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So what shape do pricing strategies typically take? Typically, three
types of pricing strategies are found. These are:
1. Cost-based strategies
Pricing a brand based on achieving
a given margin over and above
costs of manufacturing, marketing
and distribution. Often associated
with sales- or production-led
organisations; tends to encourage
a mechanistic approach to cost
control and pricing. Examples:
Cost-Plus: Price = full cost +
mark-up (as a % of full cost)
Mark-Up: Price = direct cost +
mark-up (as a % of direct cost).
This technique is preferred to
Cost-Plus for products with a
relevant percentage of direct
costs on total costs.
Break-Even Analysis: Price =
variable costs + fixed
costs/quantity. This formula
does not depend on any cost
controlling technique (Full Cost
or Direct Cost); it provides a
useful decisional support for
different marketing strategies,
taking into account
return on investments.
2. Competition-based
strategies
Pricing based on the competitive
strategy and on “attack/defence
moves” of competitors against
a given brand. Often associatedwith “competitive intelligence-led”
organizations; characterised by an
“against-someone” positioning.
Pure Parity: Price = Price of
a chosen competitor. Typical
strategy of “price takers” who
set price equal to one of the
“price makers” and align
constantly to it. This can also be
a strategy for specific channels,
e.g.: vending impulse.
Dynamic Parity: Given a
chosen competitor, the gap
with its price is kept constant
in time, in order not to change
competitive positioning in the
consumer perception. This
is most common amongst
category leaders and the #2
brand, and is usually expressed
as an index, i.e.: #2 brand will
aim for 90% of the category
leader’s price.
Discount Pricing: Price is
always below the average of
competitors, allowing a precise
positioning of low perceived
price and low perceived
benefits.
Premium Pricing: Price is
always above the average of
competitors, allowing a precise
positioning of high perceived
price and high perceived
benefits.
3. Value-based strategies
Pricing based on value of a brand
as perceived by the consumer.
Value perceived by consumer
may have little to do with the cost
of manufacturing, marketing or
distribution. Often associated with
marketing-led organisations, tends
to focus organisations on maximising
the value creation process. Some
common techniques are:
Elasticity Analysis: The
price decision results from the
calculation of the sensitivity
of volumes to price changes.
By simulating different price
scenarios it is possible to set
the optimal price to the one
maximizing expected revenues
and profits.
Buy-Response Analysis: The
price decision results from
market research estimating the
consumer’s intention to buy
at different price levels. The
outcome is a quantification of
perceived value.
Conjoint Analysis: The
consumer quantifies the
economic value of the perceived
utility for each product attribute,
making it possible to determine
the ideal pricing of each product
configuration.
Segmentation pricing,
niche pricing, EDLP
or Hi-Lo pricing, and
other approaches are ultimately variations of
these three fundamental
strategies
This toolkit of price tactics is the
marketers’ / retailers’ arsenal for
strategizing in the pricing game.
Managing price strategy consists of
viewing pricing through a variety of
perspectives.
By looking at the varied elements
of marketing, profit, value, pricing
objectives and how these interact
with the impact on profitability and the
competitive dynamics of the market,
arriving at a definitive pricing strategy
can be a rewarding activity. This
includes looking at key elements of
the marketing mix. These are:
Those that exert a downward
pressure on prices:
Consumer dynamics
• Macro-economic pressure
• Sensitivity to price and gaps to
key competitors
• Whether the product is a luxury,
necessity or substitute
Competitor marketing
• Pricing, promotions, media,
innovation of the competition in
the market
• New entrants
Retailer strategy
• Role of category and brand
• Competition between retailers
• Private Label strategy
• Balance of power; trade margin
negotiations
Those that exert an upward
pressure on prices:
Your own business objectives
• Profit, turnover, volume, share
Own marketing
• Investment in innovation, media,
promotions, packaging
Cost of goods
• Increasing supplier and
distribution costs
• Volume-dependent costs
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