Session 24 mg 220 mba - 4 nov 10

MG 220 Marketing ManagementMBA 10

Fall 2010

Muhammad Talha Salam, Asst. [email protected]

Access it online: www.slideshare.net/talhasalam

Part 5: Shaping the Marketing Offerings

> Setting the Price

> Adapting the Price

> Initiating and Responding to Price Changes

Class Presentation | Session 24 | 4 Nov 2010


Setting the PriceProcess Review

Concept of Price-Tiers

• In some markets, as many as eight price points or price-tiers can be found:– Ultimate

– Gold Standard

– Luxury

– Special Needs

– Middle

– Ease/Convenience

– Me too, but cheaper

– Price Alone

• Some or all of these price points may exist in a certain market

MG 220 Marketing Management 2


Setting the PriceProcess Review

Concept of Price-Tiers

• Consumers often rank products based on price tiers for a certain category

• Within any tier, there are price bands

• Example of Ice-cream brands:

Steps in Setting the Price

• Step 1: Setting the Price Objective

• Step 2: Determining Demand

• Step 3: Estimating Objectives

• Step 4: Analyzing Competitors’ costs, prices & offer

• Step 5: Selecting the price method

• Step 6: Selecting the final price



Setting the PriceStep 1: Selecting the Pricing Objective

Key Price Objectives

• Survival– Short-term

• Maximum Current Profit

• Maximum Market Share– Setting lowest price to stimulate demand

– Conditions: Highly price sensitive market | production & distribution costs fall with accum. Prod. | low price discourages competition

• Maximum Market Skimming– Price start high and are reduced gradually

– Conditions: Sufficient no. of buyers have high demand | unit cost of producing small vol are not high | high initial cost doesn’t attract more competition | high price: superior prod image

• Product-Quality Leadership– “Affordable luxuries”

– Being premium, quality product yet just within reach of consumers



Setting the PriceStep 2: Determining Demand

Key considerations in determining demand

• Price Sensitivity– Companies need to understand price sensitivity

of their consumers

– Also trade-offs people are willing to makebetween price and product characteristics

• Estimating Demand Curves– Statistical analysis

– Price experiments

– Surveys

• Price Elasticity of Demand– Responsiveness of consumers to price

– Based on elasticity, it can be determined how much effect will be on total revenue

– E.g. More elastic means, lower price will produce more total revenue

– Price elasticity depends on magnitude and direction of price change

– Long-run price elasticity is different from short-run price elasticity



Setting the PriceStep 3: Estimating Costs

Types of Costs• Fixed Costs – costs that do not vary with level of production

• Variable Costs – costs that vary with level of production

• Total Costs – sum of fixed and variable costs at any level of production

• Average Costs – cost per unit at that level of production

Accumulated Production

• Concept of Learning/Experience curve

• With more experience, costs come down

• Its not only for manufacturing costs but also for otherslike marketing costs etc

• Needs to be used carefully particularly vis-à-vis competitors

ABC Cost Accounting

• Every activity is accounted for

• Costs are analyzed for different consumers, retailersand assigned to them

Target Costing

• Establishing product functions and price at which it will sell using market research

• Then, target costing with production team(s) to achieve that level



Setting the PriceStep 4: Analyzing Competitors’ costs, prices & offers

Review & Analyze Competitors’ costs

Competitors’ Prices & Offers



Setting the PriceStep 5: Selecting a Pricing Method

Three Cs

• Customers’ Demand schedule

• Cost Function

• Competitors’ prices

• FLOOR Costs

• CEILING Customers’ assessment

• STARTING POINT Competitors’ prices (& prices of substitutes)

• Six different methods used– Markup pricing

– Target-Return Pricing

– Perceived Value Pricing

– Value Pricing

– Going-Rate Price

– Auction-type Pricing



Setting the PriceStep 5: Selecting a Pricing Method (…contd.)

Six different methods used

• Markup pricing– Add markup to costs | Most simple | Ignores several key factors like competitors, perceived image

• Target-Return Pricing– ROI target is established and is used to achieve at a price

– Break-even level has to be established

– Book’s example

• Perceived Value Pricing– Companies base their price on customer’s perceived value

– Key is to deliver more value than competitors and demonstrate it

• Value Pricing– Lowering pricing on high-quality offerings

– Requies re-engineering to become a low-cost producer

• Going-Rate Price– Prices are based largely on competitors prices

• Auction-type Pricing– Types: English (Ascending) | Dutch (Descending) | Sealed bid



Setting the PriceStep 6: Selecting the Final Price

Impact of other Marketing Activities

• Studies showed that brands with higher advertising budgets were able to charge premium

• Consumers paid more for ‘known’ brands than ‘unknown’ ones

Impact of Price on other parties

• Reaction of other stakeholders

• Particularly distributors, dealers as their profits (earnings) are dependent on company’s pricing

• How will competitors’ react?



Adapting the Price

Geographical Pricing• Several considerations

• Should there be different prices to ‘distant’ customers to cover extra logistics’ costs

• How to accept payments

• Countertrade – Offering payment in other items than cash

• Different forms:– Barter

– Compensation Deal

– Buyback arrangement

– Offset

Price Discounts & Allowances

• Cash Discount

• Quantity Discount

• Functional Discount

• Seasonal Discount

• Allowance



Adapting the Price

Promotional Pricing

• Loss-leader pricing

• Special-even pricing

• Cash rebates

• Low-interest financing

• Longer payment terms

• Warranties and service contracts

• Psychological discounting

Differentiated Pricing



Initiating & Responding to Price Changes

NOT INCLUDED IN COURSE


MG 220 Marketing ManagementMBA 10

Fall 2010

Muhammad Talha Salam, Asst. [email protected]


Covering Prev Session’s material

Class Presentation | Session 25 | 8 Nov 2010

Documents

Session 24 mg 220 mba - 4 nov 10