Pricing & promotion

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Lecture 9

Pricing & Promotion
Refer to any introductory marketing text

Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008

Slide 12.2

PRICE: A Definition
• Marketing involves the exchange of
something of value.
• Price is a statement of value because it is
the amount of money given in exchange
for a product or service.
• Price is an important component in the
marketing mix. In marketing, the strategic
skill is to build the products' worth and
increase its value to the consumer.
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WHAT IS PRICE?

Prices go by many names -
• rent, tuition, fee, fare, rate, interest, dues,
wages, premium, etc. -
• whatever it's called it is what one must give up
as an exchange for something of value

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Slide 12.4

PRICING - OVERVIEW (1)
• Consumers react to price more than they do
to other mix variables
• Most purchase decisions place price as the most
important consideration
• Impacts heavily on the exchange
• Decisions on setting price is often made
quickly after less analysis
• Often treated by product managers as
routine or intuitive, often based on cost
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PRICING - OVERVIEW (2)
• Cost based data is readily available in firm
• Product managers cannot charge price lower than cost (sets
floor)
• Customer more concerned about value rather than cost
• Price higher than value results in lost sales, leading to
lowering of price.
• Different prices produce different levels of demand
• Price is not determined by internal factors alone (costs) but
also by customers

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Slide 12.6

View of Pricing: Buyer vs Seller
Buyer View
• Price is something of value given up
• Purchasing power impacts on choices – price
determines what we buy
Seller View
• Price represents a revenue stream
• Contributes to profit
• Accumulation of costs
• Important in marketing mix

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Demand Curve

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Slide 12.8

Inelastic and Elastic Demand

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COSTS
• Costs alone should never determine price
• Costs have a critical role in formulating price
strategy
• Pricing decisions relate to sales volume
• Sales involve cost of distribution and marketing
• Effective pricing requires an evaluation of buyers
will pay and on this basis set quantities to produce
and markets to serve.

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Slide 12.10

EXAMPLE
Camera company Olympus
• Determined what features future customers would
value
• MR- focus groups, interviews, and a complete
competitor analysis (capabilities)
• Set a price point for a new compact camera at
$100
• Subtracted margins for dealers, import costs, its
own margin and arrived at a preliminary target
cost
• This target cost forced scientists to develop anew
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technology to meet the cost target

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Perceived Value
• Our reaction to price has a lot to do with
perceived value.
• Our notion what is a good and bad price.
• We compare price being charged to
perceived value or benefit that will arise
from purchase.
• We also compare price to a reference point
(like price paid before).

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Slide 12.12

Setting price

• The maximum price the product manager
can charge is the customer value.
• The minimum is the variable cost

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Price Bands Explained

• Prices can vary even within target segments
referred to as “price bands.”
• There is a positive relationship between
price and perceived quality.
• Curves in previous slide represent
distribution of prices within segment – more
the spread the wider the variation in price.

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Slide 12.14

Why do variations exist within
• Consumers become brand loyal to certain products
segments?
or suppliers
• In purchase decision they tend to rate price lower
compared to other factors eg. reliability, brand
equity, image, etc
• In some industries price is less visible (esp in
industrial products – working of a price list).
Compare this to a supermarket or shop where
price is displayed.
• The larger the number of suppliers and the more
intense the competition, the narrower the price
band.
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Some key pricing questions
• How consumers make purchase decisions?
• How important is price in the overall decision?
• How important is price in the purchase decision
process for different individuals?
• How important is (total) product to the customer?

• To answer these you need in-depth knowledge of
the customer

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Slide 12.16

An Illustration of the Gap between
Customer Value and Cost

$
Customer Value
Price (A) {keeping
value for firm – more
profit}

Price (B) { value
pricing}
Cost
0

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Overall estimates of customer
• value
Interview customers to determine economic
value or benefits of using the product
• Focus group and surveys
• Aims to measure willingness-to-pay

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Slide 12.18

Compositional approach and
• Direct customer questions ratings of
Importance about value
product attributes
• Customers rank order or rate the importance of
product attributes
• Compared to substitutes or competitors
offerings

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Consumers Internal Reference
• The “fair price, or what the product ought to cost
Prices
the customer
• The price frequently charged
• The last price paid
• The upper amount someone would pay
• The lower threshold or lowest amount a customer
would pay
• The price of the brand usually bought
• The average price charged for similar products
• The expected future price
• The typical discounted price
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Slide 12.20

Influences on the Product Manager’s Pricing
Decisions
Psychological aspects
• Reference prices
• Price/Perceived quality

Pricing objectives:
• Penetration Stage of the
• Skimming product life
• Customer value cost cycle
• Return-on-investment
• Stability
Industry conditions
• Threat of new entrants
• Power of buyers/suppliers
• Rivalry
• Substitutes
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Factors Affecting Price

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Slide 12.22

EXTERNAL FACTORS
AFFECTING PRICING
• Demand levels
DECISIONS
• Market structures
• Consumer Perceptions of Price and Value, price
sensitivity
• Demand-Price relationship, elasticity
• Competitors’ Prices and Offers
• Other External Factors- price protections

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Other Factors Affecting Price
• Stage of the product life cycle
• Category conditions
• Threat of new entrants
• Power of buyers/sellers
• Rivalry
• Pressure from substitutes
• Unused capacity

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Slide 12.24

Price & PLC
• Introductory Stage
Skimming or Penetration Strategy?
• Growth Stage
Price to gain or hold market share
Countering competitors’ pricing strategy
• Mature Stage
Constant price pressure
Price cutting
Lower margins
• Decline Stage
Low demand, low prices , slim margins
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Pricing Environment Analysis

• Threat of New Entrants
• Power of Buyers/Suppliers
• Rivalry
• Pressure from Substitutes
• Unused Capacity

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Slide 12.26

Market-Based Pricing Model
Logic Application
Pricing
Price set to meet customer needs, Price = $100
Logic
competition, and product Based on desired
positioning Starts product positioning
Here
Price discounted to achieve Price = $50
desired reseller margins Based on 50% retail margin

Net price set is selling price less Price = $40
distribution costs Based on 20% wholesale margin

Target margins established based Net Price = $40
on profit goals to the manufacturer

Cost targets established to meet Cost = $20
marketing objectives Unit margin= $20, % margin= 50%

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Source: Market-Based Management Strategies by R. J. Best, © 1997.
Adapted by permission of Prentice-Hall, Inc., Upper Saddle River, NJ.

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Cost-Plus Pricing Model
Logic Application
Price to customer = $75
Result is price set to customers
Based on stream of costs

Resellers mark up price to Price to retailer = $37.50
achieve desired margins Based on 50% retail margin

Set price to yield desired margin Price to Wholesaler = $30
and profits Based on 20% wholesale margin

At target volume, what margin is Desired Unit Margin = $10
needed for set profitability? % margin = 33%
Pricing
What is the total cost of making Logic Total Cost = $20
the product? Starts Fixed costs = $10, Variable = $10
Here
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Source: Market-Based Management Strategies by R. J. Best, © 1997. Adapted
Paul Trott, Innovation Management andof Prentice-Hall, Inc., Upper Saddle River, NJ.
by permission New Product Development, 4th Edition, © Pearson Education Limited 2008

Slide 12.28

COST-PLUS PRICING
• Historically common
• Pricing based on a fair return over all costs
• Starts with the cost of the product and desired
margin
• Price is set and product sold to channel
• Channel margins are added
• Why is it impossible to determine a products unit
cost before determining its price?
• Unit costs change with volume
• TC=FC+VC
• Unit cost is a moving target
• Price affects volume and Volume affects cost
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PROBLEMS WITH COST
PLUS PRICING
• Difficult to determine in advance
• Difficult to allocate joint costs to specific products
• Not based on realistic profit or market share objectives
• Ignores elasticity of demand
• Generally disregards competition
• Buyers more concerned about value for money
• Difficult to determine fair return
• Ignores capital requirements and ROI
• Many costs vary with volume (which depends on price)

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Slide 12.30

BE MARKET SHARE
• Market Share is contrained between 0 - 100 %
• BEMS a better framework from which to judge
profit potential and risk
• BEMS = (BE volume / Market Demand) x 100
• If Market demand = 1m units per year and BE
volume = 90,000
• BEMS = 9%
• If the firm’s target MS =10% there is risk of loss.
would feel more comfortable if BEMS was 3 - %

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QUESTION?Would market-
based prices differ in segments?
• Market-based pricing starts with customers
• Goal is to create greater customer value
• Different market-price strategies would be
developed in response to different customer needs
• A price sensetive segment would be most attracted
to low pice regardless of additional product
benefits
• A quality - sensitive segment may pay more for
extra benefits they desire (product featues, service,
brand)
• See example on mobile phones
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Slide 12.32

QUESTION?
Is there a relationship between price and
market growth
• Market growth and market demand are
often dependent on price levels
• At high prices many customers simply
cannot enter the market
• As price of mobiles phones, computers
decrease more customers enter the market
• Price therefore regulates both the size of the
market and how fast it will grow
• see example

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EXAMPLE
• At $5 the estimated demand is 9000 units
• Price elasticity is -2.20
• 1% fall in price = 2.2% rise in demand
• 10% fall in price = 22% rise in dd = 10980
• Can continue to lower price to make
demand grow till elasticity reaches -1.0. At
this point sales revenue is maximum. At
this point increase or decrease in price will
result in lower sales revenue (but not
necessarily profit)
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Slide 12.34

Price setting:
information needs
In order to set price, we need:
• An analysis of product costs.
• Expected profit levels.
• Market needs and wants.
• Competition and lead times.
• Expected buying responses of market segments.
• The key to determining price is the understanding
of the value that customers place on the product.

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Selecting the price strategy
• How much flexibility is there for price
levels How far above cost should a firm
price a new product — skimming versus
penetration options?
• How visible should price be in the
promotion of a new product?
• Illustrative pricing strategies (see exhibit
10.8)

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Slide 12.36

Pricing an innovative product

• Market Skimming Strategy

• Market Penetration Strategy

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MARKET-SKIMMING
• PRICING.
High initial prices to skim maximum profits
from each successive layer of the target
market.
• Skimming strategies typically set a price as
high as some segments will bear.
• Used when the cost of producing small
volume are not prohibitive.
• Works well only when product quality,
image, and innovation are sufficiently
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distinct Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008

Slide 12.38

EXAMPLE
• Market Skimming Pricing

Eg Polaroid’s original instant camera charged
the highest price it could
As segment got saturated it lowered price to
capture the next layer of the price sensitive
customers

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MARKET-PENETRATION PRICING.

• Some innovations are priced low upon
introduction in order to capture large market
share quickly thus penetrating the market.
• Works well in highly price sensitive
markets with volume potential.
• Helps accelerate overall market adoption
rates.
• Discourages competitors from entering.
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Slide 12.40

EXAMPLE
• Market Penetration Pricing
Eg Microsoft with Windows 95 set the price
as low as possible to win large market share
(when its costs began to fall it cut price
even further)

Eg Netscape browser started off free. Once it
captured 80%of market it introduced better
versions for a low price to retain customer
base.
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Question?

• How do you decide whether a low or a high
price strategy is appropriate for a new
innovative product?
• What would you need to consider?

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Slide 12.42

The Communications Mix
Company mission
or vision

Overall business plan

Unit marketing plan

Unit communication plan
and objectives

Communications strategies

Advertising Public relations Sale Direct Packaging
promotion marketing and graphics
Advertising objectives

Advertising
strategy
Advertising
tactics
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Strategic Advertising Objectives

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Slide 12.44

Types of Advertising Objectives

• Customer-Focused Objectives
• Exposure-Oriented Objectives
• Specific Objectives

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Factors Affecting the Advertising and Promotion Budget

1. The product is relatively standardized (as opposed to
when the product is produced or supplied to order).
2. There are many end users.
3. The typical purchase amount is small.
4. Sales are made through channel intermediaries
rather than directly to end users.
5. The product is premium priced.
6. The product has a high contribution margin.
7. The product or service has a small market share.

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Slide 12.46

Trade Promotions
• Financial incentives and discounts given to
retailers and distributors
• Slotting allowances, point of purchase
displays, contests, training programs
• Aim to secure shelf space and prominance in
the store
• A brand at eye level increases sales

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SALES PROMOTION STRATEGY

SALES PROMOTION consists of various
incentives, mostly short term, intended to stimulate
quicker and/or greater purchase of particular
goods/services by end-user consumers or value
chain organizations.

The strategy process is similar to the design of
advertising strategy.

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Slide 12.48

Aims of consumer promotions
• Change choices
• Enhance the attitudes and loyalty towards a
brand
• Sampling – to create brand associations and
kick-start WOM
• Markets are becoming more precise in how
they deliver samples – point of use – eg Dove
body wash and deodorants handed to gym
users at end of session.
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Why do markets sponsor events?
• To identify with particular target market or lifestyle –
linking brands to events – eg Subaru – skiing events –
4WD cars
• To increase awareness of company or product
• To reinforce band association / perception – eg Seiko
as official timer at Olympics
• To enhance corporate image and commitment to
community- eg Colgate Palmolive sponsoring the
Starlight Foundation

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Slide 12.50

Impacts of Promotion

• Temporary retail price reductions substantially
increase sales
• The frequency of deals changes the
consumer’s reference price
• Cross-promotional effects are asymmetric, and
promoting higher quality brands affects
weaker brands

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Impacts of Promotion (cont)

• Display and feature advertising have strong
effects on item sales
• Advertised promotions can result in
increased store traffic
• Promotions affect sales in complementary
and competitive categories

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Slide 12.52

Composition of Promotion Strategy

Interactive/Internet
Marketing

Direct Advertising
Marketing
Promotion
Components
Personal Sales
Selling Promotion

Public
Relations


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EXAMPLES OF COMMUNICATION
OBJECTIVES
 Need Recognition

 Finding Buyers

 Brand Building

 Evaluation of Alternatives

 Decision to Purchase

 Customer Retention

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