Session 17 - Price and Place

Question 1

What is Price?

Answer 1

Amount of money charged for a product or service. Sum of the values that customers exchange for the benefits of having or using the product or service.

Question 2

What is the relationship between Price and value?

Answer 2

• Cutting price in tough economic times isnt always the answer, companies should sell value, not price!
• Price reducations can cut profits, initiate price wars and cheapen perceptions of brand quality.
• Goal of marketers is to convince consumers that price is justified by value provided

Question 3

How is price determed on the customers side?

Answer 3

Price should be viewed from customer perspective, it is the value that they must give up to obtain a desired product.

Customer value = Product’s benefits/Price

Question 4

What are the objectives of pricing?

Answer 4

1. Maximize revenue
2. Maximize sales
3. Increase market share

Question 5

What considerations do you need to take in setting price?

Answer 5

Product costs (Price floor, no profits below this price)

Competition and other external factors (Competitor’s strategies and prices, marketing strategy, objectives, and mix. Nature of the market and demand)

Consumer perceptions of value (Price ceiling, no demand above this price)

Question 6

What are the approaches to pricing of products?

Answer 6

1. Cost based pricing / standard mark-up pricing
2. Competitive pricing
3. position-based pricing
4. Value-based pricing

Question 7

What is cost-based pricing?

Answer 7

Aka standard mark up pricing. Calculate how much it would cost to make and deliver a product and add a flat percentage on top.

Question 8

What is the formula for price in cost-based pricing?

Answer 8

Price = Markup + cost

Markup is the firms profit

Question 9

What is competitive-based pricing?

Answer 9

Setting prices based on the prices of competitions.

Question 10

When should competition-based pricing be used?

Answer 10

• In a market with a small number of competitors, normally the small firms will follow the leader. THey will change their prices when market leader does so.
• When firms bid for jobs (e.g. consulting). A firm will base its price on how it thinks competitors will price rather than on its own costs or the demand

Question 11

What is the assumption of Competition-based pricing?

Answer 11

• Assumes much pricing knowledge of competition is present
• Commodity manufactures and airlines practice competition-based pricing

Question 12

When should competition-based pricing be used/not used?

Answer 12

Used: When products are homogeneous (demand is elastic), competition oriented pricing is more important because price is likely to be a factor in the buying decision

Not used: Competing products are heterogeneous (demand is inelastic), competition oriented pricing is less important because price is not a driving factor in the buying decision

Question 13

What is positioning-based pricing?

Answer 13

What price will strengthen the positioning in the consumer’s mind?

For example, in belgium Stella Artois is a “peasant” beer but Premium in the US due to increased US price, despite not costing any more than lower price beers.

Question 14

What is value-based pricing?

Answer 14

Determine the price that customers are willing to pay, instead of what a product costs to make.

Price is based on buyer’s perceptions.

Question 15

What is the difference in order of price decision making in Cost-based vs Value-based pricing?

Answer 15

Cost:
1. Product
2. Cost
3. Price
4. Value
5. Customers

Value (decision making is reversed):
1. Customers
2. Value
3. Price
4. Cost
5. Product

Question 16

What are 2 examples of products that use value-based pricing?

Answer 16

1. Seats at concerts: seats closer are more expensive
2. Business class seats: seats more expensive than coach seats

Question 17

What are the two main strategies for pricing new products?

Answer 17

1. Skimming
2. Penetration strategy

Question 18

What is skimming pricing strategy?

Answer 18

Setting prices high initially, then slowly lowering them over time to maximize profits at every price-sensitive layer in the market.

They use a high price to skim profits from the market, it works best for new or innovative products with little competition.

reason: Easier to lower prices in the future than it is to raise them.

Question 19

What is penetration pricing strategy?

Answer 19

Set low initial price to enter market quickly to attract large number of buyers and win larger market share. Works best for mature product categories, when there is a lot of competition as low price will distinguish them from the pack.

Best suited for late in PLC when products possess eleastic demand.

reason: set low price to appeal to mass market quickly and deeply.

Question 20

When to use Skimming vs Penetration?

Answer 20

Skimming:
1. Enough early adopters willing to pay high price
2. high price will not attract competition
3. People assume high price = high quality
4. Lower price only has small effect on increased sales volume (inelastic)

Penetration:
1. Customers are price sensitive
2. production costs decrease with more volume
3. Low price means lower competition

Question 21

What is product line pricing?

Answer 21

Setting price across an entire product line. Based on cost differences between teh products, customer evaluations of different features, and competitors’ prices.

Question 22

What s product bundle pricing?

Answer 22

Combining several products and offering the bundle at a reduced price

Question 23

What are the types of allowances?

Answer 23

Trade-in allowance: price reduction given when a used product is part of the payment on a new product (e.g. trade in car)

Promotional allowance: discount alowed by the manufacturer to the seller so the seller can undertake advertising or selling activities to promote the product (P&G gives discount to walmart in exchange for promoting Tide in their stores)

Question 24

What is psychological pricing?

Answer 24

Relationship between price and perceibed qualtiy in the absence of other product cues. (E.g. $100 wine vs $10 wine)

Question 25

What is 99 cent pricing?

Answer 25

ending price end in .99, it is perceived to be more than 1 cent.

Question 26

What are distribution channels?

Answer 26

set of firms or individuals who participate in the flow of products from manufacturers to customers. It can also be viewed as the set of organizations involved in making the goods available for use/consumption

Question 27

Why is distribution important?

Answer 27

• channels are intermediaries between manufacturer and customer. (They take some profit/cost, may be partners or competitors)
• channels are often overlooked as mere distribution (also point of contact wiht customers, they have a lot of control in marketing mix and buying process)
• They perform physical distribution, inventory, service, information/market feedback, negotiation

Question 28

Why is there contact efficiency with distribution channels?

Answer 28

if 3 factories need to distribute to 3 different people, they would all need to make 3 contacts (total of 9)

If 3 factors contact a store and the store contacts the people, they all make 1 contact and the store makes 1 contact with client (total 6)

Question 29

What can poorly designed and poorly managed distribution channels cause?

Answer 29

1. Stock outs: absence of product for customers, therefore decrease in sales and profits
2. Bloated inventories: too much product, therefore decreased price due to too much supply
3. Inefficient channels, for example MBW selling cars online

Question 30

What is indirect distribution?

Answer 30

Uses middlemen or specialists to help distribute products

Manufacturer –> wholesaler –> retailer –> custoemr

Manufacturer –> wholesaler –> customer

Manufacturer –> retailer –> customer

Question 31

What is direct distribution?

Answer 31

Manufacturer –> customer

Goes directly to consumer, this is growing as online business functions grow in sophistication

Question 32

What is multi channel distribution?

Answer 32

Simultaneously employing multiple channels to reach customers

Question 33

What is intensive distribution?

Answer 33

Objective is to saturate the market with products, image of being sold everywhere is consistent with the nature of the product. Often used by convenience goods and commodity manufacturers

Question 34

What is selective distribution

Answer 34

A limited number of retailers or dealers are used to reach target market

• strategy should be consistent with teh image of the products are as good that can be bought only in certain stores. Cars, apparel, furniture.

Question 35

What are the pros and cons of exclusive distribution?

Answer 35

Benefits of exclusive distributions (disadvantages of intensive):
- Encourages channel members to make dedicated investments in the manufacturer’s product line
- encourage channel members to offer service to customers
- Reduce competition betwene channel members and therefore increase focus on marketing

Disadvantages:

• Risky (all eggs in 1 basket)

Question 36

What is exclusive distribution?

Answer 36

only one or a limited number of retailers to market the product in a particular geographical area. Should be consistent with high quality image of the product. Specialty goods employ this strategy

Question 37

What are push/pull strategies?

Answer 37

Push: direct marketing efforts to channel members to gain cooperation

Pull: Direct Marketing efforts to ultimate consumers to gain their cooperation

Question 38

what is combo strategy of pull and push?

Answer 38

Producers convince retailers to purchase more by offering discounts for bulk purchases, etc and advertise to customers to make them purchase more.

Question 39

When is push strategy appropriate?

Answer 39

Consumers will not deliberately seek out your product (low brand loyalty, impulse item)

• high product substitutability, beer, grocery, coke vs pepsi

Question 40

When is pull strategy appropriate?

Answer 40

• Consumers will seek out your product (High brand loyalty, significant differentiation among brands)

Low product Substitutability, automobiles

Question 41

Why is channel management important?

Answer 41

It can be a sustainable competitive advantage because it is long term and requires a channel structure.

Question 42

What are the key criteria for channel design?

Answer 42

• Fit with customer behavior and preferences
• fit with targeting, position and 4 Ps
• Adaptive capabilities (long term)
• Possible control and economic performance

Question 43

What are the divergent interest of channel partners?

Answer 43

Manufacturer: carry a full line of all the products we make
Distributor: we can try but we cant sell everything, we should concentrate on strong points

Manufacturer: must concentrate on our products,
Distributor: we need exclusive territories

Manufacturer: need active involvement in selling new products
Distributor: very costly to do so, compensate us for it

Manufacturer: need to know your customers in greater detail
Distributor: we dont keep records

Manufacturer: need to improve sales effort
Distributor: you need to improve promotion

Manufacturer: your channel margins are too high
Distributor: your prices are too high

Question 44

What is horizontal vs vertical conflict?

Answer 44

Horizontal conflict: occurs among firms in the same level of the channel. E.g. Ford dealers complaining that other ford dealers are stealing sales by lowering their prices or adversiting outside their territories

Vertical conflicts: Conflict between different levels of same channel. More common than horizontal. E.g. Herman miller created conflict with its dealers when it opened an online store and sold directly to customers

Question 45

What are solutions to avoid conflict?

Answer 45

1. Differentiated offer: offer different products online than what manufacturer sells through the retailer
2. Conventional distribution: consisting of one or more independant producers, wholesalers and retailers and each business seeks to maximize their profits at the expense of the profits of the whole
3. vertical marketing system: distribution channel structure where producers, wholesales and retailers act as a unified system. One channel has contracts or so much power that they all cooperate

Question 46

What is corporate VMS vs Contractual VMS?

Answer 46

Corporate: single ownership, Luxottica produces many famous eyewear brands then sells them in two of world’s largest optical chains which it also owns.

Contractual: Independent firms join together through contracts to obtain more economies of scale than they could acheive alone. Franchise organization.

Question 47

How does franchising work?

Answer 47

Individual franchises are tightly knit group of enterprises whose operations are planned, directed and controlled by franchisor.

• Franchisor owns a trade mark and franchisees pay royalties
• franchisee pays for right to be part of system
• Franchisor provides franchisee with marketing and operating systems for doing business

Question 48

What is an administered VMS?

Answer 48

VMS that cordinates successive stages of production and distribution through the size and power of one of teh parties