Marketing Final

6 Step pricing process

1. Identify pricing objectives and constraints

2. Estimate demand and revenue

3. Determine cost, volume, profit relationships

4. Select approximate price level

5. Set list or quoted price

6. Make special adjustments to list or quoted price

Pricing process step 4: Select approximate price level

Cost oriented approaches, profit orientated approaches, competition oriented approaches, demand oriented approaches, goes from internal to external focus

Cost oriented approaches

Stress cost side of pricing problem not demand, look at production and marketing costs then add enough to cover direct expenses overhead and profit, approaches include cost plus, standard mark up, and experience curve

Why companies choose cost oriented pricing rationale

Although this approach has disadvantage of ignoring customer demand, sellers are more comfortable about their costs than demand, makes pricing decisions easy, similar pricing and minimized competition when used by all firms in industry

Cost plus

Add specific amount to unit cost to arrive at price, one or few of kind items, cost plu percentage of pricing, cost plus fixed fee pricing

Standard mark up

Add fixed percentage to cost of all items in specific product class, percentage mark up varies by type of retailer, within retail outlet the percentage mark up will also vary by product, high volume products will generally have smaller mark up than low volume products, ex. standard cost of making vacuum is $100, manufacturer applies 50% mark up when setting price to retailer and the retailer in turn plans to add 30% mark up to consumer, reailer will pay 150 for vacuum and retailer will charge customers 195

Experience curve

Based on learning effect, unit cost declines by 10-30% each time firm’s experience at producing and selling them doubles, price follows costs

Profit oriented approaches

To establish price, balance both revenue and costs, use dollar profit target or express profit as percent of sales or investment when setting price, approaches include target profit, target return on sales, target ROI

Target profit

Set annual target of specific dollar volume of profit, simple approach, profit = (P x Q) - [FC + (UVC x Q)]

Target return on sales

Set price to achieve profit that’s specified percentage of sales volume, = (P x Q) - [FC + (UVC x Q)] / (P x Q)

Target ROI

Set price to achieve annual target return on investment

Competition oriented approaches

Rather than emphasize demand, cost, or profit factors, set price according to what the market is doing, approaches include customary, above at or below market, loss leader

Customary

Tradition, standardized channel of distribution, or other competitive factors dictate the price, ex. swatch continues to price watches at $50 as it has for past 10 years, candy bars in vending machine typically have price of $1.50

Above, at, or below market

Set market price for product or product class based on subjective feel for competitor’s price or market price as benchmark, ex. below market is at 60% per nigh for room Motel 6 charges lowest price in Hampton area, above market is Nordstrom typically sets premium prices for product in its stores, at market is for comparable products consumers consider Belk’s prices to be average or as expected

Loss leader

Deliberately selling product below its customary price, not to increase sales but to attract customer’s attention in hopes that they will buy other products with large markups as well, ex. Walmart prices toilet paper lower than other grocieries in area and although price doesn’t generate profit will draw customers into store

Demand oriented approaches

Weigh factors that underlie expected consumer tastes and preferences more heavily than cost, profit, and competition, approaches include new product (skimming, penetration), product mix (price lining, captive product, by product, product bundle), psychological, several approaches to setting price exists under each of these sub categories

Skimming

Highest initial price that customers will pay (maximize profit), over time price is lowered to attract another more price sensitive segment, product quality and image, enough buyers, competitors can’t undercut, ex. Apple’s introductory pricing strategy of newest iphone set at highest possible level first

Penetration

Low initial price to penetrate market quickly and deeply attracting large number of buyers to build market share, price sensitive market, production and distribution costs drop with volume, challenge is raising price, ex. Unilever introducing new brand of shampoo at low price with in store promotion to generate consumer trial in competitive product category

Product mix pricing

Approach where company sets prices for its various products in way that considers how they relate to each other aiming to maximize overall profits rather than focusing on individual product prices

Price lining

Setting price of line of products at number of specific pricing points, price elastic at each of specific price points but inelastic between them, manufacturers may design products for different price points and retailers apply same mark up percentage to each, products may be purchased by retailers at same cost then marked up by different percentages, number of price points should be limited, ex. Uggs boots with different designs selling for different prices

Captive product

Pricing products that must be used with main product, ex. razor blade cartridges

By product

Pricing low value by products to get rid of or make money on them

Product bundle

Combine several products and offer bundle at reduced price, ex. combo meals, Microsoft office

Psychological pricing

Prestige, odd even, multiple unit, reference

Prestige pricing

Setting prices at artificially high level to convey prestige or quality image, higher price associated with higher quality, as price drops initially between points A and B consumers see lower price as bargain and buy more, as price drops further from B to C consumers question quality and prestige buying less, key is to stay above B which is Po, ex. Rolex sets prices at high levels to create image of status and exclusivity

Odd even

Ending price with certain numbers to influence buyer’s perceptions of price or product

Multiple unit

Packaging together two or more identical products and selling them at single price, increase sales by encouraging multi unit purchases, ex. 2 for $1 instead of $.50 per item

Reference

Pricing product at moderate level and displaying it next to more expensive model or brand, ex. Walmart places Great Value brand next to competing brand that costs more to demonstrate its value

Pricing process step 5: Set list or quoted price

• Price policy is either fixed or dynamic

• Company effects- product line or mix, product line pricing with either lowest price entry, highest price premium, or differentials perceived value

• Customer effects- consider ultimate consumer’s perceptions and expectations, resellers price to gain their support

• Competitive effects- anticipate potential price response, price war with successive price cutting

• Cut price when cost or technological advantage, primary demand will grow, cut is confined to specific products/customers

Price policy

How company sets price of its products and services based on costs, value, demand, competition

Fixed price policy

One price policy, setting one price for all buyers of product and service, ex. department stores like Nordstrom and Macys

Dynamic

Flexible price policy, setting different prices in real time in response to supply and demand conditions, tech driven, ability to customize price by customer, ex. Amazon

Pricing process step 6: Make special adjustments to list price

Price adjustments occur throughout distribution chain from manufacturers, wholesalers, retailers, to consumers, special adjustments to list or quoted price include discounts, allowances, geographical adjustments

Discounts

• Cash- incentives to encourage retailers to pay manufacturers quickly

• Quantity- reductions in unit costs for larger order

• Seasonal- encourage buyers to stock inventory earlier than normal demand would require, reward wholesalers and retailers for assuming risk and higher inventory carrying costs

• Trade- compensation to resellers for marketing activities they are expected to perform

Promotional allowances

• EDLP- constant low price with few temporary price reductions, drop in retailer profits by average of 18%, ex. Walmart

• High low- higher everyday prices coupled with frequent temporary deep discounts on selected products, preferred by retailers

Questionable illegal pricing practices

• Vertical price fixing- controlling agreements between manufacturer and retailer, Consumer goods pricing act

• Horizontal price fixing- two or more competitors explicity or implictly set prices, Sherman act

• Predatory pricing- low price to force competition out of business, Sherman act

• Geographical pricing, Robinson patman act, Federal trade commision act

• Price discrimination- same product different prices to different buyers, Robinson patman act, Federal trade commission act

• Deceptive pricing- bait and switch occurs, comparable price comparisons, former price comparisons, Federal trade commission act

Distribution traits

• Source of competitive advantage

• Evolutionary/dynamic

• Rapid change stimulated by shifts in technology

• Requires adaptive or anticipatory mindset to survive or thrive

Place (Distribution)

Decisions and activities that make products available to consumers when and where they want to purchase them, essential to success of other mix elements, range of options, difficult to change once established, goal is to reach prospective buyers

Logistics

Activities that focus on getting right amount of right products to right place at right time at lowest possible cost, lowest cost options won’t always meet customer needs effectively so there needs balance

Supply chain

All organizations and activities involved with flow and transformation of products from raw materials through to end consumer

Supply chain management

Integration and organization of information and logistics activities across firms for purpose of creating and delivering products and services that provide value to consumers

Upstream partners

Firms that supply raw materials, components, parts, info, finances, and expertise needed to create product or service

Downstream partners

Marketing channels or distribution channels that look toward customer, including retailers and wholesalers

Marketing channel

Outbound flow of finished products from producer to consumers

Marketing intermediaries

Middlemen linking producers to other intermediaries or ultimate consumers through contractual arrangements or through purchase and resale of products, goes by various names like agent, wholesaler, distributer, retailer

Agent

Independent individual or company who acts as primary selling arm of producer, takes possession of products but don’t actually own them

Wholesaler

Independently owned firms taking title to merchandise they handle, purchase product in bulk and store it until they can resell it

Distributor

Buys noncompeting products or product lines, warehouses them, and resells them to retailers or direct to end users

Retailer

Sells goods to consumer as opposed to wholesaler, typically purchases product sold to consumers

Marketing channel

Set of interdependent organizations helping make product or service available for use or consumption by consumer, major role is to make products available at right time at right place in right quantities, providing customer satisfaction should be driving force behind marketing channel decisions

3 Basic functions of intermediaries flowing products

• Transactional function

• Logistical function

• Facilitating function

Transactional function

• Buying- purchasing products for resale or as agent for supply of product

• Selling- contacting potential customers, promoting products, and seeking orders, ex. Kroger places in-store signage advertising several new varieties of Special K, RPF Specialty Food Brokers represents the products manufactured by Silva Sausage Company (small family-owned company) to major food chains in the U.S.

• Risk taking- assuming business risks in ownership of inventory that can become obsolete or deteriorate, ex. Major U.S. trucking company, hauls retail store merchandise for Home Depot and its contract states JB Hunt is responsible for breakage that occurs in transit

Logistical function

• Assorting- creating product assortments from several sources to serve customers, ex. Sysco assembles and distributes a range of food products, smallwares and tabletop items to fast food chains, such as Chipotle, McDonald’s, and Wendy’

• Storing- assembling and protecting products at convenient location to offer better customer service, ex. Dotcom Distribution leases its space to 20 different retailers that warehouse beauty products, toys, and other products

• Sorting- purchasing in large quantities and breaking into smaller amounts desired by customers, ex. Staff at Wegman’s places bottles of Dove Shampoo on shelf after removing them from cases of 24 that have been shipped to the store

• Transporting- physically moving product to customers, ex. UPS delivers small furnishings for Wayfair

Facilitating function

• Financing- extending credit to customers

• Grading- inspecting, testing, or judging products and assigning them quality grades

• Marketing information and research- providing information to customers and suppliers including competitive conditions and trends, ex. McKesson, a major wholesaler of medical supplies and equipment, aids hospitals and nursing homes in planning by providing data regarding recent industry trends

Time utility

Having product or service when you want it

Place utility

Having product or service available where you want it

Form utility

Enhancing product or service to make it more appealing to customer

Possession

Helping buyers take possession or ownership of product/service

Channel level

Layer of intermediaries that performs some work in bringing product and its ownership closer to final buyer, length of channel measured by number of intermediaries involved, direct has no intermediary levels while indirect has one or more levels, ex. Major food company sells its line of breakfast cereal to Wegman’s, Giant, and other major US grocery store chains who then sell these items to consumers has one level with the retailers as middlemen, recently-founded pet food company has a small sales force and cannot manage its relationships with all of the retailers in the US and this company sells its products to a wholesaler who, in turn, sells to the major retail chains, such as Petco and Petsmart has 2 levels of wholesaler and retailers as middlemen, manufacturer of yoga-related gear (apparel, mats, towels, bags) has decided to sell its products to consumers solely through its company website has no levels and is direct

Multichannel (omnichannel) marketing

Use one or more channels to reach multiple customer segments and leverage value adding capabilities of different channels

Corporate vertical marketing system

Combines successive stages of production and distribution under single ownership, ex. Kroger owning 37 manufacturing plants with backward integration, Ralph Lauren manufacturing clothes and owns clothing shops with forward integration

Contractual vertical marketing system

Consist of independent firms at different levels of production and distribution who join together through contracts, 4 types include manufacturer sponsored retail, manufacturer sponsored wholesale, service sponsored retail, and service sponsored franchise systems

Administered vertical marketing system

Coordinates successive stages of production and distribution through size and power of one of parties, ex. Apple and Best Buy since Apple dictates displaces, pricing policies, and shelf space

Horizontal marketing system

Two or more companies at one level join together to follow new marketing opportunity

Target market coverage

Asks which channel and intermediaries will provide best coverage for target market, market coverage equals number and kinds of outlets in which product will be sold, intensive distribution uses all available outlets in area to distribute product with low cost convenience products, selective distribution uses only some available outlets with shopping products and higher end, exclusive distribution uses single outlet in fairly large geographic area to distribute product with specialty products and luxury items

Buyer requirements

Asks which channel and intermediaries will best satisfy buying requirement of target market,

Intensity of distribution or market coverage

Number and kinds of outlets in which product will be sold

Intensive distribution

Using all available outlets to distribute product, low cost convenience products

Selective distribution

Using only some available outlets in area to distribute product, shopping higher end products

Exclusive distribution

Using single outlet in fairly large geographic area to distribute product, specialty products luxury items

Buying requirements

• Information- key concern when buyers have limited knowledge

• Convenience- multiple aspects like proximity, minimize time, easy to locate and navigate

• Variety- availability of different choices

• Pre or post sale services- important for items that require delivery, installation, or credit

Profitiability

Asses margins earned (revenue minus cost) for each channel member and channel as whole

Disintermediation

Cutting out marketing channel intermediaries by product or service producers or displacement of traditional retailers by radical new types of intermediaries, ex. Toys r us drove small toy stores out of business, Walmart and Amazon effected Toys r us bankruptcy

Retailing

All activities involved in selling products or services to final customers for their personal non business use, creates value for customer in various forms of utility like time, place, form, possession

Top 20 retailers list indicates…

Wide range of retail formats and strategies, there’s no typical retailers, predominance of brick and mortar retailers with approx 85% sales while retail sales of online retail outlets are 15.4%

Retailing classification schemas

Amount of service, product line, relative prices, organizational approach

Amount of service

• Self service- serves customers willing to perform their own locate compare select process, discount operations retailers selling convenience goods, ex. TJ Maxx, Publix

• Limited service- more sales assistance, carry more shopping goods, ex. Macys

• Full service- assist customers in every phase of shopping process, high end specialty stores and first class department stores, ex. Tiffany & Co, Sephora

Classifying stores by product line

• Specialty- narrow product line, deep assortment, ex. Sephora

• Department- multiple product lines, each operated as separate department, service oriented, ex. Macys

• Convenience- small self service, 24/7 operations, convenience items, ex. 7 Eleven

• Discount- standard merchandise, lower prices with higher volume, ex. Walmart

• Superstores- very large, meets consumers total needs, food and nonfood items, ex. Walmart

• Category killers- specialty superstores that carry deep assortment in particular category, ex. Home depot

Relative prices

Most retailers charge regular prices and offer normal quality goods and customer service, some offer higher quality goods and service at higher prices, several other types of retailers feature lower price including discount stores, off price retailers, factory outlets, warehouse clubs

Discount stores

Standard products at lower price, lower margins and higher volume

Off price retailers

Buys at less than regular wholesale prices and sells at less than retail, ex. TJ maxx

Factory outlets

Owned and operated by manufacturer, sells surplus, discontinued, irregular goods

Warehouse clubs

Limited selection of goods, no frill, membership fees, ex. Costco

Organizational approach

• Independent retailer- business owned by individual, accounts for largest number of retailers

• Corporate chains- multiple outlets under common ownership, strongest in department stores, food, drug stores, restaurants, size allows for buying power and promote efficiecny

• Retailer cooperative- group of independent retailers with central buying organization, joint promotions

• Franchises- contractual association typically based on unique product or way of doing business

As retailing changes and formats are redefined, differentiation is becoming increasingly difficult to achieve, assortment and services from various retailers are looking more alike so retailers must develop strategy guiding execution of marketing mix

Retail strategy

Retail segmentation and targeting, store differentiation and positioning

• Segmentation include geographic, demographic, psychographic, behavioral, multiple bases, store differentiation

• Store differentiation include product, services, people, image

• Retail positioning include more for more, more for less, etc.

Retail marketing mix

Product and service assortment, retail prices, promotion, distribution

How retailers use marketing mix

• Product assortment and services- assortment with highly targeted, unique products, services with level of service, atmosphere with color, scent, sounds, experience

• Price- decide on high markup on lower volume or low markup on higher volume

• Promotion- combination of sales, advertising, personal selling, direct and social media marketing

• Location- type of community and specific settings like shopping districts, power centers, lifestyle centers

Emerging trends in retailing

• Retail convergence- different retailers increasingly selling same products at same price to same customers

• Tighter consumer spending

• Rise of mega retailers- larger retailers squeezing out smaller competition, change in power structure within channel

• Green retailing- development of sustainable building design, construction and operations, promoting more environmentally responsible products, sustainable packaging

• Omnichannel retailing, careful channel integration- creating seamless cross channel buying experience that integrates in store online and mobile shopping