W2 Pricing

Lesson Proper for Week 2
GOALS
The strategy is the art and science of developing and deploying all of a company’s resources to
achieve the most profitable long-term survival of the company. The approach is all-encompassing and
affects all functions. A company’s strategy must embody a high-level vision for the firm, but it must
also be concrete and practical.
Common Corporate Goals Include:
1. Profitability Goals (profit, return on sales, return on investment, shareholder value).
2. Financial Goals (liquidity, creditworthiness, debt-to-equity ratio).
3. Power Goals (market leadership, market dominance, social or political influence).
PRICE MANAGEMENT AND SHAREHOLDER VALUE
Profit and growth drive shareholder value. Because price exerts a decisive and robust influence on
both profit and growth, price is a crucial determinant of shareholder value. More and more managers
have begun to recognize this connection. They have incorporated it into their strategic planning as
well as into their communication to the capital markets.
VALUE AND PRICE
As a guideline for addressing price problems, this view suggests that we should start by looking at
value through the eyes of the customer, giving rise to three critical tasks for the supplier or seller:
1. Create Value: Innovation, product quality, the standards and nature of a product’s materials and
components, design, etc., and all contribute to value creation. The choice of customer segments also
influences value creation because customers have different requirements and different perceptions.
2. Communicate Value: Statements about the product, its position, and last but not least about its
brand all communicate value. Value communication includes packaging, product presentation, and
placement at shelf or online.
3. Retain Value: The degree to which a product retains its value will influence first-time willingness
to pay for consumer durables. For luxury goods and automobiles, value retention—resale value—can
even constitute a deciding factor for initial willingness to pay.
POSITIONING
Positioning is define as the endeavor of a company to craft its offer in such a way that it takes on a
special, appreciated, and differentiated place in the awareness of the customer.
APPROACH
Price and value should always be seen relative to each other. One must interpret the price position
from the perspective of the price-performance or price-value relationship.
PRICE POSITIONS
In this section, we will elaborate on the five basic options for price positioning. We will look at the
following categories: luxury, premium, medium, low, and ultra-low. We start with the luxury segment.
1. Luxury Price Position
· Basics - A luxury price position implies that a company offers an extremely high level of quality
or service (relative to the market average) at a sustained extremely high price. In terms of price
management and marketing, in general, luxury goods exhibit a range of conspicuous characteristics.
To protect the image of high prestige, rarity, and the finest quality, the price of the product or service
should remain very high and stable.
· Management
· Opportunities and Risks
2. Premium Price Position
· Basics - A premium price position means that a product or service is offered at a price that is
noticeably and sustainably above the market average. There are premium products and services in
almost every sector. On the consumer side, these include Mercedes Benz and Lexus (cars), Miele
(washing machines), Nespresso (coffee), Starbucks (coffee shops), Clinique (cosmetics), and Apple
(consumer electronics and computers).
· Management
· Opportunities and Risks - The logic of a premium price position is as follows: high margins,
together with reasonable unit volume, lead to high profits. This logic only works, however, when
demand remains sufficiently strong despite the high price. The higher the price is, the smaller the
accessible segment becomes.
3. Medium-Price Position
· Basics - A medium-price position means that from the customers’ point of view, a product or
service has an average level of performance and a consistent midrange price, relative to the market
average. An average price falls within the customers’ perceived market average. The same applies to
the level of performance. Products with a medium-price position typically include excellent branded
products, which have often helped to set standards in their respective markets.
· Management
· Opportunities and Risks - For a long time, it was common to proclaim the imminent demise of
the medium-price position. These forecasts did not come true. The medium-price range continues, as
it long has to account for a vast majority of the demand in many markets, and in some, it has even
grown stronger. The medium-price position faces the following opportunities and risks:
4. Low-Price Position
· Basics - A low-price position means that relative to the market average, a company offers a
lower level of performance at a sustained lower price.
· Management - A low-price position is tightly linked to cost leadership. To survive long term with
low prices and generate adequate returns, companies must have sustainable cost advantages. They
need to exploit the economies of scale and the experience curve. Constant monitoring and the
minimization of costs along the entire value chain are indispensable for low-price positioning.
· Opportunities and Risks
• The low-price segment must be sufficiently large.
• Low-priced suppliers need to achieve and maintain significantly lower costs.
• Quality still must be acceptable for a sufficiently large number of customers.
• Traditionally higher-priced manufacturers face structural barriers, which make it very difficult
for them to respond to the market entry of low-price competitors.
• Low-price suppliers require unique marketing competencies.
• Despite their low costs, low-priced suppliers are still dependent on a mix of businesses.
• Low-priced companies face considerable risks.
5. Ultra-Low-Price Position
· Basics – An ultra-low-price positioning represents a radically minimalist product offered at a

meager price. In the developed, industrialized countries, the low-price segment we described in the
previous section forms the low end of the price scale. In emerging markets, an entirely new sector has
come into existence over the last several years. Prices in this ultra-low-price segment are sometimes
up to 50% below those in the low-priced part.
· Management
· Opportunities and Risks - As we have already said, the question of whether one can earn
sufficient returns with ultra-low-price products has yet to be resolved. As always, there are
opportunities and risks which one must weigh when deciding on such a strategy:
The Dynamics of Price Positioning - The positioning of a product, a brand, or a company requires a
clear and steady long-term orientation. Image and price positions cannot be changed quickly or at
will. But markets are dynamic. Technology, costs, consumer behavior, and competition are in constant
flux. Regular review and examination, and, if needed, an adjustment of the performance profile and
the price position, is therefore warranted.

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Lesson Proper for Week 2

Common Corporate Goals Include:

1. Proﬁtability Goals (proﬁt, return on sales, return on investment, shareholder value).

2. Financial Goals (liquidity, creditworthiness, debt-to-equity ratio).

3. Power Goals (market leadership, market dominance, social or political inﬂuence).

PRICE MANAGEMENT AND SHAREHOLDER VALUE

VALUE AND PRICE

1. Luxury Price Position

· Opportunities and Risks

2. Premium Price Position

· Opportunities and Risks

• The low-price segment must be sufﬁciently large.

• Low-priced suppliers need to achieve and maintain signiﬁcantly lower costs.

• Quality still must be acceptable for a sufﬁciently large number of customers.

• Low-price suppliers require unique marketing competencies.

• Low-priced companies face considerable risks.

· Basics – An ultra-low-price positioning represents a radically minimalist product offered at a

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