December 3, 2011

Pricing Strategy and Tactics

Marketing Management Article Series
In marketing terminology seven levels of price are identified, that give a range between very high price to very low price for a range of products that satisfy a need. Pricing strategy determines the price point and this has to be in alignment with the marketing mix.
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Kotler on Pricing


Many companies do not handle pricing well. Pricing is too cost-oriented. It is not varied enough for different product items, market segments, and purchase occasions.
Demand sets a ceiling no the price that the company can charge for its product. And the cost of production and distribution of the company sets the floor.


The Price Levels


A firm must set a price when it introduces a product into the market. In marketing terminology seven levels of price are identified, that give a range between very high price to very low price for a range of products that satisfy a need. The seven levels are;

1. Ultimate
2. Luxury
3. Special needs
4. Middle
5. Ease/convenience
6. Me Too, but Cheaper
7. Price Alone

Setting the Price


The process of setting the price has six steps.

1. Selecting the pricing objective.


The possible alternative objectives are:

Survival of the firm
Maximum current profit
Maximum current revenue
Maximum sales growth
Maximum market skimming
Indication of product-quality leadership through price
Other objectives like full cost recovery and partial cost recovery for government organization and social organizations

2. Determining the demand.

The possible demand for the product at various feasible prices is to be ascertained. Economic theory posits that as price increases for a particular product, demand for it will come down.
Methods for Estimating Demand Curves
A. Analysis of past data. Data can be longitudinal with varying prices or cross-sectional (various locations with varying prices).
B. The alternative approach is to do an experiment in the same store by varying price during different periods or by setting different prices in similar stores or territories.
C. Survey approach: In this approach buyers are asked to state their purchase intentions at different price levels

3. Estimating cost


The cost of production at the volume of estimated sale is to be ascertained.

4. Analyzing competitors costs and prices


The costs and margins that competitors are earning are to be determined from the analysis of their balance sheets and other alternative methods to be of use in setting prices.

5. Pricing methods


Various pricing methods like markup pricing, target return pricing, perceived value pricing,, value pricing, going rate pricing,  etc. are available to give various alternatives for pricing.

6. Selecting the final price


Pricing methods give a narrow range for setting the price. The final stage might consider some psychological consideration related to market in arriving at the final price.


Adapting the Price


Companies usually do not set a single price for all customers and all transactions. A pricing structure is set up as a strategy that provides scope to account for different demand situations in different geographic markets and costs involved in serving customers and customer specified features related to delivery, credit etc.

Price Increases and Decreases


If there is recession in the economy, companies may have to decrease prices. Inflation may force companies to raise prices.

References


Philip Kotler, Marketing Management (Main text for revision and article)

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Related Knols

Six Sigma Pricing (Based on a HBR article)

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Marketing articles are available under the label http://nraomtr.blogspot.com/search/label/Marketing%20Management
Article on differentiating and positioning http://nraomtr.blogspot.com/2011/11/marketing-strategy-differentiating-and.html


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Article originally posted on
http://knol.google.com/k/ pricing-strategy-and-tactics - Knol Number 133

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