13
Price (Subject) / Price Implemenation (Lesson)
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- Capturing value: The role of pricing Price (value capture) excellence requires… “the coordination of interrelated marketing, competitive, and financialdecisions to set prices profitability.” “...much more than setting prices. It is about§ targeting markets that can be served profitably,§ communicating information that justifies price levels, and§ managing pricing processes and systemsto keep prices aligned with value received.”
- What is price implementation about? • Price implementation means translating strategic and operativeprice decisions into practical application. • The challenge is to lead all stakeholders to accept thecompany‘s pricing strategy as well as the prices calculated. • Price implementation requires managing internal and externalstakeholders in the price management process.
- Stakeholders in the pricing process Internal price stakeholder: Main actors in strategy and calculation (e.g. marketing director, sales director, controlling+ Sales Force+ Subsidaries+ Purchasing, logistics External price stakeholder: WholesalersRetailersConsumersCompetitorsJournalistsNGOs
- Main tasks of Internal price implementation • Inform: communicate pricing decisions (strategy, calculation methodsetc.) and tools (price lists, discount systems etc.) • Explain: provide the reasons for pricing decisions and the choice forpricing tools to create transparency and make objectives clear • Enable: put in place price information systems and train employees forthe use of pricing tools, for negotiations with customers etc. • Motivate: Ensure that employees are willing to implement the strategy,use pricing tools and maintain price levels:- Monetary incentives: e.g. variable salary based upon contribution margin- Non-monetary incentives: e.g. awards, status symbols
- Key challenges in external price implementation from an industrial company‘s vantage point Stakeholder ChallengeWholesalers • Maintaining own margin • Ensuring wholesale price level is in line with marketing strategyRetailers • Maintaining own margin • Ensuring retail price level is in line with marketing strategyConsumers • Ensuring price acceptance / willingness-to-pay • Maintaining quality image through corresponding price levelCompetitors • Communicating price intentions in a legal mannerJournalists • Ensuring understanding of and acceptance for pricing practicesNGOs • Ensuring understanding of and acceptance for pricing practices Depending on the channel constellation, either the manufacturer orthe retailer set prices for final customers. They need to:- Inform customers about prices- Provide reasons to customers to accept the prices
- Instruments of external price implementation Price presentation & advertisment: • Price labels -> price tags, price lists, price search systems (internet)• Price optics -> price perception (cf. chapter 2)• Price argumentation -> formulation of value proposition• Price image Price agreements:• Price guarantees -> reduce price risk for customer• Price adaptation clauses -> share cost risk with customer
- Reference prices Formation of a reference price • The use of an advertised reference price with an advertised sale pricefocuses consumers’ attention on the difference between the two prices.• This leads to a perception of greater value concerning the purchase ofthe product.• In addition, consumers are less likely to search other retail locations andhave an increased likelihood of purchase “Moon prices”:• Indicating external reference prices that have never really been charged:e.g. 12,99 (only maintained during one hour) -> 5,99 Repeated discounting decreases the reference price of the product1. Previous low prices (compared to the current price) are predicted to cause alow adaptation level, which is itself predicted to cause the current price to beperceived as relatively expensive, thus decreasing transaction utility anddemand.2. Both the price promotion frequency and the size of price discounts have asignificant adverse impact on a brand's expected priceDiscounts should be advertised differently according to theamount of savingsE.g. sales involving a high percentage of savings but offering little in termsof the absolute amount of money saved might be best advertised in termsof the percentage of savings offered.
- Developing Value propositions Challenge:• Value propositions must match needs / problems / interests.• Value propositions need to be more than “just communication”,they need to reflect the true characteristics of an offering.• Value propositions must be convincing (demonstration /documentation of value).Objective:Convince the customer of the superior value of the company’soffering through the use of well-crafted and persuasive valuepropositions. When formulating a value proposition, a firm should distinguish betweendifferent points (elements of the value proposition). Point of difference: Aspect of the value proposition where the offering ofcompany A differs from the offering of competitors B, C, etc. Point of parity: Aspect of the value proposition where the offering ofcompany A is equal to the offering of competitor B or C. Point of contention: Aspect of the value proposition that customers or competitorsmay question, e.g. because• it is not true, or• there is no evidence for its truth.
- Value Proposition Types “All benefits” approach:Simple and exhaustive list ofall assumed benefits of anoffering (from the supplier’spoint of view)Based only on knowledge ofown market offering “Favorable points of difference” approach:List of points of differencefrom the next best alternativeoffers (competitors).Knowledge of own marketoffering and next bestalternative(s) “Customer focus” approach:Supplier demonstrates anddocuments its superior value,but only on the few points ofdifference that matter most tothe target customer.Knowledge of how ownmarket offering deliverssuperior value to customer,compared with next bestalternative Substantiating Customer Value PropositionsObjective: to demonstrate and document the customer value gains, in an easily andunderstandable manner for the customer.Value equation:• quantifies the relative added value and cost savings [into dollars, euros etc.] of thesupplier’s offering against the one from its competitors.• Requires close collaboration between suppliers and customers in order to collect real datafrom the customers’ business operation
- A company‘s price image A price image is an overall perception customers develop as to whethera producer or distributor offers – in general – products at rather low orrather higher price levels.Price images replace detailed price knowledge about a producer‘s ordistributor‘s prices. They are often based on limited experiences withthe firm.Price images can be influenced through advertising, price promotionsand the like. Bsp. Mediamarkt
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- Relationship between manufacturer and intermediary • Main issues are1. Purchasing price:at what price does the manufacturer sell goods to the intermediary?2. Store price:at what price does the intermediary sell goods to his customers? • Just as prices depend on demand conditions, markups increasewith the strength of demando If more customers demand more of a product, then the firm is ableto command a higher markup• Markups also depend on the elasticity of demando Demand is said to be elastic if customers are very sensitive to theprice, that is, if a small increase in the price results in a largedecrease in the demando Markups are smaller when demand is more elastic• Markups also fluctuate with the intensity of competitiono If competition is intense, it is more difficult for
- Relationship between manufacturer and intermediary • Manufacurers‘ and intermediaries‘ objectives are often incongruent• Intermediaries attempt to optimize the profitability of an assortment (mix ofproducts sold under private labels and national brands)• Manufacturers attempt to optimize the profitability of their own assortment• Manufacturers attempt to maintain the intended price positioning of the products intheir assortment – but do not set prices for final customers• Intermediaries use price promotions in order to attract customers to their stores –they will use the brands that allow attracting customers in the short term and havelittle concern for the long term positioning of manufacturer (national) brands
- Channel pricing systems • Selective distribution systems• Price maintenance activities--> retailer-directed incentives (monetary and non-monetary)--> relationship marketing