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DIY TECHWARE
 STRATEGIC PRICING
Strategic pricing typically combines the benefits and innovations set by a product
with the price sensitivities of consumers to develop flexible, executable and
sustainable value-based strategies. By implementing thorough customer
segmentation to identify the needs of individual customers and achieve profit
optimization since perceived value varies across clusters of customers, strategic
pricing exploits variances between micro-segments, to provide customers with
custom-made price/benefit advantages.
Strategic pricing encompasses
 PREDATORY PRICING,
 MULTIPOINT PRICING AND
 EXPERIENCE CURVE PRICING.

WHAT IS PRICING?
Pricing is the method of determining the value a producer will get in the exchange
of goods and services. Simply, pricing method is used to set the price of producer’s
offerings relevant to both the producer and the customer.

MULTI POINT PRICING

Multipoint pricing occurs when two or more firms compete in two or more
national markets and the pricing strategy in one market may have an impact on
the rival pricing strategy in another national market. Multipoint pricing,
especially if it is aggressive in a national market, may bring forth a competitive
response from a rival firm that operates in another national market. For this
kind of pricing strategy to work, marketing managers need to develop a
mechanism that can centrally scrutinize pricing decisions in each national
market around the globe.
Aggressive pricing in one market may elicit a competitive response from a rival
in another market
 TWO MAJOR CHARACTERISTICS TO BE AVAILABLE TO USE THIS
STRATEGY
 The economic cost price of the product could be easily reached by a new
competitor entrant.
 The customers are price sensitive.
THE QUESTION IS HOW TO DISCOURAGE THE COMPETITORS TO
ENTER THE MARKET?
The pricing strategy takes the same logic like the periodic discounting. The
strategy is divided in two steps:
The product will be sold at the price that the customers are willing to pay for it
The firm will sell the product at the cost price to keep new entrants out of the
market.
The major difference with the periodic discounting is that the insensitive
segment can benefit from having the opportunity to pay less than they were
willing to pay. The firms which use this strategy act according to the
competitors, creating entry barriers. In general, it is preferable to use the
periodic discounting when the threat from competitors entry is low.

EXAMPLE 1:

For example, multipoint pricing is an issue for Kodak and Fuji Photo because
both companies compete against each other in different national markets for
film products around the world.
Multipoint pricing refers to the fact a firm's pricing strategy in one market may
have an impact on its rivals' pricing strategy in another market. Aggressive
pricing in one market may elicit a competitive response from a rival in another
market.
In the case of Kodak and Fuji, Fuji launched an aggressive competitive attack
against Kodak in the American company's home market in January 1997,
cutting prices on multiple-roll packs of 35mm film by as much as 50 percent.18
This price cutting resulted in a 28 percent increase in shipments of Fuji color
film during the first six months of 1997, while Kodak's shipments dropped by
11 percent. This attack created a dilemma for Kodak; the company did not want
to start price discounting in its largest and most profitable market. Kodak's
response was to aggressively cut prices in Fuji's largest market, Japan. This
strategic response recognized the interdependence between Kodak and Fuji and
the fact that they compete against each other in many different nations. Fuji
responded to Kodak's counterattack by pulling back from its aggressive stance
in the United States.

The Kodak story illustrates an important aspect of multipoint pricing--

aggressive pricing in one market may elicit a response from rivals in another
market. The firm needs to consider how its global rivals will respond to changes
in its pricing strategy before making those changes. A second aspect of
multipoint pricing arises when two or more global companies focus on
particular national markets and launch vigorous price wars in those markets in
an attempt to gain market dominance.

In the Brazil market for disposable diapers, two US companies, Kimberly-Clark

Corp. and Procter & Gamble, entered a price war as each struggled to establish
dominance in the market.
As a result, the cost of disposable diapers fell from $1 per diaper in 1994 to 33
cents per diaper in 1997, while several other competitors, including indigenous
Brazilian firms, were driven out of the market.
 Pricing decisions around the world need to be centrally monitored. It is
tempting to delegate full responsibility for pricing decisions to the managers of
various national subsidiaries, thereby reaping the benefits of decentralization
However, because pricing strategy in one part of the world can elicit a
competitive response in another part, central management needs to at least
monitor and approve pricing decisions in a given national market, and local
managers need to recognize that their actions can affect competitive conditions
in other countries.

PREDATORY PRICING
Predatory pricing is the practice of using below-cost pricing to undercut
competitors and establish an unfair market advantage.
Predatory pricing is a method in which a seller sets a price so low that other
suppliers cannot compete and are forced to exit the market. A company that does
this will see initial losses, but eventually, it benefits by driving competitors out of
the market and raising its prices again. This predatory pricing practice often results
in the formation of monopolies controlling market power for a lengthy period of
time.
 HOW PREDATORY PRICING WORKS

A company that can afford the initial losses caused by predatory pricing has
an unfair market advantage in the long run. Investors see such extremely low
costs as a good way to increase market share and then to raise prices and
create equally extreme profitability further down the line. So long as the
business’ future predicted cash flows are healthy, investors may be willing
to shoulder this burden short-term.

This predatory pricing strategy kicks out new entrants, and makes the barrier
to entry much harder for new businesses. This stops the regular competitive
market from charging reasonable prices for the consumer and retailer.

In many ways, predatory pricing can be thought of as an anti-competitive pricing

practice that can only be used in the short run. At some point, businesses that
practice predatory pricing will have to continue charging higher prices as they
were before, which puts their dominant position as a price leader in jeopardy.

HOW PREDATORY PRICING AFFECTS THE MARKET

While predatory pricing has some short-term positive effects—such as ultra-

low prices for customers, for a brief time—it ultimately does serious harm to
the state of the market.

SHORT-TERM EFFECTS
The company employing predatory pricing will run initially at a loss.
Competitors may also finance a period of loss in order to keep pace with the
predatory company. Companies that are not able to shoulder the loss,
however, will suffer and lose a considerable amount of customers.

Consumers will initially benefit from outrageously lower prices that the
predatory company is selling at. They also might benefit from aggressive
competition in the market, if competitors are able to hold their ground, with
higher-quality products and services as companies are motivated to establish
an advantage over competitors.
LONG-TERM EFFECTS
Competitors not capable of sustaining themselves against the predatory
company will eventually be driven out of the market altogether. Meanwhile,
if the company employing predatory tactics is not regulated in accordance
with the law, they will form a monopoly, having now successfully undercut
the competition.

Under such conditions, prices are likely to rise sharply to compensate for the
initial period of short-term loss. Product quality is likely to drop with no
competition around to incentivize quality. Meanwhile, innovation is usually
stifled due to the monopoly company now controlling the market.

Customers will suffer from abnormally high prices from the monopoly, as
well as a drop in the quality of the product or service

EXAMPLES OF PREDATORY PRICING

Predatory pricing is nothing new. Even before Aristotle first coined the term
“monopoly,” companies all over the world have practiced predatory pricing.
To find out how the initial benefits of predatory pricing inevitably turn into
drawbacks, we looked at some examples.

1. THE WALMART/TARGET DRUG WAR

A prime example of predatory pricing tactics between two large franchises
can be seen in the prescription drug price war between Walmart and Target
in Minnesota.

Walmart, seeking to undercut the competition, initially began offering

certain prescription drugs at well below its price floor. Set by the
government, a price floor is the lowest price that goods or commodities can
be legally sold at based on the minimum cost at which turning a profit is still
possible. Target, looking not to be undercut, matched these drug price cuts.
However, Minnesota state law forbids the sale of drugs below their stated
cost and limited the discount, thus putting an end to the price war.
2. THE DARLINGTON BUS WAR
Sometimes businesses are willing to price so low that they offer their
product or service for free, as seen in the Darlington Bus War. Following the
deregulation of buses in 1986 in the United Kingdom, a number of private
companies began to compete over the demand for public transport. One
company, Busways, began offering free rides to put its rival DTC out of
business, with the intent of cultivating a monopoly in a given market. A
commission, formed to investigate their activities, called Busways’ actions
“predatory, deplorable and against the public interest.”

DTC indeed was put out of business, and Busways was then acquired by an
even larger company, Stagecoach. However, Brian Souter, the chairman of
Stagecoach, later admitted that the negative impact of the company’s
predatory strategy had outweighed the financial gains made by
monopolizing the Darlington area.

WHEN PRICING BECOMES PREDATORY

Just like business ethics, aggressive marketplace competition can be a good

thing—the pressure of competition stimulates innovation, incentivizes high-
quality goods and services, and provides customers with a range of options
to suit both their needs and budget.

Of course, getting ahead of the competition is of paramount importance from

a business perspective. However, predatory pricing is one step too far. Using
this strategy ultimately hurts everybody—your competitors (who can’t
compete), your customer base (who no longer have freedom of choice), and
you (who are breaking the law).
 EXPERIENCE CURVE PRICING

Introduced by the Boston Consulting Group, Experience Curve is a concept that

states that there is a consistent relationship between the cumulative production
quantity of a company and the cost of production. The concept implies that the
more experienced a company is in manufacturing a specific product, the lower its
cost of production.

When the total production capacity (from the first unit to the last) doubles, the
value-added costs decline by a constant percentage. The value-added costs include
the cost of manufacturing, marketing, distribution, and administration.

MAIN CHARACTERISTICS OF EXPERIENCE CURVE PRICING:

 competitive market
 price sensitive customers
 high experience effect of the industry
 more applicable for durable goods

WHAT SHOULD THE MORE EXPERIENCED FIRM DO TO ELIMINATE

COMPETITORS AND GAIN MARKET SHARE?
The strategy proposes:
The most experienced producer benefits from having lower costs than its
competitors. The logic of the experience curve pricing is to be price aggressive and
decrease the price of the products below the current market price.
THE EXPERIENCE CURVE PRICING PERMITS TO REACH SEVERAL
ADVANTAGES:
The competitors cannot follow the first firm and will certainly have to quit the
market, the experienced firm will evolve in a less competitive market
The experienced firm can gain new market
 New customers should enter the market thanks to lower prices, this represents the
opportunity of achieving economies of scale
This strategy imposes sacrifices, but could be rapidly sustainable

Example
IKEA, the Swedish furniture manufacturing company, is offering a table, named
''Lack''. Its price developed along with the years, e.g. price in Germany:

 2007: €9,99, 
 2009: €7,99, 
 2011: €4,99.

The company was able to decrease the selling price of this product on the one hand
because it is one of the most experienced one in the furniture industry and on the
other hand because of economies of scale.
By lowering the prices of the items offered, IKEA managed to drive some of their
competitors off the market in some countries. Young manufacturers may have less
time to experiment with new technologies, so IKEA can rely on their experience
competitive advantage
TIPS FOR STRATEGIC PRICING
Strategic pricing is a marketing decision, which means it should be informed by
dialogue with your customers.
Keeping a close eye on your competitors is important, but remember they are not
the ones purchasing your product, and they may be making mistakes in their own
pricing.
Recognize what your customer’s value and charge them accordingly rather than
going head to head on price with competitors.

CONCLUSION
One reason companies find pricing challenging is because they lack a systematic
process to translate such diverse inputs as customer value, costs, broad strategic
objectives and competitor prices into the right price.
Building a strategic pricing capability requires more than a common understanding
of the elements of an effective strategy. It requires careful development of
organization structure, systems, individual skills, and ultimately culture. These
things represent the foundation upon which the strategic pricing pyramid rests and
must be developed in tandem with the pricing strategy.