234 CHAPTER 9 PRICINGTHE PRODUCT
wisernot toengage inpric e competition forotherreasons. Pricemaysimplynotofferth~
business acompetitiveadvantage (employingthe value equation).
CompetitivePricing
Oncea business decidestouse priceas a primarycompetitivestrategy,thereare manyweJ]-
established toolsandtechniquesthat canbeemployed. Thepricingprocessnormallybegins
witha decision about the company's pricing approachto themarket.
ApproachestotheMarket
Pri ce is a veryimportantdecision criteriathat customers useto comparealternatives.Ital so
contributestothe company's position. In general,a business can pric e itself t o match its
competition, price hi gher,orpricelower. Each hasits pros an d cons.
PricingtoMeetCompetition M anyorganizationsat temptto establish prices that,
onaverage,arethe same asthose setbytheir moreimportantcompetitors.Automobiles of
thesamesizeandhaving equivalent equipment tend to have similarprices. This strategy
meansthattheorganization us es price as anindicator orbaseline. Qualityinproduction,
better serv ice, creativity in adverti sing,or so meotherelementofthemarketing mixare used
toattractcustomers whoare interested in productsin a particularpric e category,
The keys to implementinga strategyof meeting competitiveprices are anaccurate
definitionof competitio n and a knowledgeofcompetitor's prices.A makerofhand-crafted
leather s hoesis notincompetitio n withmassproducers.Ifhe/she attempts tocompete with
mass producers onprice,higherproducti on costswillmaketh ebusiness unprofitab le. A
more realistic definitionof competition fo r this purpose would be other makersof hand-
craftedleather shoes.Sucha definition along witha knowledge of theirprices would al low
a managertoputthestrategyintoeffect. Banksshop competitivebanksevery day tocheck
th eir prices.
PricingAboveCompetitors Pricing abovecompetitors canberewarding to organ-
izations,providedthat th e objectivesof thepolicy are clearly understoodandthatthe mar-
keting mixisusedto develop a strategy to enable managementtoimplement the policy
successfully.
Pricingabove competitiongenerally requires a cl earadvantageonsomenonpriceele-
mentofthemarketingmix.Inso me cases,it is possible duetoa highprice- quali tyasso-
ciationon the partof potential buyers.Butsuch an ass umption isincreasingly dangerous
in today's information-rich environment.Consumer Reportsandother similarpublications
make objective product compari sonsmuchsi mpler forthe consumer. There arealsohun-
dreds of dot.comcompanies thatprovideobjectivepric e comparisons. The keyis to prove
tocustomersthatyourproduct justifies apremiumprice.
PricingBelowCompetitors While somefirmsare positionedtopri ceab ovecom-
pe tition, otherswish to carve out amarketniche by pricing belowcompetitors. The goal
of sucha policy istorealize a l argesales volume througha lower price anciprofitmargins.
By controllingcos ts andreducing services, thesefirms are abletoearnan acceptableprofit,
eventhough profitper unitis usuallyless.
Sucha strategy canbeeffect iveifa significant segmentofthe market i s price-sensiti ve
and/or the organization's cost structu re is lowerthan competitors. Costs canbe reducedby
increased effi ciency,economics of scale, or byreducingor eliminating su ch thingsas credit,
delivery,and ad verti sing.For example,ifafirmcould replace itsfield salesforcewithtele-
