Marketing strategy and planning Strategies in different market situations          Price and promotion                 Wee...
The marketing management process                             Part 1:Marketing Strategy• Market –led strategic management –...
Today subject1. Differentiation - how2. Competitive strategies   1.   Offensive competitive strategies   2.   Defensive st...
How to create a competitive advantage                                   www.Office2go.dk
Is uniqueness imitable                         www.Office2go.dk
Generic strategies                              Perceived difference                             No perceived difference  ...
Value creation or generic routes to      competitive advantage                                  www.Office2go.dk
PIMS determine profit position                                                                              ”Profit impact...
Cost drivers               www.Office2go.dk
Achieving differentiation     Uniqueness drivers                            www.Office2go.dk
Sustaining or building a competitive advantage     How should we attack or defend – are we a pioneer or a follower        ...
1. Marketing objectives and strategies for   New Product Pioneers or followers.                             Introduction s...
1. Market entry strategies                             Pioneer or Follower• Advantages with a pioneer strategy    –   Firs...
1. Market entry strategies                            Pioneer or Follower• Advantages with a follower strategy   –   Abili...
1. Marketing strategy elements pursued bysuccessful pioneers, fast followers and late                  entrants• Successfu...
1. Marketing objectives and strategies for         New Product Pioneers.                             Introduction stage   ...
1. Mass-market penetration• Objective   – Max. numbers of triers and adopters – Awareness• Market characteristics   – Homo...
1. Competitive forces                                                    Threat of new                                    ...
1. Niche-market penetration               Typical Small firm with limited resources• Objective   – Max. numbers of triers ...
1. Skimming and early withdrawal                              all kinds of firms• Objective   – Recoup development and com...
Business-level competitive strategy and                 PLC                2. Growth stage               • Market leaders ...
2. Strategic choice for share leaders in                         growth markets                                           ...
2. Growth-market strategies for market                  leaders• Fortress or position defense strategy    – Works well whe...
2. How do we build a sustainable advantage      High                                                                      ...
2. Growth-market strategies for market                  leaders• Fortress or position defense strategy    – Works well whe...
2. Defense against flanking strategies                    ex: DyrupMain brand: DyrupSilvan home brand: Silvanol           ...
2. Growth-market strategies for market                  leaders• Fortress or position defense strategy    – Works well whe...
2. How do we build a sustainable advantage      High                                                                  cost...
2. Growth-market strategies for market                  leaders• Guerilla tactics    – Here the leader defends its relativ...
2. Growth-market strategies for market                  leaders• Market contraction strategy   – If the leader is unable t...
Positional strategy – Markops                                www.Office2go.dk
2. Business-level competitive strategy and                   PLC                   Growth stage                • Market le...
2. Share growth strategies for followers• Small companies with limited resources and competencies, may  simply seek to bui...
2. Strategic choices for challengers in                 growth markets• Frontal attack strategy:    – If the product categ...
2. How do we build a sustainable advantage    high                                                                    cost...
2. Strategic choices for challengers in                 growth markets• Frontal attack strategy:    – If the product categ...
2. Strategic choices for challengers in                growth markets• Bypass strategy:   – A challenger has the best chan...
2. Strategic choices for challengers in                growth markets• Flank attack:   – Attack segments that are not the ...
3. Business-level competitive strategy and                   PLC                 Maturity stage                           ...
3. Strategic choices in mature markets• Strategies for maintaining competitive advantages:   – At this stage you need to d...
3. Strategic choices in mature markets• How to sustain the competitive advantage:    – Differentiate, Low cost, Niche• Met...
3. Strategic choices in mature markets• Strategies for maintaining competitive advantages:   – At this stage you need to d...
4.Business-level competitive strategy and                  PLC                Declining stage                     43      ...
4. Decline stage– New entrants likely to mean market is „flooded‟– Necessity to develop new strategies becomes more pressi...
4. Strategies for a declining market• Should we just get out of this market ? – probably not !    –   Is it a cash cow who...
Coffee break     46               www.Office2go.dk
Can we soon go to war?I know which segment to go for I have targeted my customer I know everything about them I know m...
Today subject1. Differentiation - how2. Competitive strategies   1.   Offensive competitive strategies   2.   Defensive st...
What dos it cost ?   A film about prices                         www.Office2go.dk
Pricing•   Penetration pricing•   Skimming pricing•   Cost plus pricing•   Price promotions / Sales•   Competitive pricing...
Strategies when setting pricesMarket introduction stage:•cost high sales volume low•losses•Price strategy – skimming or pe...
Priselasticitet         Et produkts priselasticitet (prisfølsomhed) er den relative      mængdeændring i forhold til den r...
Price elasticity of demandBefore deciding on the right price strategy we need to know what the priceelasticity of demand i...
Why is the price elasticity of demand                 important ?               Inelastic                   Elastic       ...
Why is the price elasticity of demand             important ?           Inelastic             Elastic     Q               ...
Problems with price elasticityProblems regarding price elasticity:• Doesnt include response reactions from competitors.• P...
Approaches to pricing:• Cost-oriented pricing (cost plus pricing)   75 %    – Target rate of return    – Return of investm...
Pricing methods“The essential purpose of the price level set by the marketingmanager, then, should be to enable the firm t...
Approaches to pricing:• Cost-oriented pricing (cost plus pricing)   75 %    – Target rate of return    – Return of investm...
Example of how to work with customer           oriented pricing                                  www.Office2go.dk
How to find the optimal price for this product!                CHAMBORD Coffeemaker 1,0 L• price recommendation is kr. 299...
Price dynamicsWhat will happen if we:• Set the price to high / low?• Raise or reduce the price?• Use a penetration or a pr...
Price optimization Price level is tested Model invented by Van Westendorp – 4 price questions You show a photo and desc...
Questionnaire - buying probability                                     www.Office2go.dk
Questionnaire – 4 questions on price level4 questions on price• Highest price which is still cheap [not expensive]• Expens...
Price analysis                                                 Van Westendorp model                                  price...
Results and simulation of effect                                      Estimate on units sold and revenue                  ...
How do we calculate price elasticity?Price elasticity of demand (E) = Percent change in quantity demanded                 ...
Calculation of price elasticity                             Price. Kr.       Est units     Revenue Kr.                    ...
Conclusion:•Profitability :     • 148 % improve profitability if we reduce price from 300 kr to 200 kr. Profit =     1,850...
Price strategyWhere to set your normal price and promotion price:It is critical for the choice of strategy how the distrib...
Customer oriented pricing:•   Price according to what the market can bear: Pricing that examines the intensity of    deman...
Strategies when setting pricesMarket introduction stage:•cost high sales volume low•losses•Price strategy – skimming or pe...
Promotion“In deciding how to best promote their products, marketing managersmust decide which promotional tools to use and...
Push / Pull Strategies• Push-strategi er en betegnelse for promotion gennem grossister  eller detailhandlere. Virksomheden...
Push and pull strategies                       Channel control strategies• Push: Motivate channel members to perform more ...
Promotion Mix• Advertising: Print, Radio, Television, Outdoor, Direct mail, Brochures, catalogues, In-    store, Web, E-ma...
Decision sequence1. Define audience to be targeted2. Set the promotional objective  3. Set the promotion budget 4. Design ...
1. Define the audience                                                                                                    ...
2. Promotional objectives• What do you want to achieve?   –   Market share   –   Awareness   –   Brand building   –   Sale...
Market introduction stage:    Product life cycle - PLC•cost high sales volume low•losses•high prices – skimming or penetra...
Penetration - Frequency – Saturation :                                 What can we do?                                    ...
What is our strategic challenge?   Universe: 13.000.000 individuals                     Young adult      Mothers          ...
Penetration - Frequency – Saturation                                                                                      ...
Simulation on target group              What is our strategic challenge in our target group ?Ex. Young adult females      ...
PLCRevenue                                                 Pricewar          Penetration   Frequency   Saturation         ...
3. Promotion budget• Percentage of sales• Competitive parity – promotion spending relative to market share• Objective and ...
4. Promotion mixPromotion mix   Amount of info.   Credibility     Control over Cost to       Strategyelements        commu...
Advertisement“Everyone can do this, but as everybody knows advertising is   nothing more than a waste of money!”Why has th...
Today subject1. Differentiation - how2. Competitive strategies   1.   Offensive competitive strategies   2.   Defensive st...
Nothing more for today                              Jacob Holm                  Jacob.k.holm@gmail.com                    ...
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Cbs competitive strategies - 4 p's

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Cbs competitive strategies - 4 p's

  1. 1. Marketing strategy and planning Strategies in different market situations Price and promotion Week 40 Jacob Holm Jacob.k.holm@gmail.com hoja@udd.cbs.dk Tlf: 24 42 11 32 www.office2go.dk 1
  2. 2. The marketing management process Part 1:Marketing Strategy• Market –led strategic management – chapter 1• Strategig marketing plannng Part 2: Competitive market analysis• The changing market environment – chapter 3• Customer analysis – chapter 4• Competitor analysis - chapter5• Understanding the organizational resource base – chapter 6• Forecasting future demand and market requirements – chapter 7 Part 3: Identifying current and future competitive positions• Segmentation and positioning principles – chapter 8• Segmentation and positioning research – chapter 9• Selecting target markets– chapter 10 Part 4: Competitive position strategies• Creating sustainable competitive advantages – chapter 11• Competing through the new marketing mix – chapter 12•Competing trough innovation– chapter 13• Competing through superior service and customer relationship – chapter 14 Part 5: Implementing the strategy• Strategic customer management – chapter 15• Strategic alliances and network – chapter 16• CSR – chapter 18 www.Office2go.dk
  3. 3. Today subject1. Differentiation - how2. Competitive strategies 1. Offensive competitive strategies 2. Defensive strategies 3. Market Niche strategies 4. Harvesting strategies 5. Divestment strategies3. 4 P’s 1. Price 2. Promotion 3. (Place (distribution)) 4. (Product) 3 www.Office2go.dk
  4. 4. How to create a competitive advantage www.Office2go.dk
  5. 5. Is uniqueness imitable www.Office2go.dk
  6. 6. Generic strategies Perceived difference No perceived difference Sales curve Sales curve or pressence Broad target with a with no preference! preference! Lav elasticitet Branded Lav elasticitet categories Q elasticitet Høj Q Høj elasticitet Q QScope Sugar P P P P Narrow - focus Focus Differentiation Focus Cost strategy 6 www.Office2go.dk
  7. 7. Value creation or generic routes to competitive advantage www.Office2go.dk
  8. 8. PIMS determine profit position ”Profit impact on market share” 3 Generic strategies (not 4)Compet it ive advant age; Underst and market t ype bef ore f orming st rat egy Percieved difference No percieved difference ROI or pressence Broad target Persue Persue Cost Differentiation strategy – w hy strategy – w hy and how ? and how ? Stuck in theScope middle! Narrow - Focus Focus Cost focus Dif f erent iat ion st rat egy Læs nu selv bøgerne og ikke en der har læst en der har læst en, der har læst Port er – t ekst en er ikke helt korrekt if ht Port er! •Actually only one niche strategy -though we often see two focus versions. •However PIMS is not law! Market share = Size 8 www.Office2go.dk
  9. 9. Cost drivers www.Office2go.dk
  10. 10. Achieving differentiation Uniqueness drivers www.Office2go.dk
  11. 11. Sustaining or building a competitive advantage How should we attack or defend – are we a pioneer or a follower www.Office2go.dk
  12. 12. 1. Marketing objectives and strategies for New Product Pioneers or followers. Introduction stage • Mass market penetration • Niche penetration • Skimming – early withdrawal 12 www.Office2go.dk
  13. 13. 1. Market entry strategies Pioneer or Follower• Advantages with a pioneer strategy – First choice of market segments and positions – The pioneer defines the rules of the game – Distribution advantages – Economies of scale and experience – High switching cost for early adaptors – Possibility of positive network effects – Possibility of preempting scarce resources and supplies• Not all potential pioneers win the market. – Failure during introduction stage – Lack of resources – Lack of competencies – Best beats first 13 www.Office2go.dk
  14. 14. 1. Market entry strategies Pioneer or Follower• Advantages with a follower strategy – Ability to take advantage of the pioneer‟s positioning mistakes – Ability to take advantage of the pioneer‟s product mistake – Ability to take advantage of the pioneer‟s marketing mistake – Ability to take advantage of the of the latest technology – Ability to take advantage of the pioneer‟s limited resources 14 www.Office2go.dk
  15. 15. 1. Marketing strategy elements pursued bysuccessful pioneers, fast followers and late entrants• Successful pioneers: – Large entry scale – Broad product line – High product quality – Heavy promotional expenditure• Successful fast followers – Willingness to go all the way – Larger entry scale than the pioneer – Leapfrogging the pioneer with superior prod. Technology, quality, service• Successful late entrants – Focus on peripheral target markets or niches 15 www.Office2go.dk
  16. 16. 1. Marketing objectives and strategies for New Product Pioneers. Introduction stage • Mass market penetration • Niche penetration • Skimming – early withdrawal 16 www.Office2go.dk
  17. 17. 1. Mass-market penetration• Objective – Max. numbers of triers and adopters – Awareness• Market characteristics – Homogeneous customer needs – Customers adapt the product quickly• Product characteristics – Patentable technology or hard to copy – Limited source of supply – Complex production process• Competitor characteristics – Few competitors – Potential competitors have limited resources• Firm characteristics – Strong engineering, marketing and financial resources. 17 www.Office2go.dk
  18. 18. 1. Competitive forces Threat of new entrants Bargaining power Rivalry among Bargaining power of suppliers existing firms of buyersEntry is more difficult when: Threat of• Strong economies of scale are substitute prod.present. – Ex. Shipping• High capital requirements – ex 3Gmobile technology• When product differentiation exists –ex Cirque-Du-Soleil• When it is difficult gaining distribution– ex Paint market 18 www.Office2go.dk
  19. 19. 1. Niche-market penetration Typical Small firm with limited resources• Objective – Max. numbers of triers and adopters – Awareness – in the target segment• Market characteristics – Fragmented market – Customers adapt the product quickly• Product characteristics – Easy to copy – Many sources of supply – Simple production process• Competitor characteristics – Many competitors – Potential competitors have substantional resources• Firm characteristics – Limited engineering, marketing and financial resources. 19 www.Office2go.dk
  20. 20. 1. Skimming and early withdrawal all kinds of firms• Objective – Recoup development and commercialization costs as soon as possible – Withdrawal from the market when increasing competition puts pressure on margins• Market characteristics – Limited potential demand – Early adopters willing to pay a high price – demand is inelastic.• Product characteristics Lav elasticitet Q Q – Easy to copy – Many sources of supply – Simple production process• Competitor characteristics P – Many competitors – Potential competitors have substantial resources• Firm characteristics – Strong engineering, marketing and financial resources. 20 www.Office2go.dk
  21. 21. Business-level competitive strategy and PLC 2. Growth stage • Market leaders • Followers 21 www.Office2go.dk
  22. 22. 2. Strategic choice for share leaders in growth markets Flanking attack Encirclement Competitor Fortress or or potential Frontal attack position competitor defense strategyWhich to choose:1. Market size and customer‟ Bypass strategy characteristics2. Number and reletive strenghs of competitiors3. Own ressources and competencies www.Office2go.dk
  23. 23. 2. Growth-market strategies for market leaders• Fortress or position defense strategy – Works well when: • homogeneous needs of the customer • Company enjoys a high level of awareness • Competitors have limited ressources – Objective: • Increase satisfaction, customer loyalty and repeat purchases 23 www.Office2go.dk
  24. 24. 2. How do we build a sustainable advantage High cost - strategy Lufthansa SAS Differentiation Build barriers strategyQuality FORTRESS BA Niche strategy EasyJet Norwegian RyanairLow high Price 24 www.Office2go.dk
  25. 25. 2. Growth-market strategies for market leaders• Fortress or position defense strategy – Works well when: • homogeneous need of the customer • Company enjoys a high level of awareness – Objective: • Increase satisfaction, customer loyalty and repeat purchases• Flanking strategy – One shortcoming of a fortress strategy is that the challenger might simply choose to bypass the leader‟s fortress and try to capture territory where the leader has not yet established a strong presence. – The leader can develop e second brand to compete against the challenger offering. 25 www.Office2go.dk
  26. 26. 2. Defense against flanking strategies ex: DyrupMain brand: DyrupSilvan home brand: Silvanol 26 www.Office2go.dk
  27. 27. 2. Growth-market strategies for market leaders• Fortress or position defense strategy – Works well when: • homogeneous need of the customer • Company enjoys a high level of awareness – Objective: • Increase satisfaction, customer loyalty and repeat purchases• Flanker strategy – One shortcoming of a fortress strategy is that the challenger might simply choose to bypass the leader‟s fortress and try to capture territory where the leader has not yet established a strong presence. – The leader can develop e second brand to compete against the challenger offering.• Confrontation strategy – Confrontational battle – on which field? • What are the combats generic strategy? • How many resources are they willing to through into the battle? 27 www.Office2go.dk
  28. 28. 2. How do we build a sustainable advantage High cost - strategy Lufthansa SAS Differentiation strategyQuality Head on confrontation BA Niche strategy EasyJet Ryanair NorwegianLow high Price 28 www.Office2go.dk
  29. 29. 2. Growth-market strategies for market leaders• Guerilla tactics – Here the leader defends its relative market share by expanding into new market segments. – Ex. Dyrup waterproof series – This is a synthetic rubber material that will prevent moisture from penetrating the surface 29 www.Office2go.dk
  30. 30. 2. Growth-market strategies for market leaders• Market contraction strategy – If the leader is unable to defend it self – the oblivious solution is to withdraw from the market. 30 www.Office2go.dk
  31. 31. Positional strategy – Markops www.Office2go.dk
  32. 32. 2. Business-level competitive strategy and PLC Growth stage • Market leaders • Followers 32 www.Office2go.dk
  33. 33. 2. Share growth strategies for followers• Small companies with limited resources and competencies, may simply seek to build small but profitable businesses within a specialized segment. – Ex. Paint market:• Larger companies who enters the market shortly after the pioneer often seek to displace the leader or at least become a powerful competitor. ROI St uck in t he middle! 33 www.Office2go.dk M arket share = Size
  34. 34. 2. Strategic choices for challengers in growth markets• Frontal attack strategy: – If the product category is relative homogeneous with few untapped segments and at least one well-established competitor, a follower wanting to capture market share may have to take on the competitor head on. – Target competitor has relatively limited ressources and competencies – To successfully implement a frontal attack, a challenger should seek one or more ways to achieve a sustainable advantage over the target competitor Perceived difference No perceived difference Broad target or presence Dif f erent iat ion Cost st rat egy Narrow - focus Focus Dif f erent iat ion Focus Cost st rat egy 34 www.Office2go.dk
  35. 35. 2. How do we build a sustainable advantage high cost - strategy Lufthansa SAS Differentiation strategyQuality Frontal attack BA Niche strategy Cimber/ EasyJet Sterling RyanairLow high Price 35 www.Office2go.dk
  36. 36. 2. Strategic choices for challengers in growth markets• Frontal attack strategy: – If the product category is relative homogeneous with few untapped segments and at least one well-established competitor, a follower wanting to capture market share may have to take on the competitor head on. – Target competitor has relatively limited ressources and competencies – To successfully implement a frontal attack, a challenger should seek one or more ways to achieve a sustainable advantage over the target competitor• Problems with this strategy – Challenging basis on low prices can be a problem - Experience curve – Challenging basis on larger promotional spending – -> find another strategy to fight with – Easyjet, Ryanair 36 www.Office2go.dk
  37. 37. 2. Strategic choices for challengers in growth markets• Bypass strategy: – A challenger has the best chances of beating the competitor if they can offer products that are attractively differentiated from the competitors products. – Ex. Swiss watches and Japanese digital watches in the 70‟th 37 www.Office2go.dk
  38. 38. 2. Strategic choices for challengers in growth markets• Flank attack: – Attack segments that are not the primary segment for the market leader. – Concentrate on this segment and put all resources into this. – Ex: Japanese cars penetration of the US market• Encirclement: – Targeting several small untapped or underdeveloped in the market simultaneously. – Works in fragmented markets www.Office2go.dk
  39. 39. 3. Business-level competitive strategy and PLC Maturity stage • Differentiation • Low cost 39 www.Office2go.dk
  40. 40. 3. Strategic choices in mature markets• Strategies for maintaining competitive advantages: – At this stage you need to decide what you want to do with your product: • Try to sustain the competitive advantage • Milk to cow – so to speak • Sell the product 40 www.Office2go.dk
  41. 41. 3. Strategic choices in mature markets• How to sustain the competitive advantage: – Differentiate, Low cost, Niche• Methods of differentiation – Product quality – Service quality• Methods of maintaining a low-cost position – No frills products – Cheaper raw materials – Innovative production processes Perceived difference No perceived difference – Low-cost distribution Broad target or presence – Reduction of overhead Dif f erent iat ion Cost st rat egy• Niche strategy Narrow - focus Focus Dif f erent iat ion Focus Cost st rat egy 41 www.Office2go.dk
  42. 42. 3. Strategic choices in mature markets• Strategies for maintaining competitive advantages: – At this stage you need to decide what you want to do with your product: • Try to sustain the competitive advantage • Milk to cow – so to speak • Sell the product Sales Expanding: Increase penetration – Extended use – Market expansion Maintaining: Fortress defense strategy: Loyalty, repeat purchase 42 Time www.Office2go.dk
  43. 43. 4.Business-level competitive strategy and PLC Declining stage 43 www.Office2go.dk
  44. 44. 4. Decline stage– New entrants likely to mean market is „flooded‟– Necessity to develop new strategies becomes more pressing:– Searching out new markets: • Linking to changing fashions • Seeking new or exploiting market segments • Linking to joint ventures – media/music, etc.– Developing new uses– Focus on adapting the product– Re-packaging or format– Improving the standard or quality– Developing the product range www.Office2go.dk
  45. 45. 4. Strategies for a declining market• Should we just get out of this market ? – probably not ! – Is it a cash cow who can support other products ? – Can we minimize our efforts in marketing, sales, R&D etc. – Low unit costs – Is the sped of decline high or low – Low competition – price stability.• Exit barriers – The higher the exit barriers -> higher competitive action• Harvesting strategies – Maximize short-term cash flow – increase margins• Maintenance strategies – Maintain market share for a period even at the expense of margins• Survivor strategies – Increase share of the declining market – encourage weaker competitors to exit.• Niche strategies – Strengthen share position in one or a few segments with potential for continued profit 45 www.Office2go.dk
  46. 46. Coffee break 46 www.Office2go.dk
  47. 47. Can we soon go to war?I know which segment to go for I have targeted my customer I know everything about them I know my enemy ! We have discussed strategy We have positioned our selvesKnow we need to find the righttactics to implement our strategy www.Office2go.dk
  48. 48. Today subject1. Differentiation - how2. Competitive strategies 1. Offensive competitive strategies 2. Defensive strategies 3. Market Niche strategies 4. Harvesting strategies 5. Divestment strategies3. 4 P’s 1. Price 2. Promotion 3. (Place (distribution)) 4. (Product) 48 www.Office2go.dk
  49. 49. What dos it cost ? A film about prices www.Office2go.dk
  50. 50. Pricing• Penetration pricing• Skimming pricing• Cost plus pricing• Price promotions / Sales• Competitive pricing• Customer oriented pricing www.Office2go.dk
  51. 51. Strategies when setting pricesMarket introduction stage:•cost high sales volume low•losses•Price strategy – skimming or penetration•InnovatorsGrowth stage:•costs reduced due to economies ofscale - sales volume increasessignificantly•profitability•prices to maximize market share•Early adaptors and majorityMature stage:•costs are very low sales volume peaks•prices tend to drop due to theproliferation of competing products - veryprofitable – Comp. pricing•Late majority – innovators are gone Penetration / Max pricing / HarvestingDecline stage: Skimming Survival pricing•sales decline•prices drop (lower prices may lead tolower value perception). Pricepromotion/sales•profits decline www.Office2go.dk
  52. 52. Priselasticitet Et produkts priselasticitet (prisfølsomhed) er den relative mængdeændring i forhold til den relative prisændring på det samme produktPriselasticitet = ep = relativ mængdeændring = Procentuel mængdeændring relativ prisændring Procentuel prisændring => ∆X/X ∆P/P 52 www.Office2go.dk
  53. 53. Price elasticity of demandBefore deciding on the right price strategy we need to know what the priceelasticity of demand is:Price elasticity of demand (E) = Percent change in quantity demanded Percent change in priceA price elasticity of demand > 1 = ElasticA price elasticity of demand < 1 = InelasticThis means that the demand for the product is elastic if the relative quantitychange is higher than the relative price change and inelastic if the relativequantity change is lover than the relative price change. This is also known asprice sensitivity. Inelastic Elastic Q Q P P www.Office2go.dk
  54. 54. Why is the price elasticity of demand important ? Inelastic Elastic Q QSkimming Penetrationpricing pricing P P Penetration / Price war Skimming www.Office2go.dk
  55. 55. Why is the price elasticity of demand important ? Inelastic Elastic Q Q P Pspecial promotion price ? Where would you place this ? www.Office2go.dk
  56. 56. Problems with price elasticityProblems regarding price elasticity:• Doesnt include response reactions from competitors.• Price elasticity can differ through the demand curve – see later• It doesnt take product line considerations – cannibalization effect. www.Office2go.dk
  57. 57. Approaches to pricing:• Cost-oriented pricing (cost plus pricing) 75 % – Target rate of return – Return of investment – Payback method 20 %• Competition-oriented pricing – Penetration/skimming pricing – Going rate pricing – Sealed bid – Competitive reaction 5%• Customer-oriented pricing – Identifying customer value – Matching buyer and seller benefits – Perceived values www.Office2go.dk
  58. 58. Pricing methods“The essential purpose of the price level set by the marketingmanager, then, should be to enable the firm to capture the valueof the product as perceived in the mind of the consumer”Why is it then that almost every marketing manager uses cost-plus pricingmaybe combined with one kind of competitor oriented pricing ?“Remember that one danger of cost-orientated (or even competitororiented) pricing methods is that it can produce prices that are lower thanperceived value, causing the firm to leave money on the table or it canalso result in prices that exceed many customers perception of theproducts value resulting in loss of sales and competitive vulnerability” – www.Office2go.dk
  59. 59. Approaches to pricing:• Cost-oriented pricing (cost plus pricing) 75 % – Target rate of return – Return of investment – Payback method 20 %• Competition-oriented pricing – Going rate pricing – Sealed bid – Competitive reaction• Customer-oriented pricing 5% – Identifying customer value – Matching buyer and seller benefits – Perceived values www.Office2go.dk
  60. 60. Example of how to work with customer oriented pricing www.Office2go.dk
  61. 61. How to find the optimal price for this product! CHAMBORD Coffeemaker 1,0 L• price recommendation is kr. 299 at Bahne – promotion price kr. 199 – extra promotion price (without a box) kr. 169• Is this the optimal price if you compare with the customers perceived value of the coffeemaker?• How do you in practice work with customer oriented prices and what are the dynamics in pricing. www.Office2go.dk
  62. 62. Price dynamicsWhat will happen if we:• Set the price to high / low?• Raise or reduce the price?• Use a penetration or a price skimming strategy?• Know the price elasticity of demand of the product www.Office2go.dk
  63. 63. Price optimization Price level is tested Model invented by Van Westendorp – 4 price questions You show a photo and describe the product in a internet research Case: Spot sample with 500 participants Target group: women 25-50 years old Price recommendation kr. 299 Promotion price kr. 199 www.Office2go.dk
  64. 64. Questionnaire - buying probability www.Office2go.dk
  65. 65. Questionnaire – 4 questions on price level4 questions on price• Highest price which is still cheap [not expensive]• Expensive, but still worth wile a consideration [not cheap]• To expensive to considerate [to expensive]• To cheap to consider [to cheap]Newer ask directly on the price level! www.Office2go.dk
  66. 66. Price analysis Van Westendorp model price differential100%90%80% "NORMAL" PRICE70% kr. 20060%50% MAX. PRICE kr. 27040% MIN. PRICE30% kr. 11020% PENETRATIONS PRICE Kr. 15010% 0% 75 kr 100 kr 125 kr 150 kr 175 kr 200 kr 225 kr 250 kr 275 kr 300 kr 325 kr 350 kr 375 kr 400 kr 425 kr Not cheap Not expensive To cheap To expensive www.Office2go.dk
  67. 67. Results and simulation of effect Estimate on units sold and revenue Price. Kr. Est units Revenue Kr. 175 17.200 3.000.000 200 15.400 3.100.000 225 13.000 2.900.000 250 10.000 2.450.000 275 8.800 2.400.000 300 4.200 1.250.000 25.000 kr 3.500.000 Units kr 3.000.000 20.000 Revenue kr 2.500.000 Reven 15.000Units kr 2.000.000 ue 10.000 kr 1.500.000 kr 1.000.000 5.000 kr 500.000 0 kr 0 75 kr 100 kr 125 kr 150 kr 175 kr 200 kr 225 kr 250 kr 275 kr 300 kr 325 kr 350 kr 375 kr 400 kr Precondition: Price • 80% of the target group is in the market. • The target group stands for 95% of the total sales. • Buying probability is weighted www.Office2go.dk
  68. 68. How do we calculate price elasticity?Price elasticity of demand (E) = Percent change in quantity demanded Percent change in priceA price elasticity of demand > 1 = ElasticA price elasticity of demand < 1 = Inelastic Inelastic Elastic Q Q P P www.Office2go.dk
  69. 69. Calculation of price elasticity Price. Kr. Est units Revenue Kr. 175 17.200 3.000.000 200 15.400 3.100.000 225 13.000 2.900.000 250 10.000 2.450.000 275 8.800 2.400.000 300 4.200 1.250.000 25.000 kr 3.500.000 Units kr 3.000.000 20.000 Revenue kr 2.500.000 Reven 15.000Units kr 2.000.000 ue 10.000 kr 1.500.000 kr 1.000.000 5.000 kr 500.000 0 kr 0 75 kr 100 kr 125 kr 150 kr 175 kr 200 kr 225 kr 250 kr 275 kr 300 kr 325 kr 350 kr 375 kr 400 kr Price Price elasticity: Price: 225/200: 12,5% Units: 13000/15400: 16% PE= 1,28 -> elastic www.Office2go.dk
  70. 70. Conclusion:•Profitability : • 148 % improve profitability if we reduce price from 300 kr to 200 kr. Profit = 1,850.000 kr.• Promotion pricing • Price elasticity • Sales amount in the promotion time and normal price period • psychological pricing www.Office2go.dk
  71. 71. Price strategyWhere to set your normal price and promotion price:It is critical for the choice of strategy how the distribution is between sale in the normal price situation and in the promotion price situation.80 % sales in the promotion price period – 20 % sales in the normal price period: in this case you should place the promotion price at the optimal price in the Van Westendorp model. The normal price will then be higher than the optimal price, but this relates only to 20 % and it will only have a minor effect on the revenue optimization.20 % sales in the promotion price period – 80 % sales in the normal price period: In this case the normal price should be the optimal price. The price elasticity determines how far we should place the promotion price from the optimal price.50 % sales in the promotion price period – 50 % sales in the normal price period: In this case it will be the price elasticity and the psychological pricing that determines which price should be placed by the optimal price.Psychological price distance:The consumer has a tendency to buy ”the saving” instead of the reel price of the product. Consumers are triggered by the savings because it gives them a sense of purchase experience and it means that the saving needs to be significant before we can use promotion pricing in a practical way. A good example is wine in the convenience stores. www.Office2go.dk
  72. 72. Customer oriented pricing:• Price according to what the market can bear: Pricing that examines the intensity of demand expressed by customers for a given product – reflects the intensity of demand.• Multidimensional pricing: Perceived value pricing or charging a price that the market will bear is a version of price customization whereby every customer is charged the price he or she is willing to pay based on the value on the product. – Multiple price parameters are a common way: Unit price and a rental element. Mobil phone companies use this approach to customize price for various user segments. – Multi person pricing: Different prices are charged at different customer groups. One group pays full price and while other groups receives a discount. - Synoptik – Price bundle: more products sold together gives a rebate – McDonald menu – Microsoft office package.• Fixed price list, haggling and auctions: – Fixed price is where the seller sets a price which everybody follows - Dyrup. Works only with no real access to information about the market – price / quality – Haggling (prutte): A customer and a provider negotiate (unstructured) to discover in a mutually acceptable price. Works only with limited access to information about the market – price / quality – Auctions: www.Office2go.dk
  73. 73. Strategies when setting pricesMarket introduction stage:•cost high sales volume low•losses•Price strategy – skimming or penetration•InnovatorsGrowth stage:•costs reduced due to economies ofscale - sales volume increasessignificantly•profitability•prices to maximize market share•Early adaptors and majorityMature stage:•costs are very low sales volume peaks•prices tend to drop due to theproliferation of competing products - veryprofitable – Comp. pricing•Late majority – innovators are gone Penetration / Max pricing / HarvestingDecline stage: Skimming Survival pricing•sales decline•prices drop (lower prices may lead tolower value perception). Pricepromotion/sales•profits decline www.Office2go.dk
  74. 74. Promotion“In deciding how to best promote their products, marketing managersmust decide which promotional tools to use and with whom they wish tocommunicate” www.Office2go.dk
  75. 75. Push / Pull Strategies• Push-strategi er en betegnelse for promotion gennem grossister eller detailhandlere. Virksomheden prøver på den måde at få deres produkt i butikken ved for eksempel at tilbyde grossisten eller detailhandleren lang kredit, gaver eller høj avance.• Pull-strategi er en betegnelse for promotion, som sker direkte til forbrugeren eller virksomheder. Promotionen sker ved at gøre konsumenten/virks. opmærksom på at virksomhedens produkt(er) findes. Ofte ses denne form for markedsføring ved at der i bunden af reklamen står "Spørg efter den hos din forhandler". På denne måde bliver forhandleren/detailhandleren nødt til at sælge det pågældende produkt, og virksomheden har på den måde opnået en efterspørgsel på produktet. www.Office2go.dk
  76. 76. Push and pull strategies Channel control strategies• Push: Motivate channel members to perform more – Rewards – Bonuses – Acces to new products Typical smaller companies – Better prices – Exclusivity• Pull: Building demand an brand loyality – Media advertising – Consumer promotions – Instore promotions – Customer service Large and small companies – Extented warranties – Product improvements www.Office2go.dk
  77. 77. Promotion Mix• Advertising: Print, Radio, Television, Outdoor, Direct mail, Brochures, catalogues, In- store, Web, E-mails. Product placement, Viral marketing• Personal Selling: Relationship marketing, Sales presentation, Sales Meetings, telemarketing• Sales promotion: Coupons, Contests, Product samples, rebates, trade shows• Public relations: Articles in newspapers, TV and radio presentations, Speeches, seminars• Social Media: Facebook, Twitter, LinkedIn, MySpace, Blogs www.Office2go.dk
  78. 78. Decision sequence1. Define audience to be targeted2. Set the promotional objective 3. Set the promotion budget 4. Design the promotional mix 5. Evaluate the results www.Office2go.dk
  79. 79. 1. Define the audience M arket value Total value 5.405 mio kr. – 2003 data (Source: Byggemateriale Indust rien: BI, maj 2004)• Identify a homogenous segment that Large- 26% Local - Private- Prof. /Large 74% Housing Private- houses contractor Contractor/ industry housing association +(sommer differ from other segments and Carpenter association houses) 9,5% - 513 mkr. Renovation - 189 mkr. specify criteria that define the 2% - 108 mkr. 7% - 378 mkr. 7% - 378 mkr. 3% - 162 mkr. 32,4% segment 3,5%• Determine segment size and 21,0% - 1.135 mkr. 19% - 1.027 mkr. potential 13% - 703 mkr. 6% - 324 mkr. 6% - 324 mkr. 3% - 162 mkr. New building – Financial figures 67,7%• Visualize the market for better Fact s understanding Est . Large- contractor Local - Contractor/ Private- industry Prof. /Large housing Housing association Private- houses• Carpenter association +(sommer Prioritize the segments 27 44% 56% houses)• Target the segment or segments that you want to concur (target marketing) www.Office2go.dk
  80. 80. 2. Promotional objectives• What do you want to achieve? – Market share – Awareness – Brand building – Sales test• How do we want to reach the goal – Penetration – saturation - frequency• In what time frame do you want to achieve this goal?• Resources – Cost – Manpower www.Office2go.dk
  81. 81. Market introduction stage: Product life cycle - PLC•cost high sales volume low•losses•high prices – skimming or penetration•InnovatorsGrowth stage:•costs reduced due to economies ofscale - sales volume increasessignificantly•profitability•prices to maximize market share•Early adaptors and majorityMature stage:•costs are very low sales volume peaks•prices tend to drop due to theproliferation of competing products - veryprofitable•Late majority – innovators are goneDecline stage:•sales decline•prices drop (lower prices may lead tolower value perception)•profits decline www.Office2go.dk
  82. 82. Penetration - Frequency – Saturation : What can we do? Penetration (f(x)) U-penetrated • Media marketing - Above the line = 15% •Awareness & trialPenetrated = 85% • Occasion (activities) •Image • Creative content •Competitors Frekvensfordeling Frequency (f(x)) • Relationship marketing 50 40 Awr= 1,1 •Satisfaction • Direct marketing • Loyalty programs (Belov 30 20 •Loyalty 10 the line) 0 1 gang 2 gang 3 gang +4 gang •Relevance (offer) 35 Fordeling af spend Saturation (f(x)) • Price offers 30 Awr= 10 $ •Offer & mechanisms 25 20 • Promotion (Below the line) 15 10 •Willingness • Drivers •Relevance 5 0 50-100 100-150 150-200 250-300 350-400 400- www.Office2go.dk
  83. 83. What is our strategic challenge? Universe: 13.000.000 individuals Young adult Mothers Hispanic women African american female womenUnivers 3.500.000 6.500.000 1.600.000 1.400.000 85% 70% 18% 60%PenetrationFrequency 1,1 visit/year 4,8 visit/year 3,1 visit/year 1,5 visit/yearSaturation 10 $/visit 25 $/visit 22 $/visit 22 $/visit www.Office2go.dk
  84. 84. Penetration - Frequency – Saturation Penetration (f(x)) U-penetrated Is it realistic to achieve = 15% •Awareness & trialPenetrated = 85% a higher penetration - •Image •Competitors McDonald Frekvensfordeling Frequency (f(x)) 50 Is it realistic to get the 40 Awr= 1,1 •Satisfaction 30 20 •Loyalty target group to come 10 0 •Relevance (offer) more frequently 1 gang 2 gang 3 gang +4 gang Fordeling af spend Saturation (f(x)) 35 30 Awr= 10 $ •Offer & mechanisms Is it realistic to get the 25 20 15 •Willingness customer to use more 10 5 0 50-100 100-150 150-200 250-300 350-400 400- •Relevance money www.Office2go.dk
  85. 85. Simulation on target group What is our strategic challenge in our target group ?Ex. Young adult females Base line Sim 1 Sim 2 Sim 3 Sim 4 Sim 5 Sim 6Universe 3.500.000 3.500.000 3.500.000 3.500.000 3.500.000 3.500.000 3.500.000Penetration, % 85% 86% 87% 85% 85% 85% 85%Frequency, pr. year 1,10 1,10 1,10 1,20 1,30 1,10 1,10Saturation, $/visit 10 10 10 10 10 12 14Rev, mil $ 32,7 33,1 33,5 35,7 38,7 39,3 45,8Effect, t$. 400 800 3.000 6.000 6.600 13.100• Understand the proportions in your choice of actions• Prioritize and focus on the most important issues• Understand the realistic conditions behind : Saturation - Penetration – Frequency• What is the cost to gain the objective: GRP – gross rating points www.Office2go.dk
  86. 86. PLCRevenue Pricewar Penetration Frequency Saturation Time www.Office2go.dk
  87. 87. 3. Promotion budget• Percentage of sales• Competitive parity – promotion spending relative to market share• Objective and task – which task is in front of you and what dos it cost• Above and below the line? www.Office2go.dk
  88. 88. 4. Promotion mixPromotion mix Amount of info. Credibility Control over Cost to Strategyelements communicated message reach suitability consumerAdvertising Above the Low Good Low Pull strategy line - littlePersonal Lots of info Depends on Poor Very high Push strategyselling comp., brand. personSales Non ? Good Low and self Pull & Pushpromotion liquidatingPR Lots of info High Poor Very low Pull & Push www.Office2go.dk
  89. 89. Advertisement“Everyone can do this, but as everybody knows advertising is nothing more than a waste of money!”Why has there then beenadvertised for more than 2 billionDkr. in the last 12 months inDenmark alone…………… www.Office2go.dk
  90. 90. Today subject1. Differentiation - how2. Competitive strategies 1. Offensive competitive strategies 2. Defensive strategies 3. Market Niche strategies 4. Harvesting strategies 5. Divestment strategies3. 4 P’s 1. Price 2. Promotion 3. (Place (distribution)) 4. (Product) 90 www.Office2go.dk
  91. 91. Nothing more for today Jacob Holm Jacob.k.holm@gmail.com hoja@udd.cbs.dk Tlf: 24 42 11 32 www.office2go.dk 91
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