MGT 252 (Winter 2007) Principles of Marketing Jaewoo Joo 0. Introduction 1. What is marketing (Ch. 1) 2. Dynamic Marketing...
Outline <ul><li>Last Class </li></ul><ul><ul><li>Product  </li></ul></ul><ul><ul><ul><li>Product mix </li></ul></ul></ul><...
Last Class: Product Mix <ul><li>Product mix </li></ul><ul><ul><li>The collection of  product lines </li></ul></ul><ul><ul>...
Last Class: NPD
Last Class: Product Life Cycle
Today’s Class <ul><li>Services (ch. 8) </li></ul><ul><li>Pricing (ch. 15) </li></ul>
Services (ch. 8) <ul><li>Characteristics of services </li></ul><ul><li>Services value proposition </li></ul>
Where are we now? Environment PEST : Political, Economic, Social, Technological Market Analysis Customer  Analysis Target ...
A Goods-Services Continuum Nursing Theatre Advertising agency Air travel Television Fast-food restaurant, gas station Tail...
5 Characteristics of Services <ul><li>Intangibility </li></ul><ul><ul><li>difficult to sample and evaluate </li></ul></ul>...
Services Value Proposition <ul><li>The value proposition in a services setting is influenced by services’ characteristics ...
Pricing (ch. 15) <ul><li>Pricing Objective </li></ul><ul><li>Factors influencing Price </li></ul><ul><li>Pricing Strategie...
Where are we now? Environment PEST : Political, Economic, Social, Technological Market Analysis Customer  Analysis Target ...
Pricing <ul><li>Why important? </li></ul><ul><ul><li>Quite often, key determinant of success/failure </li></ul></ul><ul><u...
[1] Pricing Objective <ul><li>Always Profit Maximization!! </li></ul><ul><ul><li>While firms may use other strategies to s...
[2] Factors Influencing Price <ul><li>Putting simply </li></ul><ul><ul><li>Demand factors: </li></ul></ul><ul><ul><ul><li>...
Demand and Supply Curves P o Q o P Q P 1 Q 1 D 1 D 0 S
So… what happens? <ul><li>A firm engages in  price competition </li></ul><ul><ul><li>Regularly offering products priced as...
Price Competition (ex) <ul><li>Airlines:  </li></ul><ul><ul><li>One airline gets cost advantage and initiates price war.  ...
Nonprice Competition <ul><li>Many firms would prefer to engage in  nonprice competition </li></ul><ul><li>How to move away...
[3] Pricing Strategies and Tactics <ul><li>Cost-Based Pricing </li></ul><ul><li>Break-Even Analysis </li></ul><ul><li>Mark...
1. Cost-Based Pricing <ul><li>Set price based on total cost of the unit plus desired profit. </li></ul><ul><ul><li>Ignores...
1. Cost-Based Pricing (ex)
2. Break-Even Analysis <ul><li>A way to calculate the break-even point </li></ul><ul><ul><li>how much output (q) is requir...
2. Break-Even Analysis (ex) <ul><li>Futon Factory </li></ul><ul><ul><li>Fixed costs=$25,000 </li></ul></ul><ul><ul><li>Var...
3. Market-Based Pricing <ul><li>Pricing to  meet the competition </li></ul><ul><ul><li>Highly competitive market and undif...
4. Market Entry Pricing <ul><li>Skimming (“skim the cream”) </li></ul><ul><ul><li>Enter at a high price to take maximum sh...
4. Market Entry Pricing (ex)
3 & 4. Example <ul><li>What Your Gadget Really Costs  (Feb 2007) </li></ul><ul><li>“ Market research company  iSuppli  dig...
[4] Price Discrimination  <ul><li>First-degree price discrimination (perfect price discrimination) </li></ul><ul><ul><li>A...
[5] Psychology of Pricing <ul><li>How do consumers assess price differences? </li></ul><ul><ul><li>Ex 1: Which station do ...
[5] Psychology of Pricing <ul><ul><li>Ex 3: Which tuition plan would you rather have? </li></ul></ul><ul><ul><ul><li>A: Re...
[6] Discount <ul><li>Quantity discount (or Volume discount) </li></ul><ul><ul><li>The more you buy, the cheaper it becomes...
Cash discount (ex) <ul><li>Suppose that a buyer owes $200 and is offered a 5% discount if paid in 15 days.  Otherwise the ...
Summary <ul><li>Pricing Objective: Profit Maximization! </li></ul><ul><li>Factors influencing Price: Supply & Demant </li>...
True or False? <ul><li>Cost-based pricing is when a company uses its costs as the basis for setting its prices and does no...
Next Week <ul><li>Branding (chapter 9) </li></ul><ul><ul><li>Guest speaker! </li></ul></ul>
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MGT 252 (Winter 2007) Principles of Marketing

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  • Some companies are willing to swallow losses on some gadgets—for instance, gaming consoles—in hopes that they&apos;ll make up the difference, and then some, on sales of related gear, such as video game software. Other companies, including Apple, are able to sell many products for a healthy profit from the get-go. Market research company iSuppli takes it upon itself to tear down popular gadgets to find out the price of the component parts and the vendors supplying those ingredients.
  • MGT 252 (Winter 2007) Principles of Marketing

    1. 1. MGT 252 (Winter 2007) Principles of Marketing Jaewoo Joo 0. Introduction 1. What is marketing (Ch. 1) 2. Dynamic Marketing Environment (Ch. 2) 3. Understanding Customers and Segmentation, Targeting, and Positioning (Ch. 3 & 4) 4. Marketing Research (Ch. 6) 5. Product Planning & Services Marketing (Ch. 7 & 8) 6. Midterm test 7. Branding and Packaging (Ch. 9) 8. Pricing (Ch. 15) 9. Marketing Communication and Advertising (Ch. 10 & 11) 10. Selling, Sales Promotion, and Public Relations (Ch. 12) 11. Retailing & B2B Marketing (Ch. 13 & 5)
    2. 2. Outline <ul><li>Last Class </li></ul><ul><ul><li>Product </li></ul></ul><ul><ul><ul><li>Product mix </li></ul></ul></ul><ul><ul><ul><li>New Product Development </li></ul></ul></ul><ul><ul><ul><li>Adoption Process </li></ul></ul></ul><ul><ul><ul><li>Product Life cycle </li></ul></ul></ul><ul><li>Today’s Class </li></ul><ul><ul><li>Services </li></ul></ul><ul><ul><li>Pricing </li></ul></ul>
    3. 3. Last Class: Product Mix <ul><li>Product mix </li></ul><ul><ul><li>The collection of product lines </li></ul></ul><ul><ul><li>Breadth </li></ul></ul><ul><ul><ul><li>Number of product lines within the mix </li></ul></ul></ul><ul><ul><li>Depth </li></ul></ul><ul><ul><ul><li>variety of sizes, models, or items </li></ul></ul></ul><ul><ul><ul><li>within each product line </li></ul></ul></ul><ul><ul><li>Product line </li></ul></ul><ul><ul><ul><li>A group of related products </li></ul></ul></ul>TV 12” 14” HDTV … Camera 1-4 Megapixels 5-7 Megapixels 8+ Megapixels …
    4. 4. Last Class: NPD
    5. 5. Last Class: Product Life Cycle
    6. 6. Today’s Class <ul><li>Services (ch. 8) </li></ul><ul><li>Pricing (ch. 15) </li></ul>
    7. 7. Services (ch. 8) <ul><li>Characteristics of services </li></ul><ul><li>Services value proposition </li></ul>
    8. 8. Where are we now? Environment PEST : Political, Economic, Social, Technological Market Analysis Customer Analysis Target market needs Marketing Strategy Value Proposition : What we do; Why we’ll win STP : Segmentation, Targeting, Positioning Marketing Mix Product Competitor Analysis Why we can be better Company Analysis What we can do Price Place Promotion Services
    9. 9. A Goods-Services Continuum Nursing Theatre Advertising agency Air travel Television Fast-food restaurant, gas station Tailored suit Automobile House Dog food Necktie Salt Balanced items; equally weighed between goods and services Service-dominated item (intangible) Good-dominated item (tangible) Balanced
    10. 10. 5 Characteristics of Services <ul><li>Intangibility </li></ul><ul><ul><li>difficult to sample and evaluate </li></ul></ul><ul><li>Inseparability </li></ul><ul><ul><li>difficult to separate services from the provider; staff are essential to the delivery of quality services </li></ul></ul><ul><li>Heterogeneity </li></ul><ul><ul><li>virtually every service is different; very difficult to standardize quality </li></ul></ul><ul><li>Perishability </li></ul><ul><ul><li>those not sold can not be stored </li></ul></ul><ul><li>Fluctuating demand </li></ul><ul><ul><li>demand for some services fluctuates by season, or by time of day </li></ul></ul>
    11. 11. Services Value Proposition <ul><li>The value proposition in a services setting is influenced by services’ characteristics </li></ul><ul><ul><li>services firms must get the core service right </li></ul></ul><ul><ul><li>They must provide solid support service </li></ul></ul><ul><ul><li>And, they must deliver excellent service to their customers </li></ul></ul><ul><li>Make sure we understand these three different uses of the term “service” </li></ul>
    12. 12. Pricing (ch. 15) <ul><li>Pricing Objective </li></ul><ul><li>Factors influencing Price </li></ul><ul><li>Pricing Strategies & Tactics </li></ul><ul><li>Price discrimination </li></ul><ul><li>Psychology of Pricing </li></ul><ul><li>Discount </li></ul>
    13. 13. Where are we now? Environment PEST : Political, Economic, Social, Technological Market Analysis Customer Analysis Target market needs Marketing Strategy Value Proposition : What we do; Why we’ll win STP : Segmentation, Targeting, Positioning Marketing Mix Product Competitor Analysis Why we can be better Company Analysis What we can do Place Promotion Price Price
    14. 14. Pricing <ul><li>Why important? </li></ul><ul><ul><li>Quite often, key determinant of success/failure </li></ul></ul><ul><ul><li>More direct, instant and powerful impact, relative to other marketing variables </li></ul></ul><ul><ul><li>Dynamic strategy: (1) must adapt throughout the product life cycle and (2) easy to adjust or modify </li></ul></ul><ul><ul><li>At later stage, a sole alternative for competition </li></ul></ul><ul><li>Basic ideas </li></ul><ul><ul><li>Price positions a product in the market. </li></ul></ul><ul><ul><li>Lower prices increase market penetration. </li></ul></ul><ul><ul><li>Price decline throughout a market evolution. </li></ul></ul>
    15. 15. [1] Pricing Objective <ul><li>Always Profit Maximization!! </li></ul><ul><ul><li>While firms may use other strategies to simplify concepts, the final goal for all pricing choices is maximizing profits . </li></ul></ul><ul><li>Profit-Oriented </li></ul><ul><li>Sales-Oriented </li></ul><ul><li>Status Quo-Oriented </li></ul><ul><li>Sales-Oriented or Status Quo-Oriented? </li></ul><ul><ul><li>Should only be used when direct connection between sales and profits is understood. </li></ul></ul><ul><ul><ul><li>Increase Sales Volume (By X % over Y years) </li></ul></ul></ul><ul><ul><ul><li>Stabilize Prices/Meet Competition </li></ul></ul></ul>
    16. 16. [2] Factors Influencing Price <ul><li>Putting simply </li></ul><ul><ul><li>Demand factors: </li></ul></ul><ul><ul><ul><li>Market size, number of competitors, differentiation from competitors, promotion, distribution </li></ul></ul></ul><ul><ul><li>Supply factors: </li></ul></ul><ul><ul><ul><li>Marginal cost. From product and distribution. </li></ul></ul></ul><ul><ul><ul><li>Total Cost = Fixed Cost + Variable Cost </li></ul></ul></ul>
    17. 17. Demand and Supply Curves P o Q o P Q P 1 Q 1 D 1 D 0 S
    18. 18. So… what happens? <ul><li>A firm engages in price competition </li></ul><ul><ul><li>Regularly offering products priced as low as possible </li></ul></ul><ul><ul><li>Reacting to competitors price changes by engaging in a price war—price wars hurt financially weak competitors most & largest companies least. </li></ul></ul><ul><li>OR </li></ul><ul><li>A firm engages in nonprice competition </li></ul><ul><ul><li>Compete in another dimension (4P-price) in order to protect prices (i.e., product differentiation, product variety, product attributes, services, promotion, or distribution) </li></ul></ul>
    19. 19. Price Competition (ex) <ul><li>Airlines: </li></ul><ul><ul><li>One airline gets cost advantage and initiates price war. All others follow. All earn near zero profits. Some go out of business. </li></ul></ul><ul><li>Internet: </li></ul><ul><ul><li>Pets.com, Petstore.com, & Petsmart.com were price focused. Sold below marginal cost. Only Petsmart survived. </li></ul></ul>
    20. 20. Nonprice Competition <ul><li>Many firms would prefer to engage in nonprice competition </li></ul><ul><li>How to move away from competing mainly on price? </li></ul><ul><ul><li>Add “Value” </li></ul></ul><ul><ul><ul><li>Tries to offer the best price possible, but also adds other benefits to increase perceived value , while keeping its costs as low as possible </li></ul></ul></ul><ul><ul><li>Build brand equity and “Relationship” with customers </li></ul></ul><ul><ul><ul><li>Gives the best prices to the firm’s better customers as an incentive for them to remain loyal </li></ul></ul></ul>
    21. 21. [3] Pricing Strategies and Tactics <ul><li>Cost-Based Pricing </li></ul><ul><li>Break-Even Analysis </li></ul><ul><li>Market-Based Pricing </li></ul><ul><li>Two strategies of Market Entry Pricing </li></ul><ul><ul><li>Skimming </li></ul></ul><ul><ul><li>Penetration </li></ul></ul>
    22. 22. 1. Cost-Based Pricing <ul><li>Set price based on total cost of the unit plus desired profit. </li></ul><ul><ul><li>Ignores market demand </li></ul></ul><ul><li>In any conditions, costs (especially variable costs) are the lowest prices should go </li></ul><ul><li>As a rule, this is a weak method in most industries because it ignores the market condition. </li></ul>
    23. 23. 1. Cost-Based Pricing (ex)
    24. 24. 2. Break-Even Analysis <ul><li>A way to calculate the break-even point </li></ul><ul><ul><li>how much output (q) is required at each price to break even </li></ul></ul><ul><li>Needs to be done in conjunction with demand analysis </li></ul>Break-Even Point
    25. 25. 2. Break-Even Analysis (ex) <ul><li>Futon Factory </li></ul><ul><ul><li>Fixed costs=$25,000 </li></ul></ul><ul><ul><li>Variable costs=$30 per unit </li></ul></ul><ul><ul><ul><li>Cost of producing 1 unit therefore $25,030 </li></ul></ul></ul><ul><ul><li>If price is $80 then break even point is: </li></ul></ul><ul><ul><ul><li>$25,000/($80-$30)=500 </li></ul></ul></ul>
    26. 26. 3. Market-Based Pricing <ul><li>Pricing to meet the competition </li></ul><ul><ul><li>Highly competitive market and undifferentiated products </li></ul></ul><ul><ul><li>An oligopoly (a few firms, similar products) </li></ul></ul><ul><li>Pricing below competition </li></ul><ul><ul><li>commonly used by discount retailers to gain a competitive advantage —must have lower costs or will be forced out of business! </li></ul></ul><ul><li>Pricing above competition </li></ul><ul><ul><li>When the product is distinctive, the seller has acquired prestige, or it is able to add value for customers </li></ul></ul>
    27. 27. 4. Market Entry Pricing <ul><li>Skimming (“skim the cream”) </li></ul><ul><ul><li>Enter at a high price to take maximum short term profit before competition arrives </li></ul></ul><ul><ul><li>Conditions : </li></ul></ul><ul><ul><ul><li>Sufficiently high quality, better image to attract buyers </li></ul></ul></ul><ul><ul><ul><li>Difficult for competitors to enter and undercut </li></ul></ul></ul><ul><li>OR </li></ul><ul><li>Penetration </li></ul><ul><ul><li>Enter at a low price to build rapid trial and deter competition </li></ul></ul><ul><ul><li>Conditions: </li></ul></ul><ul><ul><ul><li>Market growth with lower price - i.e., price elastic </li></ul></ul></ul><ul><ul><ul><li>Economies of scale </li></ul></ul></ul><ul><ul><ul><li>Low price deters competitive entry </li></ul></ul></ul>
    28. 28. 4. Market Entry Pricing (ex)
    29. 29. 3 & 4. Example <ul><li>What Your Gadget Really Costs (Feb 2007) </li></ul><ul><li>“ Market research company iSuppli digs into your electronic gadgets to find out how much they cost the makers to make. You may have actually paid either more or less for them” </li></ul><ul><li>“ Each slide lists the product, maker, release date, retail price on the release date, and iSuppli's estimate of the cost of materials.” </li></ul>
    30. 30. [4] Price Discrimination <ul><li>First-degree price discrimination (perfect price discrimination) </li></ul><ul><ul><li>A firm has perfect information on the willingness to pay of each customer </li></ul></ul><ul><ul><ul><li>Personalized pricing: Sell to each user at a different price </li></ul></ul></ul><ul><ul><ul><ul><li>Internet pricing: Priceline, eBay model </li></ul></ul></ul></ul><ul><li>Third-degree price discrimination (or market segmentation) </li></ul><ul><ul><li>A firm is aware of differences in willingness to pay across groups, but not within a group </li></ul></ul><ul><ul><ul><li>Group Pricing: Set different prices for different groups </li></ul></ul></ul><ul><ul><ul><ul><li>Price sensitivity – student or senior discount </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Bundling (offer a product line and let users choose the version most appropriate for them, i.e., MS Office) </li></ul></ul></ul></ul>
    31. 31. [5] Psychology of Pricing <ul><li>How do consumers assess price differences? </li></ul><ul><ul><li>Ex 1: Which station do you prefer? </li></ul></ul><ul><ul><ul><li>Station A: Sells gas for 80 ¢ a liter and gives a 10¢ discount for cash </li></ul></ul></ul><ul><ul><ul><li>Station B: Sells gas for 70 ¢ a liter and charges 10¢ extra for credit cards </li></ul></ul></ul><ul><ul><li>Ex 2: Which one do you think better? </li></ul></ul><ul><ul><ul><li>Option A: Free no-interest checking if you have a balance of $1500 or more (savings accounts pay 4.5%) </li></ul></ul></ul><ul><ul><ul><li>Option B: $5 service charge if balance is less than $1500. </li></ul></ul></ul>
    32. 32. [5] Psychology of Pricing <ul><ul><li>Ex 3: Which tuition plan would you rather have? </li></ul></ul><ul><ul><ul><li>A: Regular tuition of $10,000 and a $5,000 scholarship to 50% of its needy or gifted students </li></ul></ul></ul><ul><ul><ul><li>B: Regular tuition of $5,000 and an additional $5,000 for students who don’t cross a threshold of academic performance or financial need. </li></ul></ul></ul><ul><li>Conclusion </li></ul><ul><ul><li>Frame purchases as “ gains” not losses </li></ul></ul><ul><ul><ul><li>Selective discounts (+) rather than surcharges (-) </li></ul></ul></ul><ul><ul><ul><li>Scholarship (+) rather than additional tuition (-) </li></ul></ul></ul>
    33. 33. [6] Discount <ul><li>Quantity discount (or Volume discount) </li></ul><ul><ul><li>The more you buy, the cheaper it becomes (cumulative or non-cumulative) </li></ul></ul><ul><ul><li>To reward large purchases and encourage repeat buying </li></ul></ul><ul><li>Cash discount </li></ul><ul><ul><li>A deduction granted to buyers for paying their bills within a specified period of time ( after first deducting trade and quantity discounts from the base price ) </li></ul></ul><ul><ul><li>To encourage speedy payment and enhance the seller’s cash flow </li></ul></ul>
    34. 34. Cash discount (ex) <ul><li>Suppose that a buyer owes $200 and is offered a 5% discount if paid in 15 days. Otherwise the entire bill must be paid in 60 days. This is written as “5/15, n/60”. </li></ul><ul><li>Deal or No deal? </li></ul><ul><ul><li>Calculate the value of this cash discount! (depending on (a) percentage of discount, (b) length of discount period, and (c) time bill due) </li></ul></ul><ul><ul><li>In essence, the value of the cash discount is the opportunity cost of delaying payment </li></ul></ul><ul><ul><li>5% in 15 days. Full payment in 60 days. Roughly, a 5% discount for 45 days . </li></ul></ul><ul><ul><li>It is same as 5%/45= 0.00111% per day </li></ul></ul><ul><ul><li>Then, it is 0.00111*365= 40.56% per year </li></ul></ul><ul><ul><li>40.5% is a high annual interest rate. Take the discount!!! </li></ul></ul>
    35. 35. Summary <ul><li>Pricing Objective: Profit Maximization! </li></ul><ul><li>Factors influencing Price: Supply & Demant </li></ul><ul><ul><li>Price competition vs. Nonprice competition </li></ul></ul><ul><li>Pricing Strategies & Tactics </li></ul><ul><ul><li>Cost-Based Pricing </li></ul></ul><ul><ul><li>Break-Even Analysis </li></ul></ul><ul><ul><li>Market-Based Pricing </li></ul></ul><ul><ul><li>Two strategies of Market Entry Pricing </li></ul></ul><ul><ul><ul><li>Skimming </li></ul></ul></ul><ul><ul><ul><li>Penetration </li></ul></ul></ul><ul><li>Price discrimination: First degree vs. Third degree </li></ul><ul><li>Psychology of Pricing: People love gains! </li></ul><ul><li>Discount: Quantity discount or Cash discount </li></ul>
    36. 36. True or False? <ul><li>Cost-based pricing is when a company uses its costs as the basis for setting its prices and does not take the customer or market into account. </li></ul><ul><li>True </li></ul>
    37. 37. Next Week <ul><li>Branding (chapter 9) </li></ul><ul><ul><li>Guest speaker! </li></ul></ul>

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