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Pricing and Product Strategy

Pricing and Product Strategy. Course Introduction. Price – The “P” of the marketing mix that captures value of the good or service being offered to the market. Even commodities can be marketed effectively to gain highly profitable returns.

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Pricing and Product Strategy

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  1. Pricing and Product Strategy

  2. Course Introduction Price – The “P” of the marketing mix that captures value of the good or service being offered to the market. Even commodities can be marketedeffectively to gain highly profitablereturns . . . .

  3. The price of the most basic of commodity products . . . .

  4. Source: Wall Street Journal [April 18, 2002, pages A1 & A8]

  5. The relevant question is: Why are consumers willing to pay relatively steep prices for a commodity product?

  6. Chapter 1 – Strategic Pricing Marketing Mix • Product – creates value • Place – creates value • Promotion – creates and communicates value • Price – captures value created Price - often neglected by marketing professionals and corporate managers • An easy to change variable in the marketing mix • Seen as rather independent of other business functions • Too much emphasis on cost-based pricing • Too little emphasis on customer-driven pricing • Corporate focus on market share or other sales goal rather than profit

  7. PROBLEMATIC PRICING STRATEGIES Cost-Based Pricing (cost-plus pricing) • Price is set based on costs and a “fair return” • Assumes unit costs of production are somewhat “sticky” – they do not change with volume of sales • Typically results in under-pricing in strong markets and overpricing in weak markets • Cost IS a fundamental element of profit, but it does not act alone The Cost-based Pricing Process PRODUCT COST PRICE VALUE CUSTOMERS

  8. PROBLEMATIC PRICING STRATEGIES Customer-Driven Pricing • Price is set to reflect market conditions • Price seen as dynamic element in company strategy, but from a reactionary perspective • Price is set based on what customers are willing to pay and not on the value of the product • Lowering price is common to achieve sales objectives such as higher sales or meeting sales quotas • Setting price based solely on customers’ satisfaction often results with under-pricing and lower profits • Competition often seen as secondary in pricing decisions

  9. PROBLEMATIC PRICING STRATEGIES Competition-Driven Pricing • Price is set to reflect market conditions • Price seen as dynamic element in company strategy, but from a reactionary perspective • Price is set based on maintenance of market share or strengthening market share • Differentiation between products begins to focus on price

  10. Value-Based Pricing Maximize the difference between the value created for the customer andthe costs of the company to provide that value. The Value-based Pricing Process CUSTOMER VALUE PRICE COST PRODUCT Effective pricing strategies should be based on three factors: COSTS CUSTOMERS COMPETITION foundation price sensitivity purchase motivations reactions goals substitutability

  11. Applying a Strategic Pricing Framework(means asking the right questions – example from textbook) Tactical Question Strategic Question What sales changes would benecessary or tolerable for us toprofit from a price change? Can we deploy a marketingstrategy that will keep those saleschanges within acceptable ranges? What costs can we afford to incur,given the prices we can achievein the marketplace, and still earna profit? How will competitors react to ourprice, as well as our price changes? What price is needed tocover cost and profit objectives? As managers, we tend to apply tactics without assessment of the strategy.

  12. Chapter 2 – Strategic Pricing Key Point:Pricing strategy involves the management of customer behavior(s) andpurchase motivations, not the adaptation to customer behavior(s) andmotivations. Margin erosion is not always caused by price issues. Price is only oneattribute affecting the customer’s choice decision. Other attributes dealingwith distribution/delivery, product function, promotion, as well asinformation availability and knowledge dissemination, can cause marginerosion.

  13. Strategic Pricing Pyramid Price LevelPrice Setting Pricing PolicyNegotiation Tactics andPrice Setting Procedures Price/Value CommunicationCommunication and Value Setting Tools Price StructureMetrics, Fences, and Controls Value Creation Economic Value, Offering Design, Segment/Target/Position

  14. Customers Three C’s of marketing Interrelated Pricing Elements Costs Competition Product Promotion Place strategic objectives goals Price Setting Filter tactics • Product/Service Price • Price Policy

  15. Institutionalizing Pricing Strategy • Institutionalizing or embedding a pricing strategy does not focusonly on the firm. It must also focus on competitors and customers. • Approaches to Institutionalizing a Pricing Strategy: • Incentives – carrots and sticks • Rationale Expectations • Knowledge, Information, and Skills (enabling tools)

  16. Ways of Thinking about Competition • Porters 5 Forces • The Big Middle • (R-A Theory) Dynamic Competition vs. Neoclassical

  17. Porters 5 Forces

  18. Big Middle The structure of retailing is such that retailers typically exist in one of four segments: Innovative, Big Middle, Low Price, and In Trouble. • Innovative segment direct their strategies toward quality-conscious markets who seek premium offerings. • Low-price retailers appeal to price-conscious markets, • Big Middle retailers thrive because of their value offerings • Introuble retailers are unable to deliver high levels of value relative to their competitors.

  19. FIGURE 1 A Schematic of the Resource - Advantage Theory of Competition Societal Resources Societal Institutions Resources Market Position Fina ncial Performance • Competitive Advanta ge • Superior • Comparative Advantage • Parity • Parity • Parity • Competitive Disadvantage • Inferior • Comparative Disadvantage Competitors - Suppliers Consumers Public Policy Read: Competition is the disequilibrating, ongoing process that consists of the constant struggle among firms for a comparative advantage in resources that will yield a marketplace position of competitive advantage . and, thereby, superior financial performance Firms learn through competition as a result of feedback from relative financial performance “signaling” relative market position, which, in turn signals relative resources. Source: Hunt and Morgan (1997) (R-A Theory) Dynamic Competition

  20. R-A Theory: On Value vs. Cost Relative Resource-Produced Value Success and Failure Sequences Competitive Position Matrix Lower Superior Parity Lower Relative Resource Costs Parity Higher (1) All firms in marketplace positions of competitive disadvantage seek reactive innovations that will move them upward and to the right. (2) All firms in marketplace positions of competitive advantage seek proactive innovations to avoid moving downward and to the left.

  21. Foundational Premises of Resource-Advantage Theory Theory X Resource-Advantage Theory P1. Demand is: heterogeneous across industries, heterogeneous within industries, and dynamic. ? P2. Consumer information is: ? imperfect and costly. constrained self-interest seeking. P3. Human motivation is: ? superior financial performance. P4. The firm's objective is: ? P5. The firm's information is: imperfect and costly. ? P6. The firm's resources are: financial, physical, legal, human, organizational, informational, and relational. ? heterogeneous and imperfectly mobile. ? P7. Resource characteristics are: P8. The role of management is: to recognize, understand, create, select, implement, and modify strategies. ? P9. Competitive dynamics are: disequilibrium-provoking, with innovation endogenous. ? Note: The foundational premises of R-A theory are to be interpreted as descriptively realistic of the general case. Specifically, P1, P2, P5 and P7 for R-A theory are not viewed as idealized states that anchor end-points of continua. For example, P1 posits that intra-industry demand in most industries (i.e., the general case) is substantially heterogeneous, not perfectly heterogeneous. In contrast, P1 for perfect competition assumes the idealized state of perfect homogeneity. Source: Hunt and Morgan (1997).

  22. Elasticity – Measurement of Price Sensitivity at the Market Segment Level We can measure price sensitivity at the market segment level by assessing the price elasticity for a particular product or service. Percent Change in Unit Sales Percent Change in Price Elasticity =

  23. Elasticity – Measurement of Price Sensitivity at the Market Segment Level Measure of Price Elasticity |Price Elasticity| < 1An increase in price within the range evaluated will result lower unit sales but higher revenue (profit). Inelastic |Price Elasticity| > 1An increase in price within the range evaluated will result lower unit sales and lower revenue (profit). Elastic |Price Elasticity| = 1An increase in price within the range evaluated will result in an identical change in unit sales and the same revenue (profit). Unit Elastic

  24. Elasticity – a visual representation . . . . Price P2 P1 elastic (many substitutes – grains,fruits and vegetables, bagged soil,paper clips, rubber bands) P2 unit elastic P1 inelastic (few substitutes – gasoline, gemstones, transplant organs) Quantity Demanded Q2 Q1 Q2 Q1

  25. Elasticity – Measurement of Price Sensitivity at the Market Segment Level Properties of Price Elasticity • Elasticity is usually negative since positive price changes usually result in unit sales declines and negative price changes usually produce a unit sales increase. • Elasticity is relevant only over a short range of data since it is dependent on the shape of the market demand curve. • The elasticity for a product early in its life cycle can be significantly different than its elasticity later in its life cycle. • It is difficult to make any generalizations about price elasticity since it is so dependent of the product or service and the specific shape of the product or service’s demand curve.

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