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Pricing Strategies

There are a number of factors that go into a firm's pricing strategy. The firm can consider the prices offered by competitors and the firm's own desired competitive position. It can base prices on the cost of production. The firm must consider the price elasticity of the demand for the good. The company can also choose from a number of different strategies, based on this demand curve: revenue maximization, profit maximization, cost leadership, penetration pricing and more. Other strategies include skimming and other forms of price discrimination (NetMBA.com, 2010). For example, if Brooks Brothers priced its goods differently for different marketing channels such as the Internet or a retail channel partner like Nordstrom, this would be a form of price discrimination.

These different pricing strategies are used to achieve different objectives. For a luxury brand like Brooks Brothers, the price will support the luxury brand image. Prices therefore must be relatively high. While the quality of the goods is high, the company is deliberately choosing not to compete on the basis of high quality at a low price (value proposition) but high quality at a high price. As the result of this strategy, the high price reinforces the luxury image of the brand. It has been hypothesized in the past that buyers of luxury goods often have reverse price elasticity of demand wherein the higher the price is the higher the demand will be (Kapferer & Bastien, 2009).

For Brooks Brothers, it must consider its overall strategy when setting prices. Because its customers have a relatively low level of price sensitivity, the company can reasonably assume that it will cover the costs associated with production, distribution and marketing. Its market share is firmly established, so there is little need for penetration pricing. Indeed, lowering costs would like hurt the company's market share by pushing it out of the luxury category. Thus, Brooks Brothers probably will set prices in line with a profit maximization strategy. At some point, its price would become too high and it would lose sales, simply by pricing itself out of its core market. Brooks Brothers wants to price at this level in order to maximize prices.

There are a number of factors that come into play in the development of a pricing strategy. The example above showed that a number of major pricing strategies are simply inappropriate for Brooks Brothers, but in a more conventional industry the company would have a wider range of pricing options at its disposal. For a company to determine the optimal pricing strategy for its goods, it needs to first gather information. One of the most important pieces of information is the demand curve, as this is used to estimate the price elasticity of demand, the breakeven point and the point of profit maximization. By moving prices along the demand curve the company can optimize a number of different market priorities with its pricing strategy.

The relationship between costs and prices is dependent in large part on the firm's overall pricing strategy. Some firms set their prices directly on the basis of their costs. However, some studies have shown that there is little relationship between prices and costs -- that prices are essentially set by the prevailing market conditions and firms must adjust their costs in order to make those prices happen. There is some influence, however, of fixed costs and key variable costs on prices. For example, increases in costs that are sticky, such as labor costs, will eventually need to be built into the price (Sbordone, 2002). The cost of the good may not change directly with the cost of the price, but it may change indirectly. For example, if Brooks Brothers' suppliers increase their costs, that increase will eventually need to be built into Brooks Brothers' prices to consumers, although this may not occur right away; the company may choose to eat the price increase in order to retain its current price level for competitive reasons.

For Brooks Brothers, the most important determinant of price will not be the cost of producing the good. In some luxury brands, high shipping costs associated with the delivery of high service levels may be built into the cost of doing business. However, at Brooks Brothers the need to price at a level expected of a luxury brand is a far more important determining factor in the price of goods. This relatively low level of price sensitivity -- and even reverse price sensitivity -- allows for a strong disconnect between the cost of Brooks Brothers apparel and the price of this apparel.

The different elements of marketing strategy have a high degree of interrelatedness. The pricing strategy can reflect the distribution and promotion strategies. Both of those strategies can also introduce costs that must be considered in the pricing strategy. This can work in reverse, too. A company that adopts penetration pricing will set a very low price, and the company will then need to develop distribution and promotion strategies that allow the company to deliver its products to the market at that low price, while still maintaining a profit.

The product strategy is intertwined with all of these other considerations. The cost of producing a good will be reflected at least loosely in the pricing strategy -- Brooks Brothers would never sell at Wal-Mart for example because it cannot produce its goods at a low enough price to appeal to Wal-Mart's corporate buyers. For a luxury brand, the product must be of high quality, as must the service level and that will be reflected in the distribution strategy. The price and distribution/market channel strategy should also provide some measure of exclusivity, to support the brand image that the company has adopted.