MKT5610 Chap.9 Pricing Strategy and Competitive Price Dynamics
Pricing Strategy and Competitive Price Dynamics
A price problem is usually not a price problem
The course reading opens with that warning rather than with a method. A price carries everything else about the product with it: what it does well and badly, what buyers believe it is worth, where it stands against rivals, and how much weight its distribution has. It should never be looked at on its own. That is why the topic sits after positioning.
A price is a claim about where you sit, and it can only be set once you know what the claim is meant to be.
Three properties that make price both powerful and dangerous
It determines the sacrifice a buyer weighs directly against perceived value, and sales are reported to respond to a percentage change in price between ten and twenty times as strongly as to the same change in advertising spend.
It can be changed quickly, unlike product or distribution. And its effect appears quickly.
The same three properties let competitors react as fast, which is why a price move without a cost advantage reduces profit across an industry without changing anyone's position.
The profit curve is flat at the top and steep at the sides
An optimal price always exists; the curve around it is relatively flat, so precision is not worth buying; the further from the optimum you are the steeper the fall; and a price set too low sacrifices profit exactly as a price set too high does.
The fourth property is the one most often disbelieved, because managers think in unit margins rather than in the trade between margin and volume.
What this chapter covers
- 01
Price elasticity against advertising elasticity, and what follows
- 02
Four properties of the profit-price curve and the practice each overturns
- 03
Expert judgement, and the procedure that makes it more than opinion
- 04
Why asking buyers directly produces an unrealistically price-conscious answer
- 05
Conjoint measurement and perceived value expressed in price terms
- 06
Observing behaviour, through experiment and through historical records
- 07
Skimming and penetration, and what shortening life cycles have changed
- 08
Three incumbent responses to an entrant, and why the proactive cut wins
- 09
Nonlinear pricing and price bundling as structural rather than promotional
Pick a price and name what would change it
- 3Compute contribution at each of the three prices.
- 2State the ranking and describe the shape it reveals.
- 3Name the estimate the decision is most sensitive to.
Key terms
- Price Elasticity
- The responsiveness of sales to a percentage change in price. Sales are reported to respond to it between ten and twenty times as strongly as to the same percentage change in advertising spend, which is the arithmetic behind price being the most powerful instrument.
- Optimal Price Range
- The band around the profit-maximising price within which profit barely varies. Its existence is why searching for a precise figure wastes effort while getting the magnitude right does not.
- Conjoint Measurement
- A method deriving the value of product attributes from choices between whole profiles that include a price, rather than from direct questions about price. Its output is perceived value expressed in money.
- Preference Contribution
- A numerical value allowing attributes to be compared, from which percentage importance weights summing to one hundred are derived. A computed vector of these occasionally inverts a management prior.
- Skimming
- Launching close to or above the short-term profit-maximising price and reducing it across the life cycle. It requires superior value the buyer can see before purchase.
- Penetration
- Launching at a considerably lower price to build volume and position quickly and, where experience effects are strong, to drive costs down. It remains the choice for undifferentiated products and unknown entrants.
- Proactive Price Cut
- Reducing price before a competitor enters rather than after losing share. Simulation favours it as the best compromise between short-term and long-term profit, and it avoids customers feeling cheated.
- Harvesting
- Holding a high price and accepting share erosion. It is profitable when a company intends to leave a market or has a successor product close behind, because a loyal base keeps an old product alive.
- Nonlinear Pricing
- Charging differently for each unit, through quantity discounts, multi-buy offers, block tariffs or frequent-flyer schemes. It separates heavy from light buyers without asking them which they are.
- Price Bundling
- Selling several products at one combined price, so buyers with opposite valuations of the components can both be served at a price each finds acceptable.
Pricing Strategy and Competitive Price Dynamics FAQ
Why is asking customers what they would pay a bad way to set a price?
Because a price considered on its own makes people far more price-focused than they are in a real purchase, where they weigh what the price buys against what the product offers. The question changes the thing it is trying to measure.
A choice-based approach that embeds price inside whole product profiles preserves the trade-off, and the value of each attribute is then derived from the pattern of choices rather than stated directly.
What does a conjoint study actually give me that I could use?
Quantitative measures of perceived value expressed in price terms. That lets you answer questions that are otherwise unanswerable: what a brand is worth in money, what a technical feature or a faster delivery is worth, and what happens to share if a price or a feature moves.
The caution attached is that design and interpretation flaws are frequent, profiles should be highly realistic, and numerical attributes must stay within realistic levels and intervals.
Should I use skimming or penetration for a new product?
Neither is a default. Penetration remains the choice for products that are not differentiated and for an unknown company entering a new market, because in both cases there is no basis on which a buyer would accept a premium. Skimming rests on superior value the buyer can verify, and shortening life cycles have pushed it to be more pronounced than tradition suggested in order to shorten the payoff period.
Choose on whether the value exists and is visible.
A competitor is about to enter. What are my options?
Three. Cut before they enter, cut after entry once you have lost some share, or hold the price and accept erosion. Simulation across many cases favours cutting first as the best compromise between short-term and long-term profit, and it also avoids customers feeling cheated by a reduction that arrives only under competitive pressure. The difficulty is organisational: nobody enjoys cutting a price while business is still good.
Assessment move
Take one product you sell or plan to sell and write three prices with an honest volume estimate against each, then compute contribution at all three. The exercise takes ten minutes and it usually shows that the price being argued about is inside the flat region while the price nobody proposed is on the falling side. Then name which volume estimate the answer turns on.
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