PRICING STRATEGY AND MANAGEMENT

The pricing strategies for goods and services are becoming increasingly
challengeing for many firms because of deregulation, informed buyers, intense global
competition, slow growth in many markets and the opportunity for firms to strengthen
market position. Price impacts financial perfomance and is an important influence on
buyers’ value positioning of brands. Price may become a proxy measure for product
quality when buyers have difficulty in evaluating complex products.

Strategic Role of Price

Several factors influence management’s decisions about how price will be used in
marketing strategy. An important concern is estimating how buyers will respond to
alternative prices for a good or service.

 Price in the Positioning Strategy

Strategic choices about market targets, positioning strataegies and product and
distribution strategies set guidelines for both price and promotion strategies. Prodict
quality and features, type of distribution channel, end users served and the functions
performed by value-chain members all help establish a feasible price range.

 Pricing Situations

pricing strategy requires continuous monitoring because of changing external

conditions, the actions of competitors and the opportunities to gain a competitive edge
through pricing actions. There are various situations requiring pricing actions such
as :

1. Deciding how to price a new product or line products

2. Evaluating the need to adjust price as the product moves through the product life
cycle.

3. Changing a positioning strategy that calls for modifying the current pricing
strategy.

4. Deciding how to respond to the pressures of competitive threats.

 Various Roles of Pricing

Prices perform various functions in the marketing program as signal to the buyer, an
instrument of competition, a mean to improve financial perfomance and a substitute
for other marketing program functions.

 Pricing Strategy

Strategy formulation begins by determining pricing objectives, which guide strategy

development. Next, it is necessary to analyze the pricing situation, taking into account
demand, cost, competition and legal and ethical factors. These analyses indicate how
much flexibility there is in pricing a new product or changing the pricing strategy for
an existing product.

 Pricing Objectives

Managers use their pricing strategies to achieve specific objectives. More than one
pricing objective is usually involved and sometimes the objective may conflicts with
each other. If so, adjustments may be needed on one of the conflicting objectives.
Pricing objectives vary according to the situational factors present and management’s
preferences. A high price may be set to recover investment in a new product. This
practice is typical in the pricing of new prescription drugs. A low price may be used
to gain market position, discourage new competition or attract new buyer.

ANALYZING THE PRICING SITUATION

Pricing analysis is essential in evaluating new-product ideas, developing test

marketing strategy and selecting a new-product introduction strategy. Pricing analysis
on a regular basis is also necessary for existing products because of changes in the
market and competitive environment, unstatisfactory market perfomancce and
modifications in marketing strategy over the product’s life cycle.

 Customer Price Sensitivity. One of the challenges in pricing analysis is

estimating how buyers will respond to alternative prices. Analysis of buyers’
responsiveness to price should answer the following question :

1. Size of the product-market in terms of buying potential

2. The market segments and market targeting strategy to be used

3. Sensitivity of demand in each segment to changes in price

 4. Importance of nonprice factors, such as features and perfomance

5. The estimated sales at different price levels

 Competitor Analysis. Each competitor’s pricing strategy needs to be evaluated

to determine (1) which firms represent the most direct competition (actual and
potential) for buyers in the market targets that are under consideration; (2) how
competing firms are positioned on a relative price basis and the extent to which
price is used as an active part of their marketing strategies; (3) how successful
each firm’s price strategy has been and (4) the key competitors probable for
competitor identification.

 Legal and Ethical Considerations. The last step in analyzing the pricing
situation is identifying possible legal and ethical factors that may affect the
choice of a price strategy.

1. Horizontal Price Fixing. Pricing collusion between competitors. Products with

narrow profit margins are more likely to lead to price fixing.

2. Price Discrimination. Charging different customers different prices without an

underlying cost basis for discrimination.

3. Deceptive Pricing. This pricing practice involves misleading the buyer by a high
price that is subsequently reduced to the normal price.

4. Price Fixing in Channels of Distribution.

5. Price Information. This practice involves violating requirements concerning the

form and the availability of price information for consumers. Unit pricing and
consumer credit requirements are examples.

SELECTING THE PRICING STRATEGY

Analysis of the pricing situation provides essential information for selecting the
pricing strategy. Using this information management needs to (1) determine extent of
pricing flexibility and (2) decide how to position price relative to costs and how
visible to make the price of the product.

 How Much Flexibility Exist?

Demand and cost factors determine the extent of pricing flexibility. Within these
upper and lower boundaries, competition and legal and ethical considerations also
influence the choice of a specific pricing strategy. The price gap between demand and
cost may be narrow or wide. A narrow gap simplifies the decisions; a wide gap
provides a greater range of feasible strategies. Choice of the pricing strategy is
influenced by competitors’ strategies, present and future and by legal and ethical
considerations.

 Price Positioning and Visibility

A relatively low market entry price may be used with the objective of building
volume and market position or instead, a high price may be selected to generate large
margins. Analysis of the results of low-price strategies in highly competitive markets
indicates that while the strategies are sometimes necessary.

 Illustrative Pricing Strategies

The pricing strategy selected depends on how management decides to position the
product relative to competition and whether price performs an active or passive role in
the marketing program.

1. High-Active Strategy. The underlying logic of emphasizing the high price in

promotional activities is to convey to the buyer that because the brand is
expensive it offers superior value.

2. High-Passive Strategy. High prices may be essential to gain the margins

necessary to serve small target markets, produce high-quality products, or pay for
the development of new products.

3. Low-Active Strategy. The low-active strategy is also popular with discount

stock brokers. When price is an important factor for a large segment of buyers, a
low-active price strategy is very effective, as indicated by the rapid growth of
retailers like Wal-Mart.

4. Low-Passive Strategy. this strategy may be used by small manufacturing whose

products have lower-cost features than other suppliers. By not emphasizing a low
price, the firm runs less danger that potential buyers will assume the product
quality is inferior to the brands.
DETERMINING SPECIFIC PRICES AND POLICIES

 Determining Specific Prices. It is necessary to either assign a specific price to

each product item or porvide a method for computing price for a particular
buyer-seller transaction. Many methods and techniques are available for
calculating price.

1. Cost-Oriented Approaches. Break-even pricing is a cost-oriented approach that

may be used to determine prices. The initial compulation is as follows :

Total Fixed Costs

Break - Even (Units) 
Unit Price - Unit Variable Cost

When using markup pricing, this formula determines the selling price :

Average Unit Cost

Price 
1  Markup Percent *

2. Competition-Oriented Approaches. Pricing decisions are always affected by

the actions of competitors. Pricing methods that use competitors’ prices in
calculating actual prices include setting prices equal to or at some sepcified
percentage above or below the competition’s.

3. Demand-Oriented Approaches. The buyer is the frame of reference for these

methods. One popular method is estimating the value of the product to the buyer.
The objective is to determine how much the buyer is willing to pay for the
product based on its contribution to the buyer’s needs or wants.

ESTABLISHING PRICING POLICY AND STRUCTURE

 Pricing Policy. A pricing policy may include consideration of discounts,

allowance, returns and other operating guidelines. The policy serves as the basis
for implementing and managing the pricing strategy. The policing may be in
written form, although many companies operate without formal pricing policies.

 Pricing Structure. Pricing structure concerns how individual items in the line are
priced in relation to one another : The items may be aimed at the same market
target or different end user groups.

SPECIAL PRICING SITUATIONS

 Price Segmentation. Price may be used to appeal to different market segments.

 Distribution Channel Pricing. The pricing strategies of producers using

marketing middlemen should include consideration of pricing needs of channel
members.

 Price Flexibility. Another special consideration is deciding how flexible prices

will be. Will prices be firm or will they be negotiated between buyer and seller.