Lecture 5 Price and Place (1) - Marketing MARKEC04 PDF

International Business Marketing MARKEC04 A-cluster (1st year, 1st semester) Lecture 5 / 2024-2025 Price and Place Marketing: Real People, Real Choices Eleventh Edition, Global Edition Chapter 10...

International Business Marketing MARKEC04 A-cluster (1st year, 1st semester) Lecture 5 / 2024-2025 Price and Place Marketing: Real People, Real Choices Eleventh Edition, Global Edition Chapter 10 Price: What Is the Value Proposition Worth? Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Learning Objectives 10.1 Explain the importance of pricing and how marketers set objectives for their pricing strategies. 10.2 Describe how marketers use costs, demand, revenue, and the pricing environment to make pricing decisions. 10.3 Understand key pricing strategies and tactics. 10.4 Understand the opportunities for Internet pricing strategies and innovations in payment. 10.5 Describe the psychological, legal, and ethical aspects of pricing. 10.6 Understand the important considerations in job compensation, how to set realistic expectations, and how to improve your chances of getting a great first job “Yes, But What Does It Cost?” Price: assignment of value Payment: anything that has value to the other party: money, goods, services, favors, votes, and so on. – What are opportunity costs? – What is bartering? – Sometimes other names are used. When is price a fee? A fare? Interest? Tuition? Rent? Elements of Price Planning Step 1: Develop Pricing Objectives Must support the broader objectives of the firm as well as overall marketing objectives. Costs, Demand, Revenue, and the Pricing Environment To set the right price, marketers must understand a variety of quantitative and qualitative factors. Step 2: Estimate Demand Demand refers to customers’ desire for a product. – How much are customers willing to pay as the price of the product goes up or down? Economists use demand curves to illustrate the effect of price on quantity of a product demanded. The law of demand: As price goes up, quantity demanded goes down. Demand Curves for Normal and Prestige Products Shifts in Demand A shift is a change in direction or position. Marketers can stimulate shifts through effective marketing. An upward shift is when a greater demand for a product occurs. A downward shift is when demand suddenly drops. Estimating Demand for Pizza Number of families in market 180,000 Average number of pizzas per family per year 6 Total annual market demand 1,080,000 Company’s predicted share of the total market 3 percent Estimated annual company demand 32,400 pizzas Estimated monthly company demand 2,700 pizzas Estimated weekly company demand 675 pizzas Price Elasticity of Demand Price elasticity of demand is the percentage change in unit sales that results from a percentage change in price. Elastic demand is when changes in price have large effects on the amount demanded. Inelastic demand is when changes in price have little or no effect on the amount demanded. Price Elasticity of Demand Marketers know that price elasticity of demand is an important pricing metric. Price-Elastic and Price-Inelastic Demand Cross-Elasticity of Demand Changes in the prices of other products may affect a product’s demand. – If products are substitutes, an increase in the price of one will increase demand for the other. ▪ Beef versus chicken – If one product is essential for use of a second product, an increase in the price of one decreases demand for the other. ▪ Cars and gasoline Class Discussion Question How would you classify the following in terms of price elasticity? Gasoline Baby food Movie tickets Ice cream 5kg bag of rice 11-16 Case Celeb air 17 Step 3: Determine Costs In order to ensure that product price will cover costs, marketers must determine – Variable Costs: Per-unit costs of production that will fluctuate depending on how many units a firm produces (such as the costs to make a pizza include the ingredients, labor costs of cooks, and boxes for the pizza). – Fixed Costs: Costs that do not vary with the number of units produced (such as rent on the building, electricity, water, and insurance). – Average fixed costs: fixed cost per unit. – Total costs: Total of fixed and variable costs for a set number of units produced. Variable Costs for Bookcases at Different Levels of Production Break-Even Analysis Break-even analysis tells marketers how many units must be sold in order to cover all costs. Knowing the break-even point will tell you at what point the firm will start (or stop) making a profit. If the firm sells one fewer units than the break-even quantity, they will lose money. If they sell one more unit than the break-even quantity, they will make a profit. Break-even analysis is important because it helps marketers understand the relationship between costs and price. Break-Even Analysis Assuming a Price of $100 Break-Even Calculation Total fixed costs Break - even point (in units ) = Contribution per unit to fixed costs Total fixed costs Break - even point (in dollars ) = variable cost per unit 1− selling price Markups and Margins: Pricing through the Channel Markup is an amount added to the cost of the product to create a price at which the channel member will sell the product. The markup is referred to as a margin. – Gross margin – Retailer margin – Wholesaler margin – List price or manufacturer’s suggested retail price (MSRP) Markups through the Channel Step 4: Examine the Pricing Environment Firms must also consider external influences upon pricing decisions. – Broad economic trends ▪ The business cycle ▪ Economic growth ▪ Inflation ▪ Consumer confidence The Pricing Environment: Non-Economic Influences Competition – The type of industry structure (oligopoly, monopolistic competition, or pure competition) can influence pricing. Government regulation – Laws and government agencies impact pricing decisions. Consumer trends – Culture and demographics influence pricing. The International environment – Companies may vary their pricing depending upon the country in which their product is sold. Pricing Strategies and Tactics Pricing Strategies Pricing Tactics Based on cost Cost plus Pricing for individual Based on demand Target products Two-part pricing costing Yield management Payment pricing. Based on the competition Pricing for multiple products Price leadership Price bundling Captive pricing Based on customers’ needs Value (EDLP) pricing Distribution-based pricing New product pricing Skimming Discounting for channel pricing Penetration pricing. members Trial pricing Pricing Strategies Based on Cost Cost-based pricing is very common. Most frequently used cost-based is cost-plus pricing. – Easy to calculate – Relatively risk free But not without drawbacks: – Cost-based approaches do not factor in key considerations, such as the nature of target market, demand, and competitors. Pricing Strategies Based on Demand Demand-based pricing: firm base selling price on an estimate of volume it can sell in different markets at different prices. – Yield management pricing – Target costing Target Costing Using a Jeans Example Step 1: Determine the price customers are willing to pay for the jeans $79.99 Step 2: Determine the markup required by the retailer 40% (.40) Step 3: Calculate the maximum price the retailer will pay, the price customers are willing to pay minus the markup amount Formula : Price to the retailer = Selling price  (1.00 − markup percentage) Price to the retailer = $79.99  (1.00 −.40) = $79.99  0.60 = $47.99 Step 4: Determine the profit required by the firm 15% (.15) Step 5: Calculate the target cost, the maximum cost of producing the jeans Formula : Target cost = Price to the retailer  (1.00 − profit percentage) Target cost = $47.99  0.85 = $40.79 Pricing Strategies Based on Competition and Customer Needs Pricing based on competition – Price leadership strategy Pricing based on customer needs – Value or every day low pricing (EDLP) – Hybrid EDLP approaches New Product Pricing New products present unique pricing challenges! In absence of reliable demand estimates and pricing norms, common pricing tactics include: – Skimming price – Penetration pricing – Trial pricing Step 6: Develop Pricing Tactics Implementing pricing strategies using pricing tactics is the sixth step in price planning Pricing for individual products – Two-part pricing – Payment pricing – Subscription pricing Pricing for multiple products – Price bundling – Captive pricing – Decoy pricing Develop Pricing Tactics: Discounting for Channel Members When setting prices for channel members, marketers may also apply tactics such as: – Trade or functional discounts – Quantity discounts – Cash discounts – Seasonal discounts Pricing Advantages for Online Shoppers The Internet provides consumers and business buyers more control over the purchase process. – Increased consumer price sensitivity and negotiating power What do you think are the implications of increased price transparency for marketers (and marketing)? Pricing and Electronic Commerce The online environment provides even more pricing options. Technology and market efficiency has led to – Dynamic pricing strategies – Online auctions – “Freemium” pricing models – Internet price discrimination Innovations in Payment Systems Cryptocurrency Digital and Mobile Wallets Buy-Now-Pay-Later Save-Now-Buy-Later Collaborative Savings and Consumption P2P Lending Rent-to-Own Cashless Society Marketing: Real People, Real Choices Eleventh Edition, Global Edition Chapter 11 Deliver the Goods: Determine the Distribution Strategy Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Learning Objectives 11.1 Explain what a distribution channel is, identify types of wholesaling intermediaries, and describe the different types of distribution channels. 11.2 List and explain the steps to plan a distribution channel strategy. 11.3 Discuss the concepts of logistics and supply chain. 11.4 Understand how to prepare for an interview to maximize your chances of getting the job. Copyright © 2023 Pearson Education Ltd. All Rights Reserved.  40 Breakfast Pizza Copyright © 2023 Pearson Education Ltd. All Rights Reserved.  41 the Pizza Galore chain would like to introduce a mini breakfast pizza which Channel is the best way to distribute it? 1. Offer as a ‘take away’ option in all their stores (which would require their stores opening 4-5 hours earlier than normal) 2. Offer as a ‘take away’ option in their key/busy stores (that is, those located in shopping centers and on main roads) 3. Offer as a home delivery option only (which would still require their stores to open 4-5 hours earlier than normal) 4. Distribute via gas/fuel stations (that is, set up a small pizza section in larger petrol stations) 5. Distribute via convenience stores 6. Distribute via coffee shops (exclusively offer to selective coffee shops) 7. Set a range of special vending machines to be located around the Copyright © 2023 Pearson Education Ltd. All Rights Reserved. city and at key train/bus stations Types of Distribution Channels and Wholesale Intermediaries Physical distribution refers to activities that move finished goods from manufacturers to final customers including order processing, warehousing, materials handling, transportation, and inventory control. A channel of distribution is a series of firms or individuals that facilitate the movement of a product from a producer to a final consumer. – Direct channels: from producer to end customer – Indirect channels: include intermediaries or middlemen. Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Distribution Channel Functions (1 of 3) 1. Provide time, place, and possession utility – Make products available when and where, and in the sizes and quantities customers desire 2. Provide logistics and/or physical distribution functions that increase efficiencies in the flow of goods from producer to customer Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Distribution Channel Functions (2 of 3) 3. Create efficiencies by reducing the number of transactions by – Breaking bulk: Dividing larger quantities of goods into smaller lots to meet the needs of buyers. – Creating assortments: Providing a variety of products for sale in one location. – Transportation and storage: When channel members move goods from the production point to other locations where they can hold them until consumers want them. Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Figure 11.1 Reduce Transactions via Intermediaries Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Distribution Channel Functions (3 of 3) Facilitating functions that make the purchase process easier for customers and manufacturers. Intermediaries often provide customer services, such as offering credit to buyers. Risk taking: Retailers take risks retailers when they buy a product from a manufacturer. The product might just sit on the shelf if no customers want it. Communication and transaction: When channel members develop and execute both promotional and other types of communication among members of the channel. Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Evolution of Distribution Functions If intermediaries fail to provide unique value to the channel, they are at risk of disintermediation (of the channel of distribution). Disintermediation is the elimination of some layers of the channel of distribution to cut costs and improve the efficiency of the channel. Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Online Distribution The Internet has changed how channel members coordinate supply chains. – Better ways to implement knowledge management, a comprehensive approach to collecting, organizing, storing, and retrieving a firm’s information assets. Use of the Internet as a distribution channel is not without challenges – Online distribution piracy – Copyright infringement: use of works protected by copyright without permission, for example, unauthorized downloads of music, TV shows, and movies Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Key Types of Intermediaries Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Merchant Wholesalers Full-service merchant wholesalers Limited-service merchant wholesalers – Cash-and-carry wholesalers – Truck jobbers – Drop shippers – Mail-order wholesalers – Rack jobbers Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Merchandise Agents or Brokers Agents and brokers provide services in exchange for commissions but never take title to the product. – Manufacturer’s agents – Selling agents – Commission agents – Merchandise brokers Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Manufacturer-Owned Intermediaries Manufacturers may set up their own channel intermediaries. Perform functions of independent intermediaries while maintaining control: – Sales branches – Sales offices – Manufacturer’s showrooms Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Different Types of Channels of Distribution (1 of 3) Major Types of Channels of Distribution Channels differ by the number of members who participate Choice influenced by market size, purchase frequency and intermediary availability Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Dual (or Multiple) and Hybrid Distribution Channels Channel members may participate in more than one type of channel—a concept known as dual or hybrid distribution channels. – Pharmaceutical companies Some companies combine channels and communication methods—direct sales, distributors, retail sales, and direct mail—to create a hybrid marketing system such as Xerox has done. Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Steps in Distribution Planning Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Step 1: Develop Distribution Objectives Objectives must support overall marketing goals. – How does distribution work with the other marketing mix elements? Should the objectives be to increase sales, profits, or market share? – Specific objectives may depend on nature of the product (e.g., if product is heavy, a key goal may be to minimize shipping costs). Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Step 2: Evaluate Internal and External Environmental Influences What are relevant internal and external environmental influences? How can these factors be used or minimized in developing the best channel structure? Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Step 3: Choose a Distribution Strategy Beyond the number of channel levels, distribution strategies also involve two additional decisions: Decision 1: a conventional, vertical, or horizontal marketing system Decision 2: Intensive, exclusive, or selective distribution Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Decision 1: Conventional, Vertical, or Horizontal Marketing System Conventional: Multilevel distribution channel in which members work independently, buying and selling from each other. Members of a conventional system recognize that self- interest is best served by fair dealing. Vertical: Cooperation among members at the manufacturing, wholesaling, and/or retailing levels. VMSs are a way to meet customer needs better while keeping costs low. Include administered, corporate, contractual VMSs. Horizontal: Two or more firms at same level agree to work together to get their product to the customer. Most airlines are members of a horizontal alliance. Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Decision 2: Intensive, Exclusive, or Selective Distribution How many wholesalers and retailers should carry the product within a given market? – Intensive distribution: Maximize coverage by selling through as many outlets as possible. – Exclusive distribution: Limit distribution to a single outlet in a particular region. ▪ May create gray markets. – Selective distribution: Seeks to strike a balance between intensive and exclusive distribution. Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Characteristics That Favor Intensive Versus Exclusive Distribution Decision Factor Intensive Distribution Exclusive Distribution Oriented toward specialized Company Oriented toward mass markets markets Customers High customer density Low customer density Blank Price and convenience are Service and cooperation are priorities priorities Nonoverlapping market Channels Overlapping market coverage coverage Cost of serving individual Cost of serving individual Constraints customers is low customers is high Based on a strong market Based on individualized Competition presence, often through advertising attention to customers, often and promotion through relationship marketing Copyright © 2023 Pearson Education Ltd. All Rights Reserved. Step 4: Develop Distribution Tactics Distribution tactics relate to two aspects of strategy implementation: 1. Selecting channel partners ▪ Firms consider economic, competitive, relationship, and sustainability factors. 2. Managing the channel Copyright © 2023 Pearson Education Ltd. All Rights Reserved. The End Copyright © 2023 Pearson Education Ltd. All Rights Reserved.