Pricing Considerations and Approaches
Factors to Consider When Setting Prices
A company's pricing decisions are affected by both internal company factors and external environmental factors (see Figure 11.1).7
INTERNAL FACTORS AFFECTING PRICING DECISIONS
Internal factors affecting pricing include the company's marketing objectives, marketing mix strategy, costs, and organizational considerations.
Before setting a price, the company must decide on its strategy for the product. If the company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward. For example, when Honda and Toyota decided to develop their Acura and Lexus brands to compete with European luxury-performance cars in the higher-income segment, this required charging a high price. In contrast, Motel 6, Econo Lodge, and Red Roof Inn have positioned themselves as motels that provide economical rooms for budget-minded travelers; this position requires charging a low price. Thus, pricing strategy is largely determined by decisions on market positioning.
ACTIVE FIGURE 11.1
Factors affecting price decisions
At the same time, the company may seek additional objectives. Common objectives include survival, current profit maximization, market share leadership, and product quality leadership. Companies setsurvival as their major objective if they are troubled by too much capacity, heavy competition, or changing consumer wants. To keep a plant going, a company may set a low price, hoping to increase demand. In the long run, however, the firm must learn how to add value that consumers will pay for or face extinction.
Many companies use current profit maximization as their pricing goal. They estimate what demand and costs will be at different prices and choose the price that will produce the maximum current profit, cash flow, or return on investment. Other companies want to obtain market share leadership. To become the market share leader, these firms set prices as low as possible.
A company might decide that it wants to achieve product quality leadership. This normally calls for charging a high price to cover higher performance quality and the high cost of R&D. For example, Caterpillar charges 20 percent to 30 percent more than competitors for its heavy construction equipment based on superior product and service quality. Gillette's product superiority lets it price its Mach3 razor cartridges at a 50 percent premium over its own SensorExcel and competitors' cartridges. And A. T. Cross doesn't sell just ballpoint pens-you can get those from Bic. Instead, it sells "fine writing instruments" in models bearing names like Classic Century, Ion, Morph, Matrix, ATX, and Radiance, selling for prices as high as $400.
A company might also use price to attain other, more specific objectives. It can set prices low to...