price and place Essays

price and place Essays price and place Essay price and place Essay Lecture 5: PRICE AND PLACE Price: Define the pricing concept and explain different pricing methods ( cost oriented, competitor oriented and market oriented pricing) -Explain pricing strategies for new products( market penetration and market skimming) AND existing products. ( Understand condition and when we can use it) -Consider ethical issue in pricing ( dont think it will be on the exam) PLACE: Define place(distripution) concept and explain the role of intermediaries in distribution channel Describe types of distribution channels Explain factors to consider in formulating channel strategy Consider ethical issues in distribution Past exam questions: 1 . Define two pricing strategies for new products: MARKET SKIMMING AND MARKET PENETRATION. List the conditions which are suitable for each of these strategies according y. Provide examples for each strategy. 2. Critically assess the benefits of two pricing strategies for new products: market skimming dn market penetration. Discuss which pricing method you would use and why in lunching the new phone and the game console PS4 PRICE: What will happen if we charge too much for a product o too little? If you charge too little, then you have to understand that demand fo a product or service could be igh, we will be losing a profit for the organization, and if you charge too much for a poduct we have to think about competitors, who can charge less than us. 1. Pricing Concept: Out of marketing mix(4Ps) Pice is the revenue earner. The other thee elements of the marketing mix product, promotion and place are costs. 2. THE DEMAND CURVE: In the demand curve we r talking about the product and the price relathionship. For example is you charge E50 FOR A particular t-shirt or Jeans , then the quantity in the market could be lets say 2000 units. If they decries the price from E50 to E30 then you xcept the demand fo the product to increase from Quantityl to quantity 2. And from 2000 units demand can be now 3000 units. By reducing the price from E50 to E30 we increased demand for pear of Jeans to go from 2000 to 3000 units. The products that we are buying at the supermarket when a huge sells promotion and then demand increased is and this is called PRODUCT AND PRICE ELASTILITYCY or we say that the price is elastic in this case. By increasing the price, we are not able to increase demand of the product. If you think about market with luxury objects like watch, increase in price not necessary impact increase in demand of this product. Even sometimes aecrles In prlce can sena negative signal to tne market. Example: the guitar producer; very high quality producer. When they decided to demand their prices of 30% send negative signal to the customers and the company suffered. There are also product which are price elastic. There are also other factors which demands: like promotion, if you talk about different region of the country, income levels per country, tradition, 3. PRICING METHODS: (strategies) -Cost Oriented Pricing: The simple pricing method takes into account all cost of producer product then we ad additional mark up. Two types are: Full Cost Pricing: pricing takes into account full cost of making product which can be fixed and variable and adds mark up. This can include fixed cost and also variable cost. Direct Cost Pricing: Calculation of only those costs that are likely to rise as output increases ( variable costs) -fixed costs: these costs dont change as output increases , for ex: office and manufacturing facilities. Variable costs: the cost that increases as output increases, for ex: raw materials, electricity. Lets assume that full cost of producing one pair of Jeans E50 (its included fixed cost as well variable cost), hen of to of them we want additional 20% so we happy to sell it fo E60 ( Elo OF Profit on each Jeans). Direct cost involved : we can only take in to account only variable cost; we ignore fixed cost. FULL COST PRICING: A DVANTAGES: By using full cost pricing we include all cost incurred , were would it be the fixed cost or variable cost. So it is gives an indication of the minimum price, needed to make a profit. If you dont charge the minimum price to make a profit then company will be making a lose It X has the constraint, we use other methods. AND this will be competetitive pricing as well marketing orientation price. If you dont consider all cost in the long term company will be making lose o could go bankrupt because if you dont cover all the cost in term it is difficult to make a profit and if you are not making a profit, you wont be able to cover the cost in the long term. CRITICISMS: Because its looks in a personal orientation rather than in external marketing orientation by charging a price, we are ignoring the customer willingness to pay. Lets assume that I develop a new product for example a laptop, and using a new software. Each laptop costs me E2000 to produce. How much profit I want to make Lets say 25%. Lets charge E500 more so my laptop is E2500. As a manufacturer I decide that I sell the laptop for E2500. It will be success? Everything depends on demand. Either the customers may be able to purchase the product and if they are willing to buy my product or not? E2500 may be too expensive and the customers will for another cheaper option. The second is followed strictly, leads to incise in price when demand falls. So when I produced my laptop it was E2000 this include fixed and variable cost; And every time demand falls for the laptop because is to expensive; And I need to still cover my fixed cost. facilities I use in the factory o fixed salary to my employees. So every time demand falls, for example I expected to sell 10. 000 units of my laptop, but I sold Just only 5000. So I still need to cover the fixed cost (for the factory, fixed salary and so on). So what happened is: the price for a product will increase because you want to cover more rather than chargingE 2. 500, now I need to cnarge Decause I nave more costs to cover so I need to cnarge E4000. When you think about it ,it doesnt make logical sense; from the market point of view because my product sold already because there is no much demand and nstead of reducing the price or changing some feature of the product you are increasing the price of the product to cover all my costs and the result will be that my company would go bankrupt. Is illogical because a Sales estimate is made before a price is set. Maybe problems in allocating overheads. The fixed cost for the organization is E50. OOO; I expect to produce 50 units and I expect to sell 50 units. So all those E50. OOO fixed cost each product will allocate EIOOO. It is difficult point of view because reality point of view we have competitors and the market acceptability of the product. And the last problem is: when I produce or example various product with in one organization it will be very difficult to allocate all head cost like electricity, rent and labour. Without to be technical what its means is when you have overhead cost such like rent, gas I will have to allocate those cost into each product. The where you allocate those costs actually will define how much the product will cost. And is very complex process, if you get it wrong some product may not be sale very well in the market , some good product actually could be pull out of the market because of the wrong allocation of the overall. DIRECT COST PRICING: Advantages: We ignore fixed cost we Just consider the variable cost; and direct cost relevant in producing one additional product in the manufacture facility. Why would I do it What are the advantages of ignoring the fixed cost Direct cost pricing avoid the problems of allocating the overhead; Indicates price up demand the problem because rather than allocating the fixed cost every time to a product we are putting in the side, we are only consider cost directly reverent to each unit of the product. Lowest price which allows the marketing people to identify the lowest price which makes sense to charge for the product. For example: If you think about Hotel or airline industry; there are some fixed cost there are also some variable cost. Airline ; ex: there are 200 seats every day on particular fly from London to Madrid. If there are 200 seats by rather we fly with 1 person or 200 people, the price, the fixed cost incurred will remain the same, but variable cost changes. For each ticket to fly we are charging E200, out of those E200, EIOO is a fixed cost (such as salary of the pilot, fuel, the charges we pay to the airport) and there are EIOO variable cost which is directly related to each passenger (the meals provided, drinks and so on). If you are the manager for this airline on the particular date only 10 people fly there will be very difficult to cover all cost. So you have dilemma and you know you cant charge E200 for a ticket, but what you can do , you can charge El 50 or E120. What does it allow us to do When we charge El 50 thats definitely covering the fixed cost, we cant do anything about it. But on top of that is also allowing us to earn what we call PROFIT MARGEN of E50. So when we sell the ticket for El 50, EIOO covers the all additional costs and variable costs and on the top of that we have E50 extra; this E50 wont cover nls Tull Tlxea cost, nowever Its covers some 0T tne Tlxea costs wnlcn Is DeneTlclal to the company. If we wont sell the tickets for a El 50 still for any lost seats on the airplane we are losing fixed EIOO (the fixed cost) So if you sell any ticket abo the EIOO it is benefitial. Criticisms: When business is buoyant, we have more demand for a product an it doesnt give any correct indication of optimum price customer is willing to pay because in this case we are charging low and actually price of the product; Using airline as a example, when we are charging direct cost pricing it can work only in the short term because if you se the strategy in the long term it means in the long term you are not covering your fixed cost and company in the future will be making significant loses SUmarazing the DIRECT COST PRICING it is a good strategy, but Just for a short time. PRICING METHODS: 1. COMPETITOR ORIENTED PRICING : Our pricing depends on what the competitors charge. Going- rate pricing: when we thing that our product or service is not different in a particular market and doesnt have any differentiation and doesnt have any competitive advantages the company will accept going rate. For example raw materials like otton; if you buying particular product it can be the same , however competitors can provide additional services, for example: better customer service , it could provide better credit terms. Ex: REAL TED TO THE Steel stake holder Trummans, who sales steel. They have the same steel product sales to the customers ; one of the strategies Trummans uses to sales the steel to the large organizations, it develop strategy of delivering on the time and there was the price guaranty saying that if they dont deliver on the time they will give 10% of money back. This strategy was so successful for organizations. Producer they were willing to pay 5% more. Competitive bidding: This happens more often in business-to-business market (82B), when organization are selling products or services to another organization. One of the difficulties in competitive bidding; example NHS or school authorities decided to build 10th additional school and they want the other instruction companies in the I-JK to bid the contract. One of the challenges in competitive bidding is charge blind. You do your research, and then you charge. Usually the supplier will choose the lowest (most competitive) price. If you were working for a particular community who should decide ho should the build the school. What are the other factors you would consider? Factors apart from price we consider, how reliable is the construction company; what are the time frame, did they build schools before, do they have the skills, is there guaranty, and many other factors. 2. Marketing orientated pricing: its listens to the market and his strategy is obviously reflected in there. There are some key factors: a) Marketing strategy: when you thinking about pricing the product o service, each should be in line with the marketing strategy. For example when we launch a new product there are TWO STRATEGIES available to us: MARKET SKIMMING or PRICE PENETRATION and both of those methods could be use when we launch a new product. You cant use both in one time; you can use one or tne otner. Ana tnen It wlll nave tne marketing consequence. What is our positing strategy: when we are launching a new product our choice of target market and creating differentiation advantage, the value is delivered to the customes. For example: when first calculators were developed they had 3 key segments: they had engineers and scientists who pay high values to the calculator and accountants and bankers and general public. o for the first segment they charged E250 per calculator, when for general public when Casio entered the market was Elo or less. So managers should decided which target market they should concentrate on, and understand the values. When we think about Mercedes Case study, we look on over their sells to higher customers then and now they are increasing their segment, they are bringing modify versions of the cars which are bit cheaper to the high car segment. Merceds by producing different models, modify the versions of the models they are able to charge different prices and then attract the arger segments B)Price quality relationship: there is a relationship between price and the quality received by customer. Many people use the price as a indicator of the quality of the product or service. The study has shown that higher price of the cars presets higher quality. Ex: pills for the pain. They were two types of pills, one E2. 50 ,other EO. 50, but they were the same pills. But after research on customers , the consumers said that pills for E2. 50 were working better. Another example is trying the wine, test with 2 bottle of wine. c) Product Line pricing: you looking in existing roduct and you expending product range so you can charge different price ranges. For example, when you think about Apple, when they launched iPod shuffle for E50, when the iPod cost E250. By bringing the simple version of the iPod, you are attractive new segment, because there is a massive different between to pay E50 and E250. and this increase the revenue for the organization And profit. However, you need to be very careful by charging to little for the product to an attractive a new segment, and it can send it confusing message to the other segment. d) Negotiating margins: is where we expecting the price reduction. When we pay the price different from the list price. It can depend on getting large order, paying cash in developing countries which is an advantage. if the negotiating price is a part of the culture, of tradition; and those companies who are launching their product in this particular country should be it should take it this in to the count with their pricing strategy. d) Political factors: If you charge high prices and the public cry European commission can intervene, like for medicine products and childrens games. For example in the I-JK regulation off come had to reduce the prices like orange. If there is situation of monopoly and the only one organization provides the service or oligopoly,when we have few large players in the market , market should be tightly controlled by organizations which consider competition and protects their customers. For example if you think about recent out cry of increase prices of electricity and gas by 10%, so you have 6 large players in the I-JK market which dominate 95% of the market. So if they decide to increase the price by 10% those 6 organizations work together and is very difficult for the customers to go somewhere else because you dont have an option. Politician can entered and hold them for the price changes. e) Costs: what every we do in the market, in the future the price we charge should cover all cost consider, whatever it could be variable cost or fixed cost as such. f) Effect on OlstrlDutors/ retallers: wnen we use tne OlstrlDutors, Tor example IT you nave aalry product manufacturer and you sale your products through the supermarkets. In this case when you change the price, you need also consider rules of the retailers. For example, the Mullher yogurts, if you want to use penetration pricing distributors can refuse your product, it is not much profit to be made. ) Competition: in the market, you cannot operate in isolation. There are always other companies offering similar product or service. Your price is in one way or to other, and is related to your competitors. We need to understand who the competitors are. First, you have imitative competitors the competitors who are producing technically similar product. You can have secondary competitors : different product selling in the same way. h) Explicability: means that sells people to explain why they are charging particular price, specifically the higher price for product and service. They should be able to justify the price. Think about the Michelin tires, there are one of the biggest manufacturers in the world. As far as car manufacture is considered and being the largest in the market they also charge the premium price for the particular tires. If you are the car manufacturer you want to understand why are you paying the premium price. If they are able to explain why the price is high due specific technology to develop those particular tires, higher quality, the longer life of the product then obviously the manufacturer may be more willing to purchase the product and pay higher price than the competitors. i) Value to customer: it is very mportant to us to estimate what is the product value to the customer; because we can use various methods to assess their value to the customers as far as manufacture product is concerned. We can use different test to see how much customer is ready to pay for the product: 1. rade of analysis :it measure between the price and other product features which may impact the product preference; For example, by using the trade of analysis could it provide it different product features with different price range and could be asked what product they prefer. You can even do the test for a launching the ice cream. By applying trade of analysis you find what should be the optimal price and what qualities should be included in the product which are valued by customers. 2. Experimentation : when we have the particular product , lets say if you think about supermarkets they have hundreds of stores in the I-JK. When the launch a new product in a different location they can launch the same product with different prices i different location, to asses the customers reaction where they are happy to buy a product. They can decide for other stores what should be the price. When they do the experimentation , they can use ontrolled store experiment, they selct some stores and compeer ; for example if you have 300 stores you pick 50 of them and you launch the product and in other 250 you launch the product; then you compare the impact of the price change of those 50 to other 250 stores. . test marketing: works in the way if you have again 300 stores, rather than launching the product you can decided to pick up several stores to launch the product with the particular launching strategy and to see how it is performing as far as the pricing is concern you can make good decision of what should be the pricing, the strategy for the overall product of stores. 4. economic value analysis to the customers: ve ry important to 82B business. They consider the economic value of the product. Ex: Michelin tires . car manufactures purchasing tnelrs product, tney want to unaerstana wnat Is tne economic value 0T partlcular tire And what the duration of this product. for example you pay more, but last double time than the competitors product. PRICING NEW PRODUCT STRATEGIES MARKET SKIMMING: Marketing Skimming Pricing- is when we charge a high price to attract the least price sensitive market segments. We try to attract the market segments, which are not price sensitive. Many companies which invent a new product initially set high prices to skim the revenues layer by layer from the market because when they launch a new product there are not other product available in the market. Good example will be when digital cameras were first introduced they were selling for over E 1000 for the public and for around E 5000 for semi professional. In 2003 when Canon introduced similar cameras but they were priced less than EIOOO they sold 1. billion units in a year because was huge demand. Another good example will be when Sony launched first HD TV in 1990s the price was E30. OOO per TV, and now around E500. There are 7 key factors which should be applicable when we use the skimming market: what we need to take toa count for a particular organization it doesnt need to be all 7 conditions, it could be some of the conditions met. 1. Product provides high value: If the product provides high value you can charge the premium price. But what you need to take to a count is high value could be due functional compatibility of the product; for example, better design, better material, better technology, but also could be some sociological value when you buy a perfume roduct like Chanel, is more a sociological value than the functional value. 2. Customers have high ability to pay: If the customers are not able to buy the product it is very difficult to sell it. For example when you launch the product in the development countries your product could be offer a very high quality , you may have very high demand for a product. However, you cant launch the product using skimming strategy if the income of those people does not allow to buy your product 3. Consumer and bill payer are different: For example hotels. Hotels can charge premium price during the weekdays where mostly business people stay in the hotel. However, on the weekends they can charge much lower prices for the families. During the business needs , the company is more than happy to pay a premium price and the people dont pay for the room, the company that they work for them. The same with the trains, in the morning they charge more, because they now that professional are going to work. 4. Lack of competition: in extreme case you will have the monopoly and there is one large organization in the particular market and where is no competitor you can charge a premium price, because customers they dont have any option, for example the gas/oil company. 5. Excess demand: limited amount of supply and the price for the product goes up. 6. High pressure to buy: in case of emergency customers are happy to pay more for the product o service. For example, the airplanes companies, they pay more for the urgent repairs.. Because where is the problem at the airport territorial and they need and urgent repair. The cost of the urgent situation they will pay the premium price. 7. Switching costs: it could be very expensive Tor me to cnange my product needs Trom one suppller to anotner. IT you think about an organization, lets say if you are particular retail bank and you already nvested millions of pounds in your IT system and you are using lets say windows operating system and on the top of that you are investing rather on other program. Lets say windows 8 and related problems and as a organization you are not happy with your windows operating system; at the same time changing the windows operating system you need to consider the switching cost, money already invested. Changing the operating system can be very expensive( training the stuff and so on). Switching the mobile phones for example from iphone to Samsung, and you have at home your music system that works with the iphone, but doesnt work with the Samsung mobile. So this may be expensive, because you may have to buy a new music system suitable for a Samsung. PRICING NEW PRODUCTS STRATEGIES MARKET PENETRATION PRICING: MARKET PENETRATION PRICING we use aggressively low price to gain volume and market share. Companies can set a initial low price to penetrate the market quickly and deeply to attract a large number of buyers in the market and have large market share. Once the market share is won, organisation may decide to increase the price which happens in most of the times. There are 6 conditions 1. Only feasible alternative: For example if you have a product, which is not so ifferent to competitors product in the market and you want to launch this product you have to go to competitive launch pricing. You try to charge similar price as your competitors or you charge less price to attract more customers. 2. Market penetration or domination: some companies use market penetration or domination strategy to gain the market share. For example, insurance company the Direct Line was launch , aggressively challenge all insurance companies because they offer direct services . And now they are the market leader for home and auto- insurance. 3. Experience curve effect/ low costs: example for higher product which uses market penetration and domination strategy by charging market penetration prices. High quality product you charge lower price , penetration pricing once you have the market share then you increase the price. Good example will be the Mercedes company in the US market in 1967. When they entered the market in the US the Mercedes wasnt known for the quality. They charged much lower price in 1967 to attract more customers, to let customers know. hat good quality cars they were producing. By 1982 the Mercedes doubled the price. if you increase output of the roduct, the cost reduces. If the production double then the cost of producing the product reduces by 20%. The larger corporations which they have high production facilities they can significantly reduce their prices so they have better market competitive advantage to bit the competitors. For examp le, Intel due to the large market share (80%) when they were challenged by smaller company AMD, due to the cost advantages of Intel they could reduce the price up to 60%. Within 6 weeks they defeated the competitor. Because the Itel was already making the huge profit, they could manipulate the prices to bit the competitors. . Make money later or elsewhere: Make money later- when you make a product you are happy to not making any profit Tor tne product you sell, out tnen agaln you wlll make money later on selling additional product. For example the printers. You buy the printer for E30 and then you run of the ink, so you need to buy a new ink for your printer. So if you buy a new one you must buy ink for a particular printer. And then you have to pay some like E40/50, Those companies make more money on selling the inks for the printers than on actually printers. The other example will be the Gillette company with theirs razors. They make more money on razors than on blades. They make 5% on the razors, and 95% is coming from the blades. Make money elsewhere for those who drive the cars so you need a petrol, sometimes supermarket who sells the petrol doesnt make money, but they work as a trigger to attractive people to make the shopping. . Barrier to entry: If you have already low price, it can be difficult for competitors to enter , example : easy Jet and Rainair. They have already large market share they allow to manipulate the market, as at the same time it will be very difficult for a new companies to enter to bit them with the prices. . Predation: is when you artificially reduce price to put you other competitors out of the business. Once you get rid of you competitors then you increase the price for your product. Microsoft was accused for predation, when they banded 3 software such as internet browser and Media Player with his best selling windows operating system. NEW PRODUCT LAUNCH STRATEGY: High Rapid skimming Slow skimming Rapid penetration Slow penetration PROMOTION Low PRICE Rap10 SKImmlng ana Slow sKlmmlng: we cnarge tne premium prlce, promotlon could be high as well or promotion could be low, when we call a slow skimming. RAPID SKIMMING- when we charge a lot of money for the product and spend a lot of on promotion. For example Nike or Adidas: they spend significant amount money on promotion. However, there are some companies whose not spending money on promotion. For example, the Rolls-Royce company , they are expensive, but they dont spend money on promotion because this is very well know brand. The same the Swiss watches. PENETRATION PRICING : THE price is low but we can spend huge amount of money on promotion or lower amount of money on promotion. RAPID PENETRATION: in this case we spend a lot of money on promotion but the price is low. When you think about easy Jet and Rayanair when they spend significant amount of money to promote the cheapest fly. SLOW PENETRATION STRATEGY: when we say the price is low but we dont spend any money on promotion. Especially if we have on label brand , any supermarket ; asda fines wines, etc. PRICING EXISTING PRODUCTS STRATEGIC OBJECTIVES BUILD OBJECTIVE: and e want to increase the market then it would depend whatever on price sensitive market so price lower than competitors. If the price is insensitive then pricing, strategy depends on positioning strategy; for example, sometimes increasing the price could be a etter strategy, depending where you are in the market. Example Luis Vuitton when during Christmas they were struggling with the supplier with their particular bags they did increase the price by 20%. This increase made that people were even more interested to buy the bags. In this situation added value to the brand . HOLD OBJECTIVES: (HOLD SALES/ MARKET SHARE): we are protecting our market share. we dont want to increase our market share but in the same time we dont want to reduce it. Everything depends on how on competitors are doing. Supermarkets: the biggest 6 have their shares and they dont want any other to enter. If Tesco starts the war of reducing the prices then Asda would follow AND THE same strategy would by follow buy other. So they are fghting with each other to make sure they wont lose their position in the market share. HARVEST OBJECTIVE ( MAINTAIN OR RAISING PROFIT MARGINS EVEN THOUGH SALES/ MARKET SHARE FALLING) : when we serve one segment and we want to move to other segment. Reposition the existing product. Ex: Skoda cars, they had to reposition their product, because few years ago their cars were cheap, bad quality. Once Skoda repositioned their segment they became one of the top sellers in the western Europe. PLACE ( DISTRIBUTION)