Pricing and Distribution MKTG 201 Semester 1, 2010 Sandy Bennett

Pricing--Overview Definitions Pricing objectives and constraints Pricing approaches and methods New product pricing Pricing and the PLC

Marketing Mix Product Price Place Promotion

Definitions ________ is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service. ________ is a conscious, explicit management activity.

Why do firms need a pricing strategy? Price is the easiest marketing mix element to change Price affects ________ Pricing is the only element of marketing that actually brings in ________, rather than incurring costs. Price is a critical factor in the profit equation

Pricing objectives The key to successful marketing lies in the creation of a mutually beneficial exchange of value between one party and another For the _______: benefit = satisfaction derived from the consumption or ownership of the product (benefit > price) For the ________: benefit = primarily the revenue derived from purchases (benefit >cost)

Pricing objectives cont… Pricing objectives tend to focus on various combinations of the following: Profitability Long-term prosperity Market share Positioning

Price constraints Price Ceiling (Max Price) List Price Price Floor (Min Price)

Price constraints cont… Consumer Demand Costs ________ and ________ Competitors – Prices – Intensity of competition – Barriers to entry Legal constraints – Which industry in NZ has just had tighter pricing constraints imposed? – Is there an industry in NZ which you think should have tighter price constraints imposed?

Price Elasticity Elastic demand: a _______ change in price leads to a big change in demand Luxuries e.g. Inelastic demand: a _______ change in price leads to a small change in demand Necessities e.g.

Pricing approaches Demand Cost Profit Competition

DEMAND ORIENTED Pricing method Prestige pricing Price lining Demand backward pricing Odd-even pricing Target pricing Bundle pricing Yield management pricing

COST ORIENTED Pricing method Standard Markup Cost-plus pricing Experience curve pricing Break even analysis

PROFT ORIENTED Pricing method Target profit pricing Target return on sales Target return-on- investment pricing

COMPETITION ORIENTED Pricing methodDefinition Customary pricing Going rate pricing (above, at or below) Loss leader pricing

Break-Even Analysis Used to evaluate whether the firm will be able to cover costs (break even) at a particular price Indicates the break-even point, i.e., sales (units or dollars) needed to break even ,000 1, Total Revenue Total Cost Fixed Cost Target Profit ($200,000)

Terminology ∏ = Profit P = price Q= quantity FC = fixed costs VC = variable costs = uvc x Q = unit variable costs x quantity TR = total revenue = P x Q = price x quantity

Break even pricing/Target profit pricing ∏ = TR – TC Profit = Total Revenue – Total Costs Profit = (P x Q) – [FC + (VC x Q)] To calculate the ____________, profit equals zero For ______________, you put in the target figure for profit e.g. $1 million

Price-adjustment Strategies _______ discounts encourage sales _______ discounts smooth out demand _______ discounts encourage early payment _______ discounts motivate intermediaries

New Product Pricing Skimming pricing (Demand oriented) Selling to the top of the market at a high price before aiming at more price sensitive customers (maximize profits from each layer of the target market) Advantages: Disadvantages:

New Product Pricing Penetration Pricing (Demand oriented) Price low to capture large market share Advantages Disadvantages:

Pricing and the PLC INTRODUCTION GROWTH MATURITY DECLINE

Pricing—Looking back Definitions Pricing objectives and constraints Pricing approaches and methods New product pricing Pricing and the PLC

Distribution--Overview Marketing channels and intermediaries Types of distribution Distribution intensity Distribution and the PLC

Marketing Mix Product Price Place Promotion

Marketing channels –Marketing ___________ are individuals or organisations that act in the distribution chain between the producer and the end user (e.g. industrial buyers, wholesalers, agents and brokers and retailers). –The _______________involves a group of individuals and organisations directing products from producers to end users.

Marketing channels Elliot et al 2010

Consumer product marketing channels Elliot et al 2010

Business-to-business product marketing channels Elliot et al 2010

Why use Intermediaries? Advantages 1.Reduces investment costs 2.Spreads risk 3. Allows manufacturers to specialize 4. Increases ________ for producers & consumers 5. Coordinates _______ and ________ 6. Makes widespread distribution possible

Why use Intermediaries? Disadvantages 1._________ are shared /reduced 2. Reduces control (over the consumption experience)

Marketing Channel Functions 1.Information 2.Promotion 3.Contact 4.Matching 5.Negotiation 6.Physical Distribution 7.Financing 8.Risk Taking

Information and Promotion Information: gathering and distributing marketing research and intelligence information about the actors and forces in the marketing environment needed for planning and aiding exchange. Promotion: developing and spreading persuasive communications about an offer

Contact and Matching Contact: finding and communicating with prospective buyers Matching: shaping and fitting the offer to the buyer’s needs, including such activities as manufacturing, grading, assembling and packaging

Negotiation and Physical Distribution Negotiation: reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred Physical Distribution: transporting and storing goods

Financing and Risk Taking Financing: acquiring and using funds to cover the costs of the channel work Risk taking: assuming the risks of carrying out the channel work

Number of channel levels Marketing channels may be described by the number of channel levels involved (________) Each layer of intermediaries that performs some work in bringing the product and its ownership closer to the final consumer is a channel level.

Channel levels _______ marketing C1: has NO intermediaries. Consists of a manufacturer selling directly to consumers. Example: ________marketing C2: one intermediary. Example: C3: two intermediaries. Example: C4: three intermediaries. Example:

Dual Distribution Using more than one distribution channel at the same time. Seller (Producer Intermediary(ies) Buyer (Consumer)

Channel Behaviour Horizontal conflict: between firms at the same level of the channel. Example: Vertical conflict: between different levels of the same channel. Example:

Channels in the service sector The concept of marketing channels is not limited to the distribution of physical goods. Producers of services and experiences also have to make their output available to target populations. Example:

Distribution intensity The market coverage decision takes into account the nature of the product and its target market. Generally, marketers will choose from: –___________ distribution which distributes products via every suitable intermediary –___________ distribution which distributes products through a single intermediary for any given geographic region –___________ distribution which distributes products through intermediaries chosen for some specific reason.

Distribution intensity LowHigh e Exclusive One or a few dealers within a given area Selective Several dealers within a given area Intensive Large number of dealers within a given area

Linking Product Class & Distribution Product classCritical factorsDistribution intensity ConvenienceAvailability/ Convenience Intensive ShoppingChoice/ Selection Selective SpecialtySpecialized Info & Service Exclusive Adapted from a slide by Karen Fernandez (2008)

Distribution and the PLC INTRODUCTION GROWTH MATURITY DECLINE

Distribution—Looking back Marketing channels and intermediaries Types of distribution Distribution intensity Distribution and the PLC