Marketing’s Role in the Global Economy Chapter 12 Chapter One Marketing’s Role in the Global Economy Price Determination For use only with Perreault and McCarthy texts. © 2002 McGraw-Hill Companies, Inc. McGraw-Hill/Irwin

Marketing’s Role in the Global Economy Chapter Goals Chapter One Marketing’s Role in the Global Economy Meaning of price Concept of price and value Pricing objectives Factors influencing price Costs of producing and marketing a product Approaches to determine price Break-even analysis Strategies related . For use only with Perreault and McCarthy texts. © 2002 McGraw-Hill Companies, Inc. McGraw-Hill/Irwin

other items with utility Meaning of Price Dues PRICE Amount of money and/or other items with utility needed to acquire a product Salary Wage Fare Tuition Interest Rent Commission

Importance of Price Economy Firm Customer

Pricing Objectives: Profit-Oriented Achieve a Target Return Maximize Profits

Pricing Objectives: Sales-Oriented Increase Sales Volume Maintain or Increase Market Share

Pricing Objectives: Status Quo Meet Competition Stabilize Prices

Factors Influencing Price Estimated Demand Expected price Demand curve Price elasticity Competitive Reactions

Price and Marketing Mix Distribution Channels Promotion Price Product

Costs for an Individual Firm Inverse Demand

Cost-Plus Pricing SELLING PRICE = Total Cost + Profit Setting the price of one unit of a product equal to the total cost of the unit plus the desired profit on the unit SELLING PRICE = Total Cost + Profit

King’s Kastles

Markup Pricing

Break-Even Analysis B E P : Total revenue = Total costs BREAK-EVEN POINT The quantity of output at which total revenue equals total costs assuming a certain selling price B E P : Total revenue = Total costs

Computation of Break-Even Point

Break-Even Chart

Pricing and Competition Perfect Competition Above Competition Below Competition

Value Benefits Value = __________________ Price + Incurred costs

The FOUR Generic Competitive Strategies Market Target Type of Advantage Sought Overall Low-Cost Leadership Strategy Broad Differentiation Focused Low-Cost Lower Cost Broad Range of Buyers Narrow Buyer Segment or Niche

A Low-Cost Leadership Strategy Objective Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to Under-price rivals and reap market share gains OR Earn higher profit margin selling at going price

Low-Cost Leadership Low-cost leadership means low Keys to Success Make achievement of low-cost relative to rivals the THEME of firm’s business strategy Find ways to drive costs out of business year-after-year Low-cost leadership means low OVERALL costs, not just low manufacturing or production costs! Low-cost leadership means low OVERALL costs, not just low manufacturing or production costs!

Approaches to Securing a Cost Advantage Control costs! By-pass costs! Approach 1 Do a better job than rivals of performing value chain activities efficiently and cost effectively Approach 2 Revamp value chain to bypass some cost-producing activities

Approach 1: Controlling the Cost Drivers Capture scale economies; avoid scale diseconomies Capture learning and experience curve effects Manage costs of key resource inputs Consider linkages with other activities in value chain Find sharing opportunities with other business units Compare vertical integration vs. outsourcing Assess first-mover advantages vs. disadvantages Control percentage of capacity utilization Make prudent strategic choices related to operations

Approach 2: Revamping the Value Chain Simplify product design Offer basic, no-frills product/service Shift to a simpler, less capital-intensive, or more streamlined technological process Find ways to bypass use of high-cost raw materials Use direct-to-end user sales/marketing approaches Relocate facilities closer to suppliers or customers Reengineer core business processes---be creative in finding ways to eliminate value chain activities Use PC technology to delete works steps, modify processes, cut out cost-producing activities

Characteristics of a Low-Cost Provider Cost conscious corporate culture Employee participation in cost-control efforts Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost improvement Low-cost producers champion FRUGALITY while aggressively INVESTING in cost-saving improvements!

The Competitive Strengths of Low-Cost Leadership Better positioned than RIVAL COMPETITORS to compete offensively on basis of price Low-cost provides some protection from bargaining leverage of powerful BUYERS Low-cost provides some protection from bargaining leverage of powerful SUPPLIERS Low-cost provider’s pricing power acts as a significant barrier for POTENTIAL ENTRANTS Low cost puts a company in position to use low price as a defense against SUBSTITUTES

A Low-Cost Strategy Works Best When: Price competition is vigorous Product is standardized or readily available from many suppliers There are few ways to achieve differentiation that have value Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant bargaining power

Pitfalls of Low-Cost Strategies Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales volume--profits go down,not up) Low cost methods are easily imitated by rivals Becoming too fixated on reducing costs and ignoring Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used Technological breakthroughs open up cost reductions for rivals

Differentiation Strategies Objective Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals Find ways to differentiate that CREATE VALUE for buyers and that are NOT EASILY MATCHED or CHEAPLY COPIED by rivals Not spending more to achieve differentiation than the price premium that can be charged Keys to Success

The Appeal of Differentiation Strategies A powerful competitive approach when uniqueness can be achieved in ways that Buyers perceive as valuable Rivals find hard to match or copy Can be incorporated at a cost well below the price premium that buyers will pay Which hat is unique?

The Benefits of Successful Differentiation A product / service with unique and appealing attributes allows a firm to Command a premium price and/or Increase unit sales and/or Build brand loyalty = Competitive Advantage

Types of Differentiation Themes Unique taste -- Dr. Pepper Special features -- America Online Superior service -- FedEx, Ritz-Carlton Spare parts availability -- Caterpillar Engineering design and performance -- Mercedes Prestige -- Rolex Quality manufacture -- Honda , Toyota Technological leadership -- 3M Corporation, Intel Top-of-the-line image -- Ralph Lauren, Chanel

Sustaining Differentiation: The Key to Competitive Advantage Most appealing approaches to differentiation: Those hardest for rivals to match or imitate Those buyers will find most appealing Best choices for gaining a longer-lasting, more profitable competitive edge: New product innovation Technical superiority Product quality and reliability Comprehensive customer service

Where to Find Differentiation Opportunities in the Value Chain Purchasing and procurement activities Product R&D activities Production R&D; technology-related activities Manufacturing activities Outbound logistics and distribution activities Marketing, sales, and customer service activities Internally Performed Activities, Costs, & Margins Margins of Suppliers Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Signaling Value as Well as Delivering Value Buyers seldom pay for value that is not perceived Signals of value may be as important as actual value when Nature of differentiation is hard to quantify Buyers are making first-time purchases Repurchase is infrequent Buyers are unsophisticated

The Competitive Strengths of a Differentiation Strategy Buyers develop loyalty to brand they like best--can beat RIVAL COMPETITORS in the marketplace Mitigates bargaining power of large BUYERS since other products are less attractive Differentiation puts a seller in better position to withstand efforts of SUPPLIERS to raise prices Buyer loyalty acts as a barrier to POTENTIAL ENTRANTS Differentiation puts a seller in better position to fend off threats of SUBSTITUTES not having comparable features

A Differentiation Strategy Works Best When: There are many ways to differentiate a product that have value and please customers Buyer needs and uses are diverse Few rivals are following a similar type of differentiation approach Technological change is fast-paced and competition is focused on evolving product features

What Can Make a Differentiation Strategy Fail Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their well-being Over-differentiating such that product features exceed buyers’ needs Charging a price premium that buyers perceive is too high Failing to signal value Not understanding what buyers want or prefer and differentiating on the “wrong” things

Competitive Strategy Principle A low-cost producer strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra attributes as worth paying for!

The Strategy Clock Exhibit 5.2a Note: The strategy clock is adapted from the work of Cliff Bowman (see D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995.) However, Bowman uses the dimenstion ‘Perceived Use Value’. Exhibit 5.2a

The Strategy Clock Exhibit 5.2b

“No Frills” Strategy Commodity-like products or services Low price Low perceived product/service benefits Focus on price-sensitive market segment Commodity-like products or services Price-sensitive customers High buyer power and/ or low switching costs Small number of providers with similar market shares

Low Price Strategy Pitfalls of low price strategy Need a low cost base Lower price than competitors Maintain similar product/service benefits Public sector – year on year efficiency gains Pitfalls of low price strategy Margin reduction (competitor reaction) Inability to reinvest leading to loss of perceived benefit of product Need a low cost base Low cost itself not a basis for advantage Low cost achieved in ways that competitors cannot match to give sustainable advantage

Differentiation Strategies Offering benefits different from competitors Widely valued by buyers Better products/services at same or higher price Public sector - centre of excellence Success depends on Identification of strategic customers and knowing what they value Knowing the competitors Narrow competitor base – focused differentiation Wide competitor base – address bases of differentiation valued by customers

Hybrid Strategy Achieve greater volumes Simultaneously achieving differentiation and a price lower than competitors Achieve greater volumes Clarity about activities on which differentiation can be built (core competences) Reduce costs on other activities Entry strategy in market with established competitors

Focused Differentiation High perceived product/service benefits to selected market segment (niche) Premium products, heavily branded Choice to be made between focused differentiation and broad differentiation if growth required Difficult when the focus strategy is only part of an organisation’s overall strategy Possible conflict with stakeholder expectations New ventures start off focused, but need to grow Market situation may change, reducing differences between segments

Failure Strategies Do not provide perceived value-for-money in terms of product features, price or both Increase price without increasing product/service benefit Reduce benefits whilst maintaining price

Earnings in cost and differentiating strategies….. ROI = OPERATING INCOME / INVESTMENT ROI = OI/I; ROI = OI/ SALES * SALES/I TURNOVER MARGIN

Price Determination Process

Competition Price Non- Price Low Price Value Pricing Stable Price Emphasize other parts of marketing mix Non- Price

Market-Entry Strategies Market-Skimming Pricing Set a relatively high price. See when this strategy is Possible: page 361 Market-Penetration Pricing Low initial price See when this strategy is Possible: page 361

Discounts and Allowances Quantity Discounts Reductions based on size of purchase Trade Discounts Reductions based on buyer performing marketing functions Deductions based on paying within a specified time Cash Discounts

See each one explained on pages 369 & 370 Pricing Strategies One- price Flexible- price High-Low pricing $4.95 Everyday low price See each one explained on pages 369 & 370