Summary of Chapter – Pricing Strategy The chapter emphasizes the importance of pricing within the broader framework of marketing products and services in the competitive market. The right price helps the company to get the return along with profit which it spends on its production and marketing. Price is intrinsic part of market mix strategy where product, promotion, place etc. are used to sell the product. It is set in conjunction with other elements of market mix. There are three basic methods of setting price: cost based. competitor oriented. and market led. Cost based pricing strategy relies on calculating the base price of the product by taking into account all the expenses incurred from production to marketing. Then percentage of profit that company deems fit is added to set the final cost. The cost price strategy becomes viable for product only when defined sale volumes are estimated and met through effective marketing. This is flawed strategy as it relies on sales volumes and if they are not met, cost goes up and adversely impacts the performance of the company. It also totally ignores the customers who are increasingly become major part of business strategy and marketing.
Competitor based pricing primarily believes in the price strategy of its main competitor and follows the same regardless of its repercussion on its profitability. This is wrong because each has its own constraints and inputs that need to be considered within the pricing strategy. It becomes fatal when the competitor’s strategy is based on selling the product irrespective of loss.
The market led strategy is best described by setting one’s pricing based on the pricing of its competitors. The pricing is either the same or lowered so that to gain market position. Sometime, when value addition to the product provides it with unique features, firms can maintain their market position even when price is raised. This is most prevalent in the contemporary environment of high competition. Glaxo’s Zantac had overtaken SmithKiline Beecham’s Tagamet because it had fewer side effects in ulcer treatment.
Thus, product pricing also influences customer’s perceived value of the product. Three techniques: trade off analysis. experimentation. and economic value to the customer or EVC are used for understanding customers’ perceived value of the products. Trade off analysis uses customer’s requirements for a product and adds or removes those properties within the product to make it attractive to the customers. Firms can raise the price despite heavy competition. Experimentation tests the preferences of customers by placing same product with varying prices at different location. EVC relies on user perceived value and subsequent satisfaction in the consumption of the product. Hence, if the product is of high economic value to the customer, its price can be raised it will be bought because of its value and not because of its price.
Price setting decisions also use: Rapid skimming wher high prices and promotion create product awareness. Low skimming uses high price but low promotion as products have unique features. Rapid penetration utilizes low price and high promotion to gain fast market share. and slow penetration strategy uses low price and low promotional expenditure to maintain high profit. Product line strategy uses differentiation between products. Competitive market strategy uses build objective (lower prices than rivals). hold (waits for competitor to fix price). harvest (increases price to maximize profit). and repositioning (price change due to market conditions). Channel management strategy takes cognizance of distributors and retailers for fixing price. The companies use these strategies to compete in the highly fragmented and competitive environment of global business.
Jobber, David and Fahy, John Fahy. (2006). Foundation of Marketing. Chapter 8 – Pricing strategy. 3rd ed. NY: McGraw Hill.