 33. 11-33 SPREADING the Word on the Net Online advertising is growing at a sizzling 29% rate, to $9.3 billion this year. Here’s why: SEARCH WORKS Google and Yahoo! have demonstrated the power of the Web by using customers’ search queries to connect them with advertisers. This combination fuels a search industry expected to hit $3.9 billion this year. CUSTOMERS ARE ONLINE More than half of American households have always-on Net connections. And the Web reaches millions at the office. The Big Three portals-Yahoo, AOL, and MSN-reach a combined 50 million a day-twice the TV audience of a World Series game. VIDEO ROCKS The adoption of broadband, which can handle video, lets advertisers put TV-like ads online. Longer spots by BMW and Adidas have reached cult status. As demand for video soars, portals sell choice slots in advance, much like TV’s up-front sales. FEEDBACK IS INSTANT Marketers and online publishers have tools to track an ad’s performance in real time, allowing them to make quick adjustments if customers aren’t clicking. This turns the Net into a vast marketing lab. And as video grows, it becomes a test bed for TV ads. CUSTOMERS LEAVE TRAILS It was an empty promise during the dot-com days, but now advertisers have the technology to follow customers, click by click, and to hit them with relevant ads. The upshot? No wasted money peddling dog food to cat owners. Source: Stephen Baker, “The Online Ad Surge,” Business Week, November 22, 2004, 79.
- 34. 11-34 Access to the target audience Cost of reaching the target group(s) Favorable access to cost Unfavorable access to cost Factors Influencing Media Decisions
- 36. 11-36 SALES PROMOTION consists of various incentives, mostly short term, intended to stimulate quicker and/or greater purchase of particular goods/services by end-user consumers or value chain organizations. The strategy process is similar to the design of advertising strategy. SALES PROMOTION STRATEGY
- 37. 11-37 SALES PROMOTION TARGETS Consumer Buyers Salespeople Business Buyers Value Chain Sales Promotion Activities and Targets Activities include trade shows, specialty advertising, contests, displays, coupons, recognition programs, and free samples.