Marketing Management - Product and Price Decisions

Marketing Management - Product

• Customer value stems from three product levels: core customer value, actual product, and augmented product.
• Product decisions encompass quality, features, packaging, style, design, branding, and support services.
• Brands shape customer perception rationally and emotionally, differentiating a firm's offerings.
• Product and brand architecture development are vital for managing products over time.
• Digitalization significantly impacts product innovation and related processes.
• Ethical considerations concerning products are widespread.

Marketing Mix: Price

• Price plays a significant role in the marketing mix, impacting business immediately.
• Price management presents unique challenges.
• Price topics include: definition and importance, challenges of price management, managing price over time, price in a digital world, and ethical price issues.

Price Decisions

• Customer perception is the primary element for pricing decisions.
• Value must always be considered relative to price for pricing strategies.
• Customer-based, cost-based, and competitive-based strategies are core pricing techniques.

Pricing Strategies

• Cost-based pricing: Focuses on fixed and variable costs, independent of the price-response function.
• Customer value-based pricing: Aligns price with customer's perceived value, considering factors like competitors' prices and company costs.
• Competition-based pricing: Determines price based on competitors' prices and consumer reaction.

How is Price Determined?

• Price signals perceived value; it must cover internal costs.
• This balance is essential for a successful pricing strategy.

Customer-Value Based Pricing

• Customer-perceived value is crucial in this approach.
• This pricing method is interlinked with other marketing mix variables before proceeding with the marketing program itself.
• Good value does not equate to a low price, but rather a proper balance of offerings and price.
• Customer willingness to pay is the key metric.

Cost-Based Pricing

• The most important aspect is distinguishing fixed and variable costs.
• Fixed costs do not depend on volume, while variable costs do.
• Determining cost function is easier as necessary information is internal.
• Costs are not the basis for setting price but for determining if a product should be manufactured.

Competition-Based Pricing

• Competitors' prices strongly influence sales volume.
• Competitors' reactions to pricing adjustments are equally significant.
• Analyzing competitors' pricing actions—their current pricing, relevant competitors, and projected future behavior—is essential.

Managing "Price" Over Time

• Understanding consumer reactions to price changes, their impact on the company, and the degree of pricing freedom is critical
• Analyzing own price elasticity and competitor's price elasticity.

When to Cut or Increase Prices

• Motives for price cuts include excess capacity, falling demand, weakened competition, gaining market share at lower costs, and competitor cuts.
• Motives for price increases include better profits, rising costs, or over-demand.

What to Expect When Increasing or Cutting Prices

• Price repositioning downward often succeeds due to positive consumer response.
• Price repositioning upward is more complex and requires significant adjustments.
• Consumer responses to price changes may not be straightforward.

What Will Competitors Do?

• Competitors are more likely to react when the number of involved firms is small, the product is uniform, or buyers are well-informed.

How To Understand The Price-Demand Relationship

• Understanding price-demand relationship is crucial for optimizing prices. This relationship is measured via "price elasticity".
• Price elasticity metrics measure how own demand and competitor's demand change based on changes in the own price or competitors' price.

Interpreting Price Elasticity

• Own-price elasticity measures the percentage change in own demand given a percentage change in own price
• Cross-price elasticity measures the percentage change in own demand given a percentage change in the price of a competitor's good.

When Do Price Changes Have a High Impact?

• Market, customer and product characteristics influence the impact of price changes. Factors such as high similarity between competing products, frequent purchase frequency of the products, and mass-market positioning, significantly contribute to a highly elastic response to price changes.

How Do Real-World Price Elasticities Look Like?

• Price elasticities vary across industries and need to be determined on a case-by-case basis.
• The compact car segment is an example where price elasticity is high (demand highly depends on price).

Static Price-Elasticity

• Static price-elasticity is a simplified representation, and some price changes will have stronger impact than measured.
• Consumer expectations about price ("reference price") play a significant role, which could result in either higher or lower elasticity after a certain point.

Five Methods to Determine Price Elasticity

• Expert judgements, direct customer surveys, indirect customer surveys, experiments, and market observations are ways used to determine the price quantity ratio. Each has advantages and disadvantages.

The Psychology of Pricing

• Customer perception of the price, including factors like different types of pricing psychology that influence customer perception, is crucial for pricing decisions.
• Factors such as left-digit effect, Veblen effect, compromise effect, value effect, endowment effect, and decoy effect shape customer price perception.

Price Communication

• Effective communication of price changes, whether increases or decreases, is critical.
• Clear communication can mitigate potential negative effects on sales volume, or help customers better understand the value of the products, and/or strengthen customer loyalty.

Classic Ways of Price Communication

• Prices ending in ".99" or ".999" are common, and are often designed to make a price seem lower than it is.
• Discounts are often communicated using whole dollar amounts.
• Percentage off is usually not used, except in very large discounts.

Innovative Ways of Price Communication

• Explaining prices in terms of everyday items/transactions can convey affordability.
• Transformation of price into a new visual/graphic currency can support brand's high value.
• Use of anchoring price (e.g., from Steve Jobs’ iPad event.) communicates price psychology.

When Price Changes

• Communication of price changes (increases and decreases) is asymmetric.
• Price reductions need to be communicated effectively, while price increases should be communicated less prominently.

"Price" in a Digital World

• Price is increasingly linked to data collection/usage.
• Price transparency is becoming more important as consumer use of online price comparison sites increases.
• Dynamic and personalized pricing are common digital practices to increase profit margin.

Ethical Price Issues

• Price deception, price discrimination, predatory pricing, cartels, and fraudulent refund policies are common ethical concerns in pricing.

Summary of Key Learnings

• Pricing has a direct impact on profitability, but the management process is complex.
• The price-demand relationship, assessed through price elasticity, is critical to optimize pricing strategies.
• Digitalization empowers consumers with pricing transparency, influencing demand and pricing decisions.
• Ethical considerations in pricing are crucial to protect the brand's image and reputation.