Seminar 7
Managing Marketing Processes
----
Value Creation and Price Setting
Robin Teigland
Master of General Management
S...
Seminar 7 Overview
 Guest Speaker, Karin Krook
 Sales and Marketing Director
 Elite Hotels
 American Airlines' Value P...
Case Study: American Airlines
 Questions:
 What is “Value Pricing” and why did AA introduce it?
 What results did AA ex...
1. Long-term goal (objective)
1. Scope of the firm (customer or offering,
geographic location, vertical integration
1. Com...
5
Porter’s five forces of competition
ENTRANTS
SUPPLIERS BUYERS
SUBSTITUTES
INDUSTRY
COMPETITORS
Rivalry among
existing fi...
6
Generic Strategies in the Auto Industry
Scope
(Customer/
variety)
Type of
competitive advantage
Broad
Narrow
Differentia...
Avoid being stuck in the middle
Market share
Return on
investment
High
HighLow
Low
Differentiation Cost leadership
Porter 7
CHP: 8&10-8
Segmentation, Targeting, and Positioning
Market Segmentation
1. Identify bases for
segmenting market
2. Develo...
Copyright © 2011 Pearson Education, Inc.
Publishing as Prentice Hall
7-9
What is a Market Segment?
A market segment consis...
Copyright © 2011 Pearson Education, Inc.
Publishing as Prentice Hall
7-10
Approaches to Segmenting Consumer Markets
Geogra...
CHP: 8&10-11
Segment 1Segment 1
Segment 2Segment 2
Segment 3Segment 3
Segment 1Segment 1
Segment 2Segment 2
Segment 3Segme...
Targeting Strategies
12
http://www.globalspec.com/reference/47105/203279/undifferentiated-concentrated-and-
differentiated...
The Marketing Mix
Copyright © 2011 Pearson Education, Inc.
Publishing as Prentice Hall
1-13
Setting Pricing Policy
1. Selecting the pricing objective
2. Determining demand
3. Estimating costs
4. Analyzing competito...
Step 1: Selecting the Price Objective
 Survival
 Short-term objective
 Maximum current profit
 Short term over long te...
Step 2: Determining Demand
 Price sensitivity

Total Cost of Ownership (TCO)
 Estimating demand curves
 Price elastici...
Estimating Current Demand:
Total Market Potential
 Calculations
 Multiple potential number of buyers by average
quantity...
Step 3: Estimating Cost
 Types of Cost and Levels of Production

Fixed costs (overhead)

Variable costs

Total cost

...
Step 4: Analyzing Competitors’ Cost, Prices,
and Offers
 Positioning in relation to competition
 Costs
 Prices
 Possib...
Step 5: Selecting a Pricing Method
 Markup Pricing
Unit Cost = variable cost + (fixed cost/unit sales)
Markup Price= unit...
Step 6: Selecting the Final Price
 Influence of the Other Marketing Elements

Brands with average relative quality but h...
Dynamic pricing
22
23
Exploiting differences, not doing the same!
Competitive advantage:
Ability to outperform others
due to exploiting uniqu...
16-24
Sell value,
not price.
Kotler on
Marketing
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Managing Marketing Processes_Seminar 7

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Seventh seminar for my Managing Marketing Processes course in the MGM program at the Stockholm School of Economics, http://www.hhs.se/EDUCATION/MSC/MSCGM/Pages/default.aspx

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  • http://articles.mcall.com/1993-01-03/business/2909615_1_value-pricing-american-airlines-three-airlines
  • Grant 2008: the nature of strategy in a turbulent direction – it ’s about direction, not detailed planning. Madonna (like Virgin or Google) displays clear direction combined with the flexibility to adapt to and exploit unexpected change Collis & Rukstad: It is always easy to claim that maximizing shareholder value is the company ’s objective. In some sense all strategies are designed to do this. However, the question to ask when creating an actionable strategic statement is, Which objective is most likely to maximize shareholder value over the next several years?What our competitive game plan will be BALANCED SCORECARD How we will monitor and implement that plan of a Strategy Statement OBJECTIVE = Ends SCOPE = Domain ADVANTAGE = Means MISSION Why we exist VALUES What we believe in and how we will behave VISION What we want to be STRATEGY What our competitive game plan will be BALANCED SCORECARD How we will monitor and implement that plan The BASIC ELEMENTS of a Strategy Statement OBJECTIVE = Ends SCOPE = Domain ADVANTAGE = Means Single goal – profitability vs market share – what matters more? Scope - 3 dimensions – customer or offering, geographic location, vertical integration, clearly defined areas Advantage –1) value proposition – why should people buy your product over others? 2) combination of activities to deliver value proposition
  • Three horizontal forces and two vertical forces Picture from Grant 2008 All competing to get a share of the profits
  • Survival Maximize current profits Maximize market share Market-penetration pricing Best when: Market is highly price-sensitive, and a low price stimulates market growth, Production and distribution costs fall within accumulated production experience, and Low price discourages actual and potential competition
  • http://www.telegraph.co.uk/news/worldnews/asia/japan/8136743/Japanese-vending-machine-tells-you-what-you-should-drink.html
  • Managing Marketing Processes_Seminar 7

    1. 1. Seminar 7 Managing Marketing Processes ---- Value Creation and Price Setting Robin Teigland Master of General Management Stockholm School of Economics September 19, 2013
    2. 2. Seminar 7 Overview  Guest Speaker, Karin Krook  Sales and Marketing Director  Elite Hotels  American Airlines' Value Pricing - A  Group Presentations 2
    3. 3. Case Study: American Airlines  Questions:  What is “Value Pricing” and why did AA introduce it?  What results did AA expect from this plan? What are the implicit assumptions in these estimates?  What is the likely reaction of each of the competitors? In the face of the likely competitive reaction, what should AA do? 3
    4. 4. 1. Long-term goal (objective) 1. Scope of the firm (customer or offering, geographic location, vertical integration 1. Competitive advantage Components of business strategy Collis & Rukstad 2008 4
    5. 5. 5 Porter’s five forces of competition ENTRANTS SUPPLIERS BUYERS SUBSTITUTES INDUSTRY COMPETITORS Rivalry among existing firms Threat of new entrants Threat of substitutes Bargaining power of suppliers Bargaining power of buyers http://www.youtube.com/watch? v=mYF2_FBCvXw&feature=channel Porter, 2008
    6. 6. 6 Generic Strategies in the Auto Industry Scope (Customer/ variety) Type of competitive advantage Broad Narrow Differentiation Low cost Mercedes (Differentiation) Nissan (Cost leadership) BMW (Differentiation- based focus) Lada (Cost-based Focus)
    7. 7. Avoid being stuck in the middle Market share Return on investment High HighLow Low Differentiation Cost leadership Porter 7
    8. 8. CHP: 8&10-8 Segmentation, Targeting, and Positioning Market Segmentation 1. Identify bases for segmenting market 2. Develop segment profiles Market Segmentation 1. Identify bases for segmenting market 2. Develop segment profiles Market Targeting 3. Develop measure of segment attractiveness 4. Select target segments Market Targeting 3. Develop measure of segment attractiveness 4. Select target segments Market Positioning 5. Develop positioning for target segments 6. Develop marketing mix for each segment Market Positioning 5. Develop positioning for target segments 6. Develop marketing mix for each segment
    9. 9. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7-9 What is a Market Segment? A market segment consists of a group of customers who share a similar set of needs and wants.
    10. 10. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7-10 Approaches to Segmenting Consumer Markets Geographic Demographic Psychographic Behavioral 1. Descriptive: Start with consumer and then look at needs 2. Behavior & Attitudes: Start with product and then look at descriptives
    11. 11. CHP: 8&10-11 Segment 1Segment 1 Segment 2Segment 2 Segment 3Segment 3 Segment 1Segment 1 Segment 2Segment 2 Segment 3Segment 3 Company Marketing Mix Company Marketing Mix Company Marketing Mix Company Marketing Mix Company Marketing Mix 1 Company Marketing Mix 1 Company Marketing Mix 2 Company Marketing Mix 2 Company Marketing Mix 3 Company Marketing Mix 3 MarketMarket A. Undifferentiated Marketing B. Differentiated Marketing C. Concentrated Marketing Market Targeting Market Coverage Strategies
    12. 12. Targeting Strategies 12 http://www.globalspec.com/reference/47105/203279/undifferentiated-concentrated-and- differentiated-targeting-strategies
    13. 13. The Marketing Mix Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 1-13
    14. 14. Setting Pricing Policy 1. Selecting the pricing objective 2. Determining demand 3. Estimating costs 4. Analyzing competitors’ costs, prices, and offers 5. Selecting pricing method 6. Selecting the final price 14
    15. 15. Step 1: Selecting the Price Objective  Survival  Short-term objective  Maximum current profit  Short term over long term performance?  Maximum market share  Market penetration  Maximum market skimming  High current demand  Product-quality leadership  Affordable luxury
    16. 16. Step 2: Determining Demand  Price sensitivity  Total Cost of Ownership (TCO)  Estimating demand curves  Price elasticity of demand 16-16
    17. 17. Estimating Current Demand: Total Market Potential  Calculations  Multiple potential number of buyers by average quantity each purchases times price  Chain-ratio method Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 3-17
    18. 18. Step 3: Estimating Cost  Types of Cost and Levels of Production  Fixed costs (overhead)  Variable costs  Total cost  Average cost  Accumulated Production  Experience curve (Learning curve)  Differentiated Marketing Offers  Activity-based cost (ABC) accounting  Target Costing
    19. 19. Step 4: Analyzing Competitors’ Cost, Prices, and Offers  Positioning in relation to competition  Costs  Prices  Possible price or other reactions  More  Same  Less
    20. 20. Step 5: Selecting a Pricing Method  Markup Pricing Unit Cost = variable cost + (fixed cost/unit sales) Markup Price= unit cost/ (1 – desired return on sales)  Target-return Pricing Target-return price = unit cost + (desired return X investment capital)/unit sales  Perceived-value Pricing Price buyers, value buyers, loyal buyers  Value Pricing Reengineering operations to become low cost without sacrificing quality while reducing prices  Going-rate Pricing Based on competitors’ prices  Auction-type Pricing English, sealed bids
    21. 21. Step 6: Selecting the Final Price  Influence of the Other Marketing Elements  Brands with average relative quality but high relative advertising budgets charged premium prices  Brands with high relative quality and high relative advertising budgets obtained the highest prices  The positive relationship between high advertising budgets and high prices held most strongly in the later stages of the product life cycle for market leaders  Company Pricing  Consistent with company pricing policies  Gain-and-risk-sharing Pricing  Perceived level of risk by consumer?  Impact of prices on other parties (stakeholders)
    22. 22. Dynamic pricing 22
    23. 23. 23 Exploiting differences, not doing the same! Competitive advantage: Ability to outperform others due to exploiting unique features of firm’s resources and capabilities Grant 2008
    24. 24. 16-24 Sell value, not price. Kotler on Marketing
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