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2 Marketing (Fach) / ACTIONS- Price (Lektion)
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- -14.1 Importance of Pricing Product, promotion and place lie at the heart of fims effort to create value for its customers; which represents cost to the firm (Value Created) Price is the firm’s attempt to capture some of that value and generate revenues (and profits) (Value Captured) Objective of Pricing: Specify how Value Created can be divided between the customers (= incentive to buy) and the firm (covering cost of value-creation activities + provides funds for profit and reinvestment in the firm) Power of Pricing Fastest and most effective way for maximum profit is to get its pricing right. The right price can boost profit faster than other profit levers (11% vs volume 3%) Across Industries: Retail 20%, Agriculture 10% Across Retail Profit Levers: Price 20%, AVC 15%, Volume/ FC 4%
- -14.2 Approaching the Pricing Decisions - Cost Given an understanding of consumer needs and benefits offered by the product, prices should be set relative to competition to provide superior value for the target customers and the company. Customer - Cost - Competitor - Capacity - Regulation (2) What is included in the price of the product or service? Airline ticket = Base airfare + Fuel charges +Security fees +Passenger facility charge +Online booking fees + Govt tax (3) Channel Fees: Pocket Price influenced by The unit price of the product to dealers and distributorsThe manufacturer’s suggested retail price to the end consumerThe terms and conditions: Quantity discounts Cash discounts / Penalties for late payment Consumer price promotions Payment Schedule Shipping terms (FOB?) 100 % = Standard List Price - Distributor discount - End-Customer discount 66 %= Invoive Price - Cash Discount - Volume rebate - Freight 50% = Pocket Price
- -14.5 Pricing Strategies - Price Customization UNDESTAND CUSTOMERS Nature of Use Intensity of Use Competition Tastes STRATEGIES TO PRICE DIFFERENTIATE Controlling Availability Buyer Characteristics Transaction Characteristics Product-Line Offering
- -14.3 Concept of a Price Response Function Yes/No Case: Customer buys either one unit or does not buy the product at all. Reservation Price: Perceived Value (max Price willing to Pay) = Utility influenced by TEV of product for a particular buyer influenced by how well company’s marketing efforts communicate TEV If P < Perceived Value= Customer buys product if the price is less than reservation price. -> Quadrat -> Treppe Variable Quantity Case: Customer buys less or more units depending on the price. Comparisons of price and utility are made for each unit of the product. Diminishing marginal utility. -> Treppe -> Linie
- -14.4 Understanding Price Elasticity of Demand = % change in sales volume / % change in price Expert judgment: Draws on the history of using managers’ judgments to calibrate a market response function.Example: New consumer nondurable to be introduced into three countries, with a uniform price across countries. Marketing managers in each country asked to provide the following estimates:– The lowest realistic price and the sales expected at this price in the first year– The highest realistic price and the associated sales– The expected sales at the medium price Customer surveys: Direct questioning of WTP to observe reeactions to certain price levels “Would you buy the product at this price?”– Single price point per respondent– Multiple price points per respondent van Westendorp Price Sensitivity Meter: "At what price would you consider this product to be expensive?"– Conjoint analysis Price experiments– Simulated shopping task– “In-market” “Biz Ware” is marketing a software product to other companies.What should the sales message for its new national campaign look like?Tested via scripts at call centre, email, direct mail solicitations. Test 8 out of 16 combinations. Infer response to other combinations. Price 1 ($150), Message 2 (Power), and Promotion 2 (Free Gift) generates the greatest demand. Historical market data: Should be determined using a market response function rather than the “raw” data.
- -14.4 General Indicators of Low Price Sensitivity Alternatives Few substitute products available Buyers are less aware of substitutes Buyers cannot easily compare the quality of substitutes Complements: The product is used with previously purchased assets Cumulative Cost The product is purchased infrequently The expenditure is a smaller part of buyer’s total income The expenditure is small compared to the total cost of the end product Part of the cost is paid by another party The switching costs are high Features The product has high quality, prestige or exclusiveness High costs of “failure” / product performance matters
- -14.5 New Product Pricing Strategies - Skimming Policy of high initial prices that skim the cream of demand. Prices begin high to extract the maximum surplus from those who are willing to pay premium prices for the new product. Prices decline as more price-sensitive segments are targeted in turn. Helps recover up-front investments in product development and introductory marketing. High price level encourages entry unless the firm can extend its monopoly status (patent protection). Slower rate of diffusion, giving competitors time to imitate or leapfrog.
- -14.2 Experience Curve Economies of experience are reductions in cost that come with increases in cumulative volume of output (cf. economies of scale, which depend upon the current volume of output). Each time cumulative volume doubles, costs fall by a constant and predictable percentage Costs decline at a decreasing rate as volume accumulates cost of nth unit = cost of first unit × cum. volumeln 𝑘𝑘 /ln (2) For an 80% experience curve (k = 0.8), the cost will drop by 20% each time volume doubles. Reasons for the effect include: Labour efficiency Standardization, specialization, and methods improvements Better use of equipment Product redesign The experience curve effect can come to an abrupt stop as existing processes become obsolete and the firm must upgrade to remain competitive: Competitors introduce new products or processes that require a response Key suppliers stop producing key components Changes in regulation require you or your suppliers change the product design or manufacturing processes
- -14.3 Approaching the Pricing Decision - Value-Based Pricing Define the Feasible Zone TEV: Influenced by customer needs and preferences TEV = Cost of next best alternative + value performance differential TEV has to be relative to the next-best alternative Value a fully informed customer should be willing to pay <- TEV & Marketing Efforts Upper Bound: PV: Less than TEV, i.e. due to awareness of features or benefits, skeptical, relevance – influenced by marketing Lower Bound: COGS 1) UNDERSTAND NEXT BEST ALTERNATIVE 2) UNDERSTAND PERFORMANCE DIFFERENTIAL 3) MARKET RESEARCH REVEALING BELIEFS 4) PV = PRICE WITH REVEALED BELIEFS
- -14.5 New Product Pricing Strategies - Penetration Policy of low prices from the outset to aggressively penetrate the market Conditions under which the strategy makes sense:– Price-sensitive customers in the mainstream market.– Short- and long-run cost benefits from scale economics and experience effects– Product characteristics are well understood by mainstream customers (incremental rather than discontinuous innovations)– The threat of competitive entry
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