Chapter Ten

1. Chapter Ten Pricing: Understanding and Capturing Customer Value

2. What Is a Price? • Price is the amount of money charged for a product or service. It is the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service. • It is the only element in the marketing mix that produces revenue; all other elements represent costs

3. Major Pricing Strategies Customer Value-Based Pricing

4. Major Pricing Strategies Understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value Customer Value-Based Pricing

5. Major Pricing Strategies Value-based pricing uses the buyers’ perceptions of value, not the sellers cost, as the key to pricing. Price is considered before the marketing program is set. Value-based pricing is customer driven Cost-based pricing is product driven Customer Value-Based Pricing

6. Major Pricing Strategies Customer Value-Based Pricing

7. Major Pricing Strategies Good-value pricing offers the right combination of quality and good service at a fair price Existing brands are being redesigned to offer more quality for a given price or the same quality for less price Customer Value-Based Pricing

8. Major Pricing Strategies Everyday low pricing (EDLP) charging a constant everyday low price with few or no temporary price discounts High-low pricing charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items Customer Value-Based Pricing

9. Major Pricing Strategies Value-added pricing attaches value-added features and services to differentiate offers, support higher prices, and build pricing power Pricing power is the ability to escape price competition and to justify higher prices and margins without losing market share Customer Value-Based Pricing

10. Major Pricing Strategies Cost-based pricing setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk. It adds a standard markup to the cost of the product Cost-Based Pricing

11. Major Pricing Strategies Cost-Based Pricing Types of costs

12. Major Pricing Strategies Fixed costs are the costs that do not vary with production or sales level • Rent • Heat • Interest • Executive salaries Cost-Based Pricing

13. Major Pricing Strategies Variable costs are the costs that vary with the level of production • Packaging • Raw materials Cost-Based Pricing

14. Major Pricing Strategies Total costs are the sum of the fixed and variable costs for any given level of production Average cost is the cost associated with a given level of output Cost-Based Pricing

15. Major Pricing Strategies Costs as a Function of Production Experience Experience or learning curve is when average cost falls as production increases because fixed costs are spread over more units

16. Major Pricing Strategies Cost-Plus Pricing Cost-plus pricing adds a standard markup to the cost of the product Benefits • Sellers are certain about costs • Prices are similar in industry and price competition is minimized • Buyers feel it is fair Disadvantages • Ignores demand and competitor prices

17. Major Pricing Strategies Break-even pricing is the price at which total costs are equal to total revenue and there is no profit Target profit pricing is the price at which the firm will break even or make the profit it’s seeking Break-Even Analysis and Target Profit Pricing

18. Other Internal and External Considerations Affecting Price Decisions Before setting prices, the marketer must understand the relationship between price and demand for its products The Market and Demand

19. Other Internal and External Consideration Affecting Price Decisions Competition

20. Other Internal and External Considerations Affecting Price Decisions The demand curve shows the number of units the market will buy in a given period at different prices Normally, demand and price are inversely related Higher price = lower demand For prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality

21. Other Internal and External Considerations Affecting Price Decisions

22. Other Internal and External Considerations Affecting Price Decisions Price elasticity of demand illustrates the response of demand to a change in price Inelastic demand occurs when demand hardly changes when there is a small change in price Elastic demand occurs when demand changes greatly for a small change in price

23. Other Internal and External Consideration Affecting Price Decisions

24. Chapter Twelve Marketing Channels Delivering Customer Value

25. Supply Chain Partners The supply chain consists of two types of partners: Upstream partners include raw material suppliers, components, parts, information, finances, and expertise to create a product or service Downstream partners include the marketing channels or distribution channels that look toward the customer

26. Supply Chains and the Value Delivery Network From supply chain to demand chain… Supply chain “make and sell” view includes the firm’s raw materials, productive inputs, and factory capacity Demand chain “sense and respond” view suggests that planning starts with the needs of the target customer, and the firm responds to these needs by organizing a chain of resources and activities with the goal of creating customer value Supply Chain Views

27. Supply Chains and the Value Delivery Network Value delivery network is the firm’s suppliers, distributors, and ultimately customers who partner with each other to improve the performance of the entire system Value Delivery Network

28. The Nature and Importance of Marketing Channels Intermediaries offer producers greater efficiency in making goods available to target markets. Through their contacts, experience, specialization, and scale of operations, intermediaries usually offer the firm more than it can achieve on its own. How Channel Members Add Value

29. The Nature and Importance of Marketing Channels From an economic view, intermediaries transform the assortment of products into assortments wanted by consumers Channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them How Channel Members Add Value

30. The Nature and Importance of Marketing Channels How Channel Members Add Value

31. Channel Behavior and Organization Marketing channel consists of firms that have partnered for their common good with each member playing a specialized role Channel conflict refers to disagreement over goals, roles, and rewards by channel members Horizontal conflict Vertical conflict Channel Behavior

32. Channel Behavior and Organization Conventional distribution systems consist of one or more independent producers, wholesalers, and retailers. Each seeks to maximize its own profits, and there is little control over the other members and no formal means for assigning roles and resolving conflict. Conventional Distributions Systems

33. Channel Behavior and Organization Vertical marketing systems (VMS) provide channel leadership and consist of producers, wholesalers, and retailers acting as a unified system and consist of: Corporate marketing systems Contractual marketing systems Administered marketing systems Vertical Marketing Systems

34. Channel Behavior and Organization Corporate vertical marketing system integrates successive stages of production and distribution under single ownership Vertical Marketing Systems

35. Channel Behavior and Organization Contractual vertical marketing system consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone. The most common form is the franchise organization. Vertical Marketing Systems

36. Channel Behavior and Organization Franchise organization links several stages in the production distribution process • Manufacturer-sponsored retailer franchise system • Manufacturer-sponsored wholesaler franchise system • Service firm-sponsored retailer franchise system Vertical Marketing Systems

37. Channel Behavior and Organization Administered vertical marketingsystem has a few dominant channel members without common ownership. Leadership comes from size and power. Vertical Marketing Systems

38. Channel Behavior and Organization Horizontal marketing systems are when two or more companies at one level join together to follow a new marketing opportunity. Companies combine financial, production, or marketing resources to accomplish more than any one company could alone. Horizontal Marketing Systems

39. Channel Behavior and Organization Multichannel Distribution systems (Hybrid marketing channels) are when a single firm sets up two or more marketing channels to reach one or more customer segments Multichannel Distribution Systems Hybrid Marketing Channels

40. Channel Behavior and Organization Disintermediation occurs when product or service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones Changing Channel Organization