pricing considerations strategies

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nPricing Products:

Pricing Considerations and Strategies

•Chapter Ten•Week 9 + Appendix 2

©Copyright 2004, Pearson Education Canada Inc.10-2

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nToday’s objectives

• Contrast the three general approaches to price setting• Discuss pricing objectives and strategy• Calculate breakeven and conduct price –volume- cost

analyses • Prepare a simple Operating statement

• Discuss the process and advantages of integrated marketing communications

• Define the five promotional tools and discuss the factors that must be considered in shaping the overall promotion mix

• Describe and discuss the major decisions involved in developing an advertising program and advantages and disadvantages of media types


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n Why is price so important ?

• It’s the only thing that produces revenue

• It’s related to profitability

• It influences demand


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n Answer these

• How much incremental profit will a 1% price increase generate?

• How much will profit increase with a 1% volume increase?

• How much will profit decrease with a 1% increase in cost


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nFactors Affecting Pricing Decisions

External Factors 4. Economic factors

- Price elasticity of demand

5. Competitors’ costs, prices, and offers

Internal Factors

1. Marketing Pricing objectives

– Survival– Profit maximization– Market share

leadership– Product quality

leadership

2. Marketing mix strategy

3. Costs

Figure 10-1


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nPrice Elasticity of Demand

• Inelastic demand: when a percentage change in price causes a much smaller percentage change in demand– Products that have few, if any

substitutes– Consumption is necessary– Pricing strategy is to raise

prices to earn more profits

• Elastic demand: when a percentage change in price causes a much larger percentage change in demand– Products that have many substitutes– Consumption is discretionary– Pricing strategy normally to lower price to sell more


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n 3 Common Price Setting Approaches

• 1. Costs – cover costs and make a profit

• 2. Value – base on perceived value

• 3. Competitive – in relation to your competitors price


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n Pricing Strategy

• Companies sometimes position their products on price.

• Then they need to to use a technique called TARGET COSTING– reverses the usual process for a new product design

– it starts with a price the customer is willing to pay and then target your costs to allow that price to be met

– E.g. Swatch– A true marketing concept as it starts with the

customer and a value based approach


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nGeneral Pricing Approaches

Figure 10-5

Product Cost Price Value Customers

Cost-based Pricing

Customers Value Price Cost Product

Value-based Pricing


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n1. Cost-Based Pricing Approaches

• Cost-plus pricing

– Adding a standard markup to the cost of the product

– Simple to use, ensures that costs are covered

• Break-even pricing/ Target Profit pricing

– Setting price to break-even on the costs of making and marketing a product, or setting price to make a target profit


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n Understanding Costs

• Fixed costs – costs of a firm that are stable ( at least in a budget time) and do not change with sales or production volume changes

• Variable costs – costs that are attributed to a unit of product produced and sold – vary directly with quantity produced or sold

• Total costs = Fixed costs + Variable costs


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n Breakeven Analysis

• A technique that analyses the relationship between total revenue and total cost to determine profitability at different levels of output

• Break Even Point = Quantity at which total revenue and total costs are equal. After that point profit occurs.


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nCost-Based Pricing Approaches

Break-even Chart for Target Price

0

200000

400000

600000

800000

1000000

1200000

1400000

0 10000 20000 30000 40000 50000 60000 70000

Sales volume (Units)

Co

st

in d

olla

rs

Total revenue

Fixed cost

Total cost

Target profit($200,000)

Figure 10-4


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n2. Value-Based Pricing Approaches

• Value-based pricing

– Setting price based on buyers’ perceptions of value rather than on the seller’s cost

– Price must be set before the marketing program is determined

– Marketers must keep track of what their customers want and expect, relative to competitive offerings

– A focus on providing better value fits with current economic trends in Canada


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n3. Competition-Based Pricing

• Competition-based pricing– Setting price based on the prices that

competitors charge for similar products– May be a market leader who sets prices

and the other companies follow suit


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nPricing Imitative and New Products

• Skimming policy– Set price high to “skim” the maximum amount of

revenue from various segments of the market– Used for new technology products– Helps recover R&D costs quickly– May encourage competitors to enter market

• Penetration pricing– Setting a low initial pricing to penetrate the

market deeply and win a large market share.– Used when setting the standard is important– Used when the product is easily copied– May discourage competitors to enter market


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nPricing Best Practices

• Develop a 1 percent pricing mentality: consider the importance of even minor changes on long-run objectives

• Consistently deliver more value: this requires getting close to the customer to know what they want

• Price strategically, not opportunistically: use low pricing only if that is consistent with your marketing strategy

• Know your competition: driven by knowledge, not fear

• Make pricing a process: to pay attention to it on a continual basis, rather than emergencies only

• The Strategic Pricing Division of The Advantage Group, a consulting firm in Toronto suggest that effective pricing follow a number of best practices


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n

Has competitorcut price?

Will lower pricenegatively affect our

market share & profits?

Can/should effectiveaction be taken?

Hold current price;continue to monitorcompetitor’s price

Reduce price

Raise perceivedquality

Improve quality& increase price

Launch low-price“fighting brand”

Yes

No

No

No

Responding to Competitor’s Price Changes

Yes

Yes

Figure 10-6


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nFinancial Section of Plan

• Estimate market size in retail $• Estimate your market share in retail %• Estimate your sales forecast (in wholesale $)• Estimate your cost of goods – come see me

or email me for an industry mark up factor• Prepare Income Statement• Make sure you give back up data and

explanation of your numbers in an appendix or in an explanatory paragraph.


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n The Financial Section of your Project

• Operating Statement – see p. A13, 14Sales revenue (units X manufacturing Selling

price/unit)

Less cost of goods

Gross margin

Less Marketing & selling expenses

Less Fixed Expenses /overhead costs

Net Profit (before taxes)


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n Pricing Section of your Project Plan

• What is your price strategy?

• What is the expected retail selling price?

• How does your price compare to competitive prices?

• What are your promotional pricing plans (if any)


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n In class Pricing Assignment 5

• See formulas

• Assignment is due by Monday next. Answers will be posted on Tuesday to allow studying for test


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nDove Campaign for Real Beauty

• Target: women, 18 to 54 years old, • TV & Magazine advertising• Outdoor billboards• Web voting• Your Dove (Database)• PR – articles, research, fund• Free samples/bonus packs• Special events• www.dove.com• www.campaignforrealbeauty.com

• Identified a need to raise self esteem of women around the world by building awareness that real beauty comes in many forms Developed an integrated marketing campaign to address it,


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nIntegrated Marketing Communications

• Integrated marketing communications– The concept under which a company carefully integrates

and coordinates its many communications channels to deliver a clear, consistent, and compelling message about the organization and its products or services

• Integrated means “fits together”1. The messages are consistent

across all channels2. Generate leverage through

repetition and multiple sources with the same message

3. Promotional mix should also be coordinated with other marketing mix elements, such as product, price, and place


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n Influences on IMC promotion mix

1. New products - Adoption curve

2. Life cycle stage

3. Nature of competition

4. Communication task & budget

5. Nature of product

6. Customers characteristics

7. Funds available


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nSome roles of marketing

communications• create or maintain a company / brand image• explain the benefits offered• position/ reposition a product in the customers

mind• stimulate trial or purchase• Inform about sale or event

• Use different promotion tools depending on what your objective is


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nFive Main Promotional Tools

• 1. Advertising: any paid form of non-personal presentation and promotion of ideas, goods, or services by an identified sponsor– Allows for repetition and targeting of audience– Useful for generating awareness, image building

and positioning

– Can be expensive, impersonal, only one-way communication

– Media fragmentation makes finding large audiences difficult


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nPromotional Tools (continued)

• 2. Personal selling: personal presentation by the firm’s sales force for the purpose of making sales and building customer relationships– More personal, flexible, two-way communication,

and provides direct feedback– Useful for building preference, conviction, and

action, making high value sales


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• 3. Sales Promotion: short-term incentives to encourage the purchase or sale of a product or service– Coupons, contests, premiums, and incentives, point of

purchase, in store sampling– Price reductions– Can be used to attract attention and induce trial, boost

short term sales


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nSales Promotional Tools

• Consumer promotion– Samples, coupons, refunds/rebates– Contests, sweepstakes– Price packs, price discounts– Advertising specialties– Point of purchase materials

• Trade promotion– Discounts, allowances– Free goods– Push money, cooperative

advertising programs• Business promotion

– Conventions, trade shows– Sales contests, incentive

programs


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• 4. Public relations: building good relations with the company’s various publics by obtaining favourable publicity, building a good corporate image, and handling or heading off unfavourable rumours, stories, and events

– News stories, features, press conferences, annual reports, corporate website, product publicity, lobbying, and public service,

– Events and sponsorship considered a PR activity often with sales promotion overlay


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n Public Relations Tools

• News releases – new product publicity• Corporate communication• Public affairs• Investor relations• Crisis management• Brand image – event sponsorship, consumer

education, product placement, cause marketing• Company web sites• www.cprs.ca


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• 5. Direct marketing: direct communications with carefully targeted individual consumers to obtain an immediate response– Mail, catalogues, telephone, television,

door to door, and the Internet– Used when:

• Targeting specific customers or segments• Messages can be directed to a specific person• Need immediate action• Want to customize messages• Want interactivity


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n

Campaign evaluationCommunication

impactSales impact

Message decisionsMessage strategy

Message execution

Budget decisionsAffordable approach

Percent of salesCompetitive parityObjective and task

Objectives settingCommunication

objectivesSales

objectives

Media decisionsReach, frequency, impact

Major media typesSpecific media vehicles

Media timing

Major AdvertisingDecisions

Figure 13-3


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n Advertising goals

• Need to set a specific communication objective (task) for a specific target audience

• 1. Inform (build primary demand) – provide information about the product or brand image. Measure awareness of and attitudes to the brand

• 2. Persuade – explain the unique benefits so customers will prefer the brand. Measure market share

• 3. Remind – keep consumers thinking about the product


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nSetting the Advertising Budget

• Affordable method: setting the promotion budget at the level management thinks the company can afford

• Percentage-of-sales method: setting the promotion budget at a certain percentage of current or forecasted sales or as a percentage of the unit sales price

• Competitive parity method: setting the promotional budget to match competitors’ outlays

• Objective-and-task method: setting the promotional budget by – Defining specific objectives– Determining the tasks that must be performed

to achieve these objectives, and– Estimating the costs of performing these tasks


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nDeveloping Advertising Strategy

• Two major elements: message and media

• Effective message strategy begins with identifying customer benefits, related to product’s positioning

• Need a creative concept, or “big idea” to express that message


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nCreative(Communication)Strategy

1. Identify Target audience2. Define Key Benefit 3. Describe the support for the Key benefit

claims (often a feature)4. Describe any Customer insight – how, when

and why customer uses product– how it makes them feel

5. Creative Strategy - Key message that you want the audience to take away


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nPremium lager with essence of guarana, a natural source of

caffeine


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nMolson Kick

www.molsonkick.ca

• Target Audience

• Core benefit

• Support

• Customer insight

• Main Message


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nMessage Execution

• Advertising appeals should be– Meaningful– Believable– Distinctive

Execution styles• Slice of life• Lifestyle• Fantasy• Mood or image• Musical• Personality symbol• Technical expertise• Product demonstration• Testimonial or endorsement• Humour• Sexual appeal


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nConsiderations in Media Choice

1. Your promotion objectives

2. The market’s media habits

3. Availability of specialized media

4. Budget

Resources on Canadian media:

CARD

Media Digest www.cmdc.ca


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nGroup Exercise

• What are the advantages and disadvantages of common media?– Television – Radio– Internet– Out of Home (outdoor and transit)– Newspaper– Magazine

• Report back in 10 minutes


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n Newest forms of Advertising

• Podcasting

• Blogs

• Mobile Marketing -Instant messaging

• Product placement- online movies, video games


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nSelecting Media Alternatives

• Decide on reach, frequency, and impact

• Choose from media types

• Select specific media vehicles

• Decide on media timing

• Reach: a measure of the percentage of people in the target market exposed to the ad campaign in a given period

• Frequency: a measure of how many times the average person in the target market is exposed to the message

• Impact: a qualitative value of a message exposure through a given medium

©Copyright 2004, Pearson Education Canada Inc.

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nMedia Scheduling:

When to Say It

• A media schedule specifies the exact media to use, when, and how often the message should appear.


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nPromotion Strategy Section

• Promotion Objectives• Main message to communicate

– (Creative Strategy)

• Briefly describe each of the IMC promotion tactics & elements and your rationale for the tactic (may include a creative mock up)

• Media selection if choose advertising and rationale for each

• Timing chart for activities


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nPromotion Budget

• In the budget section include a breakdown of the Total promotion budget to cover all the tactics in your promotion plan. (Use cost sheets)

• E. g. Promo Budget allocation– Television advertising - $4 million– Sales/trade promotion - $ 1 million– Publicity campaign $ 250,000– Total $ 5,250,000


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nComplete and Edit your Market

Plan pp 67-72• Marketing implementation – a short paragraph of

who is doing what and list of tactics and timing – can use a chart like the Media Chart

• Evaluation and control – Paragraph explaining how you will measure your success with this plan ( link to your objectives)

• Now go back and write your Executive Summary using the style Rhonda or Heather taught – sample on webct

• Peer/self evaluations are to be included in the package

• Final written report due Monday April 17th by 12 noon.

• No final presentation - just defense and feedback. Make sure you have signed up for a time


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n Marketing Implementation

• Who in the company will be responsible for what and will outside agencies/ suppliers be used?

• What are the key activities that need to be done, when?

• A chart is the ideal way to do this section

• Read text pp.69-71


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n Evaluation and Control

• State how will you measure whether you have achieved your objectives?

– Sales analysis – monthly sales reports by product, customer etc

– Market share analysis- A C Nielsen– Distribution analysis - % distribution coverage– Financial analysis – profit, ROI, marketing

expense/sales ratio– Customer analysis – research on awareness, trial,

repurchase, attitudes etc.– Program analysis – response to marketing tactics


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n Test Details

• All short answer questions – applied plus recall. Prepare answers on the test itself - will not get back your final test.

• Concentrate study on what we learned since break – see course completion form for chapters and pages

• Includes target marketing, segmentation, positioning and swot analysis as this is basic material you should know now


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n Homework

• Finish Pricing Assignment – due tomorrow by 4pm.

• Read Ch 10 pp383 -402, pp 412-415, Appendix II pp A 13-14,Ch 13 – all

• Work on the financial section of Marketing Plan

• Finish and edit Marketing Plan

• Prepare for test.