Pricing Strategies

General pricing approaches

• Cost-based pricing
• Value-based pricing
• Competition-based pricing

 

Cost-based pricing

• Adding a standard markup to cost
• Ignores demand and competition
• Popular pricing technique because:
• Sellers more certain about cost than demand
• Simplifies pricing
• When all sellers use, prices are similar and competition is minimized
• Some feel it is more fair to both buyers and sellers

 

Value-based pricing

• Uses buyers’ perceptions of value rather than seller’s costs to set price.
• Measuring perceived value can be difficult.
• Consumer attitudes toward price and quality have shifted during the last decade.
• Introduction of less expensive versions of established brands has become common.

 

Competition-based pricing

• Going-Rate Pricing:
• Firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand.
• Sealed-Bid Pricing:
• Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.
• May price at the same level, above, or below the competition

Factors to Consider When Setting Prices

Customer Perception of Value

• Value-based pricing uses the buyers’ perception of value, not the seller’s cost, as the key to pricing. Price is considered before the marketing program is set.
• Value-based pricing
• is customer-driven.
• Represents the price ceiling
• Cost-based pricing
• is product-driven.
• Represents the price floor

Customer Perception of Value

• Good-value pricing offers the right combination of quality and good service to fair price.
• Existing brands are being redesigned to offer more quality for a given price or the same quality for less price.

Customer Perception of Value

• Everyday low pricing (EDLP)
• a constant everyday low price with few discounts.
• High-low pricing
• higher prices everyday but frequent promotions to lower prices temporarily on selected items.

Other Internal and External Considerations Affecting Price Decisions

• External factors
• The market and demand
• Types of markets
• Analyzing the price-demand relationship
• Competitors’ strategies and prices
• Other environmental factors

The Market and Demand
Types of markets

• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly

Pure competition is a market with many buyers and sellers trading uniform commodities where no single buyer or seller has much effect on market price.

 

Monopolistic competition is a market with many buyers and sellers who trade over a range of prices rather than a single market price with differentiated offers.

 

Oligopolistic competition is a market with few sellers because it is difficult for sellers to enter who are highly sensitive to each other’s pricing and marketing strategies.

 

Pure monopoly is a market with only one seller. In a regulated monopoly, the government permits a price that will yield a fair return. In a non-regulated monopoly, companies are free to set a market price.

 

Analyzing the Price-Demand Relationship

• Before setting prices, the marketer must understand the relationship between price and demand for its products.
• The demand curve shows the number of units the market will buy in a given period at different prices.
• Normally, demand and price are inversely related.
• Higher price = lower demand
• For prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality.

Price Elasticity of Demand

• Price elasticity of demand illustrates the response of demand to a change in price.
• Inelastic demand occurs when demand hardly changes when there is a small change in price.
• Elastic demand occurs when demand changes greatly for a small change in price.

 

Factors affecting price elasticity of demand

• Unique product
• Quality
• Prestige
• Substitute products
• Cost relative to income

Factors to consider:

• Comparison of offering in terms of customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity

Market-skimming pricing
Set a high price for a new product to “skim” revenues layer by layer from the market.
Company makes fewer, but more profitable sales.
When to use:
Product’s quality and image must support its higher price.
Costs of smaller volume cannot be so high they cancel the advantage of charging more.
Competitors should not be able to enter market easily and undercut the high price.

Market-penetration pricing
Set a low initial price in order to “penetrate” the market quickly and deeply.
Can attract a large number of buyers quickly and win a large market share.
When to use:
Market must be highly price sensitive so a low price produces more market growth.
Production and distribution costs must fall as sales volume increases.
Must keep out competition and maintain low price or effects are only temporary.

Market-skimming VS Market-penetration

Product-line pricing
Involves setting price steps between various products in a product line based on:
Cost differences between products
Customer evaluations of different features
Competitors’ prices

 

Optional-product pricing
Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator).

 

Captive-product pricing
Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).

 

By-product pricing
Pricing low-value by-products to get rid of them and make the main product’s price more competitive.

 

Product bundle pricing
Combining several products and offering the bundle at a reduced price.

 

Product-adjustment pricing strategies

• Discount and Allowance pricing
• Segmented pricing
• Psychological pricing
• Promotional pricing
• Geographic pricing
• International pricing

 

 

 

 

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Distribution Strategies

Conventional Distribution Systems

• Consist of one or more independent producers, wholesalers, and retailers.
• Each seeks to maximize its own profits and there is little control over the other members.
• No formal means for assigning roles and resolving conflict.

 

Vertical Marketing Systems

 

Vertical marketing systems (VMS) provide channel leadership and consist of producers, wholesalers, and retailers acting as a unified system and consist of:

• Corporate marketing systems
• Contractual marketing systems
• Administered marketing systems

Corporate vertical marketing system integrates successive stages of production and distribution under single ownership.

Contractual vertical marketing system consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone.
Most common form is the franchise organization

Administered vertical marketing system has a few dominant channel members without common ownership. Leadership comes from size and power.
Franchise organizations link several stages in the production distribution process.

 

Conventional VS Vertical system

 

Horizontal Marketing Systems

• Horizontal marketing systems include two or more companies at one level that join together to follow a new marketing opportunity
• Companies combine financial, production, or marketing resources to accomplish more than any one company could alone.

 

Multichannel Distribution Systems

• Hybrid marketing channels exist when a single firm sets up two or more marketing channels to reach one or more customer segments.

Disintermediation

• Disintermediation occurs when product or service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones.

 

Number of marketing intermediaries

 

 

Intensive distribution is a strategy used by producers of convenience products and common raw materials in which they stock their products in as many outlets as possible.

 

Exclusive distribution is a strategy in which the producer gives only a limited number of dealers the exclusive right to distribute products in territories

 

Selective distribution is a strategy when a producer uses more than one but fewer than all of the intermediaries willing to carry the producer’s products.

 

 

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Product Life-Cycle Strategies

Product life-cycle (PLC) is the course that a product’s sales and profits take over its lifetime.

• Product development
• Introduction
• Growth
• Maturity
• Decline

 

 

Introduction stage is when the new product is first launched.

Takes time

Slow sales growth

Little or no profit
High distribution and promotion expense

 

 

Growth stage is when the new product satisfies the market. Sales increase

New competitors enter the market
Price stability or decline to increase volume
Consumer education
Profits increase
Promotion and manufacturing costs gain economies of scale
Product quality increases
New features
New market segments and distribution channels are entered

 

 

Maturity stage is a long-lasting stage of a product that has gained consumer acceptance.
Slowdown in sales
Many suppliers
Substitute products
Overcapacity leads to competition
Increased promotion and R&D to support sales and profits.

 

 

Decline stage is when sales decline or level off for an extended time, creating a weak product.
Maintain the product
Harvest the product
Drop the product

 

 

Modifying Strategies

Market modifying strategy is when a company tries to increase consumption of the current product.

• New users
• Increase usage of existing users
• New market segments

Marketing mix modifying strategy is when a company changes one or more of the marketing mix elements.

• Price
• Promotion
• Distribution channels

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Product, Services and Branding Strategy

Products, Services and Experiences

 

A product is anything that can be offered in a market for attention, acquisition, use, or consumption that might satisfy a need or want.

 

Service is a form of product that consists of activities, benefits, or satisfactions offered for sale that are essentially intangible and do not result in ownership.

 

Experiences represent what buying the product or service will do for the customer.

 

 

Level of Products and Services

 

• Core benefit: show the accurate time
• Actual product: Swatch, high quality that meet the Swiss watch standard, young and stylish design, packed in high-quality clear plastic box.
• Augmented product: 1 year international warranty, worldwide service center.

 

Product and Service Classification

 

Consumer products:

• Convenience products
• Shopping products
• Specialty products
• Unsought products

Convenience products are consumer products and services that the customer usually buys frequently, immediately, and with a minimum comparison and buying effort.
Newspapers
Candy
Fast food

 

Shopping products are consumer products and services that the customer compares carefully on suitability, quality, price, and style.
Furniture
Cars
Appliances

 

Specialty products are consumer products and services with unique characteristics or brand identification for which a significant group of buyers is willing to make a special purchase effort.
Designer watches
Branded fashion wear
High-end electronics

 

Unsought products are consumer products that the consumer does not know about or knows about but does not normally think of buying.
Life insurance
Funeral services
Blood donations

 

Industrial products are products purchased for further processing or for use in conducting a business.
Classified by the purpose for which the product is purchased
Materials and parts
Capital
Raw materials

 

 

Branding Strategy: Building Strong Brand

 

Brand represents the consumer’s perceptions and feelings about a product and its performance. It is the company’s promise to deliver a specific set of features, benefits, services, and experiences consistently to the buyers.

 

 

Brand strategy decisions include:

• Brand positioning
• Brand name selection
• Brand sponsorship
• Brand development

 

 

Brand Positioning:
Product attributes
Product benefits
Product beliefs and values

 

Brand name selection
Suggests benefits and qualities
Easy to pronounce, recognize, and remember
Distinctive
Extendable
Translatable for the global economy

 

Brand sponsorship:
Manufacturer’s brand
Private brand
Licensed brand
Co-brand

 

Private brands provide retailers with advantages.
Product mix control
Slotting fees for manufacturers’ brands
Higher margins
Exclusivity

 

 

Branding Strategy: Brand Development

 

Line extensions: occur when a company extends existing brand names to new forms, colors, sizes, ingredients, or flavors of an existing product category.

 

Brand extensions: is using a successful brand name to launch a new or modified product in a new category.

 

Multibrands: New brand names introduced in the same product category. This offers a way to establish different features and appeal to different buying motives.

 

New brand: New brand names in new product categories. This is developed based on the belief that the power of its existing brand is waning and a new brand name is needed.

 

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Target Marketing Positioning for Competitive Advantage

STEPS IN SEGMENTING, TARGETING, POSITIONING

Target Marketing 

• Evaluating Market Segments
• Segment size and growth
• Segment structural attractiveness
• Level of competition
• Substitute products
• Power of buyers
• Powerful suppliers
• Company objectives and resources

Target Marketing: Selecting Target Market Segments

TARGET MARKETING

Target Marketing: Selecting Target Market Segments

Undifferentiated marketing - targets the whole market with one offer.

• Mass marketing
• Focuses on common needs rather than what’s different

Differentiated marketing - targets several different market segments and designs separate offers for each.

• Goal is to achieve higher sales and stronger position
• More expensive than undifferentiated marketing

Concentrated marketing - targets a large share of a small market

• Limited company resources
• Knowledge of the market
• More effective and efficient

Micromarketing - the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations.

• Local marketing
• Individual marketing

Differentiation and Positioning

Identifying a set of possible competitive advantages to build a position
Choosing the right competitive advantages
Selecting an overall positioning strategy

Competitive advantage is the advantage over competitors gained by offering greater value either through lower prices or by providing more benefits that justify higher prices.

Possible Differentiation and Competitive Advantages

Overall positioning strategy (Value proposition)

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Marketing Segmentation

Creating Value for Targeted Customers 4 major steps

Market Segmentation
Market segmentation is the process that companies use to divide large heterogeneous markets into small markets that can be reached more efficiently and effectively with products and services that match their unique needs.

Market Segmentation 4 Major Bases
Geographical segmentation
Marketing mixes are customized geographically

Demographic segmentation
Most popular segmentation
Demographics are closely related to needs, wants and usage rates

Psychographic segmentation
Lifestyle, social class, and personality-based segmentation

Behavioral segmentation
Typically done first


Consumer Market: Geographic Segmentation
Geographic segmentation divides the market into different geographical units such as nations, regions, states, provinces, or cities.

Consumer Market: Demographic Segmentation
Demographic segmentation is the most popular segmentation method because consumer needs, wants, and usage often vary closely with demographic variables and are easier to measure than other types of variables.

Demographic segmentation variables
> Age
> Occupation
> Income
> Gender
> Education
> Nationality
> Family size
> Religion
> Generation
> Family life cycle
> Race


Consumer Market: Psychographic Segmentation
Psychographic segmentation divides buyers into different groups based on social class, lifestyle, or personality traits.
> Social class
> Lifestyle
> Personality

Consumer Market: Behavioural Segmentation
Behavioral segmentation divides buyers into groups based on their knowledge, attitudes, uses, or responses to a product.
Occasion
Benefits sought
User status
Usage rate
Loyalty status

Business Market
In addition to the same segmentation variables as consumers, business can also be segmented by:
Customer-operating characteristics
Purchasing approaches
Situational factors
Personal characteristics

BUSINESS SEGMENT – INDUSTRY CATEGORIES

• Aerospace and Defense
• Automotive
• Banking
• Chemicals
• Computer Hardware
• Computer Software
• Conglomerates Consumer Durables
• Consumer Non-Durables
• Diversified Services
• Drugs
• Electronics
• Energy
• Financial Services
• Food and Beverage
• Health Services
• Insurance
• Internet
• Leisure
• Manufacturing
• Materials and Construction
• Media
• Metals and Mining
• Real Estate
• Retail
• Specialty Retail
• Telecommunications
• Tobacco
• Transportation
• Utilities
• Wholesale

International Market
Segmenting international markets
Geographic location
Economic factors
Political and legal factors
Cultural factors

Intermarket segmentation divides consumers into groups with similar needs and buying behaviors even though they are located in different countries.

Requirement for effective segmentation

Measurable
Size, purchasing power, and profile of segment

Accessible
Can be reached and served

Substantial
Large and profitable enough to serve

Differentiable
Respond differently

Actionable
Effective programs can be developed

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MicroEnvironment

The MicroEnvironment consists of the actors close to the company that affect its ability to serve its customers, the company, suppliers, marketing intermediaries, customer markets, competitors, and publics.

Microenvironment: The Company

Internal environment includes:

Top management

Finance

R&D

Purchasing

Operations

Accounting

 

Microenvironment: Suppliers

Provide the resources to produce goods and services

Treated as partners to provide customer value

 

Microenvironment: Intermediaries

Help the company to promote, sell, and distribute its products to final buyers. Include:
Resellers
Physical distribution firms
Marketing services agencies
Financial intermediaries


Microenvironment: Customers

Consumer markets consist of individuals and households that buy goods and services for personal consumption.

Business markets buy goods and services for further processing or for use in their production process.

Government markets
Government agencies that buy goods and services to produce public services or transfer the goods and services to others who need them

International markets
Buyers in other countries, including consumers, producers, resellers and governments


Microenvironment: Competitors

Firms must gain strategic advantage by positioning their offerings against competitors’ offerings.

Each firm should consider its own size and industry position compared to those of its competitors.

3 main sources:

Brand

from manufacturers of similar products

Substitute products

Dissimilar products that satisfy the same need

Indirect

Other firms trying to win customers’ purchasing power

Microenvironment: Publics

Any group that has an actual or potential interest in or impact on an organization’s ability to achieve its objectives:

Financial publics

Media publics

Government publics

Citizen-action publics

Local publics

General public

Internal publics

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MacroEnvironment

The macroenvironment consists of the larger societal forces that affect the microenvironment.
Demographic
Economic
Natural
Technological
Political
Cultural

 

Demographic Environment
Demography is the study of human populations in terms of size, density, location, age, gender, race, occupation, and other statistics. Demographic environment is important because it involves people, and people make up markets.

Demographic Environment: Changing Age Structure of the Population
Generational marketing is important in segmenting people by lifestyle of life state instead of age.
Baby boomers (1946 – 1964): Includes most affluent Asians
Generation X (1965 – 1976): Emphasize quality of life
Generation Y (1987 – 1994) : The internet generation

Demographic Environment: The Changing Asian Family
More people are:
Divorcing or separating
Choosing not to marry
Choosing to marry later
Marrying without intending to have children
Higher divorce rates
Increased number of
working women
More stay-at-home dads

Demographic Environment: Geographic Shifts in Population
Trends include:
Migratory movements between and within countries
Moving from rural to metropolitan areas
Changes in where people work
Telecommuting
Home office
Divorce or separation

Demographic Environment: Changes in the Workforce
Trends include:
More educated
More white collar
More professional

Markets are becoming more diverse
International
National

Trends include:
Ethnicity
Gay and lesbian
Disabled


Economic Environment
Economic environment consists of factors that affect consumer purchasing power and spending patterns.
Subsistence economies consume most of their own agriculture and industrial output.
Industrial economies are richer markets.

Economic Environment: Changes in Income
Value marketing involves ways to offer financially cautious buyers greater value—the right combination of quality and service at a fair price.

Income distribution
Upper-class consumers
Middle-class consumers
Working-class consumers
Underclass consumers

Economic Environment: Changes in Consumer Spending Patterns
Ernst Engel—Engel’s Law
As income rises:
Percentage spent on food declines
Percentage spent on housing remains constant
Percentage spent on savings increases


Natural Environment
Natural environment involves the natural resources that are needed as inputs by marketers or that are affected by marketing activities.

Trends
Shortages of raw materials
Increased pollution
Increased government intervention
Resulting in
Environmentally sustainable strategies
Green marketing


Technological Environment
Most dramatic force in changing the marketplace with many positive and negative effects
Rapid change
Provides new markets and new opportunities
> Internet 
> Weapons
> Credit cards
> Medicine
> Communication
> Miniaturization

Political Environment
Political environment consists of laws, government agencies, and pressure groups that influence or limit various organizations and individuals in a given society.

Legislation regulating business
Public policy to guide commerce—sets of laws and regulations that limit business for the good of society at large

Increasing legislation to:
Protect companies
Protect consumers
Protect the interests of society

Political Environment: Increased Emphasis on Ethics and Socially Responsible Actions
Socially responsible behavior occurs when firms actively seek out ways to protect the long-term interests of their consumers and the environment
Cause-related marketing


Cultural Environment
The cultural environment consists of institutions and other forces that affect a society’s basic values, perceptions, and behaviors.

Cultural Environment: Persistence of Cultural Values
Core beliefs and values have a high degree of persistence, are passed on from parents to children, and are reinforced by schools, churches, businesses, and government.
Secondary beliefs and values are more open to change.

Cultural Environment: Shifts in Secondary Cultural Values
Major cultural values of a society are expressed in people’s view of:
Themselves
Others
Organization
Society
Nature and the universe

People’s view of themselves
Yankelovich Monitor’s consumer segments:
Do-It-Yourselfers—recent movers
Adventurers

People’s view of others

Cultural Environment: Shifts in Secondary Cultural Values
People’s view of organizations

People’s view of society
Patriots defend it
Reformers want to change it
Malcontents want to leave it

People’s view of nature
Some feel ruled by it
Some feel in harmony with it
Some seek to master it

People’s view of the universe
Renewed interest in spirituality

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Product/Market Expansion Grid

Product/Market Expansion Grid

The product/market expansion grid is a tool for identifying company growth opportunities through market penetration, market development, product development, or diversification.

Starbucks

Starbucks is an international coffee and coffeehouse chain based in Seattle, Washington, USA. Starbucks is the largest coffeehouse company in the world, with 16,120 stores in 49 countries, including around 11,000 in the United States, followed by nearly 1,000 in Canada and more than 800 in Japan. Starbucks sells drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, snacks, and items such as mugs and coffee beans.

Market Penetration

Increasing sales of current products to current market segments without changing the product
Add more outlets in current market area
Improve in advertising, quality, selection, prices

Starbucks
Open new stores
(11,000 stores in USA)
More concentrate in advertising
Improve product quality
Offer variety of coffee

Market Development

Identifying and developing new market segments for current company product
Review new demographic markets
Review new geographic markets

Starbucks
New groups -> senior and ethic customers
Expand to another cities, international market

Product Development

Offering modified or new products to current market segments
Developing new products

Starbucks
Offer food during lunch and dinner
Jointed with PepsiCo for bottled Frappuccino drink
Jointed with Breyer’s for Starbucks ice cream
Starbucks on supermarket aisles

Diversification

Growth through starting up or acquiring business outside the company’s current products and markets
Start up new business
Buy new business


Starbucks
Two new restaurant concept – Café Starbuck and Circadia
Hear Music brand of compilation CDs
Starbucks experience in Casual clothing

The Marketing Process

KEY ELEMENTS
Analysing market opportunities
Select target markets
Develop the marketing mix
Manage the marketing effort
Evaluation

 INTEGRATED MARKETING MIX

4 P’S
Product
Price
Place
Promotion

4 C’S
Customer solution
Customer cost
Convenience
Communication

Marketing Management and Analysis - Swot Analysis

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Strategic planning and BCG Matrix

Strategic planning is defined as:

“The process of developing and maintaining a strategic fit between the organization’s goals and capabilities and its changing marketing opportunities.”

Mission Statement

• Mission statement: The organization’s purpose, what it wants to accomplish in the larger environment
• Market-oriented mission statement: Defines the business in terms of satisfying basic customer needs

Business Porfolio

The business portfolio is the collection of businesses and products that make up the company.

A strategic business unit (SBU) is a unit of the company that has a separate mission and objectives that can be planned separately from other company businesses.

• Company division
• Product line within a division
• Single product or brand

BCG Matrix

Stars are high-growth, high-share businesses or products requiring heavy investment to finance rapid growth. They will eventually turn into cash cows.

Cash cows are low-growth, high-share businesses or products that are established and successful SBUs requiring less investment to maintain market share.

Question marks are low-share business units in high-growth markets requiring a lot of cash to hold their share.

Dogs are low-growth, low-share businesses and products that may generate enough cash to maintain themselves but do not promise to be large sources of cash.

Matrix approaches to formal planning share many problems:

• Difficult, time-consuming, and costly to implement.
• Focus only on current businesses.
• Too strongly emphasize market share growth or growth via diversification.
• Centralised

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Marketing Concepts

Production Concept
Consumers will favour products that are available and highly affordable.
The demand of a product exceeds the supply.
Product’s cost is too high and improved productivity is needed to bring it down.

Product Concept
Consumers will favour products that offer the most quality, performance, and features. The organisation also making continuous product improvements.

Selling Concept
Consumers will not buy enough of the organisation’s products unless the organisation undertakes a large-scale selling and promotion effort.

Marketing Concept
The marketing concept is the idea that achieving organizational goals depends on knowing the needs and wants of the target markets and delivering the desired satisfactions better than competitors do.

Marketing Societal Concept
Organisation determines the needs, wants and interests of target markets and deliver the desired satisfactions more effectively and efficiently than competitors do in a way that maintain or improves the consumer’s and society’s well-being.

 

Building Customer Relationships

Customer Relationship Management (CRM)

Customer relationship management is the overall process of building and maintaining profitable customer relationships by delivering superior value and satisfaction.
Customer perceived value is the difference between total customer value and total customer cost.
Customer satisfaction is the extent to which a product’s perceived performance matches a buyer’s expectations.

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What Is Marketing?

Marketing defined:

• Marketing is the process by which companies create value for customers and build strong customer relationships to capture value from customers in return.

Marketing is managing profitable customer relationships

• Attracting new customers
• Retaining and growing current customers



Understanding the Marketplace and Customer Needs

Customer Needs, Wants and Demands

Needs are states of deprivation:

• Physical—food, clothing, warmth, safety
• Social—belonging and affection
• Individual—knowledge and self-expression

Wants are the form that needs take as they are shaped by culture and individual personality.

Demands are wants backed by buying power

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