Pricing & promotion

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An overview of pricing and promotional issues

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Pricing & promotion

  1. 1. Slide 12.1 Lecture 9 Pricing & Promotion Refer to any introductory marketing text Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.2 PRICE: A Definition • Marketing involves the exchange of something of value. • Price is a statement of value because it is the amount of money given in exchange for a product or service. • Price is an important component in the marketing mix. In marketing, the strategic skill is to build the products worth and increase its value to the consumer. BHO 2258 VU 2008 2 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  2. 2. Slide 12.3 WHAT IS PRICE? Prices go by many names - • rent, tuition, fee, fare, rate, interest, dues, wages, premium, etc. - • whatever its called it is what one must give up as an exchange for something of value BHO 2258 VU 2008 3 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.4 PRICING - OVERVIEW (1) • Consumers react to price more than they do to other mix variables • Most purchase decisions place price as the most important consideration • Impacts heavily on the exchange • Decisions on setting price is often made quickly after less analysis • Often treated by product managers as routine or intuitive, often based on cost BHO 2258 VU 2008 4 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  3. 3. Slide 12.5 PRICING - OVERVIEW (2) • Cost based data is readily available in firm • Product managers cannot charge price lower than cost (sets floor) • Customer more concerned about value rather than cost • Price higher than value results in lost sales, leading to lowering of price. • Different prices produce different levels of demand • Price is not determined by internal factors alone (costs) but also by customers BHO 2258 VU 2008 5 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.6 View of Pricing: Buyer vs Seller Buyer View • Price is something of value given up • Purchasing power impacts on choices – price determines what we buy Seller View • Price represents a revenue stream • Contributes to profit • Accumulation of costs • Important in marketing mix BHO 2258 VU 2008 6 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  4. 4. Slide 12.7 Demand Curve BHO 2258 VU 2008 7 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.8 Inelastic and Elastic Demand BHO 2258 VU 2008 8 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  5. 5. Slide 12.9 COSTS • Costs alone should never determine price • Costs have a critical role in formulating price strategy • Pricing decisions relate to sales volume • Sales involve cost of distribution and marketing • Effective pricing requires an evaluation of buyers will pay and on this basis set quantities to produce and markets to serve. BHO 2258 VU 2008 9 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.10 EXAMPLE Camera company Olympus • Determined what features future customers would value • MR- focus groups, interviews, and a complete competitor analysis (capabilities) • Set a price point for a new compact camera at $100 • Subtracted margins for dealers, import costs, its own margin and arrived at a preliminary target cost • This target cost forced scientists to develop anew BHO 2258 VU 2008 10 technology to meet the cost target Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  6. 6. Slide 12.11 Perceived Value • Our reaction to price has a lot to do with perceived value. • Our notion what is a good and bad price. • We compare price being charged to perceived value or benefit that will arise from purchase. • We also compare price to a reference point (like price paid before). BHO 2258 VU 2008 11 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.12 Setting price • The maximum price the product manager can charge is the customer value. • The minimum is the variable cost BHO 2258 VU 2008 12 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  7. 7. Slide 12.13 Price Bands Explained • Prices can vary even within target segments referred to as “price bands.” • There is a positive relationship between price and perceived quality. • Curves in previous slide represent distribution of prices within segment – more the spread the wider the variation in price. BHO 2258 VU 2008 13 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.14 Why do variations exist within • Consumers become brand loyal to certain products segments? or suppliers • In purchase decision they tend to rate price lower compared to other factors eg. reliability, brand equity, image, etc • In some industries price is less visible (esp in industrial products – working of a price list). Compare this to a supermarket or shop where price is displayed. • The larger the number of suppliers and the more intense the competition, the narrower the price band. BHO 2258 VU 2008 14 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  8. 8. Slide 12.15 Some key pricing questions • How consumers make purchase decisions? • How important is price in the overall decision? • How important is price in the purchase decision process for different individuals? • How important is (total) product to the customer? • To answer these you need in-depth knowledge of the customer BHO 2258 VU 2008 15 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.16 An Illustration of the Gap between Customer Value and Cost $ Customer Value Price (A) {keeping value for firm – more profit} Price (B) { value pricing} Cost 0 BHO 2258 VU 2008 16 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  9. 9. Slide 12.17 Overall estimates of customer • value Interview customers to determine economic value or benefits of using the product • Focus group and surveys • Aims to measure willingness-to-pay BHO 2258 VU 2008 17 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.18 Compositional approach and • Direct customer questions ratings of Importance about value product attributes • Customers rank order or rate the importance of product attributes • Compared to substitutes or competitors offerings BHO 2258 VU 2008 18 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  10. 10. Slide 12.19 Consumers Internal Reference • The “fair price, or what the product ought to cost Prices the customer • The price frequently charged • The last price paid • The upper amount someone would pay • The lower threshold or lowest amount a customer would pay • The price of the brand usually bought • The average price charged for similar products • The expected future price • The typical discounted price BHO 2258 VU 2008 19 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.20 Influences on the Product Manager’s Pricing Decisions Psychological aspects • Reference prices • Price/Perceived quality Pricing objectives: • Penetration Stage of the • Skimming product life • Customer value cost cycle • Return-on-investment • Stability Industry conditions • Threat of new entrants • Power of buyers/suppliers • Rivalry • Substitutes BHO 2258 • Capacity situation VU 2008 20 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  11. 11. Slide 12.21 Factors Affecting Price BHO 2258 VU 2008 21 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.22 EXTERNAL FACTORS AFFECTING PRICING • Demand levels DECISIONS • Market structures • Consumer Perceptions of Price and Value, price sensitivity • Demand-Price relationship, elasticity • Competitors’ Prices and Offers • Other External Factors- price protections BHO 2258 VU 2008 22 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  12. 12. Slide 12.23 Other Factors Affecting Price • Stage of the product life cycle • Category conditions • Threat of new entrants • Power of buyers/sellers • Rivalry • Pressure from substitutes • Unused capacity BHO 2258 VU 2008 23 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.24 Price & PLC • Introductory Stage Skimming or Penetration Strategy? • Growth Stage Price to gain or hold market share Countering competitors’ pricing strategy • Mature Stage Constant price pressure Price cutting Lower margins • Decline Stage Low demand, low prices , slim margins BHO 2258 VU 2008 24 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  13. 13. Slide 12.25 Pricing Environment Analysis • Threat of New Entrants • Power of Buyers/Suppliers • Rivalry • Pressure from Substitutes • Unused Capacity BHO 2258 VU 2008 25 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.26 Market-Based Pricing Model Logic Application Pricing Price set to meet customer needs, Price = $100 Logic competition, and product Based on desired positioning Starts product positioning Here Price discounted to achieve Price = $50 desired reseller margins Based on 50% retail margin Net price set is selling price less Price = $40 distribution costs Based on 20% wholesale margin Target margins established based Net Price = $40 on profit goals to the manufacturer Cost targets established to meet Cost = $20 marketing objectives Unit margin= $20, % margin= 50% BHO 2258 VU 2008 26 Source: Market-Based Management Strategies by R. J. Best, © 1997. Adapted by permission of Prentice-Hall, Inc., Upper Saddle River, NJ. Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  14. 14. Slide 12.27 Cost-Plus Pricing Model Logic Application Price to customer = $75 Result is price set to customers Based on stream of costs Resellers mark up price to Price to retailer = $37.50 achieve desired margins Based on 50% retail margin Set price to yield desired margin Price to Wholesaler = $30 and profits Based on 20% wholesale margin At target volume, what margin is Desired Unit Margin = $10 needed for set profitability? % margin = 33% Pricing What is the total cost of making Logic Total Cost = $20 the product? Starts Fixed costs = $10, Variable = $10 Here BHO 2258 VU 2008 27 Source: Market-Based Management Strategies by R. J. Best, © 1997. Adapted Paul Trott, Innovation Management andof Prentice-Hall, Inc., Upper Saddle River, NJ. by permission New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.28 COST-PLUS PRICING • Historically common • Pricing based on a fair return over all costs • Starts with the cost of the product and desired margin • Price is set and product sold to channel • Channel margins are added • Why is it impossible to determine a products unit cost before determining its price? • Unit costs change with volume • TC=FC+VC • Unit cost is a moving target • Price affects volume and Volume affects cost BHO 2258 VU 2008 28 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  15. 15. Slide 12.29 PROBLEMS WITH COST PLUS PRICING • Difficult to determine in advance • Difficult to allocate joint costs to specific products • Not based on realistic profit or market share objectives • Ignores elasticity of demand • Generally disregards competition • Buyers more concerned about value for money • Difficult to determine fair return • Ignores capital requirements and ROI • Many costs vary with volume (which depends on price) BHO 2258 VU 2008 29 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.30 BE MARKET SHARE • Market Share is contrained between 0 - 100 % • BEMS a better framework from which to judge profit potential and risk • BEMS = (BE volume / Market Demand) x 100 • If Market demand = 1m units per year and BE volume = 90,000 • BEMS = 9% • If the firm’s target MS =10% there is risk of loss. would feel more comfortable if BEMS was 3 - % BHO 2258 VU 2008 30 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  16. 16. Slide 12.31 QUESTION?Would market- based prices differ in segments? • Market-based pricing starts with customers • Goal is to create greater customer value • Different market-price strategies would be developed in response to different customer needs • A price sensetive segment would be most attracted to low pice regardless of additional product benefits • A quality - sensitive segment may pay more for extra benefits they desire (product featues, service, brand) • See example on mobile phones BHO 2258 VU 2008 31 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.32 QUESTION? Is there a relationship between price and market growth • Market growth and market demand are often dependent on price levels • At high prices many customers simply cannot enter the market • As price of mobiles phones, computers decrease more customers enter the market • Price therefore regulates both the size of the market and how fast it will grow • see example BHO 2258 VU 2008 32 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  17. 17. Slide 12.33 EXAMPLE • At $5 the estimated demand is 9000 units • Price elasticity is -2.20 • 1% fall in price = 2.2% rise in demand • 10% fall in price = 22% rise in dd = 10980 • Can continue to lower price to make demand grow till elasticity reaches -1.0. At this point sales revenue is maximum. At this point increase or decrease in price will result in lower sales revenue (but not necessarily profit) BHO 2258 VU 2008 33 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.34 Price setting: information needs In order to set price, we need: • An analysis of product costs. • Expected profit levels. • Market needs and wants. • Competition and lead times. • Expected buying responses of market segments. • The key to determining price is the understanding of the value that customers place on the product. BHO 2258 VU 2008 34 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  18. 18. Slide 12.35 Selecting the price strategy • How much flexibility is there for price levels How far above cost should a firm price a new product — skimming versus penetration options? • How visible should price be in the promotion of a new product? • Illustrative pricing strategies (see exhibit 10.8) BHO 2258 VU 2008 35 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.36 Pricing an innovative product • Market Skimming Strategy • Market Penetration Strategy BHO 2258 VU 2008 36 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  19. 19. Slide 12.37 MARKET-SKIMMING • PRICING. High initial prices to skim maximum profits from each successive layer of the target market. • Skimming strategies typically set a price as high as some segments will bear. • Used when the cost of producing small volume are not prohibitive. • Works well only when product quality, image, and innovation are sufficiently BHO 2258 VU 2008 37 distinct Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.38 EXAMPLE • Market Skimming Pricing Eg Polaroid’s original instant camera charged the highest price it could As segment got saturated it lowered price to capture the next layer of the price sensitive customers BHO 2258 VU 2008 38 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  20. 20. Slide 12.39 MARKET-PENETRATION PRICING. • Some innovations are priced low upon introduction in order to capture large market share quickly thus penetrating the market. • Works well in highly price sensitive markets with volume potential. • Helps accelerate overall market adoption rates. • Discourages competitors from entering. BHO 2258 VU 2008 39 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.40 EXAMPLE • Market Penetration Pricing Eg Microsoft with Windows 95 set the price as low as possible to win large market share (when its costs began to fall it cut price even further) Eg Netscape browser started off free. Once it captured 80%of market it introduced better versions for a low price to retain customer base. BHO 2258 VU 2008 40 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  21. 21. Slide 12.41 Question? • How do you decide whether a low or a high price strategy is appropriate for a new innovative product? • What would you need to consider? BHO 2258 VU 2008 41 Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008Slide 12.42 The Communications Mix Company mission or vision Overall business plan Unit marketing plan Unit communication plan and objectives Communications strategies Advertising Public relations Sale Direct Packaging promotion marketing and graphics Advertising objectives Advertising strategy Advertising tactics BHO2258 sa Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008 42
  22. 22. Slide 12.43 Strategic Advertising Objectives BHO2258 sa Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008 43Slide 12.44 Types of Advertising Objectives • Customer-Focused Objectives • Exposure-Oriented Objectives • Specific Objectives BHO2258 sa Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008 44
  23. 23. Slide 12.45 Factors Affecting the Advertising and Promotion Budget 1. The product is relatively standardized (as opposed to when the product is produced or supplied to order). 2. There are many end users. 3. The typical purchase amount is small. 4. Sales are made through channel intermediaries rather than directly to end users. 5. The product is premium priced. 6. The product has a high contribution margin. 7. The product or service has a small market share. BHO2258 sa Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008 45Slide 12.46 Trade Promotions • Financial incentives and discounts given to retailers and distributors • Slotting allowances, point of purchase displays, contests, training programs • Aim to secure shelf space and prominance in the store • A brand at eye level increases sales BHO2258 sa Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008 46
  24. 24. Slide 12.47 SALES PROMOTION STRATEGY SALES PROMOTION consists of various incentives, mostly short term, intended to stimulate quicker and/or greater purchase of particular goods/services by end-user consumers or value chain organizations. The strategy process is similar to the design of advertising strategy. BHO2258 sa Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008 47Slide 12.48 Aims of consumer promotions • Change choices • Enhance the attitudes and loyalty towards a brand • Sampling – to create brand associations and kick-start WOM • Markets are becoming more precise in how they deliver samples – point of use – eg Dove body wash and deodorants handed to gym users at end of session. BHO2258 sa Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008 48
  25. 25. Slide 12.49 Why do markets sponsor events? • To identify with particular target market or lifestyle – linking brands to events – eg Subaru – skiing events – 4WD cars • To increase awareness of company or product • To reinforce band association / perception – eg Seiko as official timer at Olympics • To enhance corporate image and commitment to community- eg Colgate Palmolive sponsoring the Starlight Foundation BHO2258 sa Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008 49Slide 12.50 Impacts of Promotion • Temporary retail price reductions substantially increase sales • The frequency of deals changes the consumer’s reference price • Cross-promotional effects are asymmetric, and promoting higher quality brands affects weaker brands BHO2258 sa Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008 50
  26. 26. Slide 12.51 Impacts of Promotion (cont) • Display and feature advertising have strong effects on item sales • Advertised promotions can result in increased store traffic • Promotions affect sales in complementary and competitive categories BHO2258 sa Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008 51Slide 12.52 Composition of Promotion Strategy Interactive/Internet Marketing Direct Advertising Marketing Promotion Components Personal Sales Selling Promotion Public Relations Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008
  27. 27. Slide 12.53 EXAMPLES OF COMMUNICATION OBJECTIVES  Need Recognition  Finding Buyers  Brand Building  Evaluation of Alternatives  Decision to Purchase  Customer Retention Paul Trott, Innovation Management and New Product Development, 4th Edition, © Pearson Education Limited 2008

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