Slides part 4 (2016)Apunte Inglés
Content of 4th exam ADE en inglés A6-B6 with Jordi Pujadas
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The operational phase is to drive the actions of the four variables we control directly and they
are: product, price, placement and promotion. The combination of these variables will call
Product We define product as anything that can be offered to a market for attention, acquisition, use, or consumption that might satisfy a want or need. Products include more than just tangible objects. Products also includes services, events, persons, places, organizations, ideas, or mixes of these.
Services are a form of product that consists of activities, benefits, or satisfactions offered for sale that are essentially intangible (banking, tourism, insurance, etc.) Product and service classifications Products are divided in consumer and industrial products.
Consumer products are products and services bought by final consumers for personal consumption: o Convenience products. They are consumer products and services that consumers usually buy frequently, immediately, and with a minimum of comparison and buying effort (laundry detergent, fast food, magazines, etc.) o Shopping products. They are less frequently purchased consumer products and services that customers compare carefully on suitability, quality, price, and style. Consumers spend much time and effort in gathering information and making comparisons.
(Clothing, airline services, tourism, etc.) o Specialty products. They are consumer products and services with unique characteristics or brand identification for which a significant group of buyers is willing to make a special purchase effort (specific brands of car, designer clothes, luxury goods, etc.) o Unsought products. Consumer products that the consumer either does not know about or knows about but does not normally think of buying (non-compulsory insurance).
Industrial products are those for further processing or for use in conducting a business.
o Materials and parts. It includes raw materials and manufactured materials and parts.
Raw materials consist of farm products (fruits, vegetables, cotton, etc.) and natural products (fish, lumber, crude petroleum, etc.) Manufactured materials and parts consist of component materials (cement, iron, etc.) and component parts (small motors, tires, etc.) o Capital items. Capital items are industrial products that aid in the buyer’s production or operations, including installations and accessory equipment. Installations consist of major purchases such as buildings and fixed equipment (generators, elevators, etc.) Accessory equipment includes portable factory equipment and tools and office equipment. They have a shorter life than installations and simply aid in the production process o Supplies and services. Supplies include operating supplies (lubricants, paper, pencils, etc.) and repair and maintenance items (paint, nails, brooms, etc.). Supplies are the convenience products of the industrial field because they are usually purchased with a minimum of effort or comparison. Business services include maintenance and repair services (cleaning, computer repair, etc.) and business advisory services (legal, consulting, advertising, etc.) Product levels: The customer-value hierarchy Each company needs to address five product levels. Each level adds more customer value.
Core benefit. The service or benefit the customer is really buying. When designing products, the companies must first define the core, problem-solving benefits or services that customers seek. “A hotel guest is buying rest and sleep”.
Basic product. The second level is the basic product: The company turn the core benefit into a basic product, etc. “A hotel room includes a bed, bathroom, towels, desk, etc.
Expected product. The third level is expected product: Ø A set of attributes and conditions buyers normally expected when they purchase this product. “A hotel guest expects a clean bed, fresh towels, working lamps” Augmented product. The fourth level is the augmented product: The company prepares an augmented product that exceeds customer expectations. Product planners build around the product additional consumer services and benefits.
Potential product. The fifth level is the potential product. This level encompasses all the possible augmentations and transformations in the future. The companies search for new ways to satisfy customers and distinguish their offering.
Services A service is any act or performance one party can offer to another that is essentially intangible and does not result in the ownership of anything. There are some type of services: The service component can be a minor or a major part of the total offering: Tangible good with accompanying services. The offering consists of a tangible good accompanied by one or more services (cars, computers, tablets, cellar-phones, etc.) Hybrid. Equal part of good and service (restaurant, hotels, etc.) Major service with accompanying minor goods and services. The offering consists of a major service along with additional good (a trip).
Pure service. The offering consists primarily of a service (audit, advisor, consulting, massage cabinet, psychotherapy.
There are four key distinguishing characteristics of services: intangibility, inseparability, variability, and perishability: Intangibility. The customer cannot own a service. Payment is for use or performance. The customer may find difficulty in evaluating a service before purchase. The challenge for the service provider is to use tangible cues to service quality (trip: pictures and details in web, social media, brochures, etc.) Inseparability. Simultaneous production and consumption. Haircut, a trip, a concert are produced and consumed at the same time. The selection, training and rewarding of staff who are the front-line service people is fundamental because in the customer’s eyes these staff are the representatives of the company. The consumption of the service may take place in the presence of other customers. Enjoyment of the service is dependent not only on the service provided, but also on other consumers (avoid crowding, and conflicts among customers by queue jumping, and others).
Variability. Difficult standardization (same service conducted at multiple locations may differ, or the same service may differ to the capabilities of the staff). The main important to avoid varieties of the same service is a rigorous selection, training and rewarding the staff to emphasize the standards of expected of personnel when dealing with customers. The use of reliable and efficient equipment may help to standardization.
Perishability. The consumption of a service cannot be stored for the future. A hotel room or airline seat that is not occupied today represents lost income that cannot be gained tomorrow (very different in the case of physical products). Peak demands periods when supply may be insufficient. Another alternative may be encourage the participation of customers in production (self-services). Pricing strategies to encourage customers to visit during off-peak periods. Reservation systems to avoid delay of the service, or providing a comfortable waiting area.
Product and services decisions The figure shows the important decisions in development and marketing of individual products and services: Product and services attributes. Developing a product or services involves defining the benefits that it will offer. These benefits are communicated and delivered by quality, features, style and design.
o Product quality. Quality has a direct impact on product or service performance and it is closely linked to customer value and satisfaction. Product quality has two dimensions: Level. The company must first choice a quality level that will support the product’s positioning. The ability of a product to perform its functions. Companies choose a quality level that matches target market needs and the quality levels of the competition.
Consistency in delivering a targeted level of performance.
That is, the levels of quality that communicates the company ,the quality levels offered = Expected performance o Product features. Features are competitive tool for differentiating the company’s product from competitors’ product. Being the first producer to introduce a valued new feature is one of the most effective ways to compete. We can create an austere product without any extra. But every feature that we add, it will result in a new model of the same product. Take as an example the new laptop developed by Dell which can be converted into tablet.
o Product style and design. Another way to add customer value is through distinctive product style and design: Style. It describes the appearance of a product. A sensational style may grab attention and produce pleasing aesthetics. i.e. In case of wine, style would be the shape of the bottle itself.
Design. Good design contributes to a product's usefulness as well as to its looks. It begins with a deep understanding of customer needs. More than simply create product attributes, it involves shaping the customer’s product-use experience. i.e. In case of wine, the design would take into account not only the sape but also the colour of the glass, the type of glass, etc.
o Branding. Consumers view a brand as an important part of a product and branding can add value to a product. We will deepen the brand later.
o Packaging. It involves designing and producing the container or wrapper for a product. Poorly designed packages can cause headaches for consumers and lost sales for the company. By contrast, innovative packaging can give a company an advantage over competitors and boost sales. They must respect the legislation packaging products, and security. They must be designed trying to avoid damaging the environment. It involves designing and producing the container and wrapper of the product. It may include: Primary Container: it is where the product is to be used.
Secondary container: It is the wrapper (box, packaging) that is discarded when the product will be used.
o Labelling. It accomplishes different functions: The label identifies the product or brand: who made it, where it was made, when it was made, its content, how it is to be used, and how to use it safely.
Informs the consumer of the contents of the product under current legislation.
The label might help to promote the brand, support its positioning and connect with customers.
o Product support services. A company’s offer usually includes some support services, which can be a minor or a major part of the total offering. These services can augment actual products. Solving technical problems, home delivery at no extra cost are services of this nature.
Product mix and product line Product mix. It is the set of all products and items a particular seller offers to sale. A product mix consists of various product lines.
A company’s product mix has a certain width, length, depth, and consistency: o Width. It refers to how many different product lines the company carries. Example: 4 lines.
o Depth. The depth of a product mix refers to how many variants are offered of each product in the line. In this case, the depth of this line is 3 (P1+P2+P3).
o Length. The length of a product mix refers to the total number of items (products) in the mix. Example: If a company has 3 lines, and 4 items each, the total length of the product mix is 12.
o Consistency. It refers to how closely related the various product lines are in end use, product requirements, distribution channels, etc.
Product line. Products with similar functions, which are sold to the same group of consumers through the same distribution channels and a similar price level. Every company’s product line covers a part of the total possible range. Line stretching occurs when a company lengths its product line beyond its current range. It can stretch its line by: no changes, up-market, down-market, two-way and deleting lines: o No changes. Keep growing with current products.
o Up-market stretch. The companies may wish to enter the high level of market to realize higher margins, to position themselves as full-line manufacturers, or to achieve more growth.
o Down-market stretch. A company positioned in the middle market may want to introduce a lower-priced line or product because the middle market is declining or the low market is growing.
o Two-way stretch. Companies serving the middle market might decide to stretch their line in both directions. i.e. the luxury one and the current one.
o Deleting lines or products. Remove lines or products that are not profitable and does not provide synergy to the rest.
The product life cycle A useful tool for conceptualizing the changes that may take place during the time that a product is on the market is called “The product life cycle” (PLC). The PLC emphasizes the fact that nothing last forever, and products need to be terminated and next products developed to replace them. It also emphasizes the need to review marketing objectives and strategies as products pass through the various stages. The classic product life cycle (PLC) has four stages: 1. Introduction. When a product is first introduced on the market its sales growth is typically low, and losses are incurred as a result of heavy development and initial promotional costs: a. Customers have resistance to change b. Companies have difficulties in creating sales and distribution networks c. Customers who buy are often the most innovative or pioneering There is little competition: The more innovative the product, the less competition. Price will be high because of the heavy development costs and the low level of competition. Profitability tends to be low or negative.
The objectives are: Persuade the target to try and buy the product.
The target is usually the most innovative people, and, also, the less risk avoidance.
Appropriate time to use "testimonials”.
Four strategies: Fast market skimming. This strategy allows to obtain high margins. It can only be used when: o The market does not know the product o Those who know the product, through communication campaign, will buy it o Customers are willing to pay a high price o The company tries to anticipate the competition.
Low market skimming. High margins and low promotion costs.
It can only be used when: o The market is limited o The market already knows the product because it has already been delivered o Buyers do not get problems with price o There are no competitors.
Fast market penetration. Low or even negative margins if the only goal is to win market share. It makes sense when: o The market is large o The market does not know the product o Buyers are price sensitive o No competition o Reduce unit costs by sales volumes.
Low market penetration. It makes sense when: o The market is price sensitive o The market knows the product o No competition.
Strategy Price Promotion Fast market skimming High High Low market skimming High Low Fast market penetration High High Low market penetration Low Low 2. Growth. It characterizes for its rapidly rising sales. It starts climbing quickly. It has a growing number of competitors. New competitors are attracted by the opportunities. It has rising profits. Moreover, the increase of competitors leads to an increase in the number of distribution outlets.
Its objectives are: Maximize market share.
Improve and adjust the product.
Maintain or reduce the price.
Improving profitability The strategies can be: Offer product extensions, service, and warranty.
Price to penetrate market.
Penetrate new market segments.
Build intense distribution.
Add product improvements.
Reduce prices to attract more price-sensitive customers.
By spending a lot of money on product improvement, promotion, and distribution the company can capture a dominant position.
3. Maturity. It has several objectives: a. Differentiating products from quality.
b. Ensure profitability.
c. Identify new market segments. n Increased investments in R & D to remain competitive in the market The strategies are: Modifying the market o Customer loyalty o Enter to the new market segments o Attract customers from the competition Modifying the product o Improve quality with new attributes o Aesthetic improvements (new layouts, change of image, etc.) o Improve perceived quality with new additional services.
Modifying the marketing mix. It can stimulate sales from: o Improving the distribution (more channels, more distributors, etc.) o Increase sales (more sellers, more outlets, etc.) o Improving promotion o More promotions (new discounts, gifts, warranty, etc.) o Changes in media planning 4. Decline. The sales of most products forms and brands eventually dip (fall down). The decline may be slow or rapid. Sales decline for many reasons: a. Shifts in consumer tastes.
b. Increased competition.
c. The product becomes obsolete by the change and evolution of laws and regulations Profitability becomes impossible. The results are negative. Many competitors leave the market or disappear, and the market becomes residual The objectives are: Harvest the product by reducing various costs (equipment, maintenance, R&D, advertising, sales force, etc.) and hoping that sales hold up.
Remove the product has entered decline.
Smaller company could specialize in the residual market n It can sell to another competitor to cover the investment.
Simply remove it, assuming losses.
The strategies to avoid it (before the decline) are: Substitution. Introduce a new product when it is in the growth phase. When it goes into decline, the new is growing. The process should be continued to go replacing products.
Extension. Promote new product applications.
Repositioning. Reposition or reinvigorate the product or the brand in hopes of moving it back into the growth stage.
This model can be used to analyse products and markets.
Branding Brand is a name, term, sign, symbol, or design, or a combination of them, intended to identify the goods or services of one seller of group of sellers and to differentiate them from those of competitors. Brand must be suggestive about the benefits and qualities of the product, easy to pronounce an to remember, evoke positive feelings, recognizable, adaptable to communication formats, and, also, it has been able to register. But fundamentally has to: Notoriety: an unknown brand is worthless.
Distinction: a brand is to differentiate from the competition.
It has been able to apply internationally: to any language.
There are two dimensions: Brand identity (or visual identity). It is the material reality: brand name (phonetic part), logo (graphics, colours, pictures) and atmosphere (smells, music, etc.) It is the physical proposal of the brand: logo, name and slogan.
Brand image. It is the perception of the consumer, who receives and decodes the signs from the company. To achieve a positive brand image must be projected values based on: o The product, by differentiation, credibility and authenticity.
o The consumer satisfaction.
o Innovative and stimulating communication campaigns.
o The consumer will ultimately result in branding the sum of identity + communication + consumer experience.
Brand sponsorship A manufacturer has four sponsorship options: manufacturer brands, private brands, licensing and co-branding: Manufacturer brand. It has long dominated the retail scene. These brands are the well-known ones such as Moritz, Tarradelles, etc.
Private brand. An increasing number of retailers and wholesalers have created their own store brand or private brand. Examples of that could be Hacendado, bonpreu, etc.
A manufacturer has four sponsorship options: manufacturer brands, private brands, licensing and co-branding: As store brand selection and quality have improved, so have consumer confidence and acceptance. Retailers have many advantages over manufacturers. They control: o What products they stock o What prices they charge o What products are going to promote o They can put the products in the best places.
To compete with private (store) brand, manufacturer brand must invest in R&D to bring out new features, and continuous quality improvements.
Licensing. Some companies license names or symbols previously created by other manufacturers, names of well-known celebrities, or characters from popular movies and books, in exchange for paying a fee.
You pay a big company in order to put their name in your product.
Apparel and accessories sellers pay large royalties to adorn their products with the name or initials of well-known fashion innovators.
Co-branding. Co-branding occurs when two established brand names of different companies are used on the same product. Co-branding offers many advantages because each brand dominates in a different category.
The combined brands create broader consumer appeal and greater brand equity. Co-branding also allows a company to expand its brand into a category it might otherwise have difficulty entering alone. Co-branding has limitations: o Relationships involve complex legal contracts and license o Partners must carefully coordinate their advertising, sales, and other Mk efforts o Each partner must trust the other will take good care of its brand.
Brand strategies The company must define the global brand strategy for its products. This basic strategy is to define the names of the new products. We have several alternatives: Line extensions. Line extension occurs when company extents existing brand names to new forms, colours, sizes, ingredients or flavours of an existing product category. Do it, if the company brand prestige all the products. i.e. Bosch: dishwasher, refrigerator, hood, washing machine, etc.
Brand extensions. It is any effort to use the name of a successful brand to launch new or modified products. An accepted brand will provide instant recognition to the new product. If the product is not competitive, it harms to the other products of the brand. i.e. Pierre Cardin Multibrands.
o Individual brand. Each product has a different brand. It is used when they are very different: Products Markets Distribution channels.
A failure in a product does not affect the rest. i.e. General Motors.
o Range of brands. Different brand names for each product family. They compete with each other to get a higher amount of sales. Attracting other market segments. Capturing the less loyal customers to other brands. i.e. Acer & Packard-Bell (In 2008, Acer bought Packard-Bell) Umbrella brands. A brand is identified with a topic or geographical area to support all products generates: o Tourist destination o Event Quality brands. A brand identifies products that are produced in a given area: Some requirements and characteristics for the production must meet. i.e. Designation of origin, designation of quality Pricing Price is the amount of money charged for a product or service. More broadly, price is the sum of all values that customers give up in order to gain the benefits of having or using a product or service.
Consumer psychology and pricing Understanding how consumers arrive at their perceptions of prices is an important marketing priority. We can consider three topics: Reference prices. When examining products, consumers often employ reference prices, comparing an observed price to an internal reference price they remember.
Price-quality inferences. Many consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, etc.
Price endings. Customers see an item priced at 399 in the 300 rather than 400 range. They tend to process prices in a “left-to-right” manner rather by rounding. “9” endings” is close to the notion of a discount or bargain.
Setting the price The company set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area. The company must consider many factors in setting its pricing policy: Step 1. Selecting the pricing objective.
o Survival. Companies pursue survival as their major objectives if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business. Survival in a short-run objective. In the long run, the company must learn to add value or face extinction.
o Maximum market share. Some companies believe that a higher sales volume will lead to lower unit costs and higher long-run profit.
They set the lowest price, assuming the market is price sensitive.
Thus low price stimulates market growth, production and distribution costs fall with accumulated production experience and a low price discourages competitors.
o Maximum market skimming. The companies get the highest price to attract customers who are not price sensitive. It makes sense when: A sufficient number of buyers have a high current demand The unit costs of producing a small volume are not so high that they cancel the advantage of charging a high price.
The high initial price does not attract more competitors.
The high price communicates the image of a superior product.
o Maximum current profit. Prices are set to get the maximum profit.
This object will collide immediately with the action of competition.
o Product quality leadership. The products recognized by consumers as higher quality have more possibilities to have a higher price. If our costs do not allow us to sell at that price, the product will not be feasible.
Step 2. Determining demand o Price sensitivity. Generally, customers are less price sensitive to low-cost products or products they buy infrequently. Customers are less price sensitive when: There are few or no competitors They do not readily notice the higher price.
They are slow to change their buying habits.
They think the higher prices are justified.
Price is only a small part of the total costs of obtaining, operating, and servicing the product over its lifetime.
o Price elasticity of demand. Marketers need to know how responsive, or elastic, demand would be to a change in price.
Changes in the prices of most products can affect the elasticity: Elastic demand: demand changes because consumers are sensitive to price changes.
Inelastic demand: demand is unchanged because consumers are not sensitive to price changes Step 3. Estimating costs o Types of costs and levels of production. The company wants to charge a price that will at least cover the total production costs at a given level of production. A company’s costs take two forms: Fixed (also known as overhead): do not vary with production level or sales revenue.
Variable: vary with the level of production o Target costing. Costs change with production scale and experience. They can also change as a result of a concentrated effort by designers, engineers, purchasing agents, to reduce them through target costing. The company examine each cost element and consider different ways to bring down costs so the final cost projections are in the target cost range. If this is not possible, it may be necessary to stop developing the product because it cannot sell for the target price.
Step 4. Analysing competitor’s costs, prices, and offers. Within the range of possible prices determined by market demand and company costs, the company must take competitors’ costs, prices, and possible price reactions into account. The company need to decide whether it can charge more, the same, or less than the competitor. How can a firm anticipate a competitor’s reaction? The company will need to research the competitor’s current financial situation, sales, customer loyalty, and corporate objectives. It depends of their objectives: Market share: it may react by changing prices.
Profit-maximization: it may react by increasing product quality or promotion.
Step 5. Selecting a pricing method.
o Mark-up pricing. Add a standard mark-up to the product’s cost.
Suppose a manufacturer has the following costs and expectations: Variable cost per unit (20) Fixed costs (200.000) Expected unit sales (40.000) The manufacturer’s unit cost is given by: 𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 + 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 200.000 = 20 + 𝑈𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 40.000 = 25€ Now, we assume the manufacturer wants to earn a 15% mark-up on sales. The price is given by: 𝑀𝑎𝑟𝑘𝑢𝑝 𝑝𝑟𝑖𝑐𝑒 = 𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 25 = (1 − 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑠𝑎𝑙𝑒𝑠) 1 − 0.15 = 29.41€ o Target-return pricing. The company determines the price that would yield its target rate of return of investment (ROI). Suppose the manufacturer has invested 2 million in the business and wants to set a price to earn a 15% ROI, specifically 300.000€. The targetreturn price is given by the following formula: 𝑇𝑎𝑟𝑔𝑒𝑡 − 𝑟𝑒𝑡𝑢𝑟𝑛 𝑝𝑟𝑖𝑐𝑒 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑥 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑈𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 0.15 𝑥 2.000.000 = 25 + = 32.5 € 40.000 = 𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 + But what if sales don’t reach 40.000? The company need to know the break-even point.
𝐵𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑣𝑜𝑙𝑢𝑚𝑒 = 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 200.000 = (𝑝𝑟𝑖𝑐𝑒 − 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡) (32.5 − 20) = 16.000 o Perceived-value pricing. An increased number of companies base their price on the customer’s perceived value. Perceived value is made up of several elements (quality, image, emotional and social value). Companies must deliver the value promised by their value proposition, and the customer perceive this value. The key to perceived-value pricing is to deliver more value than the competitor and to demonstrate this to prospective buyers.
o Value pricing. This strategy win customers by charging a fairly low price for a high-quality offering. Lower prices is a matter of reengineering the company’s operations to become a low-cost producer without sacrificing quality (Ikea, Ryanair, etc.) o Pricing based on competition. It is quite popular. Where costs are difficult to measure or competitive response is uncertain, firms feel the going price is a good solution because it is thought to reflect the industry’s collective wisdom.
o Auction-type pricing. It is growing more popular with the growth of Internet. (eBay). One major purposes of auctions is to dispose of excess inventories or used goods. The companies have to know the major types of auctions to set prices.
Step 6. Selecting the final price. Before select the price of the product, the company must consider additional factors, including: o Impact of other marketing activities. The final price must take into account the brand’s quality and promotion relative to the competition.
o Company pricing policies. The price must be consistent with company pricing policies.
o Gain-and-risk-sharing pricing. Customers and buyers may resist accepting a company’s proposal because of a high perceived level of risk. In this case, the company has the option of offering to absorb part or all the risk if it does not deliver the full promised value.
o Impact of price on other parties. The company must also consider the reactions of distributors, dealers, sales force, etc. to the contemplated price. The company need to know the laws regulating pricing Adapting the prices: Strategies Companies usually do not set a single price, but rather develop a pricing structure that reflects variations of different elements: Geographical pricing. The company decides how to price its products to different locations and countries. Should the company charge higher prices to distant customers to cover the higher shipping costs? How should it account for exchange rates and the strength of different currencies? Price discounts and allowances. Most companies will adjust their prices and give discounts and allowances for: o Discounts. A price discount to buyers who pay bills promptly (example: less than 30 days) o Quantity discount. A price reduction to those who buy large volume. Quantity discounts must be offered equally to all customers and must not exceed the cost savings to the seller.
o Functional discount. It is offered to distribution channel if they will perform functions such as selling, and storing.
o Seasonal discount. A price reduction to those who buy merchandise out of season.
o Allowance. An extra payment designed to gain reseller participation in special programs (sales support programs).
Promotional pricing. Companies can use several pricing techniques to stimulate early purchase: o Loss-leader pricing. Some companies often drop the price on well-brands to stimulate additional products (supermarkets). This is profitable if the revenue additional sales compensates for the lower margin on the loss-leader products.
o Special event pricing. Special prices in certain seasons to draw in more customers.
o Cash rebates. Companies offer cash rebates to encourage purchase products within a specified time period.
o Low-interest financing. Instead of cutting its price, the company can offer customers low-interest financing.
o Longer payment terms. Some companies stretch loans over longer periods and thus lower the monthly payments. Consumers often worry less about the cost of a loan and more about whether they can afford the monthly payment.
o Warranties and service contracts. Companies can promote sales by adding a free or low-cost warranty or service contract.
Differentiated pricing o Price discrimination. Company sells a product at two or more prices. The company charges a separate price to each customer depending on the intensity of his demand.
o Customer-segment pricing. Different customer groups pay different prices for the same product or service (museums).
o Product-form pricing. Different versions of the product are priced differently, but not proportionately to their costs (Mineral water).
o Image pricing. Some companies price the same product at two different levels, based on image differences (perfumes: one bottle with a one strong brand, and other bottle with a different name).
o Channel pricing. The same product is priced depending on the consumer purchase the product (vending machine, restaurant, fastfood, etc.) o Location pricing. The same product is priced differently at different locations (theatre, football stadium, etc.).
o Time pricing. Prices are varied by season, day, or hour (air carriers).
Initiating and responding to price changes: Strategies Companies often need to cut or raise prices: Initiating price cuts. Several circumstances might lead to cut prices: o Excess plant capacity. In this case the company needs to go to aggressive price cut strategy. It may start a price war with competitors.
o Try to dominate the market through lower costs (try to increase the market share). Possible consequences: low quality image, loss of loyal customers.
Initiating price increases. Two circumstances provoking price increases: o Cost inflation (the companies use escalator clauses with some specified index) o Over-demand Generally, consumers accept small price increases on a regular basis, than sharp increases.
Responding to competitors’ price changes. How should a company respond to a price cut initiated by a competitor? The response varies with the situation. The company must consider the product’s stage in the life cycle, its importance in the company’s portfolio, the competitor’s intentions and resources, the market’s price and quality sensitivity, the behaviour of costs, and the company’s alternative opportunities.