Pricing Strategy and Management

Role of Price

Signal to the
Buyer
Marketing Program
Considerations

Improving Financial
Performance

Instrument of
Competition

Steps involved in Pricing Strategy for

New and Existing Products
1.Set Pricing
Objectives
2.Analyze the
Pricing Situation

3.Select Pricing
Strategy

4.Determine Specific
Prices and Policies

Step 1
Pricing Objectives

Gain market position

Achieve financial performance

Product positioning

Influence competition

Step 2.

Analyzing The Pricing Situation

Customer Price
Sensitivity
Legal and Ethical
Constraints

Analyzing the
Pricing Situation

Competitors Likely
Responses

Product
Costs

Customer Price Sensitivity

How buyers will respond to alternate prices depends upon what value
(benefits-cost) buyers place on the product or brand)

How sensitive (or how elastic) is the demand due to changes in price?

Price elasticity of demand is percentage change in demand divided by

(due to) percent change in price.

Elasticity is not the slope of the demand curve. Elasticity can vary on
the same demand curve for different price levels.

What are the estimated sales at different price levels? (demand curve
forecasting or alternatives using market research techniques)

How important are non-price factors, such as features and

performance?

Inelastic and Elastic Demand

Buyers Perceptions of Value Offerings of Brands A-E

Perceived
Value

Superior Value Zone

D

A
B
E

C
Inferior Value Zone

Perceived Price
Brands A and D offer better than fair value (the diagonal line)

Guide to Cost Analysis

Determine cost
structure

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

Legal and Ethical Considerations

What are the legal and ethical factors that may affect the
choice of a price strategy? Few issues are:
Horizontal Price Fixing
Price Discrimination
Deceptive Pricing

Step 3
Selecting The Pricing Strategy

How much flexibility exists?

How to position price relative to costs? (Price

Positioning)

How visible to make the price of the product?

Determinants of Pricing Flexibility

Demand

Competition

Demand-Cost Gap

Costs

Legal and
Ethical
Influences

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

Price Floor
Price too low; no profit possible

Price Positioning
Above
Competition

Skim strategy

Neutral strategy
(same as competition)

Below
Competition

Penetration strategy

Illustrative Price Strategies (Price Visibility)

Active
strategy
Lowactive
strategy
Low
relative
price

Highactive
strategy

Lowpassive
strategy

Highpassive
strategy
Passive
strategy

High
relative
price

Step 4.
Determining Specific Prices And Policies

Determining Specific Prices

Policies to Manage Pricing Strategy

Determining Specific Price using Cost oriented approach

Break-even (units) = Total Fixed Cost / (unit price unit variable cost)

Price = Average Unit Cost / ( 1 Markup percentage)

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.