Core Concepts of Marketing by John Burnett - HTML preview

CHAPTER 9

PRICING THE PRODUCT

products. Nothing could be further from the truth.

almost every case, the process of deci-

sion is one of guesswork."2

Good pricing strategy is usually based on sound assumptions made by marketers. It

is also based on an understanding of

two other perspectives discussed earlier. Clearly,

sale pricing may prove unsuccessful unless the marketer adopts the consumer's perspec-

tive toward price. Similarly, a company should not charge high prices if it hurts society 's

health. Hertz illustrates how this can be done in the Integrated Marketing Box that follows.

A pricing decision that must be made by all organizations concems their competi-

tive position within their industry. This concern manifests itself in either a competitive pric-

ing strategy or a nonprice competitive strategy.

look at the latter first.

Nonprice Competition

Nonprice competition means that organizations use strategies other than price to attract customers . Advertising, credit, delivery, displays, private brands, and convenience are all exam-

ple of tools used in nonprice competition. Businesspeople prefer to use nonprice competition

HOW TO SELECT THE BEST PRICE

The Hertz Corporation knows when its rental cars will be gone

large corporations were conducting any sort of pricing

and it knows when the lots will be full. How? By tracking

research, reports Robert Dolan, professor at Harvard Business

demand throughout past six years. "We know, based on past

School. "People don ' t realize that if you can raise your prices

and seasonal changes, what times of year there

by just one percent, that's a big increase in your profit mar-

is a weak demand, and when there is too much demand for our

gin," he says. For example, if a supermarket is operating with

supply of cars," says Wayne Meserue, director of pricing and

a two-percent net margin, raising the prices by one percent

yield management at Hertz. To help strike a balance, the com-

will increase profitability by 33%. "The key is not taking one

pany uses a pricing strategy called "yield management" that

percent across the board, but raising it 10% for 10% of your

keeps supply and demand in check. The strategy looks at two

customers," says Dolan, "Find those segments of the market

aspects of Hertz's pricing: the rate that is charged and the length

that are willing to take the increase." That doesn't mean that

of the rental.

companies can automatically pass their cost increases on the

"Price is a legitimate rationing device," . says Meserue.

customer, notes Dolan. If the costs are affecting an entire

"What we're really talking about is efficient distribution, pric-

industry, then those costs can be passed through easily to the

ing, and response in the marketplace." For example, there are

consumer, because competitors will likely follow the lead.

times when cars are in great demand. "It's always a gamble,

A fundamental point in smart pricing, according to Dolan:

but

definitely a calculated gamble. With yield manage-

base prices on the value to the

As much as people

ment, we monitor demand day by day, and adj ust (prices as

talk about customer focus, they often price according to their

necessary)," Meserue says.

own costs, Companies can profit from customizing prices to

Hertz also uses length of rental as a yield management

different customers. The value of a product can vary widely

device. For instance, they established a three-night minimum

depending on factors such as age and location.

fo r car rentals during President's Day weekend in Febmary.

"We

want to be turning away business for someone who

Source: Ginger Conlon, "Making Sure the Price is Right;' Sales

wanted the car for five nights just because we had given our

and Marketing Management, May 1996, pp.

Thomas T.

cars to people who came in frrst for one night," says Meserue,

Nagle and Reed K. Holden, The Strategy and Tactics of Pricing,

who adds that it's often better for Hertz to mandate a mini-

2nd ed., Upper Saddle River, N.J.: Prentice Hall, Inc. 1995;

mum number of days for a rental, because it ensures that cars

William C. Symonds, "'Build a Better Mousetrap' is No Claptrap;'

Business Week, February 1, 1999, p. 47; Marcia Savage, "Intel to

will be rented for more days.

Slash Pentium II Prices," Company Reseller News , February 8,

A smart pricing strategy is essential for increasing profit

1999, pp . 1, 10.

margins and reducing supply. Yet at last count, only 15% of

DEVELOPING A PRICING STRATEGY

233

Now. choose trom more than 200 Davs Business

hOleIs worldwide.

Make !lour reservatIOns at 1-800-DAYS

or dallsinn.com

AD 9.1

An example of non price competition .

rather than price competition, because it is more difficult to match nonprice characteris-

tics. Competing on the basis of price may also

a deleterious impact on company prof-

itability. Unfortunately, when most businesses think about price competition, they view it

as matching the lower price of a competitor, rather than pricing smarter. In fact, it may be

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