Question

You may use either written paragraph or bullet-point format. Part 1 should be 2–3 paragraphs in length or an equivalent amount of content in bullet-point form.

Part 1: Pricing Strategy

Briefly describe pricing for your product or service. How does this compare to competitors, assuming competitors are at or near break-even point with their pricing? Analyze pricing alternatives and make recommendations about pricing going forward based on the following:

• How sensitive are your customers to changes in price?
• What revenue you need to break even and achieve profitability?

• What does the price says about your product in terms of value, quality, prestige, etc.?

This is For Target Corporation. The retail store

Answer 1

Pricing Strategy

Briefly describe pricing for your product or service.

Price is the value that is put to a product or service and is the result of a complex set of calculations, research and understanding and risk taking ability. A pricing strategy takes into account segments, ability to pay, market conditions, competitor actions, trade margins and input costs, amongst others. It is targeted at the defined customers and against competitors.
Description: There are several pricing strategies:
Premium pricing: high price is used as a defining criterion. Such pricing strategies work in segments and industries where a strong competitive advantage exists for the company. Example: Porche in cars and Gillette in blades.
Penetration pricing: price is set artificially low to gain market share quickly. This is done when a new product is being launched. It is understood that prices will be raised once the promotion period is over and market share objectives are achieved. Example: Mobile phone rates in India; housing loans etc.
Economy pricing: no-frills price. Margins are wafer thin; overheads like marketing and advertising costs are very low. Targets the mass market and high market share. Example: Friendly wash detergents; Nirma; local tea producers.
Skimming strategy: high price is charged for a product till such time as competitors allow after which prices can be dropped. The idea is to recover maximum money before the product or segment attracts more competitors who will lower profits for all concerned. Example: the earliest prices for mobile phones, VCRs and other electronic items where a few players ruled attracted lower cost Asian players.

How does this compare to competitors, assuming competitors are at or near break-even point with their pricing?

Competitor Impact on Pricing

It’s important to remember that pricing is just one component of the marketing mix, and even very specific pricing decisions need to take into account the other components. This is particularly true in a competitive marketplace. Actions by different competitors integrate all elements of the marketing mix and do not focus on price alone. A competitor might make a change to a product or initiate a promotion that impacts customers’ perceptions of value and, therefore, their perceptions of price.

Competitive Pricing

Once a business decides to use price as a primary competitive strategy, there are many well-established tools and techniques that can be employed. The pricing process normally begins with a decision about the company’s pricing approach to the market. Price is a very important decision criterion that customers use to compare alternatives. It also contributes to the company’s position. In general, a business can price its offering to match its competition, or it can price higher or price lower. Each has its pros and cons.

Pricing to Meet Competition

Many organizations attempt to establish prices that, on average, are the same as those set by their more important competitors. Automobiles of the same size with comparable equipment and features tend to have similar prices, for instance. This strategy means that the organization uses price as an indicator or baseline. Quality in production, better service, creativity in advertising, or some other element of the marketing mix is used to attract customers who are interested in products in a particular price category.

The key to implementing a strategy of meeting competitive prices is to have an accurate definition of competition and a knowledge of competitors’ prices. A maker of handcrafted leather shoes is not in competition with mass producers. If he/she attempts to compete with mass producers on price, higher production costs will make the business unprofitable. A more realistic definition of competition in this case would be other makers of handcrafted leather shoes. Such a definition along with an understanding of competitors’ prices would enable management to put the strategy into effect.

The banking industry often uses this strategy by using technology to actively monitor competitors’ rates, fees, and packages in order to adjust their own prices.

Pricing Above Competitors

Pricing above competitors can be rewarding to organizations, provided that the objectives of the policy are clearly understood and the marketing mix is developed in such a way that the policy can be successfully implemented by management.

Pricing above competition generally requires a clear advantage on some nonprice element of the marketing mix. In some cases, that advantage may be due to a high price-quality association on the part of potential buyers.

Betting on that advantage is increasingly dangerous in today’s information-rich environment, however. Online shoppers can get quick price comparisons and read customer or expert reviews to evaluate other elements of the value proposition. This is true for both business-to-consumer and business-to-business offerings. Many consumers also take advantage of their smartphones when they shop: it’s easy enough to stand in one store and compare price and distribution options for the same product and for competitive products. Customers’ access to information puts more pressure on marketers to understand customer value and provide an offering whose price, relative to competitors’ prices, contributes to the value.

You’ll recall our earlier example of Nike using a strategy of raising prices—while its competitors were holding pricing flat or reducing prices—because its analysis showed that it was providing sufficient value to sustain a higher price.

Pricing Below Competitors

While some firms are positioned to price above competition, others wish to carve out a market niche by pricing below competitors. The goal of such a policy is to realize a large sales volume through a lower price and lower profit margins. By controlling costs and reducing services, these firms are able to earn an acceptable profit, even though profit per unit is usually less.

Such a strategy can be effective if a significant segment of the market is price sensitive and/or the organization’s cost structure is lower than competitors’. Costs can be reduced by increased efficiency, economics of scale, or by reducing or eliminating such things as credit, delivery, and advertising. For example, if a firm could replace its field sales force with telemarketing or online access, this function might be performed at lower cost. Such reductions often involve some loss in effectiveness, so the trade-off must be considered carefully.

One of the worst outcomes that can result from pricing lower than a competitor is a “price war.” Price wars usually occur when a company believes that price-cutting will increase market share, but it doesn’t have a true cost advantage. Price wars are often caused by companies misreading or misunderstanding competitors. Typically, they are overreactions to threats that either are nonexistent or are not as big as they seem. You will remember our example of the airline price war, in which the stock price of airlines plummeted because stockholders reacted negatively to price reductions, fearing that a price war would eliminate profits and put the health of the industry at risk.

In the module on product marketing we described the ride-sharing service Uber. Uber has successfully undercut the taxi industry with a product that improves services while lowering prices, which has led to extremely rapid growth and success for the company. When lower prices are part of a complete, compelling value proposition, pricing can provide a powerful solution and create a challenging competitive environment for existing players.

Analyze pricing alternatives and make recommendations about pricing going forward based on the following:

• How sensitive are your customers to changes in price?

Your customer’s price sensitivity is the degree to which price determines his or her inclination to buy your product or service. Typically, price sensitivity is measured by price elasticity of demand, i.e. how does a % change in price affect the quantity demanded by your customers.

If the demand for your product or service is highly inelastic -- that is, your customers are not very price sensitive -- then you’ve got a good business as it leaves you with the power to increase prices without a substantial decline in demand.

Price sensitivity is very much determined by the product or service you’re selling and the industry you’re in: the price elasticity for milk is naturally higher than it is for consumer electronics. But you can, to some extent, influence your customers’ price sensitivity yourself: therefore, we look at some of the factors that determine price sensitivity, and how you can use these in your favour.

1: Reference Price : Consumers compare products. All. The. Time. Even the simplest purchases are most likely preceded by a subconscious evaluation of the alternatives out there, and the cost of this alternative. Here, we talk about the reference price, i.e. what is the price/value combination that the consumer uses to benchmark the purchase.

In theory, all prices are reference prices as they make up the general price level benchmark, and as such, the price of an iPhone can act as a reference price for Chinese takeout. However, often there is just a handful that is significant to the consumer, and the bigger the difference between the price of your product and the reference price in the customer’s mind, the higher the price sensitivity. It’s quite obvious, we know: if a product is very expensive compared to the rest, people will stop buying it. But it’s a very important thing to remember, as you can do something to influence this reference price yourself!
This is called price anchoring: often, the reference price for your product is another one of your products! We like to use smartphones as example; when Apple launches an iPhone 7, the most obvious reference price is the price of an iPhone 6, which Apple can set themselves: by setting the iPhone 6 price quite high, they make the difference between the iPhone 7 price and the reference price smaller. Consequently, the price sensitivity is reduced.

2: Ease of Comparison : All products are substitutes to each other, but some are more obvious than others. How obvious, depends on the ease of comparison. The easier it is to compare your product to alternatives, the higher the price sensitivity will be. Products with a strong brand, for instance, are very hard to compare. How does a Coca-Cola really differ from a Pepsi? Can you tell us why you prefer one over the other? Brands are so unique that it would take a complex, holistic analysis to determine how they differ.
Products with weak brands, on the other hand, which primarily sell their features/attributes are VERY easy to compare. If you go to the supermarket to buy potatoes, how do you decide which brand to buy? If they’re all similarly priced, you take a quick glance and look at which ones look more appetizing. If prices differ, the price will play a very important part in determining your purchase decision.

Lesson: Make sure to differentiate your product, so there are no direct alternatives. This includes branding efforts, but also your pricing. Studies have found that similar products priced similarly reduces the buyer’s inclination to make a purchase at all, as the choice difficulty increases the cognitive load on the customer.

3: Switching Cost : In some cases, the switching cost is explicit: for example, it is common for SaaS-companies to charge an “onboarding fee” to set you up with their software, and so it follows that switching from your current provider will result in you having to incur this onboarding fee again.

In other cases, it is less obvious and may not be a monetary switching cost, but more so the risk associated with switching. If you switch cereal brands, for instance, the switching cost may be the risk that your kids will make a fuss about it next morning.

There are several ways you can make the ‘switching cost’ higher for your product. For example, marketing automation software vendors or social media management platforms typically offer calendar-functions that teams can use to plan out their activities, creating yet another switching cost. If you switch software, you need to set up your calendar from scratch.

4: Fairness :Several studies have found that consumers’ fairness perception has substantial influence on their price sensitivity. Unfairness typically arises from various price discrimination practices, or discrimination in general, which is not necessarily a bad thing as such practices make a key component in profit maximization. However, when unfairness perceptions are created a small price increase can be the straw that breaks the camel’s bag.

What revenue you need to break even and achieve profitability?

The basic goal of every new business is to sell some product or service to earn revenue in excess of costs. Revenues that exceed costs are called profits, and business owners can keep profits as income or reinvest profits in their businesses to fuel growth. The "break-even point" describes the level of sales revenue a company needs to avoid taking a loss.

Basics of Breaking-Even

The term "breaking-even" describes a situation where a company doesn't make profit or lose money. In other to break-even, a company's sales revenue must be equal to its total expenses. This means that the break-even point is the point at which sales revenues are equal to total costs. A company must earn more revenue than the amount necessary to reach the break-even point to achieve profitability.

Sales and the Break-Even Point

Because the break-even point is determined by total cost, revenues do not directly affect the break-even point. Sales revenues do, however, determine whether a company actually reaches its break-even point. If revenues are less than total cost, a company does not reach the break-even point, which results in a loss. A company that fails to make enough sales to meet the break-even point accumulates debt over time, which can eventually cause a company to go out of business.

Break-Even Analysis

A break-even analysis is a strategic planning tool where business managers calculate the break-even point. Determining the break-even point can allow managers to make sales goals and figure out exactly how many units they must sell to make a profit. Businesses face two basic types of costs: fixed costs and variable costs. Fixed costs are costs that stay the same in the short-term, and variable costs are costs that vary depending on the number of units sold. The break-even point occurs when the number of units sold multiplied by the profit per unit equals fixed cost. Profit per unit equals the sale price of a unit minus the variable cost associated with that unit.

What does the price says about your product in terms of value, quality, prestige, etc.?

Prestige pricing, also known as premium pricing or image pricing, is when a company prices its products at a higher point to give consumers the perception that the product is high-value.

This pricing strategy is closely tied to brand perception. Companies that take this approach to pricing often have products that are recognized for their superior quality or the value they add to the lives of customers. The pricing method works based on the assumption that consumers perceive more value in the product if it's priced high, and they're willing to pay a higher price for it.

As a consumer, have you ever purchased something from a company that uses a prestige pricing strategy?

Prestige Pricing Examples

Some high-profile companies use prestige pricing to value their products. Let's take a look at examples of these businesses.

• Apple: The perceived value Apple products provide allows the company to price its products well above the cost to make them. Most are multi-purpose tools you can use to complete numerous tasks (e.g. answer calls, send texts, take photos, etc.).
• Nike: With celebrity endorsers (e.g., Michael Jordan, Serena Williams, etc.) and its well-recognized logo, Nike prices its products based on its image. If high-profile athletes are wearing Nike, shouldn't you?
• Rolex: Would you be willing to spend thousands of dollars on a watch? The perceived quality and luxury of a Rolex watch, and the status that comes with wearing one, are a few of the reasons why it's a premium-priced product.

Prestige Pricing Strategy

A prestige pricing strategy is when companies deliberately set their prices higher than the actual cost of the product. Fashion, technology, and luxury goods are often priced with this method because they can be marketed as exclusive or rare. Commodity goods aren't unique items and a prestige pricing strategy isn't a good fit.

Prestige pricing strategies can vary depending on a company's goals for their brand and offerings. You'll want to look at competitors in your market to see how they price products that are similar to yours. With a unique value proposition that differentiates your product from the competition, you'll be able to justify a higher price point.

Another method to increase the perception of value is to round to the nearest whole number and avoid ending the price with .99 (e.g., $200 instead of $199.99).

For example, it cost $288 to make the iPhone 8. With Apple's prestige pricing strategy, the iPhone 8 was sold to consumers for $799. Apple priced the smartphone 177% above the production cost.