• Marketing­Mix Strategy

• Marketing­Mix Strategy

Price is only one of the marketing­mix tools that a company uses to achieve its marketing objectives. Price decisions must be co­ordinated with product design, distribution and promotion decisions to form a consistent and effective marketing programme. Decisions made for other marketing­mix variables may affect pricing decisions. For example, producers using many resellers that arc expected to support and promote their products may have to build larger reseller margins into their prices. The decision to position the product on high performance quality will mean that the seller must charge a higher price to cover higher costs. The perfume houses argue that their high margins, expensive advertising and exclusive distribution are essential to the brands and in the public interest. 7

Companies often make their pricing decisions first and then base other marketing­mix decisions on the prices they want to charge. Here, price is a crucial product­positioning factor that defines the product's market, competition and design. The intended price determines what product features can be offered and what production costs can be incurred.

Many firms support such price­positioning strategies with a technique called

target costing target costing, a potent strategic weapon. Target costing reverses the usual

A technique to support process of first designing a new product, determining its cost and then asking'Can pricing decision, which we sell it for that?' Instead, it starts with a target cost and works back: starts with deciding a

target cost Jar « new Compaq Computer Corporation calls this process 'design to price'. After product and works back . , , being battered tor vears by lower­priced rivals, Compaq used this

to designing the product. * • j n v approach to create its highly successful, lower­priced Prohnea personal

computer line. Starting with a price target set by marketing and with profit­margin goals from management, the Prolinea design ream determined what costs had to be in order to charge the target price. From this crucial calculation all else followed. To achieve target costs, the design team negotiated doggedly with all the company departments

Factors to Consider when Setting Prices • 685

responsible for different aspects of the new product and with outside suppliers of needed parts and materials. Compaq engineers designed a machine with fewer and simpler parts, manufacturing overhauled its factories to reduce production costs and suppliers found ways to provide quality components at needed prices. By meeting its target costs,

Compaq was able to set its target price and establish the desired price position. As a result, Prolinea sales and profits soared. s

Other companies de­emphasize price and use other marketing­mix 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 (see Marketing Highlight 16.1).

For example, in the USA Johnson Controls, a producer of climate control systems for office buildings, used initial price as its primary competitive

tool. However, research showed that customers were more concerned about the total cost of installing and maintaining a system than about its initial price. Repairing broken systems was expensive, time­consuming and risky. Customers had to shut down the heat or air conditioning in the whole building, disconnect a lot of wires and face the dangers of electrocution. Johnson decided to change its strategy. It designed an entirely new system called Metasys. To repair the new system, customers need only pull out an old plastic module and slip in a new one ­ no tools required. Metasys costs more to make than the old system and customers pay a higher initial price, but it costs less to install and maintain. Despite its higher asking price, the new Metasys system brought in 8500 million

in revenues in its first year. 9

Thus the marketer must consider the total marketing mix when setting prices. If the product is positioned on non­price factors, then decisions about quality, promotion and distribution will strongly affect price. Tf price is a crucial positioning factor, then price will strongly affect decisions made about the other

marketing­mix elements. In most cases, the company will consider alS the marketing­mix decisions together when developing the marketing programme.