BUS203: Principles of Marketing

Nonprice competition means that organizations use strategies other than price to attract customers. Advertising, credit, delivery, displays, private brands, and convenience are all example of tools used in nonprice competition. Businesspeople prefer to use nonprice competition rather than price competition, because it is more difficult to match nonprice characteristics.

AD 9.1 An example of nonprice competition.

Competing on the basis of price may also have a deleterious impact on company profitability. Unfortunately, when most businesses think about price competition, they view it as matching the lower price of a competitor, rather than pricing smarter. In fact, it may be wiser not to engage in price competition for other reasons. Price may simply not offer the business a competitive advantage (employing the value equation).

Integrated marketing 9.1

How to select the best price

The Hertz Corporation knows when its rental cars will be gone and it knows when the lots will be full. How? By tracking demand throughout past six years. "We know, based on past performance and seasonal changes, what times of year there is a weak demand, and when there is too much demand for our supply of cars," says Wayne Meserue, director of pricing and yield management at Hertz. To help strike a balance, the company uses a pricing strategy called "yield management" that keeps supply and demand in check. The strategy looks at two aspects of Hertz's pricing: the rate that is charged and the length of the rental.

"Price is a legitimate rationing device,"says Meserue. "What we're really talking about is efficient distribution, pricing, and response in the marketplace". For example, there are times when cars are in great demand. "It's always a gamble, but it's definitely a calculated gamble. With yield management, we monitor demand day by day, and adjust (prices as necessary)," Meserue says.

Hertz also uses length of rental as a yield management device. For instance, in the US they established a three-night minimum for car rentals during President's Day weekend in February. "We didn't want to be turning away business for someone who wanted the car for five nights just because we had given our cars to people who came in first for one night," says Meserue, who adds that it is often better for Hertz to mandate a minimum number of days for a rental, because it ensures that cars will be rented for more days.

A smart pricing strategy is essential for increasing profit margins and reducing supply. Yet at last count, only 15% of large corporations were conducting any sort of pricing research, reports Robert Dolan, professor at Harvard Business School. "People don't realize that if you can raise your prices by just 1 percent, that's a big increase in your profit margin," he says. For example, if a supermarket is operating with a two-percent net margin, raising the prices by one percent will increase profitability by 33%. "The key is not taking one percent across the board, but raising it 10% for 10% of your customers," says Dolan, "Find those segments of the market that are willing to take the increase". That doesn't mean that companies can automatically pass their cost increases on the customer, notes Dolan. If the costs are affecting an entire industry, then those costs can be passed through easily to the consumer, because competitors will likely follow the lead.

A fundamental point in smart pricing, according to Dolan: base prices on the value to the customer. As much as people talk about customer focus, they often price according to their own costs. Companies can profit from customizing prices to different customers. The value of a product can vary widely depending on factors such as age and location.