Marketing for MOST Module 08 – Pricing and Distribution Strategies

Marketing for MOSTModule 08 – Pricing and Distribution Strategies

技術経営コンソーシアム

開発担当者： Ritsumeikan Asia Pacific University 　教授 : Takamoto, Akihiro

更新日 October, 2003

Marketing for MOST: Module 8 – Pricing & Distribution Strategies

Pricing and Distribution Strategies

1. Price

2. Factors Affecting Pricing Decisions

3. Pricing Approaches

4. Pricing Strategies

5. Place (=Distribution)

6. The Nature of the Distribution Channel

7. Discussion

Marketing Mix = P1 (Product)

P2 (Price)

P3 (Place)

P4 (Promotion)

• Q: Why is P2 so important?

• Q: How is it different from the other 3 P’s of the Marketing Mix?

Marketing Mix = P1 (Product)

P2 (Price)

P3 (Place)

P4 (Promotion)

• A: Only P2 earns Money!!

• The others are Spenders!

• Internal Factors

1. Marketing Objectives

• market share leadership

• product quality

• current profit maximization

• customer satisfaction

• survival

2. Marketing Mix Strategy ensures:

Price < Product + Place + Promotion

Q: What does this inequality mean?

2. Marketing Mix Strategy ensures:

Price < Product + Place + Promotion

A:The price (i.e. cost to the customer) of a product has to be lower than the total amount of benefits the customer gains from the product, the distribution of the product, and the communication for the product.

3. Cost

TC = FC + VC

Because

TC = c * Q

VC = v * Q

Then c = v + FC / Q

Where TC : Total cost

FC : Fixed cost

VC : Total variable cost

c : Unit cost

v : Unit variable cost

Q : Production volume

• External Factors

1. Demand

Movement along the Demand Curve

1. Demand

Shift of the Demand Curve

1. Demand

Unusual Demand Curve

• Price elasticity of Demand

ε = % change in q Δ q / q

% change in p Δ p / p

Note: ε is usually negative

If | ε | > 1 : elastic demandIf | ε | < 1 : inelastic demand

Inelastic Demand Elastic Demand

• Demand is likely to be less elastic if:

• The Product is a necessity

• There are few or no substitutes or competitors

• There are not comparative products

• The expenditure for the price is low

• The product is perishable

• The product is very rare and has a special value

• Q: What else?

• Factors affecting price sensitivity according to T.T Nagle

1. Unique Value

2. Substitute awareness

3. Difficult comparison

4. Ratio of total expenditure

5. Ratio to total cost

6. Shared cost

7. Sunk investment

8. Price for Quality

9. Inventory

Market Demand Curve as an aggregate of Individual demand curves.

Consumer A Consumer B Market

1. Necessities tend to be price inelastic, while luxuries tend to be price elastic. Do you agree?

2. Draw your own demand curves for such daily use items as coffee, beer, hair cut, telephone and compare them with your friends.

Another external factor affectring the pricing decision:

COMPETITION

Q: How does the prisoners’ dilemma affect the pricing decision, in the face of stiff competition?

Expected Jail time in the prisoners’ dilemma.

Prisoner 1

Prisoner 2

Don’t ConfessConfess

Don’t Confess

Confess 0,10

1,110,0

Prisoner 1’s

Prisoner 2’s

Cost-based pricing

• Cost-plus pricing

• Setting price by adding a standard mark up to the cost of the product

• Break-even pricing

• Q* = FC / (p-v)Where Q* : breakeven volumep : price

• Target profit pricing

• Setting price to make a target profit

• Valued-based pricing

• Setting a price based on buyers’ perceptions of value rather than on the seller’s cost.

• Value pricing

• Offering just the right combination of quality and good service at a fair price.

• Target costing

• Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.

Product Cost Price Value Customer

Customer Value Price Cost Product

Value Based Pricing

Cost Based Pricing

Price & Quality Value Curve

Ref: Alexander Hiam and Charles D. Schewe

Case Study: Honda motor fights rival on factory floor

(see attached – honda-rivals.pdf)

Q: What impact did Honda’s pricing strategies have on its competitors?

Case Study: Pricing as a Strategy

• King Gillette

• Xerox Machine

• GE’s Steam Turbine

Competition-based pricing

• Setting prices based on the prices that competitors charge for similar products (i.e. going-rate prices)

New Product Pricing Strategies

• Market-skimming pricing

• Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales.

• Market-penetration pricing

• Setting a low price for a new product in order to attract a large number of buyers and a large market share.

Product Mix Pricing Strategies

• Product line pricing • Setting the price steps between various products in a product line

based on cost differences between the products, customer evaluations of different features and competitors’ prices.

• Optional-product pricing• The pricing of optional or accessory products along with a main

product.

• Captive-product pricing• Setting a price for products that must be used along with a main

product, such as blades for a razor and film for a camera.

Product Mix Pricing Strategies (continued…)

• By-product pricing

• Setting a price for by-products in order to make the main product’s s price more competitive.

• Product bundle pricing

• Combining several products and offering the bundle at a reduced price.

• PRACTICE: Find at least one real-life example corresponding to each of the above mix pricing strategies

Price-adjustment Strategies• Discount and allowance pricing

• Promotional money paid by manufacturers to retailer in return for an agreement to feature the manufacturer’s products in some way.

• Segmented pricing

• Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.

• Psychological pricing

• A pricing approach that considers the psychology of prices and not simply the economic; the price is used to say something about the product.

Place (=Distribution)

• Question:

• Why is Place so important?

The Nature of Distribution Channel

• Distribution channel

• A set of interdependent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user.

The Nature of Distribution Channel

• Why are Marketing intermediaries used?

3 * 6 = 18 (number of transactions) 3 + 6 = 9

Distribution Channel Functions

• The primary function of distribution channels is to fill in the three gaps that separate producers, and customers / business users.

• These gaps are geographical, temporal, and proprietary.

Distribution Channel Functions

Distribution Services

• Number of Channel Levels

• Practice

1. Compare the main characteristics of retailing and wholesaling

2. Discuss how the wall between retailing and wholesaling is crumbling with innovations in distribution (i.e.. Supply chain management)

3. How is IT affecting distribution?

• Discussion:

• A) Review the students comments on pricing and distribution in the attached file.

• (student-pricing.pdf)

• How would you respond to them?

• B) What are your own comments or questions concerning pricing and distribution strategies?

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