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Learning outcomes (pricing)
1. Understand the concept of price and its elements 2. Understand the importance of price and pricing to
companies and consumers 3. Understand the factors that impact pricing 4. Understand the common approaches to pricing 5. Identify some of the common pricing tactics 6. Understand the effect of the distribution channel
in pricing
Pricing failures
What is “price”?
Price is the money exchanged for the ownership or use of an offering.
Price indicates value to both sellers and buyers.
Price (i.e., value) must be agreed on between buyer and seller or no transaction.
Buyers
Judge value by comparing the price against perceived benefits to determine the worth of the offering, relative to substitutes.
Sellers
Judge value by considering profit margins, consumers' perceptions and financial ability, and external forces (e.g., industry, competition, legal)
Pricing objectives
“Pricing” is the conscious, explicit management activity of a company.
Pricing involves specifying the role of price in a company’s marketing and overall strategic plans.
Organisational objectives
Financial objectives
Marketing objectives
Pricing objectives
Profitability
Long-term prosperity (survival)
Market share (volume)
Positioning
Customers' willingness to pay
Both the marketing and accounting/finance departments are involved in pricing.
Pricing sweet spot
Value of offering to the customer
Organisation's costs incurred in creating, communicating, and delivering the offering
Pr ic
e ce
ili ng
Price floor
Internal organisational
factors
External environmental and situational factors Satisfactory compromise
Competition
Costs
Demand
Maximising profit is just one aspect of pricing.
What does “price” do to consumers?
Price determines whether or not a consumer will buy. • Priced too high à consumer will choose not to purchase • Priced too low à can negatively influence perceived quality of offering (degrade brand image)
Research shows that most of the time, price overrides the influence of all other factors. Price has a stronger effect than: • Promotional influences • Consumer attitudes • Consumer values • Consumer beliefs Etc
Generally, increasing price = less demand (and less sold) Exception: prestige/luxury products
Why do marketers care about “price”?
Pricing is THE most important marketing management decision. • It is critical because it directly impacts company profits. • It is also the easiest marketing mix element to change.
Unit price impacts actual quantity sold à impacts a company’s costs. Hence, price directly influences revenue and indirectly influences cost. Voilà—direct effect on profit.
Elements of “price”
The price equation:
Final Price = List Price – Incentives and Allowances + Extra Fees or surcharges
In other words: What you actually pay =
Price stated – Rebate, Discount, Trade-in
+ Interest, Late Payment Penalties, Delivery Fee
Interesting fact: Buyers are often more willing to pay extra fees than a higher list price! (A psychological effect)
Customers
Competitors
Price
Costs
Pricing constraints
Certain factors can limit the price range a company can set.
These are: • Demand (product and brand effects, consumer income) • PLC (new innovation vs. mature product) • Cost of production, marketing, and distribution • Cost of changing prices (online vs. offline) • Type of competitive market (price wars) • Competitors’ prices and awareness • Legal and ethical considerations • Etc
Costs, volume, and profit relationships
When determining a price, a company must control costs and conduct break-even analysis (BEA) to determine break-even point (BEP).
Types of costs: • Total cost (TC) = Total cost incurred (FC + VC) • Fixed cost (FC) = Sum of expenses that does not change (e.g. rent) • Variable cost (VC) = Sum of expenses that vary with quantity produced/sold • Unit variable cost (UVC) = Cost expressed on a per-unit basis (VC/Q)
Break-even analysis (BEA) is used to determine the relationship between total revenue and total cost to calculate profitability across different levels of output.
Break-even point (BEP) is the quantity at which total revenue and total cost are equal. Hence, selling units beyond BEP is the goal (i.e. profit).
Common approaches to pricing
Consumer tastes and preferences
Cost and profit Competitors or “the
market” Revenue and costs
In cr
ea se
d im
po rt
an ce
Costs, profit, and competition
Demand and competition
Demand, cost, or profit
Demand and competition
D ec
re as
ed
im po
rt an
ce
Price skimming
Selling to the top of the market (less price sensitive and very willing to buy) at a high price.
As demand for this top end of the market is satisfied, a company will reduce the price to attract the next tier of consumers who are moderately price sensitive. And so on … “Layering”.
4 conditions must be met for price skimming to work: 1. Enough prospective consumers willing to buy immediately
2. High initial price will not attract competitors
3. Lowering price has only a minor effect on increasing sales and reducing costs
4. Consumers assume high price = high quality
Penetration pricing
Opposite of skimming pricing. Penetration pricing is setting a low initial price on a new product to appeal immediately to the mass market, (then raise once customer base is established). 3 conditions must be met for penetration pricing to work: 1. Many market segments are price sensitive. 2. Low initial price discourages competition entering the market. 3. Production and marketing costs decrease exponentially as production volume
increases. 2 options for companies using penetration pricing: 1. Maintain initial price long-term to gain profit lost from low introductory level. 2. Further decrease price to maximise units sold to generate profit.
Prestige pricing
Deliberately setting a very high price to attract quality-conscious and status- conscious consumers. • Increasing price = increases demand (to a certain point – “inflection point”) • Not limited to stereotypical luxury items.
Caveat: Relies heavily on consumers actually believing that price indicates value.
Standard mark-up pricing
Adding a fixed percentage to the cost of all items in a specific product class. • Often used by supermarkets or large retail stores that sell a large number
of different products. This is because it is difficult to estimate demand for each and every product. • Mark-up varies according to type of retail store, type of product, and
product volume. • Mark-ups must cover all expenses, overheads, and contribute to profits.
E.g. movie theatres à movie tickets vs. candy bar snacks
Profit-oriented pricing
Setting a target and working backwards.
Target can be: • Annual target of $ profit • Annual target of % sales • Annual target ROI
Competition-oriented pricing Customary pricing Based on tradition and history.
Dictated by competition and distribution channel.
Above-, At-, or Below-market pricing Involves making an educated-assumption of competitors’ prices or the market price and deliberately pricing above, at, or below it.
Loss leader pricing Deliberately selling a product below its customary price.
Primary purpose is to hook in customers to the store in hopes that they will buy other products.
Banking, airlines, petrol
Utilities, telcos, diamonds
Shopping products
Produce, staples
Examples
Effect of the distribution channel Producer (the company) Price $5
Wholesaler Price $5 + wholesaler mark-up $4
Retailer (Price $5 + wholesaler mark-up $4) + retailer mark-up $3
Online retailer ((Price $5 + wholesaler mark-up $4) + retailer mark-up $3) + online retailer mark-up $1
Consumer (you) Actual price you pay $5 + $4 + $3 + $1 = $13
Pricing strategy in your marketing plan
Guidance for the pricing strategy section in your marketing plan: • We do not expect you to undertake extensive calculations to work out
the price point(s). • Instead, we want you to do general research on the market prices
and then consider which of the pricing tactics would be appropriate. • We will mark you on your justification, not your ability to undertake
extensive pricing calculations. • In your justification, ensure you indicate the issues and
considerations that must be taken into account (e.g., constraints, factors, influences).
Summary (pricing) 1. Price indicates value for both sellers and buyers, where value means different things to sellers vs.
buyers.
2. Price overrides the influence of many other factors for consumers.
3. Price directly impacts company profits.
4. Pricing is the most critical element of the marketing mix that is difficult to get ‘right’ and easiest to change.
5. Pricing must reach a sweet spot that is in between the price floor and ceiling, balances internal and external factors, and provides a satisfactory compromise between demand, costs, and competition.
6. Pricing objectives must align with organisational, financial, and marketing objectives.
7. There are four types of common approaches to pricing: demand-oriented, cost-oriented, profit- oriented, and competition-oriented, that each put more importance on certain factors than others.
8. Each layer of the distribution channel creates mark-ups that must be considered when pricing offerings.
9. Consumer psychology influences price and satisfaction.
Learning outcomes (distribution)
1. Understand the function of distribution in marketing management and the importance of intermediaries.
2. Understand the different types of distribution channels and intermediaries.
3. Identify the different types of distribution strategies. 4. Understand the importance of supply chain
management. 5. Understand the difference between physical
distribution and service distribution. 6. Understand the retailing types and omnichannel
marketing.
Positioning the brand through distribution
Global retail channels E-commerce 96% of sales
Hotels Restaurants Cafes 4% of sales
Australian luxury brand
https://www.racked.com/2017/10/13/16452460/aesop-hand-soap
What is “distribution”?
The marketing function that focusses on getting the offering into the hands of the end consumer. A distribution channel is the chain of individuals and organisations (intermediaries) directing offerings from producers to end users.
Key decisions in managing ‘place’ involves choosing appropriate distribution channels and marketing via intermediaries.
Also involves service providers (e.g., transport, packing, preserving, warehousing).
Main intermediaries: • Wholesalers • Industrial buyers • Agents or brokers • Retailers • Daigou (China)
Distribution channels
Essentially, ways in which a company can get the right products to the right customers at the right place and at the right time (i.e., enhancing utility).
Typically, distribution channels are described as “a network of firms that are interconnected in their quest to provide sellers a means of infusing the marketplace with their goods, and buyers a means of purchasing those goods, doing it all as efficiently and profitably as possible” (Iacobucci, 2015, p. 175).
Intermediaries
Make the flow of offerings from the company to the consumer possible. They reduce the number of transactions required for companies to reach their final customers (i.e., reduce costs for the company). 3 functions: 1. Transactional (buying/representing,
selling, risk-taking) 2. Logistical (physical functions) 3. Facilitating (enabling functions) Intermediaries create customer value by enhancing utility.
Beware: Inefficient and ineffective intermediaries can increase costs and cause dissatisfaction to both the producer and the consumer.
Types of distribution channels
D2C or DTC
Companies can use a combination of these channels.Consider who the end consumer/customer deals with and how that impacts the brand/position.
Also, in the age of AI, machine learning, and harnessing big data, indirect channels can pose barriers to customer data.
Types of distribution strategies
Creating a “value chain” via the distribution channel is critical. The marketer must consider both the nature of the product and its target market to decide which distribution strategy is able to deliver the most value.
Intensive distribution
• Distribute products via every suitable intermediary.
• Large number of dealers within a given area.
• E.g., FMCGs
Selective distribution
• Distribute products through intermediaries chosen for some specific reason.
• Several dealers within a given area.
• E.g., clothing brands
Exclusive distribution
• Distribute products through a single intermediary for any geographic region.
• One or a few dealers within a given area.
• E.g., luxury brands
High intensity Low intensity
Retailing
Activity that includes all the activities of selling, renting, and providing offerings to end consumers. • Retail outlet is where the customer and the product meet, and
where the exchange occurs. • Can be a primary or peripheral business activity (e.g., specialised
retailer vs. producers also retailing their products).
Key decision: What retailing approach(s) is suitable based on location and positioning?
Retail positioning matrix
Where would you place Countdown?
Omnichannel marketing
Blends multiple types of distribution channels in a way that mutually reinforces attracting, retaining, and building relationships with end consumers.
Purpose is to deliver a consistent experience for both brick-and-mortar shoppers and online shoppers.
Facilitates purchase at both physical and online stores, therefore adding value.
E-commerce also includes m-commerce (i.e., apps).
Summary (distribution) 1. Distribution is the marketing function that enables the flow of the offering from the
producer to the hands of the end consumer through a distribution channel of intermediaries.
2. Distribution channels increase utility for both the consumer and the company. It is often called a value chain, because value is added at each step.
3. Intermediaries reduce the number of transactions required for companies to reach their end consumers and reduce costs, but if inefficient, they can be a source of dissatisfaction.
4. There are two main types of distribution channels: direct and indirect. Direct channels connect the producer and consumer without intermediaries. Indirect channels involve intermediaries.
5. The three types of distribution strategies range from low to high intensity in terms of market coverage.
6. Retailing should be executed by considering both location and position of the retailers. 7. Omnichannel marketing is the blending of multiple channels to create synergy.