Market-Oriented Pricing: Strategies for Management

Pricing Info from

Market-Oriented Pricing: Strategies for Management

Michael Morris and Gene Morris

EXAMPLES OF PRICING OBJECTIVES:

target return on investment
target market share
maximize long-run profit
maximize short-run profit
sales growth
stabilize the market
convey a particular image
desensitize customers to price
be the price leader
discourage entry by new competitors
speed exit of marginal firms

avoid government investigation and control
maintain loyalty and sales support of middlemen
avoid excessive demands from suppliers
be regarded as fair by customers
create interest and excitement for the item
use price of one product to sell other products in line
discourage others from lowering prices
recover investment in product development quickly
encourage quick payment of accounts receivable
generate volume as to drive down costs

TYPES OF PRICING STRATEGIES
Cost Based: /

mark-up pricing – variable and fixed costs per unit are estimated, and a standard mark-up is added. The mark-up is frequently either a percentage of sales or of costs.
target return pricing – variable and fixed costs per unit are estimated. A rate of return is then taken times the amount of capital invested in the product, and the result is divided by estimated sales. The resulting return per unit is added to unit costs to arrive at a price.

Market-based: /

floor pricing – charging a price that just covers costs. Usually in order to maintain a presence in the market given the competitive environment.
penetration pricing – charging a price that is low relative to a) the average price of major competitors and b) what customers are accustomed to paying
parity pricing (going rate) – charging a price that is roughly equivalent to the average price charged by the major competition.
premium pricing (skimming) – the price charged is intended to be high relative to a) the average price of major competitors and b) what customers are accustomed to paying
price leadership – usually involves a leading firm in the industry making fairly conservative price moves, which are subsequently followed by other firms in the industry. This limits price wars and leads to fairly stable market shares.
stay out pricing – the firm prices lower than demand conditions require, so as to discourage market entry by new competitors.
bundle pricing – a set of products or services are combined and a lower single price is charged for the bundle than would be the case if each item were sold separately.
value-based pricing (differentials) – different prices are set for different market segments based on the value each segment receives from the product or service.
cross-benefit pricing – prices are set at or below costs for one product in a product line, but relatively high for another item in the line which serves as a direct complement (e.g. certain brands of cameras and film).

FACTORS FAVORING PENETRATION PRICING / FACTORS FAVORING PARITY PRICING / FACTORS FAVORING PREMIUM PRICING
possibility of significant cost reductions with volume production / will entrenched competition or presence of a price leader / no cost savings from increased production volume
sizeable segments which highly elastic demand / desire to be regarded as “fair” by distributors and customers / sizeable segments with highly inelastic demand
low barriers to competitive entry / moderate barriers to competitive entry / high barriers to competitive entry
low customer switching costs / need exists to stabilize the market / high customer switching costs
ability to use price to convey bargain image / product or service does not lend itself to non-price differentiation / ability to use price to convey unique quality benefits or exclusivity
ability to use low price of one product to sell other products in the line / no differences in cost structures among the various competitors / clear-cut cost advantage which competitors cannot duplicate

KEY MANAGERIAL QUESTIONS TO BE ADDRESSED IN DEVELOPING A PRICING STRUCTURE

Should a standard list price be charged for the product or service?
Should frequent or large customers be charged the same base price?
Can and should separate prices be charged for different aspects of the product or service?
How should the time of purchase affect the price charged to a customer?
To what extent should the price charged be varied to reflect the cost of doing business with a particular customer?
Should customers who value the product more be charged a higher price than other customers?
What is the nature of any discounts to be offered the buyer?
When and where should title be taken by the buyer?
Is it realistic to offer a dual-rate structure, where the same customer has a choice between two pricing options for the same product or service?
Should the price structure involve a rental or leasing option?

TEN MAJOR QUESTIONS TO ADDRESS REGARDING COMPETITORS BEFORE MAKING PRICING DECISIONS

How do the market objectives of our leading competitors differ from our own objectives?
Are there meaningful differences between the pricing strategies of leading competitors and our own strategy?
Which target markets are receiving priority from our competitors? Are these the same as ours?
What existing commitments do competitors have to production schedules for various products, to customer groups, to distributors, or to suppliers?
How much unused production capacity do competitors have?
Do competitors differ significantly in terms of their financial solvency?
What are the differences in the production costs and overhead positions of our leading competitors?
How quickly can competitors react to any pricing moves on our part, given their organizational structure, current product offerings, and their production techniques?
Are there differences in the depth and breadth of competitors product lines compared to our own? Are their prices for any one item less flexible because of overall product line considerations?
What situational factors exist for competitors which have implications for their pricing behavior (e.g. seasonality in a particular market, excess or obsolete inventory)?

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