Price is only one element of the company’s broader marketing strategy. So, before setting price, the company must decide on its overall marketing strategy for the product or service. Sometimes, a company’s overall strategy is built around its price and value story. For example, grocery retailer Trader Joe’s unique price-value positioning has made it one of the nation’s fastest-growing, most popular food stores:8

Trader Joe’s has put its own special twist on the food price-value equation—call it “cheap gourmet.” It offers gourmet-caliber, one-of-a-kind products at bargain prices, all served up in a festive, vacation-like atmosphere that makes shopping fun. Trader Joe’s is a gourmet foodie’s delight, featuring everything from kettle corn cookies, organic strawberry lemonade, creamy Valencia peanut butter, and fair-trade coffees to kimchi fried rice and triple-ginger ginger snaps. If asked, almost any customer can tick off a ready list of Trader Joe’s favorites that he or she just can’t live without—a list that quickly grows.

The assortment is uniquely Trader Joe’s—90 percent of the store’s brands are private labels. The prices aren’t all that low in absolute terms, but they’re a real bargain compared with what you’d pay for the same quality and coolness elsewhere. “It’s not complicated,” says Trader Joe’s. “We just focus on what matters—great $\text{food}+\text{great}\text{prices}=\text{value}\text{.}$ So you can afford to be adventurous without breaking the bank.” Trader Joe’s inventive price-value positioning has earned it an almost cult-like following of devoted customers who love what they get from Trader Joe’s for the prices they pay.

Finding that magical price-value trade-off can be very difficult, and pricing strategies often require regular realignment to meet changes in the pricing environment. Just ask Trader Joe’s competitor Whole Foods Market, which pretty much invented the upscale organic and natural foods supermarket concept. In recent years Whole Foods Market’s pricing strategy has been a constant work in progress as the company struggles to find the right price-value equation (see Real Marketing 10.2).

If a company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward. For example, Amazon positions its Kindle Fire tablet as offering the same (or even more) for less and prices it at 40 percent less than Apple’s iPads and Samsung’s Galaxy tablets. It recently began targeting families with young children, positioning the Kindle Fire as the “perfect family tablet,” with models priced as low as $99, bundled with Kindle FreeTime, an all-in-one subscription service starting at $2.99 per month that brings together books, games, educational apps, movies, and TV shows for kids ages 3 through 8. Thus, the Kindle pricing strategy is largely determined by decisions on market positioning.

Pricing may play an important role in helping to accomplish company objectives at many levels. A firm can set prices to attract new customers or profitably retain existing ones. It can set prices low to prevent competition from entering the market or set prices at competitors’ levels to stabilize the market. It can price to keep the loyalty and support of resellers or avoid government intervention. Prices can be reduced temporarily to create excitement for a brand. Or one product may be priced to help the sales of other products in the company’s line.

Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing mix program. Decisions made for other marketing mix variables may affect pricing decisions. For example, a decision to position the product on high-performance quality will mean that the seller must charge a higher price to cover higher costs. And producers whose resellers are expected to support and promote their products may have to build larger reseller margins into their prices.

Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge. Here, price is a crucial product-positioning factor that defines the product’s market, competition, and design. Many firms support such price-positioning strategies with a technique called target costing. Target costing reverses the usual process of first designing a new product, determining its cost, and then asking, “Can we sell it for that?” Instead, it starts with an ideal selling price based on customer value considerations and then targets costs that will ensure that the price is met. For example, when Honda initially designed the Honda Fit, it began with a $13,950 starting price point and highway mileage of 33 miles per gallon firmly in mind. It then designed a stylish, peppy little car with costs that allowed it to give target customers those values.

Other companies deemphasize price and use other marketing mix tools to create nonprice positions. Often, the best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth a higher price. For example, Sleep Number puts high value into its mattresses and charges a higher price to match that value.

At the most basic level, a Sleep Number mattress lets you adjust each side to your ideal level of firmness and support. Add SleepIQ technology and you can track and optimize for the best possible night’s sleep. Sleep Number lets you “Know. Adjust. Sleep.” SleepIQ technology inside the bed monitors restful sleep time, heart rate, breathing rate, movements, and other factors. Then the SleepIQ app reports on your night’s SleepIQ score and how you slept. The app even recommends adjustments that will change your sleep for the better. The Sleep Number children’s mattress line helps parents track how their kids sleep. It even lets parents know when their kids get out of bed at night and includes a head tilt for stuffy heads, star-based rewards for sleep habits, and a clever “monster detector.” Sleep Number beds cost more than a traditional mattresses—models run from $1,000 to more than $7,000 compared with good-quality traditional mattresses at $1,000 or less. But Sleep Number’s satisfied customers are willing to pay more to get more. A recent 2015 J.D. Power Mattress Satisfaction Report rated Sleep Number highest in customer satisfaction with mattresses. After all, it’s hard to put a price on a good night’s sleep.9

Thus, marketers must consider the total marketing strategy and mix when setting prices. But again, even when featuring price, marketers need to remember that customers rarely buy on price alone. Instead, they seek products that give them the best value in terms of benefits received for the prices paid.

Management must decide who within the organization should set prices. Companies handle pricing in a variety of ways. In small companies, prices are often set by top management rather than by the marketing or sales departments. In large companies, pricing is typically handled by divisional or product managers. In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges. Even so, top management sets the pricing objectives and policies, and it often approves the prices proposed by lower-level management or salespeople.

In industries in which pricing is a key factor (airlines, aerospace, steel, railroads, oil companies), companies often have pricing departments to set the best prices or help others set them. These departments report to the marketing department or top management. Others who have an influence on pricing include sales managers, production managers, finance managers, and accountants.

As noted earlier, good pricing starts with understanding how customers’ perceptions of value affect the prices they are willing to pay. Both consumer and industrial buyers balance the price of a product or service against the benefits of owning it. Thus, before setting prices, the marketer must understand the relationship between price and demand for the company’s product. In this section, we take a deeper look at the price–demand relationship and how it varies for different types of markets. We then discuss methods for analyzing the price–demand relationship.

Pricing in Different Types of Markets

The seller’s pricing freedom varies with different types of markets. Economists recognize four types of markets, each presenting a different pricing challenge.

Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity, such as wheat, copper, or financial securities. No single buyer or seller has much effect on the going market price. In a purely competitive market, marketing research, product development, pricing, advertising, and sales promotion play little or no role. Thus, sellers in these markets do not spend much time on marketing strategy.

Under monopolistic competition, the market consists of many buyers and sellers trading over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers. Because there are many competitors, each firm is less affected by competitors’ pricing strategies than in oligopolistic markets. Sellers try to develop differentiated offers for different customer segments and, in addition to price, freely use branding, advertising, and personal selling to set their offers apart. Thus, Wrigley sets its Skittles candy brand apart from the profusion of other candy brands not by price but by brand building—clever “Taste the Rainbow” positioning built through quirky advertising and a heavy presence in social media such as Tumblr, Instagram, YouTube, Facebook, and Twitter. The social media–savvy brand boasts more than 24 million Facebook Likes and 334,000 Twitter followers.

Under oligopolistic competition, the market consists of only a few large sellers. For example, only a handful of providers—Comcast, Time Warner, AT&T, and Dish Network—control a lion’s share of the cable/satellite television market. Because there are few sellers, each seller is alert and responsive to competitors’ pricing strategies and marketing moves. In the battle for subscribers, price becomes a major competitive tool. For example, to woo customers away from Comcast, TimeWarner, and other cable companies, AT&T’s DirecTV unit offers low-price “Cable Crusher” offers, lock-in prices, and free HD.

In a pure monopoly, the market is dominated by one seller. The seller may be a government monopoly (the U.S. Postal Service), a private regulated monopoly (a power company), or a private unregulated monopoly (De Beers and diamonds). Pricing is handled differently in each case.

Analyzing the Price–Demand Relationship

Each price the company might charge will lead to a different level of demand. The relationship between the price charged and the resulting demand level is shown in the ­demand curve in Figure 10.6. The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged. In the normal case, demand and price are inversely related—that is, the higher the price, the lower the demand. Thus, the company would sell less if it raised its price from P₁ to P₂. In short, consumers with limited budgets probably will buy less of something if its price is too high.

Figure 10.6

Demand Curve

Figure 10.6 Full Alternative Text

Understanding a brand’s price-demand curve is crucial to good pricing decisions. ConAgra Foods has learned this lesson when pricing its Banquet frozen dinners:10

Banquet has charged about $1 per dinner since its start way back in 1953. And that’s what customers still expect. The $1 price is a key component in the brands appeal. Six years ago, when ConAgra tried to cover higher commodity costs by raising the list price of Banquet dinners from $1 to $1.25, consumers turned up their noses to the higher price. Sales dropped sharply, forcing ConAgra to sell off excess dinners at discount prices and drop its prices back to a buck a dinner. To make money at that price, ConAgra tried to do a better job of managing costs by shrinking portions and substituting less expensive ingredients for costlier ones. But as commodity prices continue to rise, Banquet just can’t make a decent dinner for a dollar anymore. So it’s cautiously raising prices again. Some smaller meals are still priced at $1. For example, the chicken finger meal still comes with macaroni and cheese but no longer includes a brownie. But classic meals such as Salisbury steak are now back up to $1.25, and ConAgra has introduced Banquet Select Recipes meals at a startling $1.50. The brand has seen some initial sales declines since the price increase but not as severe as feared. Banquet is an entry-point brand, notes ConAgra’s CEO, but “that doesn’t mean it’s married to a dollar. It [just] needs to be the best value for our core customer.”

Most companies try to measure their demand curves by estimating demand at different prices. The type of market makes a difference. In a monopoly, the demand curve shows the total market demand resulting from different prices. If the company faces competition, its demand at different prices will depend on whether competitors’ prices stay constant or change with the company’s own prices.

Economic conditions can have a strong impact on the firm’s pricing strategies. Economic factors such as a boom or recession, inflation, and interest rates affect pricing decisions because they affect consumer spending, consumer perceptions of the product’s price and value, and the company’s costs of producing and selling a product.

In the aftermath of the Great Recession of 2008 to 2009, many consumers rethought the price-value equation. They tightened their belts and become more value conscious. Consumers have continued their thriftier ways well beyond the economic recovery. As a result, many marketers have increased their emphasis on value-for-the-money pricing strategies.

The most obvious response to the new economic realities is to cut prices and offer discounts. Thousands of companies have done just that. Lower prices make products more affordable and help spur short-term sales. However, such price cuts can have undesirable long-term consequences. Lower prices mean lower margins. Deep discounts may cheapen a brand in consumers’ eyes. And once a company cuts prices, it’s difficult to raise them again when the economy recovers.

Rather than cutting prices on their main-market brands, many companies are holding their price positions but redefining the “value” in their value propositions. Other companies have developed “price tiers,” adding both more affordable lines and premium lines that span the varied means and preferences of different customer segments. For example, for cost-conscious customers with tighter budgets, P&G has added lower-price versions of its brands, such as “Basic” versions of Bounty and Charmin and a lower-priced version of Tide called Tide Simply Clean and Fresh. At the same time, at the higher end, P&G has launched upscale versions of some of its brands, such as Bounty DuraTowel and Cascade Platinum dishwasher detergent, which offer superior performance at up to twice the price of the middle-market versions.

Remember, even in tough economic times, consumers do not buy based on prices alone. They balance the price they pay against the value they receive. For example, despite selling its shoes for as much as $150 a pair, Nike commands the highest consumer loyalty of any brand in the footwear segment. Customers ­perceive the value of Nike’s products and the Nike ownership experience to be well worth the price. Thus, no matter what price they charge—low or high—­companies need to offer great value for the money.

Beyond the market and the economy, the company must consider several other factors in its external environment when setting prices. It must know what impact its prices will have on other parties in its environment. How will resellers react to various prices? The company should set prices that give resellers a fair profit, encourage their support, and help them to sell the product effectively. The government is another important external influence on pricing decisions. Finally, social concerns may need to be taken into account. In setting prices, a company’s short-term sales, market share, and profit goals may need to be tempered by broader societal considerations. We will examine public policy issues later in Chapter 11.