Price (Fach) / Price Strategy Formulation (Lektion)

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• Volume-based objectives • Revenue (sales) growth:Using price level to increase demand and unit sales. • Market share:Prices are set to increase sales faster than competition; or to reduce a salesdecline to be slower than competition. • Demand is the amount of a product that buyerswould be willing and able to purchase at possiblealternative prices during a given time, all otherthings remaining the same• When a product’s price is raised, fewer units ofthat product will be demanded An important reason for setting volume objectives is to ensure capacityuse (production, logistics etc,)
• Operational objectives • Pricing has an impact on the use ofproduction and logistics capacity• Higher use of production capacity leads to abetter distribution of fixed costs over unitsproduced• Larger production may lead to better use oflogistics capacity But:• Fixed costs are not absolutely fixed• They are always fixed for a specificrange of production volume only• Beyond this volume they mayincrease as well
• Financial objectives • Liquidity• Cash flow• Return on investment• Pay-off periodsIn some economic situations, fast returns oninvestment or quick liquidity may be prefered.
• Liquidity A measure of the extent to which a person or organization has cash tomeet immediate and short-term obligations, or assets that can be quicklyconverted to do this.Liquidity is a core objective at the corporate level. In certain situations orfor certain companies it may have priority over the absolute level of profita firm achieves. It can be measured through different indicators, e.g.The current ratio (also known as working capital ratio) measures the liquidityof a company and is calculated by dividing its current assets by its currentliabilities.The term current refers to short-term assets or liabilities that are consumed(assets) and paid off (liabilities) in less than one year. The current ratiois used to provide a company's ability to pay back its liabilities (debtand accounts payable) with its assets (cash, marketable securities, inventory,and accounts receivable).
• Competitive Objectives The objective is to maintain a certain difference between ownprice points and competitor price points for comparable productsor services Price stability• The firm attempts to keep prices from declining (usually found in mature markets); usually leads to non-price competition. Aggressive pricing• Price below competition to take advantage of market changes, when market demand is growing, or when opportunities to grow market share exist.
• Price wars: mechanism and implications In a price war competitors use a series of repetitive price reductionswithin a short period to face an environment of increasing competition. Mechanism: you always undercut Implications: Company§ Decrease of profitability§ Loss of brand value§ Reduction of innovation skills§ Risk of insolvencyIndustry§ Losing competitive advantages§ Danger through substitutesCustomers§ Short term effects: Lower prices§ Long term effect:- Lower product quality- Decreasing reference price- Oligopoly market structures
• Main reasons for price wars Overcapacity High commodity product Low market growthIndustry structure
• Image-related objectives § Quality-based objectives:In other areas of marketing (positioning, brand management, communication etc.)companies define the quality level at which they want consumers to perceive theirproducts.For many customers / in many situations, price is a quality indicator§ Prestige objectives:Prices are set at a relatively high level in order to develop and maintain an image ofexclusiveness that appeals to status-conscious customers Risk of price reductions or variations:Erosion of quality or prestige image in customer perception
• Profitability objectives Profit = turnover - costs • Depending on the situation, maximum profits over a planning period may be obtained- either by pricing the firm’s offerings relatively low- or by pricing the firm’s offerings relatively high.• High profits are achieved by companies following different types of pricing approaches.• Which strategy to follow depends on the nature of market demand and competition. Turnover (= sales revenue) = p * qContribution margin = (p – cv) * qContribution margin ratio = [(p – cv) * q] / [p * q ]Profit = [(p – cv) * q] - cf Example:q = 1.000.000, p = 2.-, cv = 0,50, cf = 1.000.000Turnover = 2.000.000Contribution margin = 1.500.000Contribution margin ratio = 1.500.000 / 2.000.000 = .75 = 75%Profit = 1.500.000 - 1.000.000 = 500.000Profit ratio (profitability) = 500.000 / 2.000.000 = .25 = 25%
• Conflicting objectives In practice, different objectives may be conflicting, i.e. trying to reach oneobjective may make it difficult to achieve others.For example,• High price levels and using large production capacityIn order to maintain high price levels, goods and services must remain rare;large production capacities bear the risk of over-supplying a market;decreasing demand will lead to price pressure• Market share and profitability:In order to win market share (sell more products, win more orders fromcustomers) companies often need to reduce price (through discounts, etc.)
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• 7 Objectives in pricing Volume-based objectives Operational objectives Financial objectives Competitive Objectives Image-related objectives Profitability objectives Conflicting objectives
• Scope and challenge of strategic price concepts Strategic price concepts are• comprehensive and consistent concepts• integrating the price instruments a company uses• designed with a long-term perspective• in order to help the company achieve its economic objectives. Why are such concepts important?• The number and variety of pricing tools obliges companies tocoordinate the instruments used.• Focused price concepts contribute to a clear and differentiatedpositioning under increasing competitive pressure
• Price segmentation as the starting point for strategic concepts 1. Segmentation: Analyse customer data in order to identify customer segments that differ withrespect to their price behavior and/or their willingness-to-pay 2. Targeting of selected segments through differential pricing (segment-specific prices) 3. Prioritization of profitable customer segments
• Price targeting and positioning Price targeting• Price segmentation provides the information about structures/ patterns in a company‘s customer base• If price segments with considerable differences in pricebehavior / willingness-to-pay can be identified on a market, adecision is required whether all segments should beaddressed or only one or several segments• Targeting refers to the decision which price segments toaddress Price positioning• Price positioning refers to the decision what expense-value-relationshipto define for the targeted segment(s)
• Price positioning is a key decision in price management Expense-value-diagram Traditional price positioningsare situated in the consistency zone Consistency price positionings occupylow, medium, premium and luxury pricepositions Aggressive competitors occupy thediscount zone Innovative competitors do notrespect traditional positionings Ideal price positionings depend uponcustomers’ perceptions andpreferences Zone of disadvantage consistency zone discount zone
• The luxury concept Characteristics• Exceptional quality• High profile brands• Exclusiveness / rareness• Outstanding designFocus upon:• Snob effect(exclusiveness)• Purisme• PrestigeExamples:• Rolex• LVMH• Rolls Royce
• Luxury pricing Pricing issues: 1) Profit levers are limited: Increase volume? No, keep exclusiveness Decrease variable cost? No, keep quality 2) Anti-laws of luxury pricing: Keep price constant to preserve luxury brand Price elasticity is good Prices in luxury markets are not regulated automatically 3) Signaling function High price makes customer perceive higher levels of product quality (functional value) exitement of self reward (emotional value) status (symbolic value)
• Premium value concept Characteristics• High product quality• Latest technology• Design• Full service• Trustworthy brandFocus upon:• Solid value• Trustworthy priceExamples:• Mercedes, BMW• Miele• Apple
• Fairness concept Characteristics• Price and value transparency• Sincere prices• Price guaranteesFocus upon:• Price security• Price individualization• Lean BuyingExamples:• Lands End• IKEA
• Deal-oriented concept Characteristics• Price promotions• Active pricing• Differential pricing• AuctionsFocus upon:• Price opportunities• Customer “cleverness”• Price pride / deal pronenessExamples:• McDonald‘s• Railroad companies• Last-minute trips
• Low price concept Characteristics• Lowest prices in category• Limited product rangeFocus upon:• Simple offering• “No thrills”• Time savingsExamples:• Aldi• Generic medicaments• Ryan Air, Easy Jet
• Discounting as a strategic concept: Core elements Price leadership: Price advantage: Constant low price positioning  Aggressive pricing  Price sincerity Simplification: Efficiency for customers: Focus on important features  Customer integration  Reduction of customer risk Cost leadership: No waste: Process focus  Comprehensive solutions  Implementation orientation
• Traditional retailers’ strategic reactions to discounters § Price reductions on existing assortment§ Re-examination of business costs§ Move towards buying alliances§ Development of entry-price private labels (Ja!)§ Assortment rationalisation§ New store formats
• Suppliers: To trade with discounters or not? • Key growth sector across Europe• High volume sales per product line• Fixed price annual contracts• Straightforward relationships, based on net net pricing• Prompt payment• Limited resources required to service the account 4 Options: § Supply an existing branded product without change§ Manufacture an existing brand in a different pack size§ Offer an existing secondary brand§ Manufacture a unique product for the discount channel and create a new brand
• Risks of supplying discount retailers § Negative impact on brand equity§ Existing customers must be managed & pricing justified§ Production investment e.g. mixed cases§ Service level requirements e.g. half pallets§ Emphasis is on price, not category development§ Quality cannot be compromised

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