Chapter 17 Notes - Marketing management PDF

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Chapter 17 Notes Pricing Objectives and Policies Marketing managers develop specific pricing objectives that drive decisions about key policies: 1. How flexible prices will be 2. The level of prices over the product life cycle 3. To whom and when discounts and allowances will be given 4. How transaction costs will be handled. Pricing ● Almost every business transaction in our modern economy involves an exchange of money- the price- for something. ○ The price equation: price = something of value ○ Pricing affects how consumers see value ● The only one of the 4P’s to directly impact profit ● Your pricing policy addresses: ○ brand/company objectives ○ image/positioning ○ Behavior of channel and end-user Pricing Objectives: ● Profit Oriented ○ Target Return Objective: sets a specific level of profit as an objective. Often this amount is states as a percentage of sales or of capital investment. ■ Has administrative advantages: performance can be compared against the target. Some companies eliminate divisions, or drop products that aren't yielding the target rate of return. ○ Profit Maximization Objective: seeks to get as much profit as possible, a desire to earn quick return on investment. ■ Pricing to achieve profit maximization does not always lead to high prices. If a firm is earning a very large profit, other firms will try to copy or improve on what the company offers. Frequently, this leads to lower prices. ● Sales Oriented ○ Dollar or Unit Sales Growth: seeks some level of unit sales, dollar sales, or share of market- without referring to profit. ■ Some managers are more concerned about sales growth than profits and think sales growth always leads to more profits. Sometimes it does over short term or might work well when products are in the introductory growth stages of the product life cycle. However, long term causes problems when a firm's costs are growing faster than sales. ○ Growth in Market Share: firms seek to gain a specified share (percent) of a market. If a company has a large market share, it may have better economies of

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scale than its competitors. Its usually easier to measure a firm’s market share than to determine if profits are being maximized. ■ A company with a longer-run view may aim for increased market share when the market is growing. The hope is that future volumes will justify sacrificing some profit in the short run. ■ High market share offers economies of scale and negotiating power with suppliers ■ Limitations: a larger market share,if gained at too low a price, may lead to profitless “success.” Status Quo Oriented: ○ Meeting competition/ don't rock the boat objectives: want to stabilize prices, or meet competition, or even avoid competition. ■ Sometimes firms in an industry make price changes very carefully- and only if others follow their lead. This tends to prevent price wars, which can drag down all firms profits. ○ Nonprice Competition: aggressive action on one or more of the Ps other than price. ■ ex) Zappos wins customers with its huge selection of shoes, easy to follow website, and great customer service.

Price Policies lead to Administered Prices: consciously set prices. ● Instead of letting dail market forces (or auctions) decide their prices, most firms set their own prices. ● Firms usually want to administer both the price it receives from intermediaries and the price final customers pay, yet it's difficult to administer prices throughout the channel. ● Price has many dimensions, and managers should administer their prices carefully. Price Flexibility Policies: One-price Policy: offering the same price to all customers who purchase products under essentially the same conditions in the same quantities. (majority of U.S. companies use this) ● Makes pricing easier, but a marketing manager must be careful to avoid a rigid one-price policy. This can amount to broadcasting a price that competitors can undercut. Flexible-price Policy: offering the same product and quantities to different customers at different prices. ● ex) when supermarket chains give loyalty club cardholders reduced prices on weekly specials. ● Big data helps managers make the most of flexible pricing. ○ Dynamic Pricing: offers products at a price that changes according to the level of demand, the type of customer, or the state of the weather. Big data can be used to more accurately predict future demand and adapt to maximize revenue and profit. ■ ex) airlines adjusting prices over time, and sports teams. ● Disadvantages: a customer who finds out that others paid lower prices for the same

marketing mix will be mad. Over time price level policies Skimming price policy: tries to sell the top of a market, feeling out demand at a high price. ● Pros: ○ May maximize profits in the market introduction stage for an innovation, especially if there's few substitutes or if some customers aren't price sensitive. ○ Useful when you don't know much about the shape of the demand curve. Sometimes safer to start with a high price that can be reduced. ● Critics argue that firms should not try to maximize profits by skimming on products that have important consequences. ex) life-saving drugs. ● Usually involves a slow reduction in price over time ○ As the price level steps down the demand curve, new Place, Product, and Promotion policies may be needed too. Penetration Pricing policy: tries to sell the whole market at one low price. ● Wise when there aren't many people willing to pay a high price. ○ This is when the whole demand curve is fairy elastic. ● More attractive if selling larger quantities results in lower costs because of economies of scale. ○ Penetration pricing may be wise if the firm expects strong competition very soon after introduction. ● Even a low penetration price does not keep competitors out of a market permanently, however a firm that gets a head start in a new market can often maintain its advantage. Introductory price dealing: temporary price cuts to speed new products into a market and get customers to try them. The plan is to raise prices as soon as the introductory offer is over. ● Established competitors don't usually meet introductory price dealing, but sometimes they will match the prices with short term sale prices to discourage customers from shopping around. Discount Policies Basic List prices (list price): the prices final customers are normally asked to pay for products Discounts: reductions from list prices ● Quantity Discounts: discounts offered to encourage customers to buy in larger amounts. ○ Cumulative quantity discounts: apply to purchases over a given period (year) and the discount usually increases as the amount purchased increases. ■ Encourage repeat buying by reducing the customer's cost for additional purchases → develops loyalty and ongoing relationships with customers. ■ Attractive to business customers who don't want to run up their inventory costs.

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Noncumulative quantity discounts: apply only to individual orders. ■ Encourage larger orders but do not tie a buyer to the seller after that one purchase. Seasonal Discounts: discounts offered to encourage buyers to buy earlier than present demand requires ○ Tends to shift the storing function further along in the channel and tends to even out sales over the year. ○ Service firms that face irregular demand or excess capacity often use seasonal discounts.

Payment terms and cash discounts set payment dates: ● Net: the payment for the face value of the invoice is due immediately. ● Cash Discounts: reductions in price to encourage buyers to pay their bills quickly. The terms for a cash discount usually modify the net terms. ● 2/10, net 30: the buyer can take a 2% discount off the face value of the invoice if the invoice is paid within 10 days. Otherwise the full face value is due within 30 days. ● A trade (functional) discount: a list price reduction given to channel members for the job they are going to do. ● A sale price: is a temporary discount from the list price. ○ Encourage immediate buying. ○ But prices that change constantly erode brand loyalty. ■ To avoid this, some firms sell consumer convenience products offer everyday low pricing- setting a low list price rather than relying on frequent sales, discounts, or allowances. Allowance Policies Allowances: given to final consumers, business customers, or channel members for doing something or accepting less of something. ● Advertising allowances: (something for something) are price reductions given to firms in the channel to encourage them to advertise or otherwise promote the supplier’s products locally. ● Stocking allowances (slotting allowances): are given to an intermediary to get shelf space/attention for a product. ○ With a big stocking allowance, the intermediary makes extra profit- even if a new product fails and the producer loses money. ● Push Money (prize money) allowances (PMs or Spiffs): given to retailers by manufacturers or wholesalers to pass on the retailer's’ sales-clerks for aggressively selling certain items. ○ Used for new items, slower-moving items, or higher-margin items. ○ Often used for pushing furniture, clothing, consumer electronics, and cosmetics. ● Trade-in allowance: a price reduction given for used products when similar new products are bought. ○ Easy way to lower the effective price without reducing list price. Sometimes

producers want to get older products off the market or move them to a new market. Rebates: refunds paid to customers after a purchase. ● To promote sales of slow-moving models. ● Give producer a way to be certain that final consumers actually get the price reduction. If the rebate amount were just taken off the price charged to intermediaries, they might not pass the savings along to consumers. ● Critics: Many rebates, even high-value ones, are never redeemed. Geographic Pricing Policies F.O.B. “Free on Board”: a transportation term. Whatever place is listed refers to the point where title passes from the seller to the buyer. The buyer has responsibility as soon as the product is loaded onto a vehicle at the seller’s point of shipment (perhaps its warehouse). ● Simplifies the seller’s pricing- but it might narrow the market. ● Freight-absorption pricing: absorbing freight cost so that a firm’s delivered price meets that of the nearest competitor. ○ Amounts to cutting list price to appeal to new market segments. Zone Pricing: making an average freight charge to all buyers within specific geographic areas. The seller pays the actual freight charges and bills each customer for an average charge. ● Reduces the wide variation in delivered prices that results from an F.O.B. shipping point policy ● Simplifies transportation charges Uniform delivered pricing: making an average freight charge to all buyers. It is a kind of zone pricing- an entire country as a zone- that includes the average cost of delivery in the price. ● Most often used when: ○ Transportation costs are relatively low ○ The seller wishes to sell in all geographic areas at one price, perhaps a nationally advertised price. Pricing Policies Combine to Impact Customer Value ● Value pricing: setting a fair price level for a marketing mix that really gives the target market superior customer value ○ Not just cheap or high prestige. The focus is on the customer’s requirements and how the whole marketing mix meets those needs. ○ It's important to clearly define the relevant target market and competitors when making price comparisons Legality of Pricing Policies Unfair trade practice acts: put a lower limit on prices, especially at the wholesales and retail levels. ● US minimizes the minimum price of imported products with antidumping laws to protect the country’s domestic producers and jobs.

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Dumping: pricing a product sold in a foreign market below the cost of producing it or at a price lower than its domestic market. Phony list prices: are prices customers are shown to suggest that the price has been discounted from list. ○ Wheeler Lea Amendment: bans “unfair or deceptive acts in commerce” Price fixing: competitors getting together to raise, lower, or stabilize prices ○ Common and pretty easy, but extremely illegal in the US Manufacturers usually suggest a retail list price and then leave it up to retailers to decide what to charge in their local markets. Price level and price flexibility policies can lead to price discrimination. ○ Price discrimination: selling the same products to different buyers at different prices ○ Robinson-Patman Act (1936): makes illegal any price discrimination if it injures competition. ■ Does permit some price differences but they must be based on ● Cost differences ● The need to meet competition. ■ Allows a marketing manager to charge different prices for similar products if they are not of “like grade and quality” ■ Prohibits special allowances unless they are made available to all customers on “proportionally equal” terms....