Marketing – Module 5

Assume you are the marketing manager for a large sales training company. Over many years, your firm has developed a unique set of sales training techniques. They make their income by sending in sales trainers to firms (like insurance companies and real estate agencies) to help train their sales people. Your firm typically runs three day courses and charges the client $1,000 per attendee. Most firms send around 15 sales people to each course. This gives the firm revenue of $15,000 for a three-day training course. The associated variable costs are $5,000 for the trainer and $1,000 for the training manuals that are provided to the participants. Of course, a proportion of the revenue needs to be allocated to fixed costs (of office rent, computers, communication, support staff, promotion, and so on).

Therefore, as a rough estimate, each three-day training session would generate around $5,000 gross profit. However, you now have a new pricing dilemma. A major firm has approached you to license (hire/rent) your training materials for a year to train their own staff. That means that they just want a copy of your training booklets/materials – they would then use their own training staff and produce the training manuals themselves. The firm plans to train around 100 of their sales staff (using your training materials) over the next 12 months and they want to know what your licensing fee would be.Clearly there is little cost involved. It’s almost like ‘money for nothing’, as you will simply send them the training manuals along with an invoice. Therefore, your decision is what fee to charge. You need to price it as a win-win situation – low enough so the client receives value (and you don’t lose their business), yet high enough to maximize the income from this opportunity.

• What would be the minimum you could charge to cover costs?

• What could be the income/profit you would receive if your firm did the full training for the client (like your firm normally does)?

• Do you need to be concerned with what price potential competitors might charge?

• Therefore, given your responses to the above questions, what might be an appropriate licensing fee?

• Dick Smith Foods virtually acts as the umbrella brand for a number of independent Australian manufacturers that are trying to compete with the large international firms whose products often dominate the supermarket shelves. Dick Smith Foods attempt to ‘copy’ major selling brands/products and introduce similar products. As an example, they have tried to duplicate the top-selling Arnott’s Tim Tams biscuits, with a product that they have named “Temptims’ (note the similar name).

• Dick Smith’s positioning is based on two aspects:– That their products are Australian made, and consumers, therefore, are

supporting other Australians, and– That their products offer more value than other leading brands/products

(as Dick Smith’s products sell at a discount mainly because they don’t have as advertising budget).

• Assume that a series of taste-tests were conducted, with the research comparing Arnott’s Tim Tams and Dick Smith’s Temptims. The research revealed that 60% of consumers prefer the taste of the Dick Smith product (over Tim Tams). As a result, the market research company has recommended that Dick Smith’s should increase the price from $1.75 (below Arnott’s $2.50 price) to $3.00, in order to communicate the superior quality of the product to the market.

• Should this brand (which tries to provide price value) increase their price to be more reflective of their product’s perceived quality?

• What impact will these proposed decisions have on their overall positioning?

• Therefore, other than influencing profit margins, how important is the role of price in the firm’s marketing mix?

Price

• Price is the amount of money charged for a good or service

• The only marketing mix element that produces revenue

• Changing too much chases away potential customers, charging too little cuts revenue

Factors to Considerwhen Setting Prices

Internal Factors

Marketing Objectives• Market Positioning influences strategy• Other Pricing Objectives– Survival– Current Profit Maximization– Market-Share Leadership– Brad Equity Growth– Product-Quality Leadership

• Not-for-profit objectives– Partial or Full cost recovery– Social Pricing

Internal Factors

• Marketing Mix Strategy– Pricing must be carefully coordinated with other marketing mix

elements

• Costs– Fixed vs. Variable Costs

• Organizational Considerations– Who sets the price?– Some industries have pricing departments

External Factors Affecting Pricing Decisions

• Nature of Market and Demand– Types of Market– Consumer Perceptions of Price and Value– Price – Demand Relationship

• Demand Curve• Price Elasticity

• Competitors costs, prices and offers• Other Environmental Factors

– Economic Conditions– Reseller reaction to prices– Government may limit or restrict– Social Considerations

General Pricing Approaches

• Cost-Based Approach– Cost Plus pricing– Break-Even Analysis and Target Profit Pricing

• Buyer Based Approach– Value-Based Pricing

• Competition-Based Approach– Going rate pricing– Sealed bid pricing

Cost Based Approch

Product

Cost

Price

Value

Customers

Cost Plus Pricing– Adding standard mark-up to costs– SP = Cost per Unit + Mark up price

• Customers are price sensitive• Popular because– Simplifies pricing process– Price competition may be minimized– Fair to both buyers and sellers

Break-even

• BE= Fixed Costs/Contribution (SP-VC)• Example - Meal - SP = $20, VC = $8• Fixed costs are $2400 a day• BE=$2400/$12 = 200• Need to sell 200 meals @ $20 to break-even• VC = 40%, contribution = 60%• BE = $2400/.6 = $4000

Break-even Analysis or Target Profit Pricing

Buyer based Approach

Customer

Value

Price

Cost

Product

Value Based Pricing

• Basing prices on products perceived value• Price is considered along with the other

marketing mix variables before program is set• Measuring perceived value– Asking customers– Conducting experiment

• Situations– Overpriced– Under priced

Competition-Based Approach

• Going Rate Pricing– A firm bases its price largely on competitors prices

with less attention to its own costs or demands– May price at the same level, above or below

competition– Represents collective wisdom of the industry

concerning price that will give a fair return– Holding on to going rate will prevent price wars

• Sealed bid pricing– A firm bases its price on how it thinks competitors

will price rather than on its own costs or on demand

– Firms bid for job– The firm wants to win the contract

Pricing Strategies

• New-Product Pricing Strategies

• Existing-Product Pricing Strategies

• Psychological Pricing

• Promotional Pricing

New-ProductPricing Strategies

• Prestige Pricing

• Market-Skimming Pricing

• Market-Penetration Pricing

Setting Initial Product Prices

Market Skimming Market Penetration> Setting a high price for a

new product to skim maximum revenues from the target market.

> Results in fewer, more profitable sales.

> Popular night club charges a high cover charge

> Setting a low price for a new product in order to attract a large number of guests.

> Results in a larger market share.

> New Marriott

Existing-ProductPricing Strategies

• Product-Bundle Pricing– Pricing bundles of product sold together

• Price-Adjustment Strategies– Discounts

• Cash• Volume / Quantity• Trade• Seasonal

– Allowances• Trade-in• Promotional

– Yield Management or Segmented Pricing strategies• Customer Segment• Product-form pricing• Location pricing• Time pricing

– Discounts Based on Time of Purchase – Discriminatory Pricing

Psychological Pricing

• Price-quality relationship

• Reference prices

• Rounding

• Length of the field

Promotional Pricing

• Temporary pricing of products below list price and sometimes below cost

– Loss leader– Special Event pricing–Cash rebates–Value Pricing –Price Sensitivity Measurement

Price Changes

• Initiating Price cuts• Initiating price increase

MARKETING CHANNELS

• Sets of independent organizations participating in the process of making a product or service available for use or consumption

• Merchants – Wholesalers, Retailers

• Agents – Brokers, Manufacturers representative , sales agents

• Facilitators – Transport, Warehousing, Banks, Ad Agencies

Retailers

Merchant Wholesalers

Agents and

BrokersTake Title to Goods

Take Title to Goods

Do NOT Take Title to Goods

CHANNEL INTERMEMDIARIES

How Channel Members add alue?

• Information• Promotion• Contact• Matching• Negotiation• Physical Distribution• Financing• Risk Taking• Market Intelligence and Research

Importance of Channels

• Marketing Channel System is the set of marketing channels a firm employs

• In US, channel member margins account for 30-50% of selling price

• Push Strategy – low Brand loyalty, brand choice is impulsive, Product benefits are well understood

• Pull Strategy – High Brand loyalty, high involvement, Consumers perceive difference between brands

Hybrid Channels or Multichannel Marketing

• A single firm uses 2 or more marketing channels to reach customer segments

• Philips, HP, LIC – Internet, Advisors, Bancassurance

• Each channel targets a different segment of buyers or different need states for one buyer

CHANNELS FOR CONSUMER PRODUCTS

DIRECT RESELLER WHOLESALER AGENT

Producer Producer Producer Producer

Producer Factors

Product Factors

Market Factors

Factors Affecting Channel Choice

Exclusive Distribution

Selective Distribution

Intensive Distribution

Level ofDistribution

Intensity

What makes you choose a particular channel?

Market FactorsThat Affect

ChannelChoices

Customer Profiles

Consumer or IndustrialCustomer

Size of Market

Geographic Location

MARKET FACTORS

Product FactorsThat Affect

ChannelChoices

Product Complexity

Product Price

Product Life Cycle

Product Delicacy

PRODUCT FACTORS

Producer FactorsThat Affect

ChannelChoices

Producer Resources

Number of Product Lines

Desire for Channel Control

PRODUCER FACTORS

Intensity Level Objective Number of Intermediaries

Intensive

Selective

Exclusive

Achieve mass marketselling.

Convenience goods.

Work with selected intermediaries.

Shopping and some specialty goods.

Work with singleintermediary. Specialty goods and industrial

equipment.

Many

Several

One

LEVELS OF DISTRIBUTION INTENSITY

LEVELS OF DISTRIBUTION INTENSITY

Channel Design Decisions

• Analyzing Consumer Needs and Wants– Lot Size, Waiting and Delivery Time, Spatial

Convenience, Product Variety, Service backup• Establishing Objectives and Constraints• Identifying Major Channel Alternatives– Types of Intermediaries, Number of

Intermediaries, Terms and Responsibilities of Channel Members

• Evaluating Major Channel Alternatives– Economic Criteria, Control and Adaptive Criteria

Channel Management Decision

• Selecting Channel members• Training and Motivating Channel members– Channel Power – Coercive, Reward, Legitimate, Expert,

Referent– Channel Partnerships

• Evaluating Channel members• Modifying Channel Design and Arrangements• Channel Modification Decisions• Global Channel Considerations

Channel Integration and Systems

• Vertical marketing systems – Includes producers, wholesalers, retailers– Corporate VMS – Future Group– Administered VMS – Gillette– Contractual VMS

• Horizontal Marketing Systems – 2 unrelated companies put together resources or programs to exploit market opportunity

Channel Conflict

• Conflict in generated when one channel member’s actions prevent another channel from achieving its goal

• Types – Horizontal, Vertical, Multi Channel• Causes – Goal Incompatibility, Unclear roles

and rights, Differences in perception, Intermediaries dependence on manufacturer

Managing Channel Conflict

• Strategic Justification• Dual Compensation• Super-ordinate goals• Employee Exchange• Joint Memberships• Co-optation• Diplomacy, Mediating and Arbitration• Legal Recourse

Network Marketing

• Also known as MLM• Sales force are compensated not only for sales

they generate but also for the sales of other sales people they recruit

LA FIN