Creating your price strategy for the marketing mix is critical for success in B2B and B2C organizations.
All profit organizations and in many nonprofit organization set prices on their products or services.
In this post, I’ll consider the development of a price strategy. The strategic role of price in marketing positioning strategy is considered and several pricing situations will be discussed.
The pricing of goods and services performs a key strategic role. In many companies, it’s a consequence of deregulation, intense global competition, slow growth, and the opportunity for companies to strengthen market position.
Price impacts financial performance and has an important influence on buyer’s perceptions and positioning of brands.
A higher price, through psychology pricing, may serve as a proxy for product quality when buyers find it difficult to evaluate complex products. This is known as premium pricing and can lead to higher profit margins.
Example of Pricing Strategies
Here is the list of pricing strategies:
- Penetration Pricing
- Product Bundle Pricing
- Promotional Pricing
- Geographical Pricing
- Economy Pricing
- Price Skimming
- Psychological Pricing
- Product Line Pricing
- Optional Product Pricing
- Captive Product Pricing
- Value-Based Pricing
- Premium Pricing
Aggressive pricing strategies of air passenger carriers illustrate the importance of price decisions, business performance, and competitive advantage. Most visible are the tactical actions of price cuts and special promotions. This is also seen in the automobile industry.
Underlying the maze of economy pricing and discounts offered by competing carriers are price strategies guided by computers that track travel patterns. This high level of sophistication allows airline price strategist to confine bargain rates to selected cities, seats, and shorter time periods.
Pricing decisions can have explosive and far-reaching consequences. Once implemented, a price strategy may be difficult to alter. Particularly if the change calls for a significant increase. Pricing actions that violate laws can land executives in jail.
Price as many possible uses as a strategic instrument in corporate and marketing strategy. Today, price often performs an active role in the strategies and tactics of retailers. This revolution in pricing practices has led to more flexible price strategies and tactics.
The worldwide oil glut today has led to major declines in oil prices, creating new pressures on price strategies. Some consequences are favorable. While others create new threats for the companies affected by oil prices. Pricing policies and structure must be developed to establish the role of price in marketing strategy while retaining enough flexibility to respond to changing conditions.
The Strategic Role of Price
Several factors influence marketing management’s decision about how price will be used in marketing strategy. An important concern is estimating how buyers will respond to alternative prices for a product or service.
The relationship between demand and price affects pricing decisions. The cost of producing and distributing a product set lower boundaries on the pricing decision.
Costs affect an organization’s ability to compete. The existing and potential competition in the market segments targeted by marketing management constrains the ability in selecting prices. Finally, legal and ethical constraints also create pressures on decision-makers.
Price in the Marketing Mix
The function of price in marketing strategy depends on the target market, the product, and the distribution strategies marketing management chooses. These relationships are shown in Exhibit 1. Strategic choices about products and distribution often and set important guidelines for both price and promotion strategy.
Responsibility for Price Strategy
Such factors as product quality and features, type of distribution channel, and users serve, and intermediaries functions all help establish a price range. When an organization establishes a new distribution network and the influence of one mix component on another may vary in different strategy situations.
Responsibility for pricing decisions varies among organizations. Marketing executives are responsible for price strategy and many companies. Pricing decisions are made by the chief executive officer in some companies.
These include organizations like military equipment producers and many construction firms. Manufacturing and engineering get assigned price responsibility with companies that produce custom design industrial equipment. Examples are John Deere and Caterpillar.
In general, marketing leaders are likely to have pricing responsibility for consumer products and services. Price determination for their very large purchases may involve the chief executive officer and other members of the top management team. Industrial product producers are more likely to assign pricing responsibility to non-marketing executives.
The marketing strategy may be fragmented if pricing is not part of the chief marketing executives responsibilities. Price decisions must be coordinated with other decisions in the marketing program.
Operations, engineering, and finances should participate in strategic pricing decisions, regardless of where responsibility is assigned. Coordination of strategic and tactical pricing decisions with other aspects of marketing strategy is critical because of the interrelationships involved.
When a single product is involved, the price decision is simplified. However, a product line or mix of products must be priced at a specific price point. Consider the following a product and consumable supplies for the product.
The strategy is to price a product at competitive levels and set higher margins for suppliers. The availability of supplies from several competitors may limit the producer’s price flexibility. Examples include parts for automobiles, sim cards for cameras, and refills for printers.
The prices for products in a product portfolio do not necessarily correspond to the cost of each item. Prices and supermarkets are based on a total mix strategy rather than individual item pricing. Advertising pricing strategies are important factors in advertising as well.
Understanding the composition of the mix and the interrelationships among products is important. This is essential when the branding strategy is built around a line or mix products rather than on a brand by brand basis. A popular pricing strategy in marketing SaaS software is often with bundle pricing.
Product quality and features affect price strategy. A high-quality product may require a high price to help establish a prestige position in the marketplace. And to satisfy top management’s profit performance objectives.
Likewise, a manufacturer supplying private branded products to a retailer like Target must price competitively in order to obtain sales. Companies analyze the product mix, branding strategy, and product quality and features to determine the effects of these factors on pricing strategy.
Distribution Strategy and Pricing
The pricing strategy of an organization requires continuous attention because of changing external conditions. the actions of competitors and the opportunity for gaining a competitive edge through pricing actions are also considered.
Pricing strategies include:
- Deciding how to price a new product. Often considerable flexibility exists in the selection of a price.
- Evaluating the need to adjust the price because of external forces and changes in the product life cycle.
- Changing a brand’s positioning strategy that requires adjusting the current price strategy.
Decisions about the price for existing products may include increasing, decreasing, or holding prices at current levels. The competitive situation is an important factor in deciding if and when to alter prices. Demand and cost estimates are strong influences on new product pricing.
Deciding how to price a new product also requires an assessment of competing substitutes.
Price strategy receives considerable direction from the decisions management makes about the product mix, brand strategy, and product quality.
Distribution strategy also influences the choice of how price will work in combination with advertising and sales for strategies. Price, like other marketing program components, is a means of generating a market response.
Two important trends are apparent in the use of price as a strategic variable. First, companies are designing more flexibility in their price strategies in order to cope with the rapid changes in uncertainty in the turbulent business environment. Second, the price is more often used as an active rather than a passive element of corporate and marketing strategies.
This trend is particularly apparent in the retail sector, or aggressive little price strategies are used by firms such as Walmart and Amazon.
Assigning an active role in price does not necessarily require low prices relative to the competition.
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