chapter 10 (pricing strategy)

Marketing Management by Arun Kumar and N Meenakshi© Vikas Publishing House Pvt. Ltd. 2006

CHAPTER 10PRICING STRATEGY


LEARNING OBJECTIVES

• Various methods of fixing the initial pricing on the basis of cost, competitors, marketing and customer value perceptions

• Identifying and analyzing various factors that influence pricing strategies of companies when using a marketing-oriented approach

• Understanding how companies plan, implement and measure pricing cues to customers

• Adjusting pricing according to consumption levels


• Understanding price sensitivity of customers and room for maneuverability of price levels

• Understanding when and by which methods companies can initiate price changes

• When to follow competitor induced price changes, when to follow quickly and when to follow slowly

• Price wars: Initiation of price cuts, response and impact of the response strategies

Learning Objectives (Contd.)


PRICING• Company earns revenues by charging a price from

buyers

• Price: Value that the company expects to get from customers in return of the product or the service the company is providing to the customer

• Pricing should not be treated in isolation

• Blend with other elements of marketing strategy to form a coherent mix that provides superior customer value

• Price part of positioning strategy since it sends quality cues to customer


METHODS OF PRICING

• Cost oriented pricing

Full cost pricing

Direct cost pricing

• Competitor oriented pricing

Going rate pricing

Competitive bidding


• Marketing oriented pricing

Pricing new products

Rapid skimming

Slow skimming

Rapid penetration

Slow penetration

Methods of Pricing (Contd.)


Pricing existing products

Build objective

Hold objective

Harvest

Repositioning strategy



• Value to the customer

Buy response method

Trade-off analysis

Experimentation

Economic value to customer (EVC) analysis



FACTORS INFLUENCING PRICING DECISIONS

• Price-quality relationship • Product line pricing

• Explicability • Competition• Negotiating margins • Effect on distributors and retailers • Political factors • Earning very high profits • Charging very low prices


PRICING CUES

• Cues should be planned, implemented and measured to track their success

• Sale sign announces a discount for the customer

• ‘9’ at the end of a price denotes a bargain

• Customers do not remember prices of most items so they cannot tell whether they are being charged a fair amount


• When retailers give price guarantees, customers are more confident that the store prices are lower than those of its competitors

• Have measurement systems in place to monitor the effect of a pricing cue

• Pricing cues are double-edge swords

Pricing Cues (Contd.)


CONSUMPTION AND PRICING

• Consumption of the offering important

• Customer steadily reminded of the cost he is incurring if he pays for it regularly

• Regular usage reminds customers about benefits

• Customers should consume the product that they have bought


• Customers feel compelled to use products that they have paid for

• Consumption is driven by perceived cost rather than the actual cost

• Payments that occur at or near the time of consumption increases attention to a product’s cost, increasing the likelihood of its consumption

• Price bundling influences consumption. Companies bundle prices to hide the cost of individual components

Consumption And Pricing (Contd.)


PRICE SENSITIVITY

• Reduce price sensitivity of customers to increase scope for maneuvering pricing strategies

• Determines latitude that a company will have to increase price

• Customer is price sensitive if he bears the cost instead of third party

• Customer less price sensitive if he does not have to make the payments upfront


• Allowing customers to pay later may make him less fixated on price

• Price sensitive if the cost of the item represents a substantial percentage of a customer’s total expenditure

• Company will have to evaluate the price sensitivity of its customer’s customers

• More likely to be price sensitive if he is able to judge quality without using price as an indicator

Price Sensitivity (Contd.)


• Price sensitive if he can easily shop around and assess the relative performance and price of alternatives

• More likely to be price sensitive if he is able to judge quality without using price as an indicator

• Price sensitive if he can take the time he needs to locate and assess alternatives

• Price sensitive if he can switch from one supplier to another without incurring additional costs

Price Sensitivity (Contd.)


INITIATING PRICE CHANGES

• Circumstances under which price can be raised

• Circumstances under which prices may be cut

• Proactive price cut

• Tactics of Price change

• Estimating competitor reaction


• Reacting to competitors’ price changes

When to follow a competitor’s price moves

When to ignore to a competitor’s price move

• Tactics of reaction

Initiating Price Changes (Contd.)


PRICE WARS

• Fight a price war without eroding brand equity and profits

• Price cut invariably triggers a chain reaction in the industry

• Price wars decline in the overall profits of every player in the industry

• Customers expect and want more price reductions, affecting industry competitiveness


• Companies in such situations must decide their response strategies:

Analyze the situation

Choose to reveal its strategic intentions to its competitors without responding to the price cut in any other manner

Compete strictly on non-price based measures

There is life after price wars for brands

Price Wars (Contd.)


Selectively respond to such price cuts to avoid an all out war

Last option is to fight the price war

Start planning exit strategies if it cannot fight the war, and other stronger

competitors will fight

Price Wars (Contd.)

chapter 10 (pricing strategy)

Business

customer pricing

pricing consumption

pricing cue pricing

initial pricing

measure pricing cues

pricing existing products

low prices pricing cues

price changes