In the overall marketing mix, price is the most important item that can affect a company's profitability.
If market constraints force development of sub optimal short-term strategies, how can we minimize the impact on positioning? Traditionally, marketing's role in developing pricing strategy has been to understand market acceptance of price changes to new and existing products and services. Pricing research typically focuses on a customer's preference for a specific offering and reports findings in terms of percentages.
Many organizations make pricing decisions based on secondary or syndicated data sources, internal costs, or competitive factors. While internal costs have a major impact on profitability, not linking them to market input on competitive pricing and customer willingness to pay can affect profits. Effective pricing strategy is best developed through a profitability model that incorporates market input on a competitive marketplace, current market conditions, and impact of advertising and promotions. The first step is to develop the market sensitivities associated with price, brand, features, channel, and packaging-shown in the "Modeling of Market Input" section. The last step in the model is to tie other marketing-mix items into the market response tool. An extremely important part of the model of pricing strategy is getting meaningful market input by collecting information in a way that parallels a customer's normal buying experience.
Properly designing a discrete choice exercise that allows a survey to match the customer's actual purchasing experience is probably the single most important part of extracting market input to develop a model of strategic pricing. In general, the key components of the design involve multiple price levels for the company's and key competitor offerings, along with testing of certain products and services both in and out of the marketplace. It's important to understand how the market values the different components of an offering. Once the survey has been properly designed and executed, market sensitivities need to be derived from customer input.
To increase the accuracy of the survey model, and to link market shares to total units in the marketplace, the market response tool derives a base case that reflects current prices and availability of products and services. If only market shares are considered, and a new offering completely cannibalizes from the existing company set of products and services, then a decision might be made not to launch. Consider Exhibits 2 and 3, which show the impact that changes in a company's price have on share, sales, and contribution. Not only does optimization based on contribution increase overall profitability, but these strategies will be more stable over time compared to those developed based on sales. To enhance the results from modeling market input, management must be able to adjust forecasts based on assumptions of levels of advertising and promotion. In many cases, ascertaining the relationship between advertising and promotion and their market responses might require comprehensive studies. In addition to integrating marketing-mix items into the model of pricing strategy, certain internal and marketplace constraints might affect pricing strategy. These are integrated into the model through the addition of secondary optimization criteria.
This case study involves a leading pharmaceutical product that was approaching the end of its patent protection.
To meet the research objectives, the modeling of market input was based on a two-step procedure.
The modeling of market input provided measures of price sensitivity, affinity for prescribing a generic, and preference for prescribing new products with higher safety claims. Because the client had no prior experience with a private label, a relatively simple relationship was developed to forecast what percent of the generic market the client's private label offering would achieve. Interest in the new products with higher safety claims was very high, and the client's offering was projected to be twice the size of the other entrants.
A five-year planning tool was integrated into the market response tool that allowed entry of assumptions associated with each of the six items mentioned here. To overcome these difficulties and develop a model of strategic pricing, it's important to communicate the benefits of this model so everyone shares a similar goal in terms of pricing strategy. Lots of factors affect the end price of a product, for example, the costs of production or the business need to maximise profits or sales. As NIVEA VISAGE Young is one of the leading skin care ranges meeting the beautifying needs of this market segment, it is effectively the price leader.
Subscribe to our newsletter for current business news including lesson plans and activity ideas. If you learnt more about The use of the marketing mix in product launch from this NIVEA case study, why not share it with others? This page and contents, ©2016 Business Case Studies, is intended to be viewed online and may not be printed. At Reload, we are able to tailor your business’s product and pricing strategies with the aim of developing quality price structures to attract new business and keep existing customers. It is critical in new product development that a product and pricing strategy is in place to ensure the product starts well in the marketplace. It is important for a business to have clear product and pricing strategies in place which are aligned with their target market, their position in the market, as well as their business objectives.
Product and pricing strategies not only focus on pre-existing and new product businesses but also business diversification.
The talented team at Reload can also assist in the guidance and involvement of diversification plans for your business.
There are a number of commonly used pricing models in the market, all of which can be successful depending on the type of product you have and the market you are in.
Add this to your custom enquiry form and we will be in touch with information to suit your business needs. Add us to your circles on Google+ and gain access to exclusive expert insights, tutorials and much more! Yet for many B2B marketers, the pricing strategy in their marketing plan is challenging to write; many aren’t even involved in creating their pricing strategy. There are many factors to consider when developing your pricing strategy, both short- and long-term. Note: You can access guided pricing strategy templates and step-by-step instructions for writing the pricing strategy section of your marketing plan in our marketing planning and management app. When you offer a truly unique product or service with little direct competition, it can be challenging to establish your price. When your price, value proposition and positioning are aligned, you’re in the best situation to maximize revenue and profits. Company C regularly evaluates their competitors’ prices to make sure they’re delivering on their promise.
However, if there isn’t a strong market for prestige, this strategy may be the best one for the company long-term. If Company B charges a premium price for an average product, they’ll have a very difficult time generating interest in their it. Yet Company B may be able to implement a small price increase to raise revenue and profits; it depends how much more its customers are willing to spend. By analyzing price sensitivity and testing different prices, they can evaluate the strength and potential of this new strategy. If Company C’s prices rise in relation to those of their competitors, sales will plummet – their market is shopping on price, not factors like product leadership or customer intimacy. If Company C cannot maintain its operational efficiency and cost leadership, it will need to develop new products or markets for its existing product. Their pricing is typically 15% above the competition – they’re the most expensive product in their class. Their demand curve is relatively inelastic, meaning that their market isn’t that sensitive to price. Much of that results from the carefully selected positioning and branding over the past five years. When they’re behind their sales targets, individual reps are given the green light to discount if needed to meet their sales quotas. Management doesn’t want to get in a price war, but is willing to ensure that they hit their short-term numbers. Management knows that they could spend more in R&D to differentiate their offering and have greater pricing power, but they haven’t yet committed the budget to do so.
The quality of their offering suffers, and they end up providing mediocre service for both markets. By lowering the price of their “prestige” brand to access a new market, Company C has increased its revenue, while reducing its profit margin and damaging its brand.


Create a free account in our marketing planning and management web app for step-by-step guidance. It’s best to define your positioning, create your brand strategy, and identify your distribution channels before you develop your pricing strategy in the marketing plan. For example, if your method for delivering value is product leadership, you shouldn’t discount heavily or compete on price; you should also minimize pricing conflicts with any channel partners. Your price sends a strong message to your market – it needs to be consistent with the value you’re delivering.
If your value proposition is operational efficiency, then your price needs to be extremely competitive. If your value proposition is product leadership or customer intimacy, a low price sends the wrong message. Estimate how sensitive your customers are to fluctuations – it will help you determine the right price and volume combination.
Once you’ve finalized your pricing strategy in the marketing plan, it’s time to design your marketing campaigns. The Marketing MO planning app is your behind-the-scenes Chief Marketing Officer, a comprehensive resource that will improve your overall business, whether it’s a consulting practice, start up, or mid-size company. How to set prices and measure their impact on a company's business model, however, is less clear. Through the use of conjoint-type studies, researchers have learned about the trade-offs between brand, price, and features and leveraged customer value to develop pricing strategies.
Given the lack of a complete set of competitive offerings of all products, services, and prices in the marketplace, it's hard to integrate preference measures to current market conditions and then accurately project changes in the marketing mix, especially in financial terms. While each of these items needs to be considered, profit potential and product equity can erode significantly with strategies based on these items alone. It's unwise to develop a pricing strategy based on a reaction to customers leveraging one supplier over another to get the best possible price or a reaction to competitive price changes, internal sales goals, and inventory levels. The results from this type of model will give specific direction on which new and existing offerings should be in the marketplace, how they should be packaged and priced, and how marketing investment should be allocated between advertising and promotion. The top half of the exhibit shows the model inputs of the customer and current market levels, and the bottom half represents the marketplace and the items a company has control over to optimize their offering. These sensitivities relate to how the marketplace will react to changes in new and existing company and competitive offerings.
This step converts market shares to total dollars in the market by using industry sales from the current market. This step involves developing relationships that relate advertising and marketing expenditures to market levels of awareness and distribution.
The critical step in this process is to review with management all possible scenarios they'd want to consider in the marketplace and then designing the study to allow testing for these different scenarios. Products and services are tested in and out of the marketplace to determine which offerings will lose share when a new product or service is added as well as which offerings will gain share when a product or service is no longer in the market.
For certain studies, part of the design needs to include options for de-bundling an offering, as well as the combination of multiple products and services combined in a package offering.
As indicated in Exhibit 1, the modeling of market input must analyze the choices the respondents gave to specific market conditions and convert them into measures of price sensitivity, brand loyalty, feature affinity, channel, and packaging preference. It's then compared to known market shares and market sizes at the same prices and availabilities. However, if the new offering has a higher profit contribution, then it may be beneficial to launch it.
Unless the offering is priced so low that customers question its quality, the lowest price will always produce the highest share. The price that maximizes company contribution is $27, which projects a contribution of $7.7 million.
To begin with, just redirecting the focus of the marketing program to maximize contribution vs. Some measures that need to be considered include (1) level of advertising and its impact on awareness, (2) level of distribution and its impact on volume, and (3) level of dealer incentives and promotions and its impact on channel response. Whether these relationships exist or not, the pricing model must allow management to at least be able to enter assumptions as to how the market will react to changes in their advertising and promotion. Types of constraints that might need to be considered include (1) supply constraints, (2) impact of major price changes on competitive responses, (3) difficulty in changing current prices in marketplace, (4) order of entry for new products, and (5) external regulation. In most cases, the primary optimization is associated with overall company profitability in the category. Besides the potential for generics to come into the market, there were some safety concerns fueling new product development.
First, the survey collected prescribing behavior based on a market with and without a generic at different prices for the key products in the market.
Through comparison of base cases with no generic, initial shares for all products in the market were calibrated to match known market shares.
A straight-line relationship emerged between two price points: A low price that would ensure the client private label would get 100% of the generic market and a high price so expensive the client private label wouldn't get any part of the generic market.
In addition, if generics are introduced in the marketplace, then they'll be priced as a percent of the client's branded product. Before making a decision on moving ahead with the new product offering, management needed to consider the following items: (1) impact on market size due to introduction of product with safer product claim, (2) impact of DTC advertising, (3) impact on cannibalization on current branded product, (4) cost to develop and test new product, (5) impact of generic and branded product pricing, and (6) impact of competitive responses. A product's price also needs to provide value for money in the market and attract consumers to buy. This strategy helps a business to gain maximum revenue before a competitor” product reaches the market.
At Reload, we conduct an extensive competitor analysis to identify your competitive advantage and optimal method to move into the market to give you the best chance of success. At Reload, we provide guidance on ensuring that all structures and strategies are aligned and working towards the same clear objectives. Diversification is a strategy used to increase sales volume from new products in new markets. As part of diversification planning, we will explore with you opportunities for your business and look at the feasibility of these opportunities.
The price you charge your customers reflects your brand, your position in the market, your future cash flow for the business and ultimately your viability in the market. We will take you through the key pricing models that are suited to your market and provide recommendations.
Learn how to set up, manage and improve your distribution channels with this detailed how-to guide from the experts at Marketing MO. Their consultants come from top schools, and they work with Fortune 100 clients to implement complex, large-scale projects. Their clients are buying the best expertise they can find, and they’re less sensitive to price because they care most about getting top talent. There’s a lot of competition and their product is only slightly better than the alternatives.
They regularly review the market, run promotions, and adjust prices to maintain their competitive position. Their value proposition is operational excellence and they consistently deliver the same product at a better price. They hire more consultants, but since they’re charging less per hour, they can’t afford the same top-tier talent. By doing so, you’ll ensure that your pricing reflects your value and reinforces your brand.
If you’re perceived as a commodity, you must either change the market’s perception via a new positioning strategy, or compete on price and focus on innovating to keep costs low so you can still make a profit. You’ll be far more effective when considering discount promotions – you’ll know exactly how low you can go and still be profitable. If your value proposition is operational efficiency, evaluate your competitors on a regular basis to ensure that you’re continually competitive.
When tackling any new marketing task, have confidence that we have your back – with the structure and detail you need to get things done right.
Too many times, the focus of pricing is related to short-term competition or internal cost structure.
While this is valuable information, these types of research approaches don't do a good job of replicating the complexity of current marketplaces and extracting the real impact of price and price sensitivity. This tends to lower the value of research because management can only make decisions on a relative "percentage" basis, rather than on an absolute "profit" basis. Some companies get input on customer's willingness to pay from measurements based on observed marketplace behavior.


These factors need to be considered in developing pricing strategies, but these strategies can hurt long-term profitability and product equity if they don't estimate market response and impact on sales channels and profitability. The overall process is broken down into four basic components: (1) modeling of market input, (2) calibrating model sensitivities to current market, (3) developing contribution measures, and (4) integrating with the overall marketing mix and developing profitability measures. This is especially important when making pricing decisions in light of total R&D and marketing investments.
Now the market response tool can optimize pricing and packaging strategies based on the total contribution rather than just share or sales. Also included here are any market or production constraints that need to be considered in developing pricing strategy. In addition, experiments can accommodate new brands, features, prices, and channels that currently don't exist in the marketplace.
For example, if management wants to test a new offering, they may want to consider multiple scenarios of (a) adding it to its current portfolio, (b) having it replace one or more existing products and services, or (c) not introducing it at all because it might cannibalize their more profitable current offerings. Prices can be different for all products and services being tested and should reflect current market prices. In both cases, multiple levels of price would need to be tested for each de-bundling and package offering.
Developing segments of respondents who exhibit similar market sensitivities helps discrete choice maintain a high level of heterogeneity, and better understanding of the unique needs of target segments. This is a very important step in bridging the richness of market input with the accuracy of known market information.
If the optimization criterion is based on sales, rather than share, the price that maximizes sales is $22.50. By entering "worst case" to "best case" ranges for these relationships, along with varying levels of advertising and promotion, the market response tool can determine what impact these items have on pricing strategy and overall profitability. However, because the model can provide a list of alternative pricing and packaging strategies sorted by profitability, it can identify the best alternative by locating the highest profitability subject to the necessary optimization criteria.
Overall market size had been growing due to initial direct-to-consumer (DTC) advertising and anticipation of lower priced alternatives and safer products. Then for each initial question, an additional question was asked to determine how the prescribing behavior would change based on the availability of new products with higher safety claims. Total market size, in terms of prescriptions, was overlaid into the market response tool so total prescriptions and sales could be shown.
Therefore, by raising prices, the generic pricing would also be higher, which would improve the margins for the client's private label offering. Then, based on these assumptions, the planning tool determined the five-year net present value associated with the overall company's contribution in the category. At times, the company and industry information needed to design and implement them aren't readily available. Management must then create an environment that encourages marketing managers, product managers, and finance managers to develop the necessary inputs and to work together to develop the optimum strategies.
However, the company also had to take into account that the target market was both teenage girls and mums buying the product for their daughters. NIVEA needs to regularly review prices should a competitor enter the market at the 'market growth' point of the product life cycle to ensure that its pricing remains competitive.
We will assist in putting together appropriate plans and strategies to give your business the best opportunity to create additional revenue streams.
If you are looking for some guidance on how to price your product and whether the price will be sustainable, we can help you put the necessary planning in place.
We will also provide financial forecasting such as a break even analysis and profit projections to understand the benchmarks required to see your product succeed in your specific market. If they’re extremely sensitive, you may be better off at a much lower price with substantially greater volume. Even if a company analyzes existing market data or collects new market input, this information usually doesn't provide links to profitability and other marketing-mix items.
For example, conjoint creates an artificial marketplace that forces competitive offerings to contain similar features and prices, when, in reality, many unique products and services have different features and prices. To develop a meaningful pricing strategy, researchers must integrate customer input on a complete competitive marketplace with how it interfaces with the distribution channel and variable costs. However, such measurements are limited because they only reflect existing product and service characteristics. With the calibration, the measures reported in the market response tool can show the impact on total sales as well as share. This step, along with the step relating to contribution, increases the value of market input because results are stated in direct financial terms and deal with the interaction between pricing and other items in the overall marketing mix.
Discrete choice provides the best tools for developing pricing strategy in a designed experiment. At the same time, management wants to know which prices and specific features, along with any packaging alternatives, will optimize their portfolio.
The ranges of prices must be wide enough to allow proper sensitivity testing and future use of the market response tool. Another consideration for the design is allowing respondent choices to be recorded in a way that matches how customers would normally make choices. As an example, a certain segment may be defined as customers who prefer a certain feature or package and are rather insensitive to price.
No matter how good the sampling and however realistic the survey matches the actual buying experience, this step ensures all projections are based on an agreed-upon starting point.
This increases total sales to approximately $23 million, as opposed to $22 million at a price of $21. This focus ensures the pricing strategies are optimized based on a company's overall offering, costs, and prices, rather than on what price is going to be more attractive than that of the competitors.
In addition, production costs for clients' products were included so total contribution could be shown for all clients' products.
Based on a 15% lower price for the generic alternative, generics were projected to get 50% of the branded product's share. At the proposed $.65, the impact of a generic offering that was originally priced at 50% lower than the client's product would now be a 20% reduction in contribution based on the higher price and the private label offering. Even though the company's new product offering was better than the other new offerings in the market, the company was projected to attain higher contribution by not making the investment in this new product. In addition, multiple disciplines need to come together to integrate current market conditions, market sensitivities, and profitability into one model. This is a large mountain to climb, but the benefits of a comprehensive pricing strategy compared to on-going reactive pricing can be tremendous. This meant that the price had to offer value for money or it would be out of reach of its target market. Diversification allows your business to tap into additional revenue streams and opportunities within your realm of influence.
To develop an effective pricing strategy, it's important to first analyze a method of integrating meaningful customer input based on the entire company and competitive offerings within a category. Conjoint typically underestimates the impact of price and doesn't provide a value of price sensitivity by brand, but rather only in aggregate.
In addition, observational data doesn't involve controls, so it can be difficult to separate the trends and sensitivities in the observed data from external items like product availability, promotion and advertising for the company, and competitive offerings. When properly executed, it allows the researcher to present a complete portfolio of products and services that parallels current marketplace offerings. The key for the survey is to derive sensitivities from market input and then to put this information into a context that management can understand and then use to develop an effective pricing strategy.
Even if the competitors lower their prices, in most cases, original pricing based on profitability will still be the optimal price as compared with a lower price that meets the competitor's price. With a $.25 private label offering, the client's projected share loss of 50% would be reduced to only 30%. The recommended strategy was to focus on DTC advertising for the category and implement suggested pricing strategies and the private label offering. In addition, combinations of new and existing products and services can be tested in and out of the current marketplace, as well as changing prices and specific features for any offering in the marketplace.



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