Page 418 - Marketing Management

DEVELOPING PRICING STRATEGIES AND PROGRAMS | CHAPTER 14 395

Aldi Germany’s Aldi follows a simple formula globally. It stocks only about 1,000 of the
Aldi most popular everyday grocery and household items, compared with more than 20,000 at a tra-
ditional grocer such as Royal Ahold’s Albert Heijn. Almost all the products carry Aldi’s own exclu-
sive label. Because it sells so few items, Aldi can exert strong control over quality and price and
simplify shipping and handling, leading to high margins. With more than 8,200 stores worldwide
currently,Aldi brings in almost $60 billion in annual sales. 47

Step 4: Analyzing Competitors’ Costs, Prices,
and Offers
Within the range of possible prices determined by market demand and company costs, the firm
must take competitors’ costs, prices, and possible price reactions into account. If the firm’s offer
contains features not offered by the nearest competitor, it should evaluate their worth to the cus-
tomer and add that value to the competitor’s price. If the competitor’s offer contains some features
not offered by the firm, the firm should subtract their value from its own price. Now the firm can
decide whether it can charge more, the same, or less than the competitor.
The introduction or change of any price can provoke a response from customers, competitors,
distributors, suppliers, and even government. Competitors are most likely to react when the number
of firms is few, the product is homogeneous, and buyers are highly informed. Competitor reactions
can be a special problem when these firms have a strong value proposition, as Green Works did.

Green Works Green Works Although the natural cleaner market was pioneered by High Price
Seventh Generation and method cleaning products, Clorox Green Works now commands
42 percent market share. The Green Works product line consists of 10 natural cleaners
(No possible
using biodegradable ingredients, packaged in recyclable materials, and not tested on
demand at
animals. The first major new Clorox brand in more than 20 years, it doubled the size of this price)
the natural cleaning category with its strategy of “delivering a line of affordable products that are
good for consumers, good for retailers, and good for the environment.” The company charges only a Ceiling
10 percent to 20 percent premium over conventional cleaners, versus the premium of 40 percent or price
more charged by other natural cleaners. Launch marketing efforts included the use of viral market- Customers’
assessment
ing and social media, prominent TV coverage in shows like Ellen and Oprah, collaborations with retail
of unique
customers such as Safeway and Walmart in product development and in-store promotion, and an en- product
dorsement from and cause marketing program with the Sierra Club (resulting in a donation of features
$645,000 to the organization in 2009). 48 Orienting
point
How can a firm anticipate a competitor’s reactions? One way is to assume the competitor reacts
Competitors’
in the standard way to a price being set or changed. Another is to assume the competitor treats each prices and
price difference or change as a fresh challenge and reacts according to self-interest at the time. Now prices of
the company will need to research the competitor’s current financial situation, recent sales, cus- substitutes
tomer loyalty, and corporate objectives. If the competitor has a market share objective, it is likely to Costs
49
match price differences or changes. If it has a profit-maximization objective, it may react by in-
creasing its advertising budget or improving product quality. Floor
The problem is complicated because the competitor can put different interpretations on price
lowered prices or a price cut: that the company is trying to steal the market, that it is doing
poorly and trying to boost its sales, or that it wants the whole industry to reduce prices to stimu- Low Price
late total demand. (No possible
profit at
this price)
Step 5: Selecting a Pricing Method
Given the customers’ demand schedule, the cost function, and competitors’ prices, the company is |Fig. 14.4|
now ready to select a price. Figure 14.4 summarizes the three major considerations in price
setting: Costs set a floor to the price. Competitors’ prices and the price of substitutes provide an The Three Cs Model
orienting point. Customers’ assessment of unique features establishes the price ceiling. for Price Setting