Marketing Pricing Strategy There Are Different Approaches

Marketing

Pricing Strategy

There are different approaches to pricing strategy. The pricing strategy should fit within the context of the overall marketing strategy. Among the different options for pricing strategy are revenue maximization, profit maximization, survival, skim pricing, and penetration pricing (NetMBA, 2010). There are also approaches such as cost-plus that take into account the company's cost structure but in a competitive marketplace it is more normal that the pricing strategy reflects what competitors are doing. For MegaWidget, the $10 price tag comes with a sales target of one million new units. The MegaWidget only costs $3 to produce, so the price is not based on the cost. It is based on penetration pricing strategy. Ten dollars is a threshold, one that consumes will notice more -- at ten dollars or less a consumer is willing to purchase the product on impulse. As a result of that, the MegaWidget should be able to build a good market for itself with $10 pricing. In addition, this sort of pricing strategy can be seen as defensive, because the company believes it can prevent others from entering the market with similar products if it is able to price this low.

Branding and Distribution

The MegaWidget is going to carry premium branding for a product of its nature. The brand is going to convey the following brand attributes: innovation, uniqueness, handy, and high quality. The word "widget" signifies something that is an all-purpose tool, versatile and very handy, and "mega" is a Greek prefix that implies bigness. Thus, a "mega-widget" is something that has enormous versatility.

Distribution is an important part of the marketing mix (MindTools, 2014). The MegaWidget will be distributed via wholesalers, targeting retailers mostly at the hardware store level. Wholesalers will be needed for this product in order to reach the small, independent hardware stores. Larger customers might receive self-distribution because of the need to provide superior service, something that is easier to do when you are doing your own service.

Competition Analysis

The MegaWidget does not have any genuine competitors. It is a new and unique product, and because of that it is the first of its kind. It is believed, however, that new competitors will enter the market in a year or two, because any time a product gets popular there will be imitators and knockoffs. While MegaWidget will be protected by patent, it is expected that within a year or two there will be competition from low cost producers, so it is critical that MegaWidget builds out its bargaining power with retailers, and builds its market share and brand value with customers now, before there is any more competition in the industry.

Differentiation Strategy

What the MegaWidget does is deliver a set of benefits that would otherwise require a lot of other tools, and perhaps even a lot of hard work, to replicate. The benefit is therefore convenience and versatility, above all else. This is critical to understand because the main benefit is not one feature or another, but the fact that all of these features come in one package. So it is the convenience that will differentiate it from substitutes. When competitors enter the market, as we know they will, then the differentiation strategy will focus on both the higher quality of the MegaWidget and the fact that the MegaWidget was the original. First mover advantage will mean something because we will make it a point of differentiation when the inevitable imitators enter the market, especially if they attempt to sell at a lower price. Our response will be to cast them as cheap knockoffs, rather than acknowledging them as legitimate competitive threats. There is little doubt, from this strategy, that the company intends to be a leader in the industry.

Macroenvironmental Issues

There are a number of different components to the macroenvironment, and it is important to understand not only the status of each one, but how it affects the business. For example, the economic environment is important. One might not think that sales of a $10 item would be that affected by the health of the economy overall, but hardware purchases are tied to the overall health of the economy, as are discretionary purchases, and the MegaWidget is both. The U.S. economy is actually quite healthy right now. The GDP is currently growing at 3.9% and was growing even faster last quarter (BEA, 2014). Non-durable goods -- our category -- increased by 2.2% but home improvement products are also tied to durable goods sales, and those were up a healthy 8.7% (BEA, 2014). Thus, the economic environment appears to be favorable for the MegaWidget.

The technological environment should not affect the MegaWidget much, and the legal environment will give us some patent protection. The social environment is favorable to new product innovations. Ultimately, it appears that the macroenvironment is favorable for MegaWidget, with the elements moving in the right direction.

Marketing Research Tools

There are a number of marketing research tools. Now, it was known all along that there would be a market for the MegaWidget. The inventor produced a few prototypes and gave them to his friends. The feedback was positive, in that the MegaWidget was found to be a valuable item, and was used. After this initial feedback, more formalized market research techniques were implemented. A couple of focus groups were set, and surveys were produced for the people who received the prototype. The focus groups were set up in order to gain feedback from non-biased sources, while the surveys were intended to elicit input on things like distribution, pricing and marketing strategy (Brookins, 2014). The feedback gained from these two techniques was instrumental in developing an appropriate strategy for the MegaWidget.

Expansion Plan

It is expected that sales will double in Y2, before the growth rate in sales slows up. By Y5, the company should have come close to saturating what it believes is the available market. Production is scalable to this point, but not beyond, so at the five-year market some adjustments might need to be made regarding capacity. It is believed that the company will be profitable immediately, and some of this profit will need to be plowed back into the company to fuel this growth, as the marketing expense as a percentage of gross revenue will probably have to remain constant in order to maintain sales growth over this five-year period.

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