Reference no: EM131205005

Low-active price strategy

This price strategy characterizes the behavior of discounters in all fields: Wal-Mart and Dollar General in retail, Southwest Airlines in air travel, and so on. When a large segment of buyers is sensitive to price, a low-active price strategy may be highly effective – underlined by the performance of discounters in the economic downturn. Of course, a firm using the strategy must have costs low enough to be profitable with low prices. It is a more attractive option when a company has a strong position in the product-market, has cost advantages, or competition for the target market is not strong. Interestingly, when ConAgra Foods passed on rising costs and drove the retail price of Banquet dinners from $1 to $1.25, the consumer stopped buying the product, and the company has cut costs to get back to a $1 dinner, because this price is its value positioning in the customer's mind (Weber, 2009)

Traditional pricing approaches

The evidence is that pricing has traditionally been dominated by balancing costs with competitor prices – whether in complex quantitative pricing models or on “the back of an envelope”. Even new products have too often been priced based on the price of existing products. Basic principles for determining prices have tended to be cost-oriented (e.g. “cost-plus”), competition-oriented (e.g. meeting the competition or pricing relative to their prices), or demand-oriented (e.g. judging “what the market will bear”) (Cravens and Piercy, 2009). The result has often been a piecemeal and fragmented approach to pricing.

Indeed, the result of ad hoc price decisions for some companies has been “confusion pricing” when customers do not know the real price to be paid for the product or service. Traditional approaches have led to major pricing errors – Sony overpriced the PS2 in competition with Nintendo and had to quickly bring the price down to stay competitive while more recently repeating the error with the PS3 and cutting prices again; Apple overpriced the first iPhone and very early in the cycle had to reduce the price and apologize to the existing buyers and offer refunds.

Questions

What are the pros and cons of Low-active price strategy

How does Low-active price strategy differ from traditional pricing approaches

Think of a company that may be able to adopt Low-active price strategy, and discuss how it could implement the model in its pricing strategy.