Marketing (Subject) / Price (Lesson)

Heft 3 2/2

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• buy in, follow on strategy cheap razor expensive blades all other rivals must follow! very attractive strategy
• experience curve effect learning curve = only labor experience curve =all the value-added costs related to a product labor, manufacturing, marketing, sales, administration, etc. total unit costs can be reduced by a certain percentage with each doubling of productiontypically: 70% curve = decline in costs by 30% with each doubling
• global pricing contracts increasingly global customers will pressure suppliers to accept "global pricing contracts" GPC purchasers may promise: guaranteed production volumeimproved economies of scale and scopesuppliers must take 3 key decisions: pursue GPC?how negotiate best terms?how to keep global relationship on track?the best tool for suppliers is solid info about customers -> sensible counterproposals
• influencers that reduce customers sensitivity to price (9) Nagle 1987 - price sensitivity reducers distinctive product greater perceived quality less awareness of substitutes in the markets difficulty in making comparisons  price of product is a small proportion of total expenditure increased perceived benefit product is used in combination with a product bought previously costs are shared with other parties product or service cannot be stored
• market pricing similar products exist alreadybased on competitors priceneed: Thorough understanding of product costsreactive approachretrograde calculation = backward price escalation calculation - from marketplace-> satisfactory contribution margin? go ahead
• new products - skimming strategy + 4 problems skimming strategy:(also called time segmentation) start: skim small insensitive segmentsmature: penetrate problems: small market share makes the firm vulnerable to aggressive local competitors maintain high-quality product requires heavy resources visible local presence makes entry in distant markets difficult grey marketing (parallel import)if product is sold more cheaply in another country
• new products penetrating strategy - 3 premises penetrating: 1. low initial price - penetrating quickly and deeply 2. economies of scale + learning effect -> falling costs 3. cut prices appropriate when: price elasticitycompetition threatopportunity to reduce costsAlert: Can be appropriate for some timemany firms overuse this approach - kamikaze pricing - no one wins
• price bundling - McDonald's - buy the combo- vacation bundle depends on peoples preferences better: Array of choices offered - eg telephone company problem: when client sees a cheap price, but later its more expensive
• price changes price charged → demand demand curve = number of units the market will buy in a time period at different prices normal case: price and demand are inversely related+ price - demand+ demand - price when?- change prices of existing priduct when new product has been lauched- or when changes is overall market conditions occur percentage sales volume increase or decrease required to maintain the level of profit How can price be manipulated to keep total profit contribution? Example:product contribution margin 20%price reduction 5%how much sales volume should be increased? before price reduction per product - sales price 100GE- variable costs per unit 80GE- contribution margin 20GEtotal contribution margin: 100 units x 20GE = 2000GE after price reduction (5%) per product- sales price 95GE- variable cost per unit 80GE- contribution margin 15GEtotal contribution margin: 133 units x 15 GE = 1,995GE as a consequence of 5% price reduction a 33% sales increase is required
• price escalation 4 options against, in international markets = all the added stages in the supply chain alert: Concern price for final customer - effect on demand!! especially problem in cross-border transactions available management options against price escalation: rationalize distribution processdo more in-house or circumvent members lower export price local production pressure supply chain membersto accept lower profit margins
• pricing - overview most important of the marketing mixmultidimensional - different meanings and implications for manufacturer, supplier etc.affects revenue and customer behaviorprofit generatornarrowest sense: money charged for a productbroadest sense: sum of all values customer gives up topics: competitor price responsebreak-even pricingbreak-even market sharethe pricing framework (internal vs external factors)market value-based pricingcost-based pricing pricing services vs. pricing products pricing new productsskimming and penetratingmarket pricing price changes experience curve pricing product line pricing price bundling pricing different segments relationship pricing global pricing contracts
• value-based pricing versus cost-based pricing value-based pricing price reflects value not simply costsunderstand customers and competitive marketplacevalue adding pricing strategiesattach value - differentiate product - price highercost-based pricing  traditional approachignores customer and competitionbecomes less popular price has to reflect customers value but added value also costs more... find right balance: additional costs --- price accepted Example: Pricing research in the early stage of pharmaceutical developmentceiling and floor pricesinitial price range - slowly narrowdefine upper limit
• pricing framework environmental factors national government control- tariffs (increase price directly, cannot be absorbed)- quotas (indirectly) + domestic products often price-controlled: health educationfoodother essentials also important: fluctuation of the currency
• pricing framework firm-level factors - 3 influencers - example Japanese firms influencers on international pricing: past and current organizational philosophyorganizational policymanagerial policy-> pricing as a short-term tactical tool Example Japanese firms- especially Japanese firm have entered international markets- pricing low - branding and gaining long-term market share
• pricing framework internal factors (4) external factors (3) pricing decisions a) internal factors marketing objectivesmarketing mix strategycostsorganizational considerations external factors nature of the market demandcompetitionother environmental factors
• pricing framework market factors 3 competitor market structures purchasing power of customerscompetition pressurecompetition pressure: pure competitionmany buyers and sellers trading a uniform commoditywhat, financial securities oligopolistic competitiona few large sellers (mostly B2B)highly competitiveprice main competitive tool pure monopolyone seller dominates- government (US Postal Service)- private regulated monopoly (a power enterprise)- private unregulated monopoly (De Beers and diamonds)
• pricing framework product factors influencers  unique and innovative featuresavailability of substitutesservice, manufactured good, commoditynecessity to adapt or modify the product by firmrequired services around the good
• pricing segments (4) adjust prices to different segments regarding their willingness, not costs! conditions: segmentable marketdifferent degrees of demandmore revenue than costs on segmentingsegmented prices should reflect real differences in customers perceived valueotherwise resentment on the long-run 1. geographic segments    eg grocery sellers - same city different prices 2. usage segments    frequent shopper card 3. time segments (off-peak pricing)    restaurants, amusement parks, airlines, hotels    product cannot be stored    welcome add on revenue    post-Christmas sales    problem: People learn 4. demographic segments    students, children, seniors - discount    flights - charge less for children because families are more price sensitive than business     
• pricing services pricing products service: more difficult to price!define cost and define quality?higher fix costslower variable costsmuch demand for immediate service - but speed also brings higher costs!- overtime wages- equipment
• relationship pricing pricing &developing and maintaining long-term customer relationships cheap prices to win customers is not bestcustomers then easily switch better: discounts on large purchasesdiscount when more different services are purchased together-> closer relationship + exit barrierspricing is becoming more fluid online mediumtailored immediatelysupermarket digital price lablesdynamic pricing is the future
• break-even market share break-even volume unconstrained number - hard to comparebreak-even market share = constrained number break-even market share = break-even volume / total market x 100 - 5%- 10%- 20% market share needed - OMG
• break-even pricing accountant approach - purely based on costs number that need to be sold to be in ZERO information given: profit or losses at varying levels of pricesbreak-even points at varying levels of priceeffect on break-even point and profits or losses of costs change calculation: break-even volume (point) = fixed costs / contribution per unit contribution per unit = selling price - variable costs per unit  
• break-even pricing approach - evaluation 5 problems ignored demand ignores competitorsand all other internal and external factorsfocus on costs rather than what customer is willing to paytechnical problem: define overheads in multi-product companies economist model & accountancy model only work together!
• competitor price response internal forces (6) external forces (6) lower prices - competitor follows = lower share gain!higher prices to improve margins - competitors don't follow = loose market shareWHAT WILL MY COMPETITORS DO? Response to price cut Competitors Characteristics/Internal Forces: Variable Cost structurehigh → low response probabilitylow  → high response probability Capacity Utilizationfull  → low response probabilitylow → high response probability Product PerishabilityNone  → low response probabilityhigh → high response probability Product differentiationhigh  → low response probabilitynone → high response probability Competitior Financial positionpoor  → low response propabilitystrogn → high response propability Strategic Importancelow  → low response probabilityhigh → high response probability Demand Forces: Price Elasticityinelastic → low response probabilityelastic → high response probability Efficiency in Price Shoppinglow → low response probabilityhigh → high response probability Costumer loyaltyhigh → low response probabilitylow → high response probability market growth ratehigh → low response probabilitylow → high response probability complementary productsnone → low response probabilityimportant → high response probability Substitute productsnone → low response probabilitymany → high response probability

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