Getting the price right for your product or service

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This presentation covers the main issues when thinking about effective pricing strategies. It comes from the marketing forum at the Bizface UK business Forum

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  • Introduce me as final year PhD on organizational attachment in IT outsourcing. Explain background in IT and managing people remotely. Masters and doctoral research at Birkbeck revealing interesting issues about intranets and e-mail usage. (Possibly explain a little about organizational focus as I see all other talks are to do with shopping type stuff). Could get attention by asking how many of them class themselves as remote workers or work from home sometimes? Aim of the talk today is to highlight the problems (still) faced by managers and staff in these days of increased reliance on electronic communication, and suggest that information overload is not just a ‘stress/overwork’ issue but can lead to increased isolation for remote workers.
  • Getting the price right for your product or service

    1. 1. Dr. Stephanie J. Morgan Marketing Mix 2 - Price and Place Marketing Principles and Practice Download at www.bizface.co.uk
    2. 2. Objectives <ul><li>Formulate a pricing strategy and discuss the issues involved. </li></ul><ul><li>Formulate a distribution strategy and explain the importance of channel management. </li></ul>
    3. 3. Pricing in the Marketing Mix <ul><li>Only aspect of the mix that makes you money. </li></ul><ul><li>May be special issues with services due to calculating costs, making up on inseparability and perishability. </li></ul><ul><li>Price in services may aid customer evaluation more – perceived quality; may also be more important for segmenting and targeting clearly. </li></ul><ul><li>For non-profit organizations may still be some aspects you need to price, may help you understand your suppliers and how they price things to you, may help you understand your own value. </li></ul>
    4. 4. Pricing methods 3 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Cost Competition Marketing Pricing methods
    5. 5. The demand curve Q 2 Q 1 P 2 P 1 Price Quantity D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill 2
    6. 6. Cost-oriented Pricing Direct Costs (per unit) £2 Fixed Costs £200,000 Expected Sales 100,000 Costs per Unit Direct Costs £2 Fixed Costs (200K/100K) £2 Full Costs £4 Mark-up (10%) £0.4 Price (costs + mark-up) £4.4 Costs are taken into account only when they are directly attributable to the production of a particular product. Fixed costs or overheads are not included in the marginal cost. Marginal cost for the example: Fixed Costs £200,000 Expected Sales 100,000 Marginal Cost £2 Mark-up (10%) £0.2 Marginal Price £2.2 Full Cost Pricing Direct (Marginal) Cost Pricing 4 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill
    7. 7. Determining the break even point Losses Break even point Fixed costs Total revenue Total variable costs Total cost Profits Units of Production Money (£) 5 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill
    8. 8. Competitor-oriented Pricing Going-rate Pricing : With no product differentiation producers are forced to accept the going rate. In reality there is almost no situation in which no differentiation occurs. Competitive bidding : The supplier will price according to a specification drawn up by the purchaser. Usually the supplier will choose the lowest (most competitive) price tendered. Statistical modelling has resulted in the following basis for calculating expected profits. Expected profit = Profit X Probability of winning 6 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill
    9. 9. 7 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Marketing-orientated pricing Effect on distributors/ retailers Negotiating margins Costs Political factors Product line pricing Competition Price-quality relationships Explicability Marketing strategy Value to customer Marketing-oriented pricing
    10. 10. New product launch strategy Rapid skimming 9 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill High Slow skimming Rapid penetration Slow penetration Price Low Promotion High Low
    11. 11. Characteristics of high price market segments <ul><li>Product provides high value </li></ul><ul><li>Customers have high ability to pay </li></ul><ul><li>Customer and bill payer are different </li></ul><ul><li>Lack of competition </li></ul><ul><li>High pressure to buy </li></ul>10 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill
    12. 12. Conditions for charging low prices <ul><li>Only feasible alternative </li></ul><ul><li>Market presence or domination </li></ul><ul><li>Experience curve effect </li></ul><ul><li>Make money later </li></ul><ul><li>Make money elsewhere </li></ul><ul><li>Barrier to entry </li></ul><ul><li>Predation </li></ul>11 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill
    13. 13. 13 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Pricing using EVC analysis (Industrial/Organizational Markets) Life-cycle cost Purchase price Start-up costs Post-purchase costs 200 000 200 000 40 000 Added value Reference product New product X New product Y 50 000 30 000 120 000 100 000 20 000 80 000 EVC = 90 000 120 000 30 000
    14. 14. 14 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Layers of competition Tertiary competitors Different products solving or eliminating the problem in a different way Different products solving the same problem in a different way Secondary competitors Immediate competitors Technically similar products
    15. 15. Tactics and Reacting to Competitive Price Moves <ul><li>Circumstances to consider price raise (rising costs, higher perceived value, excess demand, decision to harvest) </li></ul><ul><li>Circumstances to consider price drop (high compared to customer value, falling costs e.g. from experience curve, competitive potential entry, decision for a build objective – but beware price wars) </li></ul><ul><li>Tactics – price jump/fall, staged pricing, escalator pricing – e.g. linked to inflation, price unbundling/bundling, raise/lower discounts, changing discount terms. </li></ul><ul><li>Reaction to Competitors? (e.g. follow drop if falling costs or excess supply, ignore if increase yet incompatible with image or with build objective etc. Consider quick or slow reaction best? </li></ul>
    16. 16. Using Market Oriented Pricing <ul><li>Taking into account ten factors, can judge where to set price in a more informed manner than just cost or competition alone. </li></ul><ul><li>But – will depend on type of product – is more complex than alternatives. </li></ul><ul><li>Only a tool, is an art not a science, often based on guesswork, be aware of weaknesses. </li></ul><ul><li>Pricing is often dynamic, needs continual attention in some companies. </li></ul><ul><li>Pricing strongly linked to positioning and the rest of the marketing mix. </li></ul>
    17. 17. Ethical Issues in Pricing <ul><li>Price fixing </li></ul><ul><li>Predatory pricing </li></ul><ul><li>Deceptive pricing </li></ul><ul><li>Price discrimination </li></ul><ul><li>Product dumping </li></ul>
    18. 18. ‘Place’ in the Marketing Mix <ul><li>Need products to be available in sufficient quantity, in convenient locations, at times when customers want to buy. </li></ul><ul><li>Need therefore to consider strategy for and needs of channel intermediaries. </li></ul><ul><li>In services, less likely to be concerned with stock and transport, more concerned with location, process and people, in some markets use of Agents or Franchises. </li></ul>
    19. 19. How a channel intermediary increases distribution efficiency 3 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Direct distribution P = Producer C = Customer Number of Contacts = Number of Producers X Number of Customers P P P C C C 1 2 3 4 5 6 7 8 9
    20. 20. How a channel intermediary increases distribution efficiency 4 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Distribution using a channel intermediary P = Producer C = Customer I = Channel intermediary Number of Contacts = Number of Producers + Number of Customers P P P C C C I 1 2 3
    21. 21. Distribution channels for consumer goods 5 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Wholesaler Retailer Consumer Agent Producer Wholesaler Retailer Consumer Producer Retailer Consumer Producer Consumer Producer
    22. 22. Impact of Internet on Distribution <ul><li>Direct to customer, e.g. Amazon, ToysRUs </li></ul><ul><li>Alternatives, e.g. Tesco Direct, Acado.com </li></ul><ul><li>Digital Download of software </li></ul><ul><li>Consider issues of delivery, stock etc. </li></ul><ul><li>Consumer price checking made easy? </li></ul>
    23. 23. Distribution channels for industrial goods 7 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Producer Producer Producer Producer Industrial Consumer Industrial Consumer Industrial Consumer Industrial Consumer Distributor Agent Distributor Agent
    24. 24. Distribution channels for services 8 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Service provider Agent Consumer or industrial customer Service provider Consumer or industrial customer
    25. 25. Channel strategy 9 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Market Factors Producer, product and Competitive factors. Intensive Selective Exclusive Conventional Franchise, Vertical/ownership Channel strategy Distribution intensity Channel selection Channel integration
    26. 26. Components of the physical distribution system 12 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Physical distribution system Warehousing Materials handling Transportation Inventory control Order processing Customer service
    27. 27. Inventory control Lead Time Inventory level Inventory Maximum Inventory Order point Safety stock level Time Order placed Order received 13 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill
    28. 28. Determining the economic order quantity Order processing cost Cost per unit Order quantity Economic order quantity 14 D Jobber, Principles and Practice of Marketing, © 2001 McGraw-Hill Inventory cost Total costs
    29. 29. Channel management 11 Acceptance? Financial sup. Exclusivity Relations Internal Competencies? Retain? Develop? Power Rels. Partnership, Positioning Performance Channel management Managing conflict Motivation Selection Evaluation Training
    30. 30. Ethical Issues in Managing Channels <ul><li>Poor support </li></ul><ul><li>Slotting Allowances (rent) </li></ul><ul><li>Restricting Supply </li></ul><ul><li>Exclusive Dealing </li></ul><ul><li>Uneven pricing </li></ul><ul><li>Favouritism </li></ul><ul><li>Over-promising </li></ul><ul><li>Ignoring grey-markets </li></ul>
    31. 31. Objectives <ul><li>Formulate a pricing strategy and discuss the issues involved. </li></ul><ul><li>Formulate a distribution strategy and explain the importance of channel management </li></ul>
    32. 32. Case Study – Cafe Direct <ul><li>Objectives: </li></ul><ul><li>Use a relationship map to determine priority relationships. </li></ul><ul><li>Discuss strategies for developing relationships in situations similar to the case study. </li></ul><ul><li>Explain the links between product features, distribution and pricing. </li></ul>
    33. 33. Cafe Direct – Relationship Networks <ul><li>Draw a relationship map, marking priorities. </li></ul><ul><li>How should café direct develop relationships further to build on the initial success? </li></ul><ul><li>What does the case study tell us about the links between pricing and distribution? </li></ul><ul><li>What factors external to café direct influenced sales? </li></ul>
    34. 34. Context is Important <ul><li>BACKGROUND </li></ul><ul><li>café direct is a unique brand. It has achieved widespread success although it operates within a highly competitive market. The organisation has little experience of marketing. It operates without economies of scale, using limited marketing and business development funds and has high raw material costs. </li></ul>
    35. 35. THE MAIN RELATIONSHIPS IN THE CAFEDIRECT NETWORK <ul><li>Twin trading equal-exchange forms the axis of the value creation process. Both act as boundary management in the key external relationships. </li></ul>PRIORITY RELATIONSHIPS FOR CAFEDIRECT: <ul><li>Supermarket relationships are critical since new relationships will further build distribution and widen availability to consumers whilst closer relationships with existing stockists could lead to own label possibilities. </li></ul>
    36. 36. Pricing and Distribution <ul><li>The power of supermarkets. </li></ul><ul><li>Quality controlled along the supply chain meant could demonstrate value and demand higher price. </li></ul><ul><li>Normally a higher priced produce may allow intermediaries higher margins. </li></ul><ul><li>Pricing strategies must always depend on needs of distributors as well as the consumer. </li></ul>
    37. 37. External Factors <ul><li>Shift in consumer values </li></ul><ul><li>Increased media attention to ethical issues </li></ul><ul><li>Original breaking of International Coffee Agreements </li></ul><ul><li>Other world events making us more aware of issues of fair trade and impact on third world. </li></ul>

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