CLASS 5 – SERVICE AND PRICING STRATEGY BEFORE

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Class 5 – Service and Pricing Strategy

Before you price:

Analyze the market
Determine strengths and weaknesses
Identify target market

By doing these things you:
Determine what gives you a competitive advantage
Determined how you will offer greater satisfaction to your target market

Remember:
Being different does not guarantee success
You need to be better

Strategy for developing a competitive advantage consists of:

Product service strategy
Price strategy
Promotional strategy
Physical distribution strategy

Product-Service Strategy

Starts with identifying the type of good and services to offer
Described in terms of depth and breadth
Breadth: how many different brands you offer
Depth: number of models in each brand

Example: Computer stores
Breadth: Six different brands of PCs (Dell, COMPAQ, Apple, etc…)
Depth: Many models for each brand (Pentium III, different size hard drives, different sound cards, etc…)

Service strategy is similar
Most service companies offer a variety of services for a variety of situations
Breadth: IT company offers SW development, SW support, SW training and other services
Depth: They support and develop software in C++, VB, Oracle, etc..

Keep in mind:
Offer products that don’t come back
To customers that do come back

Product Service Classifications

Specialty Items
Brand is valued by the target market
Consumers are not price sensitive
Not likely to be influenced by advertisements
Will to go out of their way to buy the type of brand, product, or service you offer

Shopping Items
Consumers compare to find the best value
Value is a combination of price and quality
Brand loyalty is not as strong as with specialty items

Convenience Items
Ease of purchase is the most important
Consumers place convenience above brand loyalty and price consciousness
Carry basic items that people run out of
Location, facility, and hours are most important

Impulse Items
Consumer did not plan to buy it
Spur- of-the-moment purchases
Product of emotion rather than necessity
Easy for customer to see and purchase
Co-located with other services
Location, visibility, and display are important

Pricing Strategy

Depends on many factors

Size of the target market

Your costs
Markup you are willing to take
Willingness of the market to pay

Standard markup approach to pricing

“Cost-based” approach to setting prices
Base you price on what you paid for it plus a percentage of the cost

Retail price = cost+markup

Where: markup = p*cost

And p is the proportion of cost the good or service will be increased

Note: The value of p varies from industry to industry

www references showing markups:

Kelley Blue Book

Edmund’s

Problems with this approach
Does not take into consideration the unique nature of the market

Assumes that the competition uses a similar approach

Match-the-Market approach to pricing

Resembles the standard markup approach
Lower standard markup to attract price sensitive customers
Raise standard markup to increase profits for an attractive brand or type of service
New businesses match the pricing strategy of their competitors
Does not consider your unique strengths

Market-Based approach to pricing

Analyze your market to determine:

Preference to a specific brand
Amount of disposable income
Price-sensitivity of customers
How often they buy
In what category is your product or service viewed? (specialty, shopping, convenience, or impulse)

Determine if numerous businesses already meet the target market’s needs in terms of selection, brand, services and price
Is the competition conveniently located?
If yes to all of the above, match or lower your prices relative to your competition’s prices

Market-Penetration approach to pricing

Useful in price-sensitive markets
The objective is to lower prices so low as to divert customers
Problem: competition may similarly lower prices
However: most established businesses prefer not to compete on the basis of price alone
If prices go too low, there may not be enough margin to cover your expenses

Skimming approach to pricing

When customers are in search of your product or business, you can set higher prices
New products that the market has been waiting for

Exclusive distribution rights
Four drawbacks:

Assumes your business is better than any other
Assumes that your market will pay more
Fewer people can afford your product
Other business will be attracted to your market because of the high profit margin

Additional Pricing Guidelines

Discounts
Set prices lower for a period of time
Quantity discount
Which item will attract interest
How much of a discount
How long to discount

Payment plans

Buy now, pay later
Reduced interest rates

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