MGT 252 (Winter 2007)Principles of MarketingJaewoo 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)

Outline

• Last Class– Product

• Product mix

• New Product Development

• Adoption Process

• Product Life cycle

• Today’s Class– Services– Pricing

Last Class: Product Mix

• Product mix– The collection of product lines

– Breadth • Number of product lines within the mix

– Depth • variety of sizes, models, or items

within each product line

– Product line • A group of related products

TV

12”

14”

HDTV

…

Camera

1-4 Megapixels

5-7 Megapixels

8+ Megapixels

…

Last Class: NPD

Last Class: Product Life Cycle

Today’s Class

• Services (ch. 8)

• Pricing (ch. 15)

Services (ch. 8)

• Characteristics of services

• Services value proposition

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

MixProduct

Competitor Analysis

Why we can be better

Company Analysis

What we can do

Price Place Promotion

Services

A Goods-Services ContinuumNursing

TheatreAdvertising agency

Air travelTelevision

Fast-food restaurant, gas stationTailored suit

AutomobileHouse

Dog foodNecktie

Salt

Balanced items;equally weighedbetween goodsand services

Service-dominatedService-dominateditem (intangible) item (intangible)

Good-dominatedGood-dominateditem (tangible) item (tangible)

Balanced

5 Characteristics of Services

• Intangibility– difficult to sample and evaluate

• Inseparability– difficult to separate services from the provider; staff are essential to

the delivery of quality services

• Heterogeneity– virtually every service is different; very difficult to standardize

quality

• Perishability– those not sold can not be stored

• Fluctuating demand– demand for some services fluctuates by season, or by time of day

Services Value Proposition

• The value proposition in a services setting is influenced by services’ characteristics

– services firms must get the core service right

– They must provide solid support service

– And, they must deliver excellent service to their customers

• Make sure we understand these three different uses of the term “service”

Pricing (ch. 15)

1. Pricing Objective

2. Factors influencing Price

3. Pricing Strategies & Tactics

4. Price discrimination

5. Psychology of Pricing

6. Discount

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

MixProduct

Competitor Analysis

Why we can be better

Company Analysis

What we can do

Place PromotionPricePrice

Pricing

Why important? Quite often, key determinant of success/failure More direct, instant and powerful impact, relative to other

marketing variables Dynamic strategy: (1) must adapt throughout the product life

cycle and (2) easy to adjust or modify At later stage, a sole alternative for competition

Basic ideas Price positions a product in the market. Lower prices increase market penetration. Price decline throughout a market evolution.

[1] Pricing Objective

• Always Profit Maximization!!– While firms may use other strategies to simplify concepts,

the final goal for all pricing choices is maximizing profits.

1. Profit-Oriented

2. Sales-Oriented

3. Status Quo-Oriented

• Sales-Oriented or Status Quo-Oriented?– Should only be used when direct connection between

sales and profits is understood.• Increase Sales Volume (By X % over Y years)

• Stabilize Prices/Meet Competition

[2] Factors Influencing Price

• Putting simply

– Demand factors:• Market size, number of competitors, differentiation from

competitors, promotion, distribution

– Supply factors:• Marginal cost. From product and distribution.• Total Cost = Fixed Cost + Variable Cost

Demand and Supply Curves

Po

Qo

P

Q

P1

Q1

D1

D0

S

So… what happens?

• A firm engages in price competition– Regularly offering products priced as low as possible– Reacting to competitors price changes by engaging in a

price war—price wars hurt financially weak competitors most & largest companies least.

OR

• A firm engages in nonprice competition– Compete in another dimension (4P-price) in order to protect

prices (i.e., product differentiation, product variety, product attributes, services, promotion, or distribution)

Price Competition (ex)

• Airlines: – One airline gets cost advantage and initiates price war. All

others follow. All earn near zero profits. Some go out of business.

• Internet: – Pets.com, Petstore.com, & Petsmart.com were price

focused. Sold below marginal cost. Only Petsmart survived.

Nonprice Competition

• Many firms would prefer to engage in nonprice competition

• How to move away from competing mainly on price?– Add “Value”

• Tries to offer the best price possible, but also adds other benefits to increase perceived value, while keeping its costs as low as possible

– Build brand equity and “Relationship” with customers• Gives the best prices to the firm’s better customers as an

incentive for them to remain loyal

[3] Pricing Strategies and Tactics

1. Cost-Based Pricing

2. Break-Even Analysis

3. Market-Based Pricing

4. Two strategies of Market Entry Pricing (a) Skimming

(b) Penetration

1. Cost-Based Pricing

• Set price based on total cost of the unit plus desired profit.– Ignores market demand

• In any conditions, costs (especially variable costs) are the lowest prices should go

• As a rule, this is a weak method in most industries because it ignores the market condition.

1. Cost-Based Pricing (ex)

2. Break-Even Analysis

• A way to calculate the break-even point– how much output (q) is required at each price to break even

• Needs to be done in conjunction with demand analysis

costs variableAverage - price Selling

costs fixed Totaloverhead on tocontributiUnit

costs fixed Total

Break-Even Point

2. Break-Even Analysis (ex)

• Futon Factory– Fixed costs=$25,000– Variable costs=$30 per unit

• Cost of producing 1 unit therefore $25,030

– If price is $80 then break even point is:• $25,000/($80-$30)=500

3. Market-Based Pricing

• Pricing to meet the competition– Highly competitive market and undifferentiated products– An oligopoly (a few firms, similar products)

• Pricing below competition– commonly used by discount retailers to gain a competitive

advantage—must have lower costs or will be forced out of business!

• Pricing above competition– When the product is distinctive, the seller has acquired

prestige, or it is able to add value for customers

4. Market Entry Pricing

• Skimming (“skim the cream”)– Enter at a high price to take maximum short term profit

before competition arrives– Conditions:

• Sufficiently high quality, better image to attract buyers• Difficult for competitors to enter and undercut

OR

• Penetration– Enter at a low price to build rapid trial and deter competition– Conditions:

• Market growth with lower price - i.e., price elastic• Economies of scale• Low price deters competitive entry

4. Market Entry Pricing (ex)

Audio Prices

0100

200300400

500600

700800

1 2 3 4 5 6 7 8 9 10 11

Year

Real P

rices

CD player

Turntable

Telephone Prices

0

100

200

300

400

500

600

1 2 3 4 5 6 7 8 9 10 11 12

Year

Real P

rices Cellular(x3)

Cordless

Corded

3 & 4. Example

What Your Gadget Really Costs (Feb 2007)

“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”

“Each slide lists the product, maker, release date, retail price on the release date, and iSuppli's estimate of the cost of materials.”

[4] Price Discrimination

• First-degree price discrimination (perfect price discrimination)– A firm has perfect information on the willingness to pay of

each customer• Personalized pricing: Sell to each user at a different price

– Internet pricing: Priceline, eBay model

• Third-degree price discrimination (or market segmentation)– A firm is aware of differences in willingness to pay across

groups, but not within a group• Group Pricing: Set different prices for different groups

– Price sensitivity – student or senior discount– Bundling (offer a product line and let users choose the version

most appropriate for them, i.e., MS Office)

[5] Psychology of Pricing

• How do consumers assess price differences?

– Ex 1: Which station do you prefer?• Station A: Sells gas for 80¢ a liter and gives a 10¢

discount for cash• Station B: Sells gas for 70¢ a liter and charges 10¢ extra

for credit cards

– Ex 2: Which one do you think better?• Option A: Free no-interest checking if you have a

balance of $1500 or more (savings accounts pay 4.5%)• Option B: $5 service charge if balance is less than

$1500.

[5] Psychology of Pricing

– Ex 3: Which tuition plan would you rather have?• A: Regular tuition of $10,000 and a $5,000 scholarship to

50% of its needy or gifted students• 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.

• Conclusion– Frame purchases as “gains” not losses

• Selective discounts (+) rather than surcharges (-)• Scholarship (+) rather than additional tuition (-)

[6] Discount

• Quantity discount (or Volume discount)– The more you buy, the cheaper it becomes (cumulative or

non-cumulative)– To reward large purchases and encourage repeat buying

• Cash discount– 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)

– To encourage speedy payment and enhance the seller’s cash flow

Cash discount (ex)

• 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”.

• Deal or No deal?

– Calculate the value of this cash discount! (depending on (a) percentage of discount, (b) length of discount period, and (c) time bill due)

– In essence, the value of the cash discount is the opportunity cost of delaying payment

– 5% in 15 days. Full payment in 60 days. Roughly, a 5% discount for 45 days.

– It is same as 5%/45=0.00111% per day– Then, it is 0.00111*365=40.56% per year

– 40.5% is a high annual interest rate. Take the discount!!!

Summary

1. Pricing Objective: Profit Maximization!

2. Factors influencing Price: Supply & Demant• Price competition vs. Nonprice competition

3. Pricing Strategies & Tactics1. Cost-Based Pricing2. Break-Even Analysis3. Market-Based Pricing4. Two strategies of Market Entry Pricing

(a) Skimming(b) Penetration

4. Price discrimination: First degree vs. Third degree

5. Psychology of Pricing: People love gains!

6. Discount: Quantity discount or Cash discount

True or False?

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.

True

Next Week

• Branding (chapter 9)– Guest speaker!