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Discussion
INTRODUCTION
Pricing policies in many companies tend to be based more on intuition and what the market
will bear more than scientific or objective criteria. However, this approach is beginning to
change, in line with many other changes taking place in marketing and in the U.S. and global
economies. Pricing has become a key issue for both consumer and business marketers, and
sadly it is a problem area where few managers are well prepared. Pricing is not part of most
university programs, largely because it long has been considered part of the world of
economics, “the dismal science”.
Marketing professionals have tended to ignore pricing theories and concepts, and in the past
they did not even consider it as an equal part of the marketing equation. Accordingly, pricing
and the impact of price have been studied very little, but clearly it is and should be one of the
more important aspects of the marketing process. To most contemporary marketing
professionals, pricing is a final and very important marketing strategy focal point. Without an
effective pricing analysis and price decision, the rest of the marketing process is left
unfinished.
ROLE OF PRICING
Pricing can and does help a company attain its other marketing objectives. As a result, pricing
strategy should be tied closely and carefully to the overall business, competitive, and marketing
strategy. Further, the pricing program should be supported with a focused plan of
implementation. Pricing enables the marketer to segment markets, define products, create
customer incentives, and even send signals to competitors.
For example, if the company wants to enter a crowded field, such as the credit card business, it
may opt for a penetration strategy. This is what Sears did with the Discover card. The retailer
obtained as many customers as possible through a low price (i.e., no membership fee), and
established a position in the market. Skimming would be the opposite strategy, pricing a
product at a high level to “skim” the innovators. That way, the firm obtains high profits at the
beginning of the product life cycle, effectively covering the development costs. After the firm
pays for the development costs, it has the option to move the price down to the next level to
achieve other marketing objectives. Either strategy can work, but the decision, implementation
and results all depend on the firm’s marketing objectives.
Many marketing professionals argue that pricing is a valuable strategic weapon that helps
companies enhance and capitalize on competitive vulnerability, and there is no question that
pricing decisions have an immediate impact on a company’s bottom line. From this
perspective, it is easy to argue that to a large degree, pricing decisions can determine whether a
product and/or a company will succeed or fail.
PRICING LIMITS
The first thing a pricing strategy process would determine is that there is an upper and lower
price boundary, and each has to be considered. The upper boundary, the economic value of the
product, basically is the most an informed consumer is willing to pay for the product.
Marketers determine this boundary by comparing the product with a reference product, and
asking what attributes the product has that are above, or below, the value of the product offered
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by the competitors. Clearly, if a product is below the value of the competition, it is almost
impossible to set the price higher than the competitive price.
Next, the marketer should identify the best available alternative product for the most important
customer market or segment. The marketer could ask: “Other than the obvious benefit, what
additional benefits does this product provide?” Many times the benefit is labor savings or
additional productivity. Other times there could be emotional benefits, or some other intangible
benefit.
Once the list of benefits is completed, it is time to assign a value to each benefit. Some
benefits are quantifiable directly, such as labor savings. The analyst can calculate the number
of hours saved times the wage rate. If there is another specific benefit, the firm may try to
determine the value. For example, the marketer may analyze possible substitute products to
determine if there are other benefits that related products might have that eventually prove
important in the competitive process. It is appropriate to make an effort to determine the
approximate value of each such benefit to determine if and when prices should be adjusted.
Another technique that can be useful in determining the upper boundary of a particular
product’s price is a conjoint study, or survey, of various customers. With this approach,
prospects are invited to select from a series of pricing options for the product. In the survey, the
researcher attempts to determine the value of the product’s particular attributes. Once the firm
has obtained this data, they have found the upper boundary of the product’s potential price.
It is critical to approach the process from the customer perspective, separating what the
company thinks of the economic value and the customer’s perceived economic value.
Unfortunately, some companies care so much about the product, that they consider every
benefit at the high end. The result is that the survey research has to determine whether people
will believe what the company believes concerning price and value.
THE ROLE OF THE CUSTOMER
There are many examples of the role of the customer in the pricing process, and one of the
dramatically less expensive than the competition. The company maintained that pricing point
for four years. Datastorm dominated the field, with an 85 percent market share among IBM
computer users, until 1995-96. Many analysts credit the company’s pricing strategy as the key
to its success.
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approach can be quite useful for those selling into an established market, or even if they are
selling into a new market, if the measurement is performed properly.
factors could receive those benefits.
To determine low-end pricing for a particular product, it is important to adopt a customer
perspective. As noted above, companies often are so aware and care so much about the product
that every benefit is considered at the high end in price-value. Of course, the obvious question
is whether individual consumers and the marketplace have the same perception of value and
price.
and time-sensitive goods and/or services. The variable cost tells you what you are gaining for
each additional customer. If you raise that price too high, you likely consider additional
customers as not as valuable as they truly are in the final analysis (such as when the plane is
setting on the runway, ready to take off).
popularity since 9/11 as the airlines and other industries watched their carefully developed
strategies based on their perceptions of value go down the drain.
The relationship between the quality of a product and a particular price is always an issue.
Price sensitivity research has provided much information that can help determine the
place emphasis on the first number. On the other side of the scale, Nordstrom and other
high-end retailers price in even numbers. This lends an aura of quality to the product. There is
also prestige pricing, where you effectively advertise that you have the most expensive
perfume in the world. This is strictly a matter of old-fashioned snob appeal, but it works,
depending on your market segment.
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THE ART OF NAMING A PRICE
but those based on the characteristics and/or circumstances of the customer are considered
unfair. One of the major pricing issues in recent years is that of “everyday low pricing”. This is
where the retailer charges a constant, lower price at all times, with no temporary price
discounts. This approach reduces uncertainty among consumers, and it helps to restore faith in
the North.
Whatever pricing tactics the firm chooses, it is important to remember that pricing is essential
to strategy and should not be treated as an afterthought. Strategic pricing should be one of a
business’s most potent competitive weapons, and substantial sales potential may well be lost
without an effective planning and control effort in this important area of marketing activity.
III. Background Article
Issue: Pricing Online Content
Marketers Mull Formulas for Charging Consumers
As the online advertising market continues to struggle, many online content marketers are
wrestling with the issue of how to add at least some level of paid subscription income to their
revenue mix in order to reach or improve profitability. Since the business of selling content
online is still basically in its infancy—and many consumers clearly still think of Web content
pay-for-content marketing decisions: How much to charge site visitors and where to place the
site’s so-called wall that divides free and paid-access content.
According to the head of the Wall Street Journal Online operations is that many on-line firms
are looking at is that they have a massive audience coming to their free site, and what kind of
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in New York (now a division of comScore Networks Inc., based in Reston, Va.), 71 percent of
respondents said they either “strongly” or “somewhat” agreed with the statement which read,
“I can’t understand why anyone would ever pay for content on the Internet.” But online content
marketers advise ignoring consumer surveys on this point.
for one-day access to $19.50 for monthly access.
AskART says from the time the site was launched as a totally free offering in spring 2000, they
always planned to make a portion of it paid access, because they had confidence that art
collectors would recognize the value and be willing to pay. So far, his faith has been validated:
pay-for-access model. The company held firmly to this business plan because its management
was confident that their online content was “high value;” now, WSJ.com has 640,000 paid
subscribers.
In the consumer market arena, Ancestry.com, launched as a free site in June 1996 but has been
Sources say once site management has decided to begin charging for access, the next steps—
setting price points and positioning the wall(s)—usually must be navigated by good old trial
and error.
An online content analyst for Forrester Research says that when it comes to determining price
necessary.
For example, when it came to setting the prices for archived news articles and crossword
puzzles on the New York Times on the Web (www.NYTimes.com), “A big part of it was just
trial and error,” says the vice president of business development at NYTimes.com, which has
charged fees for portions of its online content since 1997. NYTimes.com also constantly
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major daily newspaper, WSJ.com executives also took an educated guess. They wanted to
make sure the price in the early days was modest enough so that people would see it as a
bargain, and also recognized the need to make a special provision in online subscription pricing
to accommodate existing print subscribers. WSJ.com thus decided on a fee of $ 49 per year (for
subscribers and $39 for print subscribers.)
The site only lost about 40 percent of average daily users when the switch was made from free
to fee in August 1996. Like WSJ.com, Ancestry.com pricing strategy was to simply “offer
services and test results,” Sherman says. Ancestry.com also had no similar pay-for-content
family history sites against which to compare prices, and the company did not survey existing
a combination of follow-up e-mails, customized banners, and phone calls to let the customer
know they can get more family history information out of the site by upgrading their
subscription. Sherman says a large number of the $29.95 subscribers are eventually upgraded
to more expensive annual subscriptions through his team’s array of follow-up marketing
site had garnered.
Ancestry.com, which derives about 80 percent of total revenues from subscription fees and the
rest primarily through on-site banner ads, has adjusted its subscription prices upward by $10
per year across the board for the past three years to reach current levels, with corresponding
increases in more historical records made available to subscribers. According to the director of
which now average 7.5 million per month.
The other key strategy decision that content site marketers confront is where to place the wall
between free and paid-access content. Marketers agree that at least some level of free content is
a must in order to lure subscribers, but exactly how much to leave out on the “front porch” for
free is again usually decided by way of an educated guess, and subsequent adjustments are
made if necessary.
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wall.
They try hard to keep pushing the envelope toward offering a lot of free content because they
know that eventually they will get the viewer to pay. They believe that just as when the site
first switched to paid content, the site’s “juicy” databases—such as historical parish records
prompting subscriptions. WSJ.com has since then seen no reason to adjust the wall.
Until a site throws up a barrier and takes the plunge into paid content, experts say it’s
impossible to forecast whether regular site visitors will eventually accept the fees. But one
thing seems certain: With the online advertising market continuing to slump, Internet users are
IV. Cases:
A. Cumberland Metal Industries: Engineered Products Division
(1989)
HBS Case: 580-104 TN: 585-115
Teaching Perspectives
responsible for the development of a marketing plan for the introduction. Of particular concern
is the price to charge for the pads in view of the benefits provided.
The case introduces the concept of “value pricing,” i.e., pricing that gives preeminence to the
value customers place on a product rather than on its costs. It reinforces the utility of careful
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decision cannot be made in isolation from the decisions on the marketing support activities the
firm provides. This sets out the marketing challenge faced by the firm and the obstacles any
MARKETING CHALLENGES
Perhaps the biggest problem facing CMI is how to communicate the benefits of the CMI pads
in such a way that the potential customer’s perceived value approaches the true value as
measured in the test. The 11-inch diameter, 1-inch thick, 151-pound doughnut shown in Case
Exhibit 4 certainly does not look like it is worth $1,000. Also, the industry has not paid much
produce and monitor its performance.
A second problem is that there are no well-established channels of distribution for this type of
product. CMI is leaning toward using manufacturers’ representatives. If CMI were to follow
this route, a rep training, support, and monitoring program would have to be developed.
A good way to stimulate debate on pricing is to get both a value-oriented and a cost-based price
Questions
bids.)
you?
3. How big is this market? What is the opportunity?
4. How much does the price affect the market share?
5. Is it more important to make high profits or to build market share?
metal pads fail? Why?
7. How should the company market the pad? Describe in detail the channel members,
influencers and others, and provide a plan.
B. Case: Becton Dickinson & Company: VACUTAINER Systems
Division
HBS Case: 592-037 TN 595-084
Teaching Perspectives
Becton Dickinson, a phenomenally successful company, with an 80 percent market share in the
blood collection needles and syringes market, faces a change in the customer buying
environment (cost containment pressures at hospitals). The marketing vice president must
make certain decisions to complete his marketing plan.
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Becton Dickinson’s VACUTAINER Systems Division (BDVS) produces blood collection tubes
and needles for sale to hospitals, commercial labs, and other areas such as physicians’ offices
and surgicenters. In 1985, the health-care industry in general, and hospitals in particular, are
affected by governmental cost control.
Within this context, Mr. William Kozy, BCVS’s national sales director, and Mr. Hank Smith,
BDVS’s vice president of marketing and sales, are negotiating a contract with personnel at
Affiliated Purchasing Group (APG), a large hospital buying group.
The immediate issue is how to respond to APG’s demands concerning pricing, labeling and
distribution terms. But the outcome of the APG negotiations will impact BDVS’s negotiations
with other purchasing groups, relationships with its current distributors, and the division’s
traditional marketing and sales strategy. Accordingly, the longer-term issue is, how should
BDVS conduct its business in a changing, volatile marketplace?
The BDVS case concerns a drama of shifting power and entangling alliances among a major
supplier, buyer, and distributor in a marketplace undergoing significant changes in demand
demographics and buying behavior. In addition, the case concerns a crucial and common task
in sales and marketing: the conduct of important, high-level, face-to-face contract negotiations.
It requires students to analyze what is at stake in the BDVS/APG negotiations, which party is
gaining or losing power as the market changes, which of several “demands” is likely to be truly
important to each party, and how BDVS managers should respond to the latest (and seemingly
final) round of negotiations with APG managers. Thus, the case is suitable for use in the
distribution or pricing modules of a general Marketing Management course,
Questions
losing this contract?
3. How important is each aspect of the negotiations (pricing, brand name, and delivery terms)
BDVS’s distributors, and competing suppliers)?
4. Given the analysis, what should BDVS do?
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