1. Lecture 9 Ch: 10 Developing Pricing Strategies and Programs

2. Structure C. WHERE DO WE WANT TO BE? B. WHERE ARE WE NOW?
A. INTRODUCTION
1. Overview and Strategy Blueprint
2. Marketing Strategy: Analysis &
perspectives
B. WHERE ARE WE NOW?
3. Environmental & Internal Analysis:
Market Information & Intelligence
C. WHERE DO WE WANT TO BE?
4. Strategic Marketing Decisions,
Choices & Mistakes
5. Segmentation, Targeting
& Positioning Strategies
6. Branding Strategies
7. Relational & Sustainability
Strategies
E. DID WE GET THERE?
14. Strategy Implementation, Control
& Metrics
D. HOW WILL WE GET THERE?
8. Product Innovation & Development
Strategies
9. Service Marketing
10. Pricing & Distribution
11. Marketing Communications
12. E-Marketing Strategies
13. Social and Ethical Strategies

3. Learning Objectives
Examine the separate and complementary roles of pricing and distribution to marketing strategy.
Assess pricing mindsets and strategic options.
Evaluate the buyer’s perspective of distribution and its implications for strategy.
Review the role of pricing and distribution amidst the drive towards the commoditisation of products and services.

4. Chapter at a Glance Pricing Strategic Options Online Pricing
Implementing Pricing Strategy
Distribution
Multi-Channel Marketing
Grey Marketing
Price and Distribution Strategies Meet

5. Introduction
Pricing and distribution are distinct yet complementary elements in marketing
Strategically they are difficult to separate
A premium priced watch cannot be sold at a discount jewellers
A tractor producer that wants a specific mark-up is going to find it difficult to control margin if it sells through intermediaries

6. Strategic options
Successful pricing means that prices set have to complement the company’s overall marketing strategy and strike a balance between maximizing revenues and offering customers value
Prices need to be coordinated across any business
Dolan suggests eight stages to pricing strategy

7. Strategic Options Reverse Cost-Plus Variations in Value POS Price
Sensitivity
Successful
Pricing
Competitor
Reaction
Customer
Costs
Emotion
Individual?
Bundled?

8. Reverse cost plus
Superior product performance
Easier schedule of doses
Fewer side effects
Taken safely with many other drugs that were not compatible with Tagamet
Perceived value to the customer was very high
Number one ulcer medication and the number one selling drug in the world
Consider how Glaxo introduced its Zantac ulcer medication to the U.S. market in 1983 to compete with SmithKline Beecham Corporation’s Tagamet. . If Glaxo had allowed product cost to drive the price of Zantac, it might have introduced the medication at a lower price than Tagamet; it might have used a “follow the leader” pricing strategy. But Glaxo instead relied on Zantac’s perceived value to the customer, initially pricing the drug at a 50% premium over Tagamet. Within four years, Zantac became the market leader.

9. Reverse cost plus
Northern Telecom’s Norstar competing with Pacific Rim suppliers
Inherent superiority of their product didn’t matter; resellers would value Norstar only at the market price
Northern’s managers decided to introduce the Norstar system at the prevailing market level and then look inward to determine how they could reduce costs in order to make money at that price.
Eventually, Norstar could convince consumers that their system was better than the competition’s
As Northern’s competitors began to fight the commodity battle and lower their prices, Northern was able to maintain its price level, secure a price premium, improve margins increase its share of the market
Northern’s managers knew that over time, they could convince consumers that their system was better than the competition’s; in other words, they knew that Norstar’s perceived value would increase as the system proved itself in the marketplace.
In Glaxo’s case, a conventional “figure cost and take a markup” approach would have resulted in forgone profits; in Northern’s case, the result would have been a noncompetitive price and no sales. By turning the process around and letting value as perceived by the customer be the driver, each company found a better initial price level and the foundation for its future growth.

10. Knorr soup costs Tk. 65/sachet
Knorr soup costs Tk.65/sachet. Radhuni wants to launch a soup which would be superior to Knorr. A market survey shows that superiority doesn’t matter; consumers would not be willing to purchase Radhuni soup at a higher price. So Radhuni launches a soup at the market price. This is an example of
Reverse cost plus
Value based pricing
Multiple pricing
Emotional pricing
Reverse cost plus pricing

11. Value based pricing
Iphone – latest versions are always priced higher than the older ones. The company segments the market over time. Initially, to target those customers who “can’t wait” for the new product. over time, they target the wider market with less than half the price.

12. Value based pricing
Airlines, for example, attempt to treat business and pleasure travelers differently by offering cheaper fares targeting travelers with special rates during holiday seasons

13. Price sensitivity Customer Economics
Will the decision maker pay for the product him or herself?
Does the cost of this item represent a substantial percentage of the total expenditure?
Is the buyer the end user? If not, will the buyer be competing on price in the end-user market?
In this market, does a higher price signal higher quality?

14. Price sensitivity Customer Search and Usage
Is it costly for the buyer to shop around?
Is the time of the purchase or the delivery significant to the buyer?
Is the buyer able to compare the price and performance of alternatives?
Is the buyer free to switch suppliers without incurring substantive costs?

15. Price sensitivity Competition
How is this offering different from competitors’ offerings?
Is the company’s reputation a consideration? Are there other intangibles affecting the buyer’s decision?

16. Single or multiple Cost: $20 What is the optimal price to charge?
At $70, you get revenue of $140 and profit of $100
In this schedule, you get total revenue of $295 and profit of $175
Greater than profit given above
Identify an optimal pricing structure consider a manufacturer that must create a pricing policy given Buyer A and Buyer B, who value successive units of the product differently:
For simplicity, let’s assume that the seller knows these valuations and that one buyer will not resell the product to the other. The naïve pricing manager would say, What is the optimal price to charge? If the producer’s cost is $20 per unit, the answer is $70. At this price, the company would sell one unit to each buyer for a total profit of $100.
The astute pricing manager, on the other hand, asks, What is the optimal pricing schedule? The insight lies in asking the right question. With the given cost and value parameters, the optimal pricing schedule is given. With this pricing schedule, buyer A would purchase one unit at $70, and buyer B would purchase five units—one at $70, one at $50, one at $40, one at $35, and one at $30, for total revenues of $295. Given the $20 cost to produce, the profits on those transactions would total $175—a 75% greater margin than that generated by the naïve pricing manager’s optimal price of $70.

17. You are the pricing manager of Dockers trousers
You are the pricing manager of Dockers trousers. Market research shows that there are two categories of buyers – category Tom and category Jerry. The table below tells you what prices they are willing to pay. How would you price your Dockers trousers? Justify showing revenue and profit calculations. Assume cost per Dockers trousers is $10.
Price willing to pay
Category Jerry
Category Tom
1st pair of Dockers
$50
2th pair of Dockers
$20
3rd pair of Dockers
4th pair of Dockers $5
1st pair to be bought by tom and jerry = 50 x 2 = 100
2nd pair to be bought by tom and jerry = 20 x 2 = 40
3rd pair to be bought by tom and jerry = 20 x 2 = 40
4th pair to be bought by jerry = 20 x 1 = 20
Total revenue = 200
Total cost = 10 x 7 = 70
Profit = 200 – 70 = 130
272761

18. Competitor reaction
Competitors usually react to a lower price by lowering their prices as well
Flanker brands might be introduced
Legal actions can be taken (in case there are any illegal discounts)

19. Point of sales
The total set of pricing terms and conditions a company offers its various customers can be quite elaborate. They include discounts for early payment, rebates based on annual volume, rebates based on prices charged to others, and negotiated discounts, based on which intermediary is being used
If a list price is agreed, it needs to be established whether this price is fixed or open because if prices are subsequently reduced by the intermediary to close a sale, it can lead to confusion

20. Emotion
Research is needed to assess a buyer’s emotional response to a price because over time people develop price points they see as fair.

21. Customer costs
Managers must consider the cost side, being certain to avoid the infamous “strategic accounts”
These accounts demand product customization, just-in-time delivery, small order quantities, training for operators, and installation support while at the same time negotiating price very aggressively, paying late, and taking discounts that they have not earned
These accounts don’t get what they pay for; they get a lot more
Companies need to decide whether the returns justify the cost
Although customer value is crucial in pricing, managers also must consider the cost side, being certain to avoid the infamous “strategic accounts” zone. (See the graph “The Dangerous ‘Strategic Accounts.’”) These accounts—and they are typically very large—demand product customization, just-in-time delivery, small order quantities, training for operators, and installation support while at the same time negotiating price very aggressively, paying late, and taking discounts that they have not earned. These accounts don’t get what they pay for; they get a lot more. They are facetiously called strategic accounts because that’s the justification given when account managers are confronted with the fact that the company is losing money on them.

22. Caterpillar is one of the vendors of Agro K. companies
Caterpillar is one of the vendors of Agro K. companies. While looking over the client-vendor relationship of Caterpillar over the past one year, the CEO found that Agro K’s demand for machinery every year is very low. Moreover they require their purchases Just in Time, seek deep discounts and constantly complains to management regarding small issues. Which one of the following elements do you think Caterpillar is incurring by being on the vendor list of Agro K?
Customer cost
Emotion
Customer reaction
Price senstivity
Customer cost