Marketing Final Study Guide

1. Product Mix Pricing Strategies

1. Product Line Pricing:

   • Price products at different levels within the same product line.

   • Consider cost differences, customer perception, and competitor pricing.

   • Example: Apple pricing its MacBooks by performance and features (Air, Pro, Pro Max).

2. Optional Product Pricing:

   • Base product priced separately; add-ons offered for extra charges.

   • Example: Airlines charging for checked baggage, extra legroom, or meals.

3. Captive Product Pricing:

   • Low price for the main product, high prices for required secondary products.

   • Example: A gaming console is affordable, but games and accessories are expensive.

4. Product Bundle Pricing:

   • Combine multiple products at a reduced price.

   • Encourages sales of less popular items.

   • Example: Cable providers bundling TV, internet, and phone services.

2. Major Pricing Strategies

1. Value-Based Pricing:

   • Price reflects perceived value to the customer.

   • Use tools like the Improvement Value Method or Cost of Ownership Method.

   • Example: LED bulbs cost more but last longer, offering greater value over time.

2. Cost-Based Pricing:

   • Price = Cost + Markup (%).

   • Easy to calculate but ignores demand and competition.

   • Example: Selling a widget for $12 after adding a 10% markup to its $10 cost.

3. Competition-Based Pricing:

   • Price determined by competitors' pricing strategies.

   • Useful when products are similar and price-sensitive.

3. New Product Pricing Strategies

1. Market Skimming Pricing:

   • High initial price to maximize profit from early adopters.

   • Gradually lower price to attract price-sensitive customers.

   • Example: New tech gadgets are priced high during launch.

2. Market Penetration Pricing:

   • Low price to gain market share quickly.

   • High-risk due to initial low profits.

   • Example: Streaming services offering cheap subscriptions at launch.

4. Channels of Distribution

• Marketing Channels:

  • Path products take from production to consumption.

  • Includes manufacturers, wholesalers, retailers, and customers.

  • Direct Channels: Manufacturer sells directly to consumers.

  • Indirect Channels: Use intermediaries like wholesalers or retailers.

• Multi-Channel Distribution:

  • Companies use multiple channels to reach different customer groups.

  • Example: Apple sells online, in its stores, and through third-party retailers.

• Breadth of Distribution:

  • Intensive Distribution: Available everywhere (e.g., soft drinks).

  • Selective Distribution: Limited outlets for specialized products (e.g., designer clothing).

  • Exclusive Distribution: One or few outlets (e.g., luxury cars).

5. Retailer Classifications

1. Service Levels:

   • Self-Service: Customers handle their own shopping (e.g., supermarkets).

   • Limited Service: Some assistance provided (e.g., department stores).

   • Full Service: Personalized service for premium products (e.g., luxury stores).

2. Product Line Breadth and Depth:

   • Specialty Stores: Focus on specific categories (e.g., shoe stores).

   • Department Stores: Wide variety, divided into departments.

   • Supermarkets: Groceries and household goods.

   • Convenience Stores: Small, quick-access items (e.g., gas station shops).

3. Relative Pricing:

   • Discount stores, off-price retailers, factory outlets, warehouse clubs, and premium stores.

4. Organizational Structure:

   • Corporate-owned, independent, or franchises.

6. Break-Even Analysis

• Determines the point where revenue equals total costs.

• Formula: Fixed Costs ÷ (Price - Variable Costs).

  • Example: A hotel with $100,000 fixed costs and $40 profit per booking breaks even after 2,500 bookings.

7. Lifetime Value (LTV) of a Customer

• Definition: Total profit a company expects to earn from a customer over their relationship.

• Key Metrics:

  • Acquisition cost.

  • Retention rate.

  • Average customer profit.

• How to Improve LTV:

  • Better targeting, reduced costs, and improved retention.

8. Strategies for Improving LTV

1. Improving Response Rates:

   • Use targeted messaging and appropriate media.

2. Reducing Acquisition Costs:

   • Focus on cheaper marketing channels.

3. Increasing Retention:

   • Address dissatisfaction, offer loyalty rewards.

9. Case Examples

1. Volvo Truck Advertising:

   • Ad cost: $2.7M.

   • Profit per truck: $12K.

   • Break-even units: 225 trucks.

   • Result: Sold 266 trucks, generating $32M in revenue.

2. Kindle Fire Pricing:

   • Sold at a loss but profited through content sales.

1. Unit Cost Formula (Cost-Based Pricing)

Formula:
Unit Cost = (Fixed Costs ÷ Units Produced) + Variable Costs per Unit

Explanation:
This formula calculates the cost of producing a single unit of a product, taking into account both fixed costs (e.g., rent) and variable costs (e.g., materials and labor). Fixed costs are divided by the number of units produced, and the variable cost per unit is added.

2. Price with Markup (Cost-Based Pricing)

Formula:
Price = Unit Cost × (1 + Markup %)

Explanation:
This formula sets the selling price based on the unit cost and desired markup. Markup is the percentage added to the unit cost to ensure profitability. For example, if the unit cost is $10 and the markup is 20%, the price will be $10 × (1 + 0.20) = $12.

3. Break-Even Analysis (No Profit or Loss)

Formula:
Break-Even Units = Fixed Costs ÷ (Price per Unit - Variable Cost per Unit)

Explanation:
This formula calculates the number of units that need to be sold to cover all fixed and variable costs. Fixed costs are the same regardless of how many units you produce or sell, while variable costs change with each unit. The result tells you how many units must be sold to break even.

4. Break-Even with Target Profit

Formula:
Break-Even Units (with Target Profit) = (Fixed Costs + Target Profit) ÷ (Price - Variable Cost)

Explanation:
This formula extends the basic break-even formula by including a target profit. It calculates how many units you need to sell to cover both fixed costs and achieve a specific profit. For example, if your fixed costs are $100,000 and you want to make $50,000 profit, you will need to sell more units than the basic break-even point.

5. Lifetime Value (LTV) of a Customer

Formula:
LTV = (PV of Future Profits - Acquisition Costs) ÷ Number of Acquired Customers

Explanation:
Lifetime Value (LTV) measures how much profit a company expects to make from a customer over the entire duration of their relationship. This formula helps businesses understand how much they should spend to acquire customers and how much a customer is worth over time.

6. Improvement Value Method (Value-Based Pricing)

Formulas:
Incremental Benefit = Improvement Value × Benefit Weight
Final Price Increase = Sum of Incremental Benefits × Benchmark Price

Explanation:
This method calculates the perceived value of a product improvement. The "Improvement Value" is how much better the new product is compared to an existing one. The "Benefit Weight" assigns a percentage value to each feature (e.g., battery life). The final price increase is based on the total benefit from improvements.

7. Cost of Ownership Method (Value-Based Pricing)

Formula:
Final Price = Benchmark Price × Relative Ownership Cost Ratio

Explanation:
This method focuses on the total cost of owning a product over its lifetime. The benchmark price is the price of a standard product, and the relative ownership cost ratio compares the ownership costs of the improved product (e.g., an LED bulb vs. a regular bulb). This formula calculates the final price based on long-term savings or costs.