Recent work in the area of marketing strategy has delineated the importance of market share as a key variable in strategy formulation. Although market share has been discussed earlier with reference to other matters, this section examines the impact of market share on pricing strategy. Time and again it has been noted that higher market share and experience lead to lower costs. Thus, a new product should be priced to improve experience and market share. The combination of enhanced market share and experience gives a company such a cost advantage that it cannot ever profitably be overcome by any competitor of normal performance. Competitors are prevented from entering the market and must learn to live in a subordinate position. Assuming the market is price sensitive, it is desirable to develop the market as early as possible. One way of achieving this is to reduce price. Unit costs are necessarily very high in the early stages of any product; if price is set to recover all costs, there may be no market for the product at its initial price in competition with existing alternatives. Following the impact of market share and experience on prices, it may be worthwhile to set price at a level that will move the product. During the early stages of a product introduction, operations may need to be conducted even at a loss.

As volume is gained, costs go down, and even at an initial low price the company makes money, implying that future competitive cost differentials should be of greater concern than current profitability. Of course, such a strategic posture makes sense only in a competitive situation. In the absence of competition there is every reason to set prices as high as possible, to be lowered only when total revenue will not be affected by such an action. The lower the initial price set by the first producer, the more rapidly that producer builds up volume and a differential cost advantage over succeeding competitors and the faster the market develops. In a sense, employing a pricing strategy that builds market share is a purchase of time advantage.

However, the lower the initial price, the greater the investment required before the progressive reduction of cost results in a profit. This in turn means that the comparative investment resources of competitors can become a significant or even the critical determinant of competitive survival. Two limitations, however, make the implementation of this type of strategy difficult. First, the resources required to institute this strategy are more than those normally available to a firm. Second, the price, once set, must not be raised and should be maintained until costs fall below price; therefore, the lower the price, the longer the time needed to realize any returns and the larger the investment required. When a future return is discounted to present value, there is obviously a limit. It is these difficulties that lead many firms to set initial price to cover all costs. This policy is particularly likely to be adopted when there is no clear competitive threat. As volume builds and costs decline, visible profitability results, which in turn induces new competitors to enter the field. As competitors make their moves, the innovating firm has the problem of choosing between current profitability and market share. Strategically, however, the pricing of a new product, following the relationship between market share and cost, should be dictated by a product’s projected future growth.

Pricing strategy is of interest to the very highest management levels of a company. Yet few management decisions are more subject to intuition than pricing. There is a reason for this. Pricing decisions are primarily affected by factors, such as pricing objectives, cost, competition, and demand, that are difficult to articulate and analyze. For example, assumptions must be made about what a competitor will do under certain hypothetical circumstances. There is no way to know that for certain; hence the characteristic reliance on intuition. This article reviewed the pricing factors mentioned above and examined important strategies that a pricer may pursue. The following strategies were discussed:

1. Pricing strategies for new products.

2. Pricing strategies for established products.

3. Price-flexibility strategy.

4. Product line-pricing strategy.

5. Leasing strategy.

6. Bundling-pricing strategy.

7. Price-leadership strategy.

8. Pricing strategy to build market share. There are two principal pricing strategies for new products, skimming and penetration. Skimming is a high-price strategy; penetration strategy sets a low initial price to generate volume. Three strategies for established products were discussed: maintaining the price, reducing the price, and increasing the price. A flexible-pricing strategy provides leverage to the pricer in terms of duration of commitment both from market to market and from product to product. Product line-pricing strategy is directed toward maintaining a balance among different products offered by a company. The leasing strategy constitutes an alternative to outright sale of the product. The bundling strategy is concerned with packaging products and associated services together for the purposes of pricing. Price-leadership strategy is a characteristic of an oligopoly, where one firm in an industry emerges as a leader and sets the pricing strategy to build market share. Setting price to build market share emphasizes the strategic significance of setting an initially low price to gain volume and market share, thereby enabling the firm to achieve additional cost reductions in the future.