Importance of (the economic aspect of) Price to the Marketer

November 16, 2017 , , , , , , ,
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  • Often the only element the marketer can change quickly in response to demand shifts.
  • Relates directly to total revenue TR = Price * Qtty
    Profits = TR - TC
    -effects profit directly through price, and indirectly by effecting the qtty sold, and effects total costs through its impact on the qtty sold, (ie economies of scale)
  • Can use price symbolically, emphasize quality or bargain (signal value).
  • Deflationary pressures, consumers very price conscious.
Six step process:
1.   Establish marketing objectives
o        survival (short term)
o        profit max.
o        revenue max. (yield management pricing; dynamic pricing)
o        growth max. (penetration pricing ... "free")
o        market skimming
o        product-quality leadership (signaling effect?)
2.   Demand schedule: elastic versus inelastic demand issues (priceline)
Percent change in quantity demanded relative to the percent change in price.
% change in Qtty demanded
-------------------------
% change in price
We are now looking at the actual impact on demand as price varies. Elastic demand is more sensitive to price than inelastic demand.
Elastic demand, greater than1 (-1)
Inelastic demand, less than 1 (-1)
Unitary demand, equal to 1
Always take the absolute values

Inelastic Demand

$|*  
 | *
 |  *
 |   *
 |    *
 |-----------Qtty
$                            

Elastic Demand

$|*  
 |   *
 |      *
 |          *
 |              *
 |-----------Qtty
$                            
TR = Price * Qtty
If demand is elastic then change in price causes an opposite change in the total revenue.
If demand is inelastic then change in price causes the same change in the total revenue.
The less elastic the demand, the more beneficial it is for the seller to increase price.
3.   Cost issues: different levels of product (learning curve issues), (dis)economies of scale, fixed/variable, breakeven issues, marginal analysis
Marginal Analysis:
What happens to the costs and revenues as production increases by one unit. This will determine at which point profit will be maximized. Need to distinguish between:
Fixed Costs
Average Fixed Costs, FC/units produced
Variable Costs (materials labor etc.)
Average Variable Cost, VC/Unit produced
Total Cost = (AFC+AVC)*QTTY
Marginal cost = the extra cost to the firm for producing one more unit.
Marginal revenue = the extra revenue with the sale of one additional unit.
MR - MC tells us if it is profitable to produce one more unit.
Profit maximization at MR = MC
To produce/sell more units than the point MR = MC the additional cost of producing one more unit is greater than the additional revenue from selling one more unit. At any point prior to MR = MC, MR will be greater than MC, therefore the additional revenue from selling one more unit will be greater than the additional cost of producing one more unit, therefore forgoing the opportunity to generate additional profits. Therefore MR = MC = Profit Maximization; assuming all products are sold.
Due to the environment, it is difficult to predict costs and revenues etc.
Cost structures can influence pricing objective: high low fixed variable make-up has significant impact on contribution margins.
4.   Competitors pricing
5.   Pricing method:
o        Cost Plus:
§         Guarantees contribution
§         simple to calculate
§         not optimal
o        Competition
§         par with market
§         price war implications?
§         not optimal
o        Value
§         optimal
§         difficult to determine
6.   Final price selection: odd / even etc.
Financing issues.
Life-cycle Pricing issues. Especially w/ services, two tier pricing etc.
Price Segmentation/Discrimination: Varying prices due to market conditions, different consumers:
  • "cost to serve" are different
  • value of product are different
  • service demands differ
Methods of segmentation/discrimination:
  • Price negotiation (second hand car examples, online auctions)
  • Geography
  • Price and quantity discounts: seasonal discounts, trade discounts, trade-ins
  • Promotion pricing: loss leader (lock-in etc.), special event, rebates, low interest financing, warranties
  • Discriminatory pricing: customer segment pricing, product form pricing, time pricing
  • Product mix pricing: line pricing, optional feature, two part pricing, product bundling
  • Product bundling: office suite etc.
Price changing issues (reducing or increasing) also relevant for establishing a price, at above or below market:
  • Customer reactions
  • Competitor reactions
  • Collaborator reactions
Game theory implications of adopting prices in competitive markets.
Signal value of price changes to competitors and customers.
Price transparency issues for establishing and changing prices.
Dealing with competitor price changes.
Discussion Topic: What are the potential long run consequences of a price promotion designed to attract competitors customers?
Discussion Topic: Relate examples of products that are "free" ... and if they are free, what is the objective of the company?
Discussion Topic: Access E-bay and describe your experiences as a buyer / seller. What type of products would work well under a dynamic pricing model? Does the life cycle stage of a product impact its attractiveness for dynamic pricing?

Relevant Knowledge @ Wharton Articles

Will Consumers Be Willing to Pay for Their Formerly Free Lunch on the Internet?
Can Priceline Remain Profitable?
New Internet Pricing Models Bring Pain, and Fortune, to Retailers
Is the Price Right? Ask Jay Walker
How Store Location and Pricing Structure Affect Shopping Behavior
Link to discussion board
Return to Syllabus

Marketing Strategy: Key Concepts 8

Channel Selection Issues

Use intermediaries who perform functions more efficiently. Functions include:
  • information flow
  • promotion
  • negotiation
  • ordering
  • financing
  • risk taking
  • physical possession
  • payment and title
Two key issues to support intermediaries
  • Improve exchange efficiency (5 mf. and 5 customers = 25 transactions with no intermediary; 10 transactions with one intermediary)
  • specialize in functions listed above
Types of utility provided by intermediaries:
  • Time
  • Place
  • Possession
  • Form
Channel decisions include:
  • direct selling versus using 1 or 2 or more intermediaries
    Manufacturer -> Consumer
    Manufacturer -> Retailer -> Consumer
    Manufacturer -> Wholesaler -> Retailer -> Consumer
    Manufacturer -> Distributor -> Wholesaler -> Retailer -> Consumer
    Examples
  • analyze customers' desired service outputs (size, waiting time, spatial convenience, support etc.)
  • channel objectives and constraints (based on product characteristics, intermediaries, environment and competitors channels)
  • buyer behavior (consumer and channel)
  • buyer demographics
  • identify channel alternatives (exclusive (BMW) vs. selective (clothes lines) vs. intensive (orange juice))
  • competitors' channels
  • channel terms and responsibilities
  • Channel incentives (trade promotions etc.)
  • evaluate channel by economic, adaptive and control criteria
Direct to market =
  • Greater fixed cost
  • Greater effectiveness / control over contacts
  • Greater control over targeting
Indirect to market =
  • Greater variable cost
  • Less control / responsibility
  • Greater coverage
  • Knowledge of customer within channel
Issues in selecting channel partners:
  • What role do partner play?
  • What margin do we give?
  • Can / do they carry competing / complementary product, private labels
  • How do we incentivize
  • Do they pass on price cuts?
  • How do we control for cannibalization w/ other channels (direct)?
Lock-in to channel decisions
Channel decisions impact on other elements of the mix
Life cycle issues change channel strategy.
Early stage: Specialized channels
Growth stage: Alternative channels
Maturity stage: Mass channels
Early stage: high control, service and delivered price
Later stage: increasing conflict, range of providers, complexity of channel
Channel member relationships
Impact of trade promotions: distortion effects?
Zero sum Relationship w/ channel members?
Need to build symbiotic relationships with channel members.
Channel modification issues
Trends include vertical, horizontal and multi-channel conflict.
Internet has had significant impact re: building new channels and changing industries through disintermediation and information flow issues.
Legal and ethical issues:
  • Exclusive dealing
  • Exclusive territories
  • Tying agreements
  • Dealers' rights

Retailing

Retailing includes all interactions w/ final customer
  • Store retailing (specialty, department stores, supermarkets, convenience, superstores, discount stores, warehouse stores, hypermarkets and catalog showrooms)
  • Non-store retailing (direct selling, direct mail billing, catalogs, web, vending machines)
  • Retail organizations (corporate chains, voluntary chains / retailer cooperatives, consumer cooperatives, franchises, independents)
Retail life cycle
Wheel of retailing
Retail market planning:
  • target audiences
  • product: assortment and service
  • product: positioning (Kmart vs. Wal Mart and Target)
  • product: services and store atmospherics
  • product: symbiotic relationships
  • pricing
  • promotion
  • place
Retailing trends:
  • new forms
  • shortening life cycles
  • non store growth
  • intertype competition, polarity, category killers
  • one-stop shopping
  • global expansion
  • stores as meeting places

Wholesaling

Wholesaling includes all interactions w/ intermediaries buying for resale or business use.
Functions include:
  • selling and promotion
  • buying and assortment-building
  • bulk-breaking
  • warehousing
  • transporting
  • financing
  • risk bearing
  • supplying market information
Wholesalers comprise four groups:
  • merchant wholesalers (take possession, full service vs. limited service)
  • agents and brokers (do not take possession, paid commission)
  • manufacturers' and retailers' branches
  • miscellaneous wholesalers (e.g. agricultural, bulk chemicals)
Increasing importance of logistics, and providing a system-wide approach at reducing costs.
Logistics decisions:
  • order processing (shorten order to remittance cycle)
  • warehousing
  • inventory
  • transportation (rail, air, trucks, waterways, and pipelines)
Interesting sites:
Discussion Topic: Impact of channel members creating a market for used product. Is this good or bad for the market, how does it impact the value of the new product?

Relevant Knowledge @ Wharton Articles



Marketing Strategy: Key Concepts 9

Direct and Online Marketing

An interactive system that creates a measurable response (variable cost versus fixed cost of marketing) and / or transaction.
Goal to develop relationships with customers.
Rapid growth rate.
  • catalog and direct mail sales growing about 7% annually (retail sales @ 3%)
  • internet growth rates (Cyberatlas is a great resource for the number)
Growth due to innovations in:
  • technology: databases (data mining and warehouses) / communication systems
  • toll-free telephone services
  • payment systems (credit cards and smart cards)
Provides continuity, better timing, testability and privacy. Can benefit both customers and business with highly targeted and efficient exchanges.
Database marketing to support direct marketing. Companies can use their databases to:
  • identify prospects
  • differentiate offers
  • cross sell products
  • build loyalty
  • reactivate customer purchases
Issues with direct marketing include:
  1. annoyance
  2. deception and fraud
  3. privacy
Major direct marketing channels:
  • Face-to-Face
  • Direct Mail (inc. voice-mail and e-mail, bills, fax)
  • Catalog Marketing (inc. CDs)
  • Telemarketing (use of computers / cell phones (contextual marketing)
  • TV (direct response advertising / infomercials / shopping channels)
  • Kiosks (and vending machines)
  • Online (permission based marketing)
Online marketing is the most recent evolution of direct marketing. This can create channel conflict.
E-Commerce Marketing
Direct Marketing Association
Add relevant websites

Relevant Knowledge @ Wharton Articles

Will Consumers Be Willing to Pay for Their Formerly Free Lunch on the Internet?
The Cell Phone as Marketing Tool: Will Consumers Answer the Call?
Clicking With Customers: New Challenges in Online Conversion
Why Job Searching is the Second Most Popular Activity on the Internet
Are There Lessons to Be Learned from Internet Porn Sites?
New Internet Pricing Models Bring Pain, and Fortune, to Retailers
Three Marketing Lessons from the Love Bug
How Companies Sponsor, Listen in and Learn From Chat Rooms
Is Your Website Working Well for You? Check its e-Performance
How to Keep Customers In Line for Your On-line Business
Hit and Miss: Why High Traffic Streams Need not Lead to More Online Business
Stephen King’s Novel Idea: Will It Change the Publishing Industry?
Christmas E-tailers: Will It Be Ho-Ho or So-So?
A Search for Google’s Success Turns Up Two Words: Trust and Technology

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