Price as Seen by Consumers or Users

1
Price as Seen by Consumers or Users
Price equals
Something of Value
List price Less discounts Quantity
Seasonal Cash Temporary
sales Less allowances Trade-ins
Damaged goods Less Rebate and coupon
value Plus Taxes
Product Physical good Service Assurance
of quality Repair facilities Packaging
Credit Warranty Place of delivery or when
available
equals
2
Price as Seen by Channel Members
Price equals
Something of Value
Product Branded--well known Guaranteed
Warranted Service--Repair facilities
Convenient packaging Place Availability--when and
where Price Price-level guarantee Sufficient
margin Promotion Promotion to consumers
List price Less discounts Quantity
Seasonal Cash Trade/functional
Temporary deals Less allowances
Promotion Damaged goods
Stocking Plus Taxes and tariffs
equals
3
Exchange Rates for Various Currencies against the
U.S. Dollar Over Time
Units shown are the average for each year
1985-1997. For 1998, units shown are for June 16,
1998.
4
Discount Policies

• DISCOUNTS are reductions from list price that are
  given by a seller to a buyer who either gives up
  some marketing function or provides the function
  himself
• Quantity discounts
• Cumulative quantity discounts encourage repeat
  purchases and relationships
• Noncumulative encourage large orders
• Seasonal discounts smooth out demand
• Cash discounts encourage early payment
• Trade (functional) discounts go to middlemen

5
Geographic Pricing Policies

• "Free on Board" (F.O.B) at some place
• Examples
• F.O.B. seller's factory
• F.O.B. delivered
• F.O.B. factoryfreight prepaid
• Zone Pricing an average freight charge to all
  buyers within specific geographic areas
• Uniform Delivered Pricing the same (average)
  freight charge to all buyers
• Freight Absorption Pricing seller pays freight
  cost so delivered price matches competition

6
Pricing Policies Combine to Impact Customer Value

• Customer value considers total costs and benefits
• Costs and benefits are impacted not only by list
  price but by
• Discounts
• Allowances
• Delivery terms and geographic pricing policies
• Sales and deals
• Price flexibility (and transaction costs)
• Value pricing leads to superior customer value
• Value pricing is setting a fair price level for a
  marketing mix that really gives the target market
  superior customer value

7
Robinson-Patman Act

• Regulates price discriminationselling the same
  products to different buyers at different prices
• if it injures competition
• Cost differences can justify prices differences
• analysis must have been done in advance
• You can match a competitor's prices
• Functional discounts are usually ok
• Does not apply to sales to final consumers

8
Markups

• Dollar amount added to the cost of the products
  to get the selling price
• Markup percent is the percentage of selling price
  that is added to the cost to get the selling
  price
• percent of selling price unless otherwise noted
• Products may be marked up several times through
  the channel
• the sequence of markups is the markup chain
• High markups don't always mean high profits
• depends on the stockturn rate

9
Alternate Approach for Computing Channel Markups
10
Average-Cost Pricing

• Adds a "reasonable" markup to the average cost of
  a product
• Simplifies pricing
• Quite common, especially among middlemen
• Usually based on estimates or past records
• actual average cost depends on quantity sold!
• quantity sold depends on price

11
Results of Average-Cost Pricing
12
Cost Structure of a Firm
13
Experience Curve Pricing

• A type of average-cost pricing using an estimate
  of future average costs
• Often leads to low prices if future economies of
  scale are expected
• costs may drop with accumulated production
  experience
• Can be very risky if costs do not drop, or if
  expected volume is not achieved

14
Break-Even Analysis

• Used to evaluate whether the firm will be able to
  cover costs (break even) at a particular price
• Indicates the break-even pointsales (units or
  dollars) needed to break even
• Can be modified to incorporate a target return
• Problems
• assumes any quantity can be sold at a given price
• total cost curve is assumed to be a straight line

15
Revenue, Cost, and Profit at Different Prices for
a Firm
16
Marginal Revenue and Price
17
Cost Structure for Individual Firm (fill in the
missing numbers)
18
Cost Structure for Individual Firm (with missing
numbers filled in)
19
Demand-Oriented Pricing Approaches

• Evaluating a Customers Price Sensitivity
• Value-in-use pricing
• Auctions
• including online
• Reference prices
• Leader pricing
• Bait pricing

• Psychological pricing
• odd-even pricing
• price lining
• Demand-backward pricing
• Prestige pricing
• Full-line pricing
• complementary pricing
• bundle pricing

20
Evaluating a Customers Price Sensitivity

• Are there substitute ways of meeting a need?
• Is it easy to compare prices?
• Who pays the bill?
• How great is the total expenditure?
• How significant is the end benefit?
• Is there already a sunk investment related to the
  purchase?

21
Value in Use Pricing

• Sets prices that will capture some of what
  customers will save by substituting the firm's
  product for the one the customer is currently
  using
• Example A construction firm that buys a new,
  more efficient bulldozer at a higher price might
  still save money on
• labor (operator) expenses
• "down-time" for repairs
• fuel consumption
• maintenance costs

22
Implementation and Control

• Faster feedback (because of information
  technology) is resulting in more rapid changes
• Marketing manager must take charge to get
  information that is needed
• Can be a source of competitive advantage
• Good implementation means that plans work as
  intended
• Builds relationships with customers

23
Implementation Objectives

• Innovative thinking and approaches may help the
  marketing manager overcome challenges and better
  achieve major implementation objectives
• Better, so customers really get superior value as
  planned
• Faster, to avoid delays that cause customers
  problems
• Lower cost, without wasting money on things that
  don't add value for the customer

24
Examples of Approaches to Overcome Specific
Marketing Implementation Problems
25
Total Quality Management

• Everyone in the organization is concerned about
  quality, throughout all of the firm's activities,
  to better serve customer needs
• The cost of poor quality is lost customers
• Achieving quality requires continuous
  improvementa commitment to constantly make
  things better one step at a time
• Uses statistical process controls to identify
  problems. Examples
• Pareto charts
• Fishbone diagrams
• "Slay the dragons first"... to get a return on
  quality
• Specify jobs and benchmark performance

26
Building Quality into Services

• Every firm must implement service quality as part
  of its plan, whether its product is primarily a
  service, primarily a physical good, or a
  combination of both
• Can't simply "inspect in" qualitymust be there
  from the start
• Ongoing training is critical (plan for the
  special)
• Empower employees to correct a problem without
  first checking with management

27
Marketing Control

• Feedback process that helps the marketing manager
  learn
• how ongoing plans and implementation are working
• how to plan for the future
• Sales Analysis looks at details of where sales
  come from
• customers
• products
• territories, etc.
• Performance Analysis compares actual with targets
• Cost Analysis controls spending

28
Some Bases for Sales, Cost, or Profit Analysis

• Geographic region
• Product (package size, style, etc.)
• Customer size
• Customer type or class of trade
• Price or discount class
• Method of sale
• Cash or charge (financial arrangement)
• Size of order
• Commission class

29
Development of a Measure of Sales Performances
(by region)
30
Cost Analysis

• Must understand costs to control them
• Analyzing and dealing with fixed costs can be a
  challenge
• full-cost approach allocates fixed costs
• contribution-margin approach is an alternative
• two approaches have different benefits,
  limitations

31
Profit and Loss Statement by Department
32
Profit and Loss Statement by Department if
Department 1 Were Eliminated
33
Contribution-Margin Statement by Departments
34
Planning and Control Chart for Cindy's Fashions
35
Example of a Planning and Control Chart Cindys
Fashions - Dept. B
36
Marketing Audit

• A systematic, critical, and unbiased review and
  appraisal of the basic objectives and policies of
  the marketing functionand of the organization,
  methods, procedures, and people employed to
  implement the policies
• Should not be necessary, but usually is
• May require objective, outside experts

37
Marketing's Link with Other Functional Areas

• Link with other functional areas affects strategy
  planning as well as implementation and control
• Finance
• Money for initial investment and ongoing expenses
• Production
• Flexibility, costs of products offered
• Accounting
• Understanding costs and profits of decisions
• Human resources
• People to do the work that needs to be done

38
Finance Function Manages Capital

• Capital is the money invested in a firm
• Investments in fixed assets (facilities, etc.)
• Working capital money to pay for short term
  expenses such as salaries, advertising, marketing
  research, etc.
• Capital may come from internal or external
  sources
• External funding (investors) sales of stock or
  debt
• Internal funding profits and cash flow

39
Coordinate Marketing Plan and Production

• Production capacity takes many forms
• Quantity and quality of specific goods or
  services the firm is able to produce
• Production flexibility may limit or increase
  opportunities
• Virtual corporation
• Perhaps more flexibility but less control
• Mass customization
• Tailors production to needs of individual
  customers
• Price must cover production costs
• Cut costs that don't add value for customers

40
Accounting Data Helps to Understand Costs and
Profit

• Traditional accounting data often are not helpful
  for making strategy planning decisions
• Activity-based accounting may help
• Allocates costs from natural accounts to
  functional accounts
• Natural accounts
• Categories to which costs are charged in the
  normal accounting cycle
• Often of limited value for marketing control
• Functional accounts
• Shows costs arranged by the purpose for which
  expenditures were made

41
Profit and Loss Statement, One Month
42
Spreading Natural Accounts to Functional Accounts
43
Basic Data for Cost and Profit Analysis Example
44
Functional Cost Account Allocations
45
Profit and Loss Statements for Customers
46
Human Resources People Put Plans into Action

• Traditional issues include selection, training,
  supervision, motivation, and compensation
• New strategy usually requires people changes
• New strategy must be communicated
• Rapid change may cause strain
• Time for training
• Time for required activities

47
Factors that Affect Marketing Mix Planning

• Product classeshow are products that consumers
  see in the same way typically marketed?
• Stage of product life cycle
• Size and geographic concentration of customers
• Value of item and frequency of purchase
• Preferences for personal contact
• Perishability
• Technical complexity

48
Typical Changes in Marketing Variables over the
Product Life Cycle

• Competition becomes more intense, moves toward
  pure competition
• Product typically moves toward more variety,
  and then less variety in decline stage
• Place typically moves toward more intensive
  distribution
• Promotion emphasis changes from primary demand
  to selective demand, and becomes more frantic
• Price moves toward more price cutting and
  dealing

49
Market Potential and Sales Forecast

• Market Potentialwhat a whole market segment
  might buy
• Sales Forecastan estimate of how much an
  industry or firm hopes to sell to a market segment

50
Approaches to Forecasting

• Extending past behavior
• Trend extension
• Assumes future patterns will be like past
  patterns
• Factor method
• Based on finding a variable (a factor) that is
  related to the variable being forecast
• Multiple factors may be helpful
• Example Buying Power Index
• Leading series
• Factors that move in advance of what is being
  forecast

51
Sample of Pages From Sales Marketing
Management's Survey of Buying Power
52
Estimated Market for Corrugated and Solid Fiber
Boxes for Industry Groups, Phoenix, Arizona,
Metropolitan Statistical Area
53
A Spreadsheet Comparing the Estimated Sales,
Costs, and Profits of Four "Reasonable"
Alternative Marketing Mixes
54
Response Functions

• Show how a target market is expected to react to
  changes in marketing variables
• Hard to estimate, but that doesn't mean they can
  be ignored
• Might be used to evaluate
• a firm's whole marketing mix
• elements of a marketing mix
• how customers respond to competitors
• differences among market segments

55
A Spreadsheet Analysis Showing How a Change in
Price Affects Sales, Revenue, and Profit

(Note spreadsheet is based on Marketing Mix C
from Exhibit 21-7)
56
Summary Outline of Different Sections of
Marketing Plan--Part A

• Name of Product-Market
• Analysis of Other Aspects of External Market
  Environment (favorable unfavorable factors and
  trends)
• Customer Analysis (organizational and/or final
  consumer)
• Competitor Analysis
• Company Analysis
• Marketing Information Requirements
• Product

57
Summary Outline of Different Sections of
Marketing Plan--Part B

• Place
• Promotion
• Price
• Special Implementation Problems to Be Overcome
• Control
• Forecasts and Estimates
• Timing

58
Exporting

• Selling some of what the firm is producing to
  foreign markets
• a market development type opportunity
• some changes in product may be required
• Usually a low risk way to get into international
  marketing
• "Red tape" is real, but usually worth the hassles
• International agents and merchant wholesalers can
  be a big help
• Relationships may take time to build

59
Multinational Corporations

• Have a direct investment in several countries
• Run the business depending on the choices
  available anywhere in the world
• selecting vendors
• locations for production
• target markets to go after
• Takes a world view, not just the view of home
  country
• More companies are looking at worldwide
  competition

60
Causes of Micro-Marketing Inefficiency

• Lack of interest in or understanding of consumers
• consumer preferences may change rapidly and often
• improper blending of the four Ps
• overemphasis on production and/or internal
  problems rather than customer needs
• Lack of understanding ofor adjustment tothe
  marketing environment, especially what
  competitors do

61
Evaluating Macro-Marketing Effectiveness

• Depends on the social and economic objectives of
  the country
• Difficult to compare marketing systems across
  countries with different objectives
• Is consumer satisfaction the criterion?
• in the United States, yes
• in other countries, often it's not

62
Some Important Changes and Trends Affecting
Marketing Strategy Planning - Communication
Technologies

• The Internet and intranets
• Satellite communications
• E-mail and fax communications
• Teleconferencing and Internet telephone
• Cellular telephones

63
Some Changes and Trends (cont.) - Role of
Computerization

• Personal computers and laptops
• Spreadsheet analysis
• Computer networks
• Scanners and bar codes for tracking
• Better, easier to learn and use software

64
Some Changes and Trends (cont.)Marketing Research

• Search engines
• Growth of marketing information systems
• Decision support systems
• Multimedia data
• Single-source data (and scanner panels)
• Data warehouses and data mining
• Multimedia questionnaires (PC, CD, Internet)
• Statistical packages and elaborate graphics
  software

65
Some Changes and Trends (cont.) - Demographic
Patterns

• "Wired" households
• Explosion in teen and ethnic submarkets
• Aging of the baby boomers
• Population growth slow-down
• Geographic shifts in population
• Slower real income growth in U.S.

66
Some Changes and Trends (cont.) - Business and
Organizational Customers

• Closer buyer-seller relationships
• Just-in-time inventory systems/EDI
• Internet sourcing
• More single-vendor sourcing
• Shift to NAICS
• ISO 9000
• Supply chain management

67
Some Changes and Trends (cont.) - Product

• More attention to "really new" products
• Faster new-product development
• Computer-aided design (CAD)
• RD teams with market-driven focus
• More attention to quality
• More attention to services
• Advances in packaging
• Extending established brand names

68
Some Changes and Trends (cont.) - Channels and
Logistics

• Internet selling (wholesale and retail)
• More vertical market systems
• Larger, more powerful retail chains
• More attention to distribution service
• Better inventory control
• Rapid response, JIT, and ECR
• Automated warehousing and handling
• Cross-docking at distribution centers
• More competition among transporters
• Cross-channel logistics coordination
• Growth of mass-merchandising

69
Some Changes and Trends (cont.) - Sales Promotion

• Database-directed promotion
• Point-of-purchase promotion
• Trade promotion is more sensible
• Event sponsorships
• Stocking allowances

70
Some Changes and Trends (cont.) - Personal Selling

• Electronic slide presentations
• Automated order-taking
• Use of laptop computers
• More specialization
• Major accounts
• Telemarketing
• Team selling
• Use of voice mail and email

71
Some Changes and Trends (cont.) - Mass Selling

• Interactive media (like web sites)
• Integrated marketing communication
• More targeted media
• Pointcasting
• Specialty publications
• Cable, satellite TV, teletext
• Specialty radio and (cable) TV
• Point-of-purchase
• Growth of interactive agencies
• Global agencies
• Changing agency compensation
• Direct-response advertising
• Shrinking media budgets

72
Some Changes and Trends (cont.) - Pricing

• Electronic bid pricing and auctions
• Value pricing
• Overuse of sales and deals for temporary price
  cuts
• Bigger differences in functional discounts
• More attention to exchange rate effects
• Lower markups on higher stockturn items
• Spreadsheets for marginal analysis

73
Some Changes and Trends (cont.) - International
Marketing

• Collapse of communism worldwide
• More international market development
• Global competitorsat home and abroad
• Global communication over Internet
• New trade rules (NAFTA, WTO, EU, etc.)
• More attention to exporting by small firms
• International expansion by retailers
• Growth of multinational corporations
• Growing role of airfreight

74
Some Changes and Trends (cont.) - General

• Explicit mission statements
• S.W.O.T. analysis
• Benchmarking and total quality management
• More attention to positioning and differentiation
• Less regulation of business
• More attention to marketing ethics
• Shift away from diversification
• More attention to profitability, not just sales
• Greater attention to superior value advantage
• Addressing environmental concerns

75
Demand Schedule for Potatoes (10-pound bags)
76
Demand Curve for Potatoes (10-pound bags)
77
Demand Schedule for 1-Cubic-Foot Microwave Ovens
78
Demand Curve for 1-Cubic Foot Microwave Ovens
79
Elastic and Inelastic Demand

• Elastic Demand if prices are dropped, the
  quantity demanded will increase enough to
  increase total revenue
• Inelastic Demand if prices are dropped, the
  increase in the quantity demanded is not enough
  to result in an increase in total revenue
• Unitary Elasticity the special case that occurs
  when a change in price results in the same total
  revenue

80
Demand Curve for Hamburger (a product with many
substitutes
81
Demand Curve for Motor Oil (a product with few
substitutes
82
Factors that Affect Elasticity of Demand

• Availability of substitutes (i.e., the buyer has
  a choice)
• Importance of the purchase in the customer's
  budget
• Urgency of the need, and its relationship to
  other needs

83
Supply Schedule for Potatoes (10-pound bags)
84
Supply Curve for Potatoes (10-pound bags)
85
Equilibrium of Supply and Demand for Potatoes
(10-pound bags)
86
Interaction of Demand and Supply in the Potato
Industry and the Resulting Demand Curve Facing
Individual Potato Farmers
Firms (each producing about 1/10,000 of industry
output)
87
Oligopoly Situation with Kinked Demand Curve
88
Monopolistic Competition

• Sellers in the market feel they have some
  competition
• Customers view competing products as
  heterogeneous, not homogeneous
• Firms may vary their marketing mixes to further
  differentiate them
• Thus, customers can choose among "substitute"
  offerings, but the different offerings are not
  exact substitutes

89
Basic Operating Statement Relationships

• Gross sales
• - Returns and Allowances
• Net sales
• Net sales
• - Cost of sales
• Gross margin
• Gross margin
• - Expenses
• Net profit

90
An Operating Statement (Profit and Loss Statement)
91
Cost of Sales Section of An Operating Statement
for a Manufacturing Firm
92
Three Methods to Compute Stockturn Rate

• 1. (Cost of sales) / (Average inventory at cost)
• 2. (Net sales) / (Average inventory at selling
  price)
• 3. (Sales in units) / (Average inventory in
  units)