Chapter 10 & 11 Pricing
Pricing
Price is the only element in the marketing mix that produces revenue; all other elements represent costs.
Two basic approaches to pricing:
Value-based pricing is customer driven. Price is considered before the marketing program is set.
Cost-based pricing is product driven.
Customer value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then set the price. Price is considered along with the other marketing mix variables before the marketing program is set.
Good-value pricing is offering just the right combination of quality and good service at a fair price. In many cases good-value pricing includes less expensive items. Examples include Taco Bell and McDonald’s and their “value menus.”
Value-added pricing is the strategy of attaching value-added features and services to differentiate their offers and thus support higher prices.
Everyday low pricing (EDLP) involves charging a constant, everyday low price with few or no temporary price discounts.
High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk.
Cost-based pricing adds a standard markup to the cost of the product.
Types of Costs
Fixed costs (also known as overhead) are costs that do not vary with production or sales level. These costs include: rent, heat, interest.
Variable costs vary directly with the level of production. They are called variable because their total varies with the number of units produced. Examples include packaging and raw materials.
Experience or learning curve is when average cost falls as production increases because fixed costs are spread over more units.
The simplest pricing method is cost plus pricing—adding a standard markup to the cost of the product.
Markup pricing remains popular because sellers are more certain about costs than about demand. This method also keeps price competition down.
The major downside is that the method ignores demand and competitors’ prices.
Break-even pricing is the price at which total costs are equal to total revenue and there is no profit.
Target profit pricing is the price at which the firm will break even or make the profit it’s seeking.
Overall Marketing Strategy, Objectives, and Mix
General pricing objectives might include survival, current profit maximization, market share leadership, or customer retention and relationship building.
Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing program.
Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge.
Target costing starts with an ideal selling price based on customer-value considerations, and then targets costs that will ensure that the price is met.
Organizational Considerations
In small companies, prices are often set by top management rather than by the marketing or sales departments.
In large companies, pricing is typically handled by divisional or product line managers.
In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges.
In industries in which pricing is a key factor, companies often have pricing departments to set the best prices or to help others in setting them.
Pure competition: The market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price.
In a purely competitive market, sellers do not spend much time on marketing strategy.
Monopolistic competition: The market consists of many buyers and sellers who trade over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers.
Oligopolistic competition: The market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies.
There are few sellers because it is difficult for new sellers to enter the market.
Pure monopoly: The market consists of one seller. The seller may be a government monopoly, a private regulated monopoly, or a private non-regulated monopoly.
Normally, demand and price are inversely related.
Higher price = lower demand
For prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality.
Marketers need to know how sensitive customers are to changes in price and how this change impacts demand.
Elasticity of demand: the percentage change in unit sales that results from a percentage change in price. When changes in price have large effects on the amount demanded, demand is elastic
Sometimes a firm’s pricing strategy involves pricing its wares near, at, above, or below the competition.
In assessing competitors’ pricing strategies, the company should ask several questions.
How does the company’s market offering compare with competitors’ offerings in terms of customer value?
How strong are current competitors and what are their current pricing strategies?
How does the competitive landscape influence customer price sensitivity?
Economic conditions can have a strong impact on the firm’s pricing strategies.
The company must also consider what impact its prices will have on other parties in its environment, such as resellers and the government.
Chapter 12 Marketing Channels
Marketing Channels
Producers try to forge a distribution channel—a set of interdependent organizations that help make a product or service available for use by the consumer or business user.
Intermediaries offer producers greater efficiency in making goods available to target markets. Through their contacts, experience, specialization, and scale of operations, intermediaries usually offer the firm more than it can achieve on its own.
Members of the marketing channel perform many key functions. Some help to complete transactions:
Information: Gathering and distributing marketing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange
Promotion: Developing and spreading persuasive communications about an offer
Contact: Finding and communicating with prospective buyers
Matching: Shaping and fitting the offer to the buyer’s needs, including activities such as manufacturing, grading, assembling, and packaging
Negotiation: Reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred
Others help to fulfill the completed transactions:
Physical distribution: Transporting and storing goods
Financing: Acquiring and using funds to cover the costs of the channel work
Risk taking: Assuming the risks of carrying out the channel work
A channel level is each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer.
The number of intermediary levels indicates the length of a channel.
A direct marketing channel has no intermediary levels; the company sells directly to consumers.
An indirect marketing channel contains one or more intermediaries.
From the producer’s point of view, a greater number of levels mean less control and greater channel complexity.
A conventional distribution channel consists of one or more independent producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own profits, perhaps even at the expense of the system as a whole.
A vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting as a unified system. One channel member owns the others, has contracts with them, or wields so much power that they must all cooperate.
A Contractual VMS consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone.
There are three types of franchises.
1. Manufacturer sponsored retailer franchise system—for example, Ford and its network of independent franchised dealers.
2. Manufacturer sponsored wholesaler franchise system—Coca Cola licenses bottlers (wholesalers) in various markets who buy Coca-Cola syrup and then bottle and sell the finished product to retailers in local markets.
3. Service firm sponsored retailer franchise system—examples are found in the auto-rental business (Avis), the fast food service business (McDonald’s), and the motel business (Ramada Inn).
In an administered VMS, leadership is assumed not through common ownership or contractual ties but through the size and power of one or a few dominant channel members.
Horizontal marketing systems are when two or more companies at one level join together to follow a new marketing opportunity. Companies combine financial, production, or marketing resources to accomplish more than any one company could alone.
Multichannel Distribution Systems (often called hybrid marketing channels): Occur when a single firm sets up two or more marketing channels to reach one or more customer segments.
These systems increase sales and market coverage, they create new opportunities to tailor products and services to specific needs of diverse customer segments. However, these systems are hard to control and prone to conflict.
Marketing channel design calls for analyzing consumer needs, setting channel objectives, identifying major channel alternatives, and evaluating them.
The company must balance consumer needs not only against the feasibility and costs of meeting these needs but also against customer price preferences.
Setting Channel Objectives
Companies should state their marketing channel objectives in terms of targeted levels of customer service.
The company should decide which segments to serve and the best channels to use in each case.
The company’s channel objectives are influenced by the nature of the company, its products, its marketing intermediaries, its competitors, and the environment.
A firm should identify the types and number of channel members available to carry out its channel work.
Intensive distribution: Ideal for producers of convenience products and common raw materials. It is a strategy in which they stock their products in as many outlets as possible.
Exclusive distribution: Purposely limit the number of intermediaries handling their products. The producer gives only a limited number of dealers the exclusive right to distribute its products in their territories.
Selective distribution: This is the use of more than one, but fewer than all, of the intermediaries who are willing to carry a company’s products.
Evaluating the Major Alternatives
Using economic criteria, a company compares the likely sales, costs, and profitability of different channel alternatives.
Using control issues means giving them some control over the marketing of the product, and some intermediaries take more control than others.
Using adaptive criteria means the company wants to keep the channel flexible so that it can adapt to environmental changes.
Designing International Distribution Channels
In some markets, the distribution system is complex and hard to penetrate, consisting of many layers and large numbers of intermediaries.
At the other extreme, distribution systems in developing countries may be scattered, inefficient, or altogether lacking.
Sometimes customs or government regulation can greatly restrict how a company distributes products in global markets.
Marketing channel management calls for selecting, managing, and motivating individual channel members and evaluating their performance over time.
Selecting Channel Members
When selecting intermediaries, the company should determine what characteristics distinguish the better ones.
Managing and Motivating Channel Members
The company must sell not only through the intermediaries but to and with them.
Most companies practice strong partner relationship management (PRM) to forge long-term partnerships with channel members.
Evaluating Channel Members
The company should recognize and reward intermediaries who are performing well and adding good value for consumers.
Those who are performing poorly should be assisted or, as a last resort, replaced.
Finally, manufacturers must be sensitive to their dealers.
Exclusive distribution occurs when the seller allows only certain outlets to carry its products.
Exclusive dealing occurs when the seller requires that these dealers not handle competitors’ products.
Exclusive territorial agreements occur when the producer agrees not to sell to other dealers in a given area, or the buyer may agree to sell only in its own territory.
Full-line pricing occurs when producers of a strong brand sell it to dealers only if the dealers will take some or all of the rest of the line. This is also known as a tying agreement.
In general, sellers can drop dealers “for cause”.
Marketing logistics (physical distribution) involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet consumer requirements at a profit.
Marketing logistics involves:
Outbound distribution—moving products from the factory to resellers and consumers.
Inbound distribution—moving products and materials from suppliers to the factory.
Reverse distribution—moving broken, unwanted, or excess products returned by consumers or resellers.
Companies today are placing greater emphasis on logistics for several reasons.
Companies can gain a powerful competitive advantage by using improved logistics to give customers better service or lower prices.
Improved logistics can yield tremendous cost savings to both the company and its customers.
The explosion in product variety has created a need for improved logistics management.
Improvements in information technology have created opportunities for major gains in distribution efficiency.
Inventory Management
Just-in-time logistics systems: Producers and retailers carry only small inventories of parts or merchandise, often only enough for a few days of operations.
Firms store goods for many reasons, such as enabling production to meet seasonal demand and creating economies in ordering.
Some companies are phasing in a sophisticated technology known as radio-frequency identification (RFID), which lets them tag products with tiny chips containing information about the item’s content, origin, and destination.
Logistics Information Management
Electronic data interchange (EDI) is the computerized exchange of data between organizations.
Vendor-managed inventory (VMI) systems, or continuous inventory replenishment systems, allow the real-time customer sharing of data on sales and current inventory levels with the supplier. The supplier then takes full responsibility for managing inventories and deliveries.
Integrated logistics management is the recognition that providing customer service and trimming distribution costs requires teamwork internally and externally.