Selecting the Pricing Strategy

Analysis of the pricing situation provides essential information for selecting the pricing strategy.Using this information management needs to 1) determine extent of pricing flexibility 2) decide how to position price relative to costs and how visible to make the price of the product.

How much flexibility exists?

Demand and cost factors determine the extent of pricing flexibility.Within these upper and lower boundaries,competition and pricing objectives also influence the choice of a specific pricing strategy.

Price Positioning and Visibility:

A key decision is how far above cost to price a new product within the flexibility band.A relatively low market entry price may be used with the objective of building volume and market position,or instead, a high price may be selected to generate large margins.The former is a "penetration" strategy whereas the latter is a "skimming" strategy.Analysis of the results of low price strategies in highly competitive markets indicates that while the strategies are sometimes necessary,they should be used with considerable caution.

Illustrative Pricing Strategies:

The pricing strategy selected depends on how management decides to position the product relative to competition and whether price will perform an active or passive role in the marketing program.The use of price as an active factor refers to whether price is highlighted in advertising,personal selling and other promotional efforts.

1.High-Active Strategy:

Emphasizing a high price in promotional activities is intended to convey to the buyer that the expensive brand offers superior value.While used on a very limited basis,this pricing strategy has been employed to symbolically position products such as high-end alcoholic beverages.

2.High-Passive Strategy:

High prices may be essential to gain the margins necessary to serve small target markets,produce high-quality products or pay for the development of new products.Relatively high priced brands are often marketed by featuring non price factors rather than using high active strategies.

3.Low-Active Strategy:

Several retailers use this pricing strategy,including home depot,office depot and southwest airlines.The low-active strategy is also popular with discount stock brokers.When price is an important factor for a large segment of buyers,a low-active price strategy is very effective,as indicated by the rapid growth of retailers like Wal-Mart.

4.Low-Passive Strategy:

This strategy may be used by small producers whose brands are not familiar to buyers and have lower cost features than other suppliers.By not emphasizing a low price,the firm runs less danger that potential buyers will assume the brand is inferior to other brands.

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