Marketing Concepts in Commercialization of High Technology

1. 1 Marketing Concepts in Commercialization of High Technology Session 6 Marketing Mix: Product Strategy Pricing Strategy

2. 2 Agenda Review Lecture/Discuss: PLC: Introduction to Marketing Mix Lecture: Product Strategy Lecture: Diffusion Theory Exercise: Designing Products to Accelerate Adoption Lecture: Pricing Strategy: Financial Concepts Exercise: Calculating Break-Even Volume Lecture: Setting a Price for a New Product Exercises: Bob�s Lawn Mowers Lecture: Setting a Price, cont.

3. 3 Review

4. 4 Catching Up

5. 5 The Marketing Plan

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9. 9 As a result of that, it seems intuitive that your marketing objectives would be different at different stages.As a result of that, it seems intuitive that your marketing objectives would be different at different stages.

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15. 15 Session 6 Objectives Describe the innovation diffusion process, the characteristics of an innovation that affect its rate of adoption, and the characteristics of different types of adopters. Describe the relationships between product development and product platform development Understand the impact of the company, competition, and the customer on pricing strategies. Describe the financial concepts that affect pricing. Describe the steps and methods that can be used for setting the price of a new product or service.

16. 16 The Marketing Plan

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20. 20 Four-Level Structure of Product Strategy

21. 21 Product Family Planning

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23. 23 Designing Products with Customers in Mind House of Quality Diffusion of Innovations

24. 24 Innovation Diffusion Process Process by which an idea spreads from its source of invention to its ultimate users or adopters.

25. 25 Customer Adoption Process

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27. 27 Characteristics that Affect Rate of Adoption Complexity (L): �is difficult to understand/ use Divisibility (T) �can be tried on a limited basis Relative Advantage (A) �appears superior Compatibility (C) �matches values/experiences of the target group Observability(0) �its beneficial results are easily observable/describable to others

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30. 30 A Thought to Consider Marketing Plan Del. #3 Product Strategy Section: What elements might you design into the product that would encourage faster diffusion through your target market?

31. 31 The Marketing Plan

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33. 33 Why is Pricing Important? In a company with average economics*, 1% increase in volume = 3.3% increase in profit 1% increase in price = 11.1% increase in profit Improvements in price typically have 3-4 times the effect on profit as proportionate increases in volume.

34. 34 Handout Effect of Contribution Margin on Breakeven Sales Changes

35. 35 Pricing Strategy First/Central Strategy question: Higher than the competition? Equal to the competition? Lower than the competition? Second: Work out the details

36. 36 Pros/Cons Higher than the competition Pros: Cons: Lower than the competition Pros: Cons: Equal to the competition Pros: Cons:

37. 37 Clarification of Terms Cost = what you/distributor/retailer paid for something Price = what you/distributor/retailer sell something for

38. 38 Pricing-Related Cost Concepts Margins Gross Margin Contribution Margin Net Profit Margin (Before Taxes) Costs Variable Fixed Contribution Analysis Break-Even Analysis Sensitivity Analysis

39. 39 Marketing Plan Template � p. 6

40. 40 Margins Gross Profit Margin Sales Less COGS = Gross Margin Contribution Margin Sales Less Variable Costs = Contribution

41. 41 Margins Net Profit Margin Sales Less COGS = Gross Margin Marketing/Selling Expenses (F.C. & V.C.) G & A Expenses (F.C.) = Net Profit Margin Net Profit Margin Sales Less Variable Costs = Contribution Margin Less Fixed Costs = Net Profit Margin

42. 42 Definitions Variable Cost Production/distribution costs required to place an additional unit of product in the hands of the customer. Vary in direct proportion to sales volume e.g., production materials, assembly work, sales commissions

43. 43 Definitions Fixed Cost Production/distribution costs that stay the same regardless of changes in sales volume Costs are fixed e.g., R&D, salaries, rent

44. 44 Fixed or Variable Cost? Materials Physical plant Plant labor Supervisors in plant Equipment Marketing staff Accounting staff Finance staff Salesperson salary Salesperson commission Advertising Promotion Coupons Price cut

45. 45 Exercise coming How many Gizmos would you need to sell to break even in the following scenario? Selling price/unit = $xxxx Variable costs/unit = $ xxxx Fixed costs = $xxxx

46. 46 Contribution Analysis Critical marketing concept Break-Even Analysis Sensitivity Analysis Cannibalization Assessment

47. 47 Definitions Unit contribution Price (revenue) less variable costs Funds available to the seller after subtracting variable costs Funds that can be used to �contribute� to fixed costs. Selling Price/widget = $75 Variable manufacturing cost/widget = $ 25 Shipping/widget = $2 Commissions to sales people/widget = $4

48. 48 Definitions Selling Price/widget = $75 Variable manufacturing cost/widget = $ 25 Shipping/widget = $2 Commissions to sales people/widget = $4 Total variable costs/widget = $31 Contribution/widget = $44

49. 49 Definitions Contribution per widget = $44 Have $44 to contribute to covering fixed costs, e.g., fixed manufacturing expenses overheads salaries fixed marketing costs for the product

50. 50 Break-Even Revenue sufficient to cover Variable costs Fixed costs No profits No losses

51. 51 Breakeven Analysis

52. 52 Break-Even Volume How many widgets do you have to sell to break even? That is, �What must our unit sales volume be to break even?� Total Fixed Costs/Unit Contribution Unit Contribution = $44 Fixed Costs = $500,000/year $500,000/$44 = 11,364 widgets Have to sell 11,364 widgets/year to break even

53. 53 Exercise How many Gizmos would you need to sell to break even in the following scenario? Selling price/unit = $10.00 Variable costs/unit = $ 7.50 Fixed costs = $9,000

54. 54 Contribution and Market Size Break-Even Point at $75 = 11, 363 widgets We know that the market size is 50,000 widgets. That would give us a market share of 22.7%. Then ask: Does that make sense given what we know about the market?

55. 55 Break-Even and Profit Goals Can work a �profit goal� into the equation by adding the desired level of profit on to fixed costs. Unit Volume to achieve profit goal: Fixed Costs + Profit Goal Contribution per unit $500,000 + $100,000 = 13, 636 units $44

56. 56 Sensitivity Analysis Methodically examining the financial impact of several sets of assumptions.

57. 57 Evaluating alternatives*

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59. 59 Six-Step Process for Setting Prices Select the pricing objective Determine customer demand Estimate costs Analyze competitors� costs, prices, offers Select a pricing method Select final price

60. 60 Overriding Goal Achieve a commanding position in the market segment(s) served.

61. 61 Select the Pricing Objective Maximize current profit Maximize market skimming Maximize sales growth (penetration) Product/quality leadership

62. 62 Estimate Demand Analyze past prices, sales, other factors of similar products if available. Conduct price experiments Ask customers Review factors affecting price elasticity and sensitivity

63. 63 Customers are less price sensitive if: the product is highly innovative the product is more distinctive than competition there are few substitutes product is used in conjunction with assets previously bought product is assumed to have high quality

64. 64 3. Estimate Costs Variable Costs Fixed Costs Other Cost Concepts Target Costing Experience Curve

65. 65 Target Costing Determine the price customers are willing to pay for the product/service. Determine what your costs would need to be to achieve that. Design the product/service to meet that cost target.

66. 66 Cost Per Unit as a Functionof Accumulated Production

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68. 68 Select a Pricing Method Mark-up Pricing - �Cost Plus�

69. 69 Mark-Up or Cost-Plus Pricing Mark-up = % profit based on cost Selling Price - Cost Cost To set price based on a desired mark-up (also called Cost-Plus . . . Cost + some %) Cost = $25; Desired mark-up = 20% $25 x 1.20 = $30.00

70. 70 Stop and Do the Bob�s Lawn Mowing Pricing Exercise Now

71. 71 Fixed Costs: $ 500 - lawnmower Variable Costs: $ 5 - per lawnDesired % Profit (Mark-up on cost): 20%Time Frame: 5 months (4wks/mo.) 1) 10 lawns, weekly (200 lawns) 2) 10 lawns, every 2 wks (100 lawns) 3) 5 lawns, every 2 wks ( 50 lawns) 4) 10 lawns, 2 times/wk (400 lawns) 5) 20 lawns, 2 times/wk (800 lawns) $ 9.00 $12.00 $18.00 $ 7.50 $ 6.75

72. 72 1) 10 lawns, weekly (200 lawns) 2) 10 lawns, every 2 wks (100 lawns) 3) 5 lawns, every 2 wks ( 50 lawns) 4) 10 lawns, 2 times/wk (400 lawns) 5) 20 lawns, 2 times/wk (800 lawns) $ 9.00 $12.00 $18.00 $ 7.50 $ 6.75

73. 73 Select a Pricing Method Mark-up Pricing - �Cost Plus� Target Return Pricing

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75. 75 Select a Pricing Method Mark-up Pricing - �Cost Plus� Target Return Pricing Perceived Value Pricing

76. 76 Exercise coming Think about your projects and *one* market segment. What are some specific ways that you could determine how much your product is worth to that market segment?

77. 77 Device Pricing vs. Whole Product Pricing Value of any product to its market is strongly influenced by prices of competitive products. Competitive �devices� are analyzed, but �products� are priced. Product �features� have different values: Customer service Warranties Distribution channels (e.g., convenience) The �sum� of the features makes up the �product�

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80. 80 Determining Perceived Value What value is placed on the end result? The cost of alternative solutions to the customer. A function of: Prices of comparable (though not identical) products The �value� (+/-) of the product�s differences vs. the competitive offering The value of the �Whole Product�

81. 81 Economic Value Analysis Identify the cost of the competitive product or process (i.e., the reference value) Identify all the factors that differentiate the product. Determine the value to the customer of these differentiating factors (i.e., the differentiation value) Sum the reference value and the differentiation value to determine the total economic value.

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87. 87 Research Approaches for Value Assessment

88. 88 Exercise Think about your projects and *one* market segment. What are some specific ways that you could determine how much your product is worth to that market segment?

89. 89 Select a Pricing Method Mark-up Pricing - �Cost Plus� Target Return Pricing Perceived Value Pricing Value Pricing Going Rate Pricing (market price) Reference Pricing (comparison w/substitutes)

90. 90 Select a Pricing Method Mark-up Pricing - �Cost Plus� Target Return Pricing Perceived Value Pricing Value Pricing Going Rate Pricing (market price) Reference Pricing (comparison w/substitutes) Sealed-Bid Pricing

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92. 92 Select the Final Price Desired/Required Distributor Margins Psychological pricing Influence of other marketing mix elements Company pricing policies Impact of price on others

93. 93 Review/Wrap-Up Marketing Mix: Product Life Cycle Product Strategy Platform Strategy Diffusion of Innovations Pricing Cost Plus Delusion Economic Value Perceived Value Determining Worth

94. 94 Next Time Topics: Reading Prepare/discuss study questions in Discussion Board � Session 7 Marketing Plan Del. #2 due on 08/18

95. 95 Marketing Plan Del. #2 Situation Analysis � supplement and polish Market Potential � supplement and polish O/I Analysis Strategy Recommendation: Target Segment Presentation Guidelines: 15 pages max., excluding exhibits Double-spaced; 1� margins; 12 pt. Font; document sources

96. 96 References Davidow, W.H. (1986). Marketing High Technology, New York: The Free Press Dwyer, F.R. & Tanner, J.F., Jr. (1999). Business Marketing, New York: Irwin McGraw-Hill Marn, M.V. & Rosiello, R.L. (1992). Managing Price, Gaining Profit. Harvard Business Review, Sept-Oct. pp. 82-93. McGrath, M.E. (1995). Product Strategy for High-Technology Companies, New York: McGraw Hill. Moore, G. (1999). Crossing the Chasm. New York: HarperBusiness. Nagle, T.T. and R.K. Holden. 1994. Ch. 1 - Strategic Pricing - The Harvest of Your Profit Potential. The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making. Second Edition. Upper Saddle River: Prentice Hall Business Publishing. Nimer, Daniel A. July 1986. There�s More to Pricing Than Meets the Eye. Journal of Information and Image Management, pp.30-34. Rogers, E.M. (1962). Diffusion of Innovations, New York: Free Press. (See also, 3rd Edition, 1983).