Class 26 Marketing Pricing
Strategies
Pricing Strategy
Considerations
for a
New Business
A Macro Overview of
Setting & Influencing Prices
Tuesday November 22, 2011
Supply Chain
Where you are in the Supply
Chain affects pricing strategies
used.
Consume
r
Retailer
Wholesaler
or Middleman
Product
Manufacturer
or
Service
Provider
Pricing Hierarchy for a Product Manufacturer
Determining Appropriate Pricing
Pricing
Strategy
Marketing Plan
Business Model
[Plan]
Business Model Components
Organization
Marketing
• Operations &
Mgmt.
• Products/Services
• Market Analysis
• Goals & Strategies
• Customer Service
Financial
• Needs & Sources
• Budget, P & L,
Bal. Sheet, BE
Analysis
• Competition
• Market
Trends
• Market
Research
• Pricing
Strategies
• Competitive
Position
• Sales,
Marketing /
Distribution
Channel
Strategies
• Branding
• Advertising &
PR
Customer Service
• Target
Market
Marketing Strategy
Market Analysis
Marketing Plan Components
• Customer
Service
Activities
• Evaluations
Price Setting Guidelines
 What Selling Price is acceptable to the market?
 How do you determine this?




Survey the market needs, wants and competitive situation
Research published industry reports
Price testing on the web
Check local businesses that carry/offer product/service
 What are the company objectives as far as
positioning itself in the marketplace?
 From the Business Plan
 What are the company costs that must be
covered and still make a reasonable profit?
 How do you determine this?
 From the Business Plan
Interrelated Factors Affecting
Appropriate Price Setting
4) External
Understanding the
Competitive Marketplace
5) External
Price reflects
consumer demand
6) External
Using Marketing Channels
Effectively
1) Internal
Meeting Business Plan
Objectives
2) Internal
Covering Product
Costs
3) Internal
Accounting for
any Added
Product Value
Managing Internal vs. External
Forces Affecting
Selling Price Strategies
Internal
External
Internal - Company Objectives
and the Effect on Price & Profits
1
 Does the Sell Price reflect intrinsic company
objectives?
Is the Type of Selling Price structured to:
 Maximize profits?
 Generate high sales growth at the expense of
profit maximization?
 Strike a balance between profits and growth?
Example Pricing Strategies
& Types
Higher Pricing
To reflect product
exclusivity & higher profits
Skimming
Initial high price,
then reduce for more
market share
Midrange
Pricing
To foster a good mix of
sales and profits
Competition
Match current market
price range
Premium
Selling exclusivity
Position
Selling image & reflect
consumer views
Lower Pricing
To increase sales and
market share
Penetration
Lower price to
increase sales
Bundle
Sell a group of
products at reduced
price
Internal – Product Cost Considerations
2
Does the SP Cover Fixed & Variable Costs & Allow
Reasonable Profit?

Givens (from Business Plan):
Breakeven Analysis
Alt. 1 Balanced
Approach
Alt 2 High Sales Growth
[20% SP Reduction]

Est. yearly production =
30,000 units
30,000 units
Starting Sell Price [SP] =
$14/unit
$11.20/unit
Max. Revenue =
$420,000
$336,000
Estimated Fixed Costs [FC] =
$50,000
$50,000
Estimated Variable Costs [VC] =
$9.00/unit
$9.00/unit
$320,000
$320,000
at capacity




[Materials= $4.00 Labor= $5.00

Total Costs [FC + VC] =


Contribution [SP/unit – VC/unit] = $5.00

$2.20
Sales volume to cover costs &
initiate profit [FC / Contribution] =
10,000 units
22,727 units
Percent of capacity utilized
33%
76%
before making a profit
3
Internal - Product Value-Added
Considerations Affecting Price
 Adding Value to Product Features
 Can the product be positively modified, and/or
enhanced giving it a higher net worth in the
marketplace vis-à-vis consumer perception of
added benefits and comparative advantage over
competing products ?
 Example: a commodity food item is made gourmet - Starbucks
If yes, will the product enhancement enable:
 A higher SP and profit without compromising sales
growth?
 A wider market penetration without compromising
profit?
Interrelated Factors Affecting
Price Setting
4) External
Understanding the
Competitive Marketplace
5) External
Price reflects
Consumer Demand
6) External
Using Marketing
Channels Effectively
1) Internal
Meeting Business Plan
Objectives
2) Internal
Covering Product
Costs
3) Internal
Accounting for any added
Product Value
4
External – Competitive
Pricing Strategy Considerations
 Understand your competition & their position in
the marketplace
 Identify competitive strengths and weaknesses
 Fairly assess your product comparative
advantages & disadvantages
 From that assessment, consider modifying your
SP accordingly
 Compare your product & price to similar
competitive products & pricing in your
marketplace
 How?
 Market Research (Web, call, visit, industry data,
interview potential customers, trade organizations,
etc.)
5
External - Market Demand
Pricing Strategy Considerations
 By researching what the consumer thinks of the
product and what they may be prepared to pay makes
using different pricing techniques possible
 Conduct thorough market analysis of target market.
Based on those results [in combination with other Internal
& External Pricing Factors]:
1) Set position price to reflect consumer’s view of the
product genre’, or;
2) Set product price based on known demand, or;
3) Set product price high to “skim” highest profits and
take advantage of some customer’s desire for a new
product at any price
 Take into consideration where the overall economy is
going, buying trends, and potential effects on product
demand vis-à-vis price
6
External - Pricing Influences
in the Marketing Channel
 What are marketing channels?
 Other than selling direct, it’s the use of
intermediaries to bring and distribute
products and services to market.
 Why companies use marketing channels?
 Lower cost of doing business, better
positioning, targeted consumers, enhanced
penetration, better match of product
features to consumer’s needs, shared
commercial risks.
External- Levels of
Distribution
1
Manufacturer
2
Manufacturer
3
Manufacturer
Consumer
Wholesaler
Retailer
Consumer
Retailer
Consumer
Manufacturer Direct
to Consumer
 Pricing Influences




Price discounts
Volume discounts
Bundled pricing incentives
Special promotions [seasonal, economyrelated, etc.]
 Rebates
Manufacturer to Retailer
 General
 Being further from the consumer means
giving up some control on the how, to whom
and at what price products are sold.
 Pricing Influences
 Shared or pass through costs
 Promotions, advertising
 Incentives
 Rebates
3
Manufacturer to
Wholesaler or Middleman
 General
 You are buying contacts, market knowledge and
access, experience, and scale of operation
 Pricing Influences
 Shared and pass through costs
 promotions, advertising
 Incentives
 Warranties, returns
 physical distribution – transportation & storage
 Enhanced cash flow
 Better efficiency in distribution costs:
 Greater sales
 Better profits through targeted sales
Summary
 Setting prices initially should consider internal
inherent factors including acknowledging
company sales objectives, covering product
costs, and adjusting prices for legitimate
value-added features.
 Setting prices should consider the competitive
market range and reflect true demands of the
target market.
 Once marketing channels have been selected,
consider pricing adjustments to reflect
additional internal efficiencies and customerperceived added value in getting products to
the desired market with cost minimization.