Pricing Strategy 1

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Pricing Strategy - 1

• Week 6
• Fall 2007

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Analysis Framework
Segmentation
Positioning (Vintage)
Company Analysis
Competitor
Analysis
Consumer Orientation
Competitive Advantage
Marketing Strategy
Consumer Behavior (TiVo)
Branding and Product Strategy
Steinway
Product
Price
Promotion
Place
Market
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Dell Computers

• Dell Corp 2006 sales 56 Billion.
• Fostered a new age of price competition. Priced
  20 to 30 below IBM and consistently
• Founded in 1984 by Michael Dell,
• 22 yr old, UT Austin marketing major, initial
  seed capital of 80K
• IBM open architecture,
• investment in RD, advertising and sales force
  support.
• Sold through regular distribution channels.
  Depended upon dealer service and support
• Dell targeted the expert market
• sold thru 1-800 number.
• Direct marketing cut out the channel fat.
• piggybacked upon IBM open architecture.

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Key Point

• Pricing must always be thought of in the context
  of the other elements of the marketing mix.
  Dells low price was possible because
• Right target experts
• Direct marketing, therefore no distribution or
  salesforce cost
• Less mass media advertising
• Dell direct marketing system strategically
  positioned to take full advantage of the Internet
  when it took off in the mid 1990s

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Comprehensive Pricing Approach
Price Ceiling (Demand Factors, Consumer
Reservation Prices)

• Competition
• Risk
• Preemption
• Market Penetration

Final Pricing Decision
Price Range

• Corporate objectives
• Managing Competition
• Liquidity
• Skimming

Price Floor (Cost Factors, Direct Variable Costs)
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IBM versus Dell

• Two types of computer buyers Novices (80)
  Experts(20)
• Computer Expert Novice
• IBM (600) 1000
• Dell (400) 800
• Why doesnt the Novice buy from Dell?
• Why doesnt the expert buy from IBM?

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Pricing Strategy
Price Ceiling (Demand Factors) 800
Competitive Factors
Final Pricing Decision
Price Range
Corporate objectives
Price Floor (Cost Factors) 400
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Responding to Price Competition

• Computer Price market
• Dell (400) 800 0
• Gateway (400) 700 100
• How does Dell respond?
• Matches price and announces that it will match
  further reductions a 50 discount!

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Managing Competition - 1Price Matching (Crazy
Eddie)

• In the New York city stereo wars Crazy Eddie had
  made his trademark We cannot be undersold. We
  will not be undersold. Our prices are the
  lowest.guaranteed. Our prices are insane.
• His main competitor Newmark Lewis is no less
  ambitious. With any purchase you get the stores
  Lifetime low-price guarantee. It promises to
  rebate double the difference if you can find a
  lower price elsewhere. If after your purchase
  from Newmark you find the same item at a lower
  price (proof of purchase required), in the
  marketing area, during the lifetime of your
  purchase, Newmark will give you a 200 gift
  certificate refund (100 of the price difference
  plus an additional 100).
• What would happen to prices when firms compete by
  offering these guarantees?
• What could be the reasons why these retailers
  adopted these policies in the first place?
• Would these price matching guarantees claims
  increase competition between the two retailers
  and reduce their profits or would it do the
  opposite?

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Price Matching Guarantees

• Will PMs increase or decrease market prices?
• Price matching guarantees
• helps a firm to protect its consumers and charge
  a high price
• It makes your competitor soft. Takes away the
  benefit for your competitor to undercut your
  price.

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Managing Competition 2Building Reputation
Price Leadership

• 1.   Two gas stations next to each other (gas
  stations CHISEL HAMMER)
• 2.   Both procure gas at a cost of 90 per
  gallon.
• 3.   Total demand per day 1,000 gallons.
• 4.   Each gas station charges price of
  1.00/gallon.
• 5.   At this price, each gets a demand of 500
  gallons/day.
• 6.   If one of the stations charges a slightly
  lower price all consumers can go to that station
  and its demand can go up to 1,000 gallons.

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Suppose

• Station CHISEL charges 99 and station HAMMER
  develops a reputation for responding by
  charging 91 for the next 3 days.
• Extra profit for CHISEL from chiseling is
• If it does not chisel it makes 10 x 500 50.00
• If it chisels it makes 9 x 1000 90.00
• Extra profit from chiseling 40.00
• Lost profit for CHISEL for the next 3 days is
• (1.00 0.91) x 500 x 3 135.00.
• So CHISEL does not chisel. HAMMER imposes profit
  loss on CHISEL by also incurring a loss. IS THIS
  REALLY TRUE ??

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Key Points

• Price leadership requires building a
  reputation.
• Price leadership also requires deep pockets
  i.e., demonstrable ability to suffer a loss.
• Possible cost of building a reputation for HAMMER
  (0.99 0.91) x 500 x 3 120.00.
• Possible cost imposed on CHISEL due to punishment
  is 135-40 95.
• Key and interesting point is that HAMMER never
  incurs the cost of 120.00 if its reputation is
  credible. Because then the need for punishment
  does not arise.

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Pricing Strategy
Price Ceiling (Demand Factors) 800
Managing Competition Price matching Building
reputation
Competition
Final Price 650
Price Floor (Cost Factors) 400
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Messages

• Pricing strategies must work in an integrated
  fashion with other elements of the marketing mix.
• It is important to consider the pricing process
  and carefully account for valuation, cost and
  strategic factors including managing competition.