Marketing – Module 3.
1
Assume you are the marketing manager for a large sales training
company. Over many years, your firm has developed a unique set of
sales training techniques. They make their income by sending in sales
trainers to firms (like insurance companies and real estate agencies)
to help train their sales people. Your firm typically runs three day
courses and charges the client $1,000 per attendee. Most firms send
around 15 sales people to each course. This gives the firm revenue of
$15,000 for a three-day training course. The associated variable costs
are $5,000 for the trainer and $1,000 for the training manuals that
are provided to the participants. Of course, a proportion of the
revenue needs to be allocated to fixed costs (of office rent,
computers, communication, support staff, promotion, and so on).
Therefore, as a rough estimate, each three-day training session
would generate around $5,000 gross profit. However, you now
have a new pricing dilemma. A major firm has approached you to
license (hire/rent) your training materials for a year to train their
own staff. That means that they just want a copy of your training
booklets/materials – they would then use their own training staff
and produce the training manuals themselves. The firm plans to
train around 100 of their sales staff (using your training materials)
over the next 12 months and they want to know what
your licensing fee would be.
Clearly there is little cost involved. It’s almost like ‘money for
nothing’, as you will simply send them the training manuals along
with an invoice. Therefore, your decision is what fee to charge. You
need to price it as a win-win situation – low enough so the client
receives value (and you don’t lose their business), yet high enough
to maximize the income from this opportunity.
• What would be the minimum you could charge to
cover costs?
• What could be the income/profit you would
receive if your firm did the full training for the
client (like your firm normally does)?
• Do you need to be concerned with what price
potential competitors might charge?
• Therefore, given your responses to the above
questions, what might be an appropriate
licensing fee?
• Dick Smith Foods virtually acts as the umbrella brand for a
number of independent Australian manufacturers that are
trying to compete with the large international firms whose
products often dominate the supermarket shelves. Dick Smith
Foods attempt to ‘copy’ major selling brands/products and
introduce similar products. As an example, they have tried to
duplicate the top-selling Arnott’s Tim Tams biscuits, with a
product that they have named “Temptims’ (note the similar
name).
• Dick Smith’s positioning is based on two aspects:
– That their products are Australian made, and consumers, therefore, are
supporting other Australians, and
– That their products offer more value than other leading brands/products
(as Dick Smith’s products sell at a discount mainly because they don’t
have as advertising budget).
• Assume that a series of taste-tests were conducted, with the
research comparing Arnott’s Tim Tams and Dick Smith’s
Temptims. The research revealed that 60% of consumers
prefer the taste of the Dick Smith product (over Tim Tams). As
a result, the market research company has recommended
that Dick Smith’s should increase the price from $1.75 (below
Arnott’s $2.50 price) to $3.00, in order to communicate the
superior quality of the product to the market.
• Should this brand (which tries to provide price
value) increase their price to be more
reflective of their product’s perceived quality?
• What impact will these proposed decisions
have on their overall positioning?
• Therefore, other than influencing profit
margins, how important is the role of price in
the firm’s marketing mix?
Price
• Price is the amount of money charged for a
good or service
• The only marketing mix element that produces
revenue
• Changing too much chases away potential
customers, charging too little cuts revenue
Factors to Consider
when Setting Prices
Internal Factors
Marketing Objectives
• Market Positioning influences strategy
• Other Pricing Objectives
– Survival
– Current Profit Maximization
– Market-Share Leadership
– Brad Equity Growth
– Product-Quality Leadership
• Not-for-profit objectives
– Partial or Full cost recovery
– Social Pricing
Internal Factors
• Marketing Mix Strategy
– Pricing must be carefully coordinated with other marketing mix
elements
• Costs
– Fixed vs. Variable Costs
• Organizational Considerations
– Who sets the price?
– Some industries have pricing departments
External Factors Affecting Pricing Decisions
• Nature of Market and Demand
– Types of Market
– Consumer Perceptions of Price and Value
– Price – Demand Relationship
• Demand Curve
• Price Elasticity
• Competitors costs, prices and offers
• Other Environmental Factors
– Economic Conditions
– Reseller reaction to prices
– Government may limit or restrict
– Social Considerations
General Pricing Approaches
• Cost-Based Approach
– Cost Plus pricing
– Break-Even Analysis and Target Profit Pricing
• Buyer Based Approach
– Value-Based Pricing
• Competition-Based Approach
– Going rate pricing
– Sealed bid pricing
Customers
Customers
Value
Value
Price
Price
Cost
Cost
Product
Product
Cost Based Approach
Cost Plus Pricing
– Adding standard mark-up to costs
– SP = Cost per Unit + Mark up price
• Customers are price sensitive
• Popular because
– Simplifies pricing process
– Price competition may be minimized
– Fair to both buyers and sellers
Break-even
• BE= Fixed Costs/Contribution (SP-VC)
• Example - Meal - SP = $20, VC = $8
• Fixed costs are $2400 a day
• BE=$2400/$12 = 200
• Need to sell 200 meals @ $20 to break-even
• VC = 40%, contribution = 60%
• BE = $2400/.6 = $4000
Break-even Analysis or Target Profit Pricing
Product
Product
Cost
Cost
Price
Price
Value
Value
Customer
Customer
Buyer based Approach
Value Based Pricing
• Basing prices on products perceived value
• Price is considered along with the other
marketing mix variables before program is set
• Measuring perceived value
– Asking customers
– Conducting experiment
• Situations
– Overpriced
– Under priced
Competition-Based Approach
• Going Rate Pricing
– A firm bases its price largely on competitors prices
with less attention to its own costs or demands
– May price at the same level, above or below
competition
– Represents collective wisdom of the industry
concerning price that will give a fair return
– Holding on to going rate will prevent price wars
• Sealed bid pricing
– A firm bases its price on how it thinks competitors
will price rather than on its own costs or on
demand
– Firms bid for job
– The firm wants to win the contract
Pricing Strategies
• New-Product Pricing Strategies
• Existing-Product Pricing Strategies
• Psychological Pricing
• Promotional Pricing
New-Product
Pricing Strategies
• Prestige Pricing
• Market-Skimming Pricing
• Market-Penetration Pricing
Setting Initial Product Prices
Market
MarketSkimming
Skimming Market
MarketPenetration
Penetration
> Setting a high price for a
> Setting a low price for
new product to skim
a new product in order
maximum revenues from
to attract a large
the target market.
number of guests.
> Results in fewer, more
> Results in a larger
profitable sales.
market share.
> Popular night club
> New Marriott
charges a high cover
charge
Existing-Product
Pricing Strategies
• Product-Bundle Pricing
– Pricing bundles of product sold together
• Price-Adjustment Strategies
– Discounts
• Cash
• Volume / Quantity
• Trade
• Seasonal
– Allowances
• Trade-in
• Promotional
– Yield Management or Segmented Pricing strategies
• Customer Segment
• Product-form pricing
• Location pricing
• Time pricing
– Discounts Based on Time of Purchase
– Discriminatory Pricing
Psychological Pricing
• Price-quality relationship
• Reference prices
• Rounding
• Length of the field
Promotional Pricing
• Temporary pricing of products below list price
and sometimes below cost
– Loss leader
– Special Event pricing
– Cash rebates
– Value Pricing
– Price Sensitivity Measurement
Price Changes
• Initiating Price cuts
• Initiating price increase
DISTRIBUTION DECISIONS
MARKETING CHANNELS
• Sets of independent organizations participating in the
process of making a product or service available for
use or consumption
• Merchants – Wholesalers, Retailers
• Agents – Brokers, Manufacturers representative , sales
agents
• Facilitators – Transport, Warehousing, Banks, Ad
Agencies
CHANNEL INTERMEMDIARIES
Retailers
Take
Take Title
Title to
to Goods
Retailers
Goods
Wholesalers
Take
Take Title
Title to
to Goods
Wholesalers
Merchant
Merchant Goods
Brokers
Brokers
and
Do
Do NOT
NOT Take
Take Title
Title to
to Goods
and
Agents
Agents Goods
How Channel Members add value?
• Information
• Promotion
• Contact
• Matching
• Negotiation
• Physical Distribution
• Financing
• Risk Taking
• Market Intelligence and Research
Importance of Channels
• Marketing Channel System is the set of marketing
channels a firm employs
• In US, channel member margins account for 30-
50% of selling price
• Push Strategy – low Brand loyalty, brand choice is
impulsive, Product benefits are well understood
• Pull Strategy – High Brand loyalty, high
involvement, Consumers perceive difference
between brands
Hybrid Channels or Multichannel Marketing
• A single firm uses 2 or more marketing
channels to reach customer segments
• Philips, HP, LIC – Internet, Advisors,
Bancassurance
• Each channel targets a different segment of
buyers or different need states for one buyer
CHANNELS FOR CONSUMER PRODUCTS
DIRECT RESELLER WHOLESALER AGENT
Producer Producer Producer Producer
What makes you choose a particular
channel?
Factors
Factors Level
Levelof
of
Affecting
Affecting Distribution
Distribution
Channel
Channel Intensity
Intensity
Choice
Choice
Market
MarketFactors
Factors Intensive
IntensiveDistribution
Distribution
Product
ProductFactors
Factors Selective
SelectiveDistribution
Distribution
Producer
ProducerFactors
Factors Exclusive
ExclusiveDistribution
Distribution
MARKET FACTORS
Customer
CustomerProfiles
Profiles
Consumer
Consumeror
orIndustrial
Industrial
Customer
Customer
Size
Sizeof
ofMarket
Market
Market
Market Factors
Factors
That Affect
That Affect
Channel
Channel
Choices
Choices Geographic Location
PRODUCT FACTORS
Product
ProductComplexity
Complexity
Product
ProductPrice
Price
Product
ProductLife
LifeCycle
Cycle
Product
Product Factors
Factors
That Affect
That Affect
Channel
Channel Product
ProductDelicacy
Delicacy
Choices
Choices
PRODUCER FACTORS
Producer
ProducerResources
Resources
Number
Numberof
ofProduct
ProductLines
Lines
Producer
Producer Factors
Factors
That
ThatAffect
Affect Desire
Desirefor
forChannel
ChannelControl
Control
Channel
Channel
Choices
Choices
LEVELS OF DISTRIBUTION INTENSITY
Number
Numberofof
Intensity
IntensityLevel
Level Objective
Objective Intermediaries
Intermediaries
Achieve
Achievemass
massmarket
market
Intensive
Intensive selling. Many
selling. Many
Convenience
Conveniencegoods.
goods.
Work
Workwith
withselected
selected
intermediaries.
intermediaries.
Selective
Selective Several
Several
Shopping
Shoppingandandsome
some
specialty
specialtygoods.
goods.
Work
Work with
with single
single
intermediary.
[Link]
Specialty
Exclusive
Exclusive One
One
goods
goods and
andindustrial
industrial
equipment.
equipment.
LEVELS OF DISTRIBUTION INTENSITY
Channel Design Decisions
• Analyzing Consumer Needs and Wants
– Lot Size, Waiting and Delivery Time, Spatial
Convenience, Product Variety, Service backup
• Establishing Objectives and Constraints
• Identifying Major Channel Alternatives
– Types of Intermediaries, Number of
Intermediaries, Terms and Responsibilities of
Channel Members
• Evaluating Major Channel Alternatives
– Economic Criteria, Control and Adaptive Criteria
Channel Management Decision
• Selecting Channel members
• Training and Motivating Channel members
– Channel Power – Coercive, Reward, Legitimate, Expert,
Referent
– Channel Partnerships
• Evaluating Channel members
• Modifying Channel Design and Arrangements
• Channel Modification Decisions
• Global Channel Considerations
Channel Integration and Systems
• Vertical marketing systems – Includes
producers, wholesalers, retailers
– Corporate VMS – Future Group
– Administered VMS – Gillette
– Contractual VMS
• Horizontal Marketing Systems – 2 unrelated
companies put together resources or
programs to exploit market opportunity
Channel Conflict
• Conflict in generated when one channel
member’s actions prevent another channel
from achieving its goal
• Types – Horizontal, Vertical, Multi Channel
• Causes – Goal Incompatibility, Unclear roles
and rights, Differences in perception,
Intermediaries dependence on manufacturer
Managing Channel Conflict
• Strategic Justification
• Dual Compensation
• Super-ordinate goals
• Employee Exchange
• Joint Memberships
• Co-optation
• Diplomacy, Mediating and Arbitration
• Legal Recourse
Network Marketing
• Also known as MLM
• Sales force are compensated not only for sales
they generate but also for the sales of other
sales people they recruit
LA FIN