Formulating Strategic Marketing Programs

1
Formulating Strategic Marketing Programs

• Pricing Management

2
Pricing...

• Converts the underlying value of a product
  offering or service into revenues and profits.
• Is a fundamentally important activity to the
  firm--pricing power.
• Is not a simple process.

3
Basic Concepts Jargon

• Marginal costs--the unit costs of production
• In a competitive market, establishes the lowest
  feasible price a firm can set.
• Value price--the highest price the market will
  bear
• Establishes an upper bound on prices, though
  competition usually prevents value prices from
  being realized.

4
The Pricing Range
Value Price
Downward price pressure From competitive
substitutes
Feasible Price Range
Our Price
Our Premium
Upward price pressure through marketing efforts
Marginal Cost
0
5
Price Sensitivity

• How customers respond to price changes
• Price elasticity of demand
• Demand is less elastic when
• Few or no substitutes or competitors
• Buyers do not notice the higher price
• Buyers are slow to change their buying habits
• Buyers think the higher prices are justified

6
Pricing Methods

• Mark-up pricing
• Add a standard mark-up to the products costs
• unit cost
• (1-desired return on sales)

Mark-up price

7

• Target-return pricing
• The firm determines price based on desired target
  rate of return on investment (ROI)
• desired return x invested capital
• unit sales

Unit cost
Target-return price


8

• Perceived value pricing
• Base price on customers perceived value
• Have to deliver more value than the competitor
  and demonstrate this to prospective buyers
• Value pricing
• Based on firm becoming a low-cost producer while
  maintaining quality
• Targets value-conscious consumers
• Everyday low pricing

9

• Going-rate pricing
• Base prices primarily on competitors prices
• The same, more, or less than major competitor
• Auction-type pricing
• Group pricing

10
Pricing Goals

• Determining pricing tactics depends on what goals
  are to be accomplished

11
Effective Pricing Management

• Discriminate between customers according to
  market segments.
• Coordinate incentives across intermediaries and
  consumers.
• Effectively deal with competition.
• Integrate with the firms other marketing
  efforts.
• Understand consumers willingness to pay.
• Understand pricing effects throughout product
  line.

12
Customer Discrimination

• Different segments of customers often have
  different value prices for the same product.
• Ideally, firms would like to charge each customer
  his/her value price.
• Discrimination, in the sense of charging
  different prices for the same good to reasonably
  identical customers is generally considered
  illegal.

13
Discrimination (continued)

• There are legal exceptions to discrimination
• Price-customization opportunities
• Business-to-business, service relations
• Customers self-select into appropriate price
  tiers
• Choose between differently priced options
• Quantity discounts
• Loyalty programs
• Proactively shape customers into what is desired

14
Incentive Coordination

• Directly link incentives to desired behavior
• Three areas of incentive coordination
• Salesperson incentives and price flexibility
• Intermediary margins and push
• End-user incentives and service pricing

15
Salesperson Incentives

• The degree of pricing flexibility allocated to
  the salesperson directly affects selling
  behavior.
• Direct link between incentives and salespersons
  compensation plan.
• If commission is tied to volume, the salesperson
  will discount heavily and frequently in order to
  maximize quantity sold.
• If commission is tied to profitability, the
  salesperson will try to hold prices high in order
  to maximize margins, but low sales volume may
  result.

16
Intermediary Incentives

• The margin built into a price provides resellers
  with incentives to push the product.
• Trade promotions are another type of incentive
• Quantity discounts
• Compensate marketing efforts

17
End-User Incentives

• Salient to services.
• To avoid over-utilization of services (e.g.,
  health care), link cost savings to consumption to
  encourage judicious consumption behavior.

18
Dealing with Competition

• In a competitive environment, have to set prices
  with competitor actions in mind.
• Commodity market often use fluctuating prices
• Mature products high use of discounts and
  promotions
• Promotions can result in forward buying
• Take price out of the equation
• Automatic Price Protection
• Loyalty programs
• Useful in product categories marked by low
  differentiation

19
Integration With Other Marketing Efforts

• Price should reflect the value of the product or
  service.
• High prices--skimming
• Obtain low market share with high margins.
• Marketing program needs to communicate product
  benefits.
• Intensive selling.
• Maximize intermediary push.

20
Integration (continued)

• Low pricespenetration
• Obtain high market share with low margins.
• Marketing program should focus on generating
  general awareness.
• Focus on productive capacity.
• Price differentiation

21
Consumers Willingness to Pay

• What is the impact of consumers willingness to
  pay on demand and a firms net income?
• At various price levels
• When price is changed
• Behavioral price vs. objective price
• How fair of a deal am I getting? vs. How good
  of a deal am I getting?

22
Psychological Update 1

• Willingness to pay is impacted by relative
  incentives.
• In determining willingness to pay, a consumer
  will consider both absolute economic utility
  from the transaction i.e., perceived value -
  actual price and relative incentive to enter the
  transaction i.e., (perceived value - actual
  price)/actual price.

23
Psychological Update 2

• Willingness to pay is impacted by a salient
  reference price.
• In determining willingness to pay, a consumer
  will consider economic utility from the
  transaction i.e., perceived value - actual
  price and the consistency between the actual
  price and a salient reference price i.e., actual
  price - reference price.
• The most common basis for a reference price is
  the previous price paid for a product.

24
Psychological Update 3

• Willingness to pay is impacted by cost of goods
  sold.
• In determining willingness to pay, a consumer
  will consider his/her economic utility from the
  transaction i.e., perceived value - actual
  price and the economic utility of the firm
  i.e., actual price - cost of goods sold.
• Consumers do not want to be taken advantage of.

25
Psychological Update 4

• Perceptions of fairness vary across product
  categories.
• In determining willingness to pay, the degree to
  which a consumer will rely upon economic utility
  from the transaction i.e., perceived value -
  actual price will vary across product
  categories.
• Necessary vs. discretionary purchases.
• Luxury vs. utilitarian products.

26
Managing Perceptions of Transaction Fairness

• Strategy 1 Actively manage price expectations.
• Establish credible reference prices.
• Customary prices
• Odd prices
• Manage product price trends.
• Encourage favorable comparisons.
• Avoid unfavorable comparison through product
  differentiation.

27
Managing Perceptions...

• Strategy 2 Actively manage perceptions of cost
  of goods sold.
• Focus attention of fully-loaded cost of goods
  sold.
• Bundle products to obscure cost of goods sold.
• Focus attention of consumer value.

28
Product Line Pricing

• The pricing of one product in product line may
  affect sales of other products in product line.
• Price elasticity of demand
• The degree of responsiveness of demand to a price
  change.
• Cross-elasticity of demand
• The degree to which changing the price of one
  product affects demand for another product.

29
Cross-elasticity of Demand

• Products with positive cross-elasticity are
  substitutes.
• Lowering the price of Product A decreases demand
  for Product B without any change in the price of
  Product B.
• Products with negative cross-elasticity are
  complementary products.
• Lowering the price of Product A increases demand
  for both Product A and Product B without any
  change in the price of Product B.