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Marketing Management

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  1. Marketing Management Developing Pricing Strategies & Programs

  2. You don’t sell through price. You sell the price.

  3. Initiating & Responding to Price Changes Adapting the Price Setting the Price Understanding Price Pricing Strategy

  4. Other Objectives Product Quality Leadership Max. Current Profit Objectives of Pricing Max. Market Share Revenues cover variable costs & some fixed costs, company survives. Economies of Scale; Begin with lowest price, assuming market is price sensitive. Lower price should not encourage competition. Premium Price to reflect premium Quality; if that is what they want. Max. Market Skimming Start with high and then lower it e.g. Sony. Given that enough buyers exist. Assuming the company knows the demand very well; estimate the cost & choose a price that promises the most return Survival

  5. Other objectives • Non-profit & public organizations may have objectives other than the FIVE. • University aims for partial cost recovery • Public Hospital for full cost recovery • A non-profit theater/club to fill maximum number of seats, • Last Word of Wisdom on Price Objectives “Businesses that use price as a strategic tool will profit more than those who simply let costs or the market determine their pricing”.

  6. A Word on Next Three Steps of Pricing: • The THREE Cs of pricing; • Customer Demand • Company Cost • Competitors’ Cost/Prices

  7. Price Sensitivity, Estimating Demand Curves & Price Elasticity of Demand • Price Sensitivity • Normally, Demand & Price are inversely proportionate • “Prestige Products”, they are directly proportionate • What affects Price Sensitivity: • More Sensitivity – if costly & frequently purchased • Less Sensitivity – if cheap & infrequently purchased • Also insensitive if price is a small part of Total Cost of Ownership (TCO) – Table 14.3; page 440 • TCO – the cost of obtaining, operating & servicing • A company can charge higher & still get customers if it can convince the customers that its TCO is less than that of competitors’

  8. Estimating Demand Curves • Statistical Analysis • Past prices • Quantity sold • Longitudinal data (over time) • Cross sectional data (one time in many locations) • Price Experiments • Offer different prices in similar territories & see the outcome • Surveys • Trying to know how many units would they buy at different price points • Also, competition & changing other Ps can bring a change not triggered by pricing strategy.

  9. Price Elasticity of Demand • Again, Price & Demand’s proportionality • If the change is drastic, it’s more elastic & vice versa • The higher the elasticity, the greater the volume growth resulting from 1% price reduction. • Demand is less elastic if: • Few/no substitutes or competitors exist • Buyers don’t’ notice the higher price • Buyers are slow to change their buying process • Price Indifference Band (PIB) • The range within which a price “cut” or “hike” doesn’t affect demand at all • McKinsey study found that PIB was: • 17% for mouthwash • 13% for Batteries & 9% for appliances

  10. Demand sets a ceiling but costs set the floor for pricing • Types of Costs & Levels of Production • Fixed Costs: • Variable Costs: • Total Cost = Fixed + Variable • Average Cost = Total Cost/Production • Management would at least want the floor to be served • Fixed Cost spreads like a “sprinkle of salt” over production which implies: • Production & Average Costs are Inversely Proportionate

  11. Demand sets a ceiling but costs set the floor for pricing • Accumulated Production • The decline in the average cost with accumulated production experience is called the experience/learning curve. • This results in better pricing as the cost of production declines. • Risk of Learning Curve – obsolescence in technology

  12. Demand sets a ceiling but costs set the floor for pricing • Activity Based Cost (ABC accounting) • ABC tries to identify the real costs associated with serving each customer. • e.g. different retail stores want different frequency & bulk of our merchandise. We must dismantle the cost & sprinkle it to individual customer; instead of summing it up in account books. • The key to ABC accounting is to identify & judge “activities” properly.

  13. Demand sets a ceiling but costs set the floor for pricing • Target Costing • Pre-determinethe cost based on what price will be favored by customers. • In other words, price determines the cost. • Key Note: • If Target Costing is the approach & the “Price-leading-Cost” doesn’t happen, stop producing it.

  14. Analyzing Competitors’ Costs, Prices & Offers • Consider the nearest competitor’s prices/costs • Evaluate & add the worth (for customers) of the features not offered by the nearest competitor • If vice versa (competitor offers features not contained in our product), subtract their worth from our price. • Now, decide whether to charge more, less or the same.

  15. Given the 3 Cs of pricing, the company is in a position to select a price

  16. Auction Type pricing Going-rate Pricing Value Pricing Pricing Methods Perceived Value Pricing Target Return Pricing Mark up pricing

  17. Mark-Up pricing=to recover costs ASAP! • e.g. a Toaster manufacturer; Variable cost per unit = $10 Fixed cost = $300,000 Expected unit sale = 50,000 units Unit cost = Variable cost + fixed cost/unit sales Unit cost = 10 + 300,000/50,000 = $16 Now a 20% mark-up is planned by the manufacturer: Markup price = unit cost/ (1-desried return on sales) Markup price = 16/ (1-0.2) = $20 Weeakness: Current demand, perceived value & competition are ignored!

  18. Mark-Up pricing • Advantages • Firstly, easier to determine costs than to determine demand • Simplifies the pricing task • Secondly, given all sellers in industry use this very same method, prices of all most probably will remain the same. • Hence, competition lies elsewhere ! • Thirdly, both parties benefit & are not exploited for their respective bargaining powers

  19. Target-Return Pricing • Determine the price that would yield the target return on investment • e.g.: 15 % ROI required on 1 million investment

  20. Target-Return Pricing • Target Return price = unit cost + (desired return x invested capital)/unit sales • Toaster company desires to have 10% ROI on $1m • TR Price = 16 + {(0.10 x 1,000,000)/50,000} TR Price = $18 • Now, Break-even volume = Fixed cost / (price – V.Cost) = 300,000/ (18 – 10) = 37,500 Units • Weakness: Competition & price elasticity are ignored Try to lower your fixed or variable costs to better reach break-even point in order to offer a better price.

  21. Perceived Value Pricing • We charge more because we offer more value • Simply, you pay more, because you get more ! • Promotion Mix is optimally used to convince customers that they do receivesuperior value. • Perceived Value (PV)= Image of product + channel deliverables + warranty quality + customer support + softer attributes (reputation, reliability & esteem) • Different perception of customers of PV results in THREE Groups of buyers; • Price Buyers – offer a stripped-down version • Value Buyers – innovation & aggressive reaffirming • Loyal Buyers – invest in relationship & intimacy • We need different strategies (as listed above) for all the three.

  22. Perceived Value Pricing • Caterpillar Construction Equipment(tractor) Superior Value = Lower lifetime operating costs Price of the Tractor = $100,000 Why? • Superior Perceived Value $90,000 tractor’s price equivalent to competition $7,000 Caterpillar’s superior durability $6,000 Caterpillar’s superior reliability $5,000 Caterpillar’s superior service $2,000 Longer Warranty on parts ____________________________________ $110,000 Total Price $10,000 Discount ____________________________________ $100,000 Actual Price for Superior Value

  23. Perceived Value Pricing • Points to remember • Some customers may still prefer a lower value • Some will suspect that we are exaggerating • So, the Key is: • Demonstrate that you offer superior value. • But how to know that market will respond to superior value & that you do offer it? • Managerial Judgment within the company • Value of similar products by competitors • Focus groups • Surveys • Experimentation • Analysis of historical data

  24. Value Pricing • Win loyal customers by charging a fairly low price for a high-quality offering. • P & G did it by undergoing a major overhaul ! • P&G redesigned the way it developed, manufactured, distributed, priced, marketed & sold its products. • As a result, a loyal family had to pay 25% less! • Point: • It is just not about lowering the price. • It is a “Re-engineering” of the Value Chain (operations) to maintain HIGH QUALITY at a lower cost of production. • Read: • Dollar General Corp. Family Dollar • Marketing Management, P. Kotler, 12th Ed, page 447

  25. Value Pricing • TWO important “Value Pricing” strategies • High-Low Pricing • EDLP (Everyday Low Pricing) • High-Low pricing • Especially a Retailer charges High on everyday basis • But, promotes a low price (temporarily) • EDLP • With little or no promotions, prices are constantly kept low. • Promotions make customers suspect the image & quality. • Point: • High-Low & EDLP may have the same average revenue. • But, EDLP gives more meaning of Low Value Pricing than High-Low (infrequently). • Wal-Mart says: • “It’s not a short-term strategy. It’s a commitment & capability to run on lower ratios to be able to offer EDLP Value Pricing.”

  26. Going-Rate Pricing • The firm bases its price largely on competitors’ prices. • The same, more or less ! • In Oligopoly that offer a commodity (steel, paper etc.), it’s usually the same, smaller firms follow the “market leader”. • Going-rate pricing makes most sense when costs are difficult to measureand when competitors’ response is uncertain. • Because, then, it reflects industry’s collective wisdom.

  27. Auction-Type Pricing • Due to especially internet. • Thousands of market-spaces offer everything (almost!) • A major purpose of auctioning is to dispose of excess inventories or used goods. • Three types of Auctioning with their different procedures: • English Auctions (ascending bids) • One seller & many buyers • Esp. for antiques, cattle, real estate & used equipment & vehicles. • Dutch Auctions (descending bids) • One Seller & many buyers • Seller keeps lowering until it finds the right buyer • One Buyer & many sellers • Competitors compete by lowering their prices • Sealed-bid Auctions

  28. Step 5 narrows the range from which the company must select its final price. • Step 6 is basically an extension of Step 5 in that we consider some additional factors such as the following diagram:

  29. Impact of Other Marketing Activities • Relative Price, Relative Quality & Relative Advertising must all be synthetically considered. • Findings of Farris and Reibstein (of 227 consumer companies): • First: Brands with average relative quality but high relative advertising budgets were able to charge premium prices. • Consumers were willing to pay higher than for unknown products. • Second: Brands with high relative quality & high relative advertising obtained the highest prices. • And vice versa for low relative quality & low relative ads. • Third: the positive relationship between high prices & high advertising held most strongly in the later stages of the PLC for market leaders. • Conclusion: • Price is not as important as quality & other benefits. • Another study: 19% for pricing; 65% Customer support 58% Timely delivery, 49% handling & shipping

  30. Company Pricing Policies • Airlines charge those who change a reservation on discount tickets. • Banks charge fees for many withdrawals in a month or early withdrawal of a certificate. • Car rental companies charge penalties for “no-show”. • Point: • Make sure such policies are justifiable & should not alienate customers. • Read: • Marketing Insight: Stealth Price Increases • Dell • M. Mgt, P. Kotler,, 12th Ed, Page 449

  31. Gain & Risk Sharing Pricing • A perceived risk may make customers reluctant • Seller must accept part of all of the risk in case the promised value is not delivered. • Baxter Healthcare – a medical products firm • Offered MIS to Columbia Hospital • Columbia resisted • Baxter wrote a check in case MIS doesn’t prove to be helpful • Impact of Price on Other Parties • How will distributers react to our pricing? • Competitors’ reaction? • Suppliers’ reaction to our prices – what if they increase their prices? • Will Government intervene to influence our prices • Price Fixing (conspire for price with competitors) – illegal • Marketers should know the law regulating pricing