Marketing and Pricing Strategies
Price
Amount of money paid for a product or service, or the sum of values consumers exchange for the benefits of using it.
Marketing Objectives
Companies must determine the product/service strategy, often influenced by market positioning. A common objective is profit maximization.
Marketing Mix Strategy
Pricing decisions should align with product design, distribution, promotion, and advertising for a cohesive and effective marketing program.
Costs
Costs establish the minimum price. Companies aim to cover production, distribution, and sales costs.
Types of Costs
- Costs at different production levels
- Costs based on production experience
External Factors
Market and Demand
While costs set the lower price limit, market and demand determine the upper limit.
Pricing in Different Markets
- Pure competition
- Monopolistic competition
- Oligopolistic competition
Price Perceptions and Consumer Value
Consumers determine a product’s price appropriateness. Pricing decisions should be buyer-centric.
Pricing Strategies
- Cost-Based: Adding a standard markup to the product cost.
- Break-Even and Target-Return Pricing: Setting prices to cover costs or achieve a specific profit goal.
- Value-Based: Setting prices based on perceived customer value, not seller costs. Offering the right quality and service at a fair price.
- Competition-Based: Basing prices primarily on competitors’ prices, with less emphasis on internal costs.
Strategies for Competing in a Price War
Non-Price Strategies
- Transparency: Reveal intentions and strategic capabilities.
- Price Matching: Offer to match competitor prices.
- Everyday Low Prices (EDLP): Offer consistently low prices.
- Cost Advantage: Highlight a lower cost structure.
- Quality Focus: Enhance product differentiation through features or highlighting existing benefits.
- Strategic Alliances: Form partnerships with suppliers, resellers, or related service providers.
Price-Based Strategies
- Complex Pricing: Launching new products or using fighter brands to compete in specific segments.
- Dynamic Pricing: Adjusting prices in response to competitor actions or market changes.
- Simple Pricing: Offering bundled pricing, quantity discounts, promotions, or loyalty programs.
Pricing Process
- Selecting the target market and pricing objective.
- Designing appropriate strategies (price vs. non-price, skim vs. penetration, discounts, freight, fixed vs. flexible, psychological, leader, EDLP vs. high-low, resale price maintenance).
- Choosing the base price determination method (cost-plus, unit-plus).
Price vs. Non-Price Competition
Price Competition: Offering products at the lowest possible price with minimal services (e.g., appliances, computers, travel).
- Many consumers prioritize value over price, leading companies to adopt value-oriented pricing.
- This strategy involves offering cheaper products with similar benefits or finding ways to reduce costs and profits.
Non-Price Competition: Maintaining stable prices and focusing on other marketing aspects to improve market position (e.g., highlighting product features or benefits).
Market Entry Strategies
Market Skimming Pricing
Setting a high initial price for a new product to generate high margins and recover costs quickly.
Appropriate when:
- The product has unique features in high demand.
- Demand is inelastic.
- Competition is limited by barriers to entry (e.g., cell phones, LCD/LED TVs).
Market Penetration Pricing
Setting a low initial price to capture a large market share quickly.
Suitable when:
- The product has a mass market.
- Demand is elastic.
- Unit costs can be reduced through large-scale production.
- Strong competition exists or is expected.
Discounts and Rebates
- Volume Discounts: Encourage large purchases based on quantity or monetary value.
- Non-Cumulative Discounts: Apply to individual orders.
- Cumulative Discounts: Based on total purchases over a period.
- Trade Discounts: Offered to channel partners for performing marketing functions.
- Cash Discounts: Reward prompt payment.
Factors Influencing Pricing
Internal Factors
- Demand level
- Profitability
- Brand positioning
- Comparability with competitors
- Compatibility with other marketing mix elements
External Factors
- Shortening product life cycles
- Proliferation of brands
- Economic conditions (inflation, price controls)
- Legal restrictions
- Reduced purchasing power
Positioning
- Product: Set of attributes or characteristics.
- Satisfaction: Set of objective and perceived values.
- Price: Reflects the perceived value and overall utility to the buyer.
- Importance of a clear position for pricing decisions.
Pricing Objectives
- Profit: Maximizing ROI or achieving an acceptable profit level. Determined by demand.
- Volume: Maximizing sales or market share. Penetration pricing involves setting a low price to gain market share, then adjusting for profit once volume is achieved.
- Value: Targeting specific buyer segments with high perceived value. Aiming for the highest possible price with the highest possible sales volume.
Price Elasticity
Elasticity refers to the sensitivity of demand to price changes.
Determinants of Price Sensitivity
- Unique Value: Consumers are less price-sensitive when a product has unique qualities.
- Substitute Awareness: Consumers are less price-sensitive when they are unaware of substitutes.
- Comparison Difficulty: Consumers are less price-sensitive when product comparisons are difficult.
- Total Expenditure: Consumers are less price-sensitive when the product price is a small part of their total spending.
- End Benefit: Consumers are less price-sensitive when the product provides a significant benefit.
- Cost Sharing: Consumers are less price-sensitive when costs are shared.
- Sunk Investment: Consumers are less price-sensitive when the product complements a previous purchase.
- Prestige: Consumers are less price-sensitive when the product is associated with quality, prestige, or exclusivity.
- Inventory: Consumers are less price-sensitive when they can store the product.