1. Developing Pricing Strategies and Programs

1.1 How customers think about price

• Reference prices: customers compare what they see with an internal price in their memory (last price paid, fair price, typical price) or an external one (a competitor’s price, the “original” price on a sale tag).
• Price-quality inferences: many people assume a higher price means higher quality, especially when they cannot judge quality themselves (wine, perfume, services).
• Price cues: endings such as 99 or 95 suggest a bargain; a sale sign, “reduced” tags and even the number of digits can nudge perception.

1.2 The six steps for setting price

Step 1: Pricing objectives (five major)

Step 2: Determining demand

Demand typically falls as price rises (the demand curve slopes downward), except for prestige goods, where a higher price can raise perceived value. The firm needs to know price sensitivity and the price elasticity of demand: how much demand changes when price changes. If demand barely moves when price changes, it is inelastic; if it changes a lot, it is elastic. Demand is likely to be less elastic when there are few or no substitutes, when buyers do not notice the higher price, when they are slow to change habits, or when they believe the higher price is justified.

Step 3: Estimating costs

• Fixed costs (overhead) do not change with output (rent, salaries); variable costs change with output (materials); total cost is both.
• Cost at different production levels: unit cost typically falls as output rises, up to a point.
• Accumulated production (experience or learning curve): as the firm gains experience, unit costs fall.
• Target costing: start with the price customers will pay, subtract the profit the firm wants, and engineer the product to meet that cost.

Step 4: Competitors’ costs, prices and offers

A firm needs to compare its offer with rivals’ on value, because customers will judge both. If the offer is similar, the firm cannot charge much more; if it is superior, it can charge more; if inferior, it must price lower.

Step 5: Pricing methods

Step 6: Selecting the final price

Before settling, the firm considers: the impact of other marketing activities (brand quality and advertising can support a premium), company pricing policies, gain-and-risk-sharing pricing (the seller takes some of the risk if the promised value is not delivered) and the impact of price on other parties (distributors, salespeople, competitors, suppliers, government).

1.3 Adapting the price

Companies rarely use a single price. They create a price structure that reflects differences in geography, segment, timing, order size and more. Four main strategies:

Differentiated pricing works only when the market can be segmented, the segments show different degrees of demand, the lower-price segment cannot resell to the higher-price segment, competitors cannot undercut in the higher-priced segment, the cost of segmenting does not exceed the extra revenue, and the practice is legal and does not cause customer resentment.

1.4 Initiating and responding to price changes

When to cut or raise prices

• Price cuts may happen due to excess plant capacity, declining market share, a wish to dominate the market through lower costs, or economic recession. Risks: customers may think quality dropped, a low-quality trap, a fragile market share or a price war.
• Price increases may come from cost inflation or overdemand. Customers will tolerate them better if the firm explains the reason, announces in advance, uses escalator clauses, unbundles (prices the extras separately), reduces discounts, or cuts size or ingredients instead of raising the sticker price. Managing customer perception is key.

Responding to a competitor’s price change

First, try to understand the competitor’s intent and the likely duration of the change. Then choose between maintaining price, raising perceived quality, cutting price, raising price and improving quality, or launching a cheaper “fighter” line. A market leader attacked by lower-priced rivals can better differentiate itself, introduce its own low-cost competitor, or transform itself more completely. Smart firms also anticipate competitor moves and prepare contingency responses.

2. PLACE

Channels, retailing, wholesaling and logistics

Designing and Managing Integrated Marketing Channels

2.1 Why use intermediaries?

Producers use intermediaries when they lack the financial resources for direct marketing, when direct marketing is not feasible, or when they can earn more by focusing on their core business. Intermediaries offer efficiency: they reduce the number of transactions needed, they bring contact, experience, specialisation and scale.

Functions performed by channel members (the “flows”): information, promotion, negotiation, ordering, financing, risk taking, physical possession, payment and title. These functions can be shifted between members but they cannot be eliminated. If a manufacturer drops an intermediary, the manufacturer must do those tasks itself.

2.2 Channel levels

For business markets, channels may include the manufacturer’s sales force, industrial distributors, or manufacturers’ representatives and agents.

2.3 Channel-design decisions

1. Analyse customers’ desired service output levels: lot size, waiting and delivery time, spatial convenience, product variety and service backup.
2. Establish objectives and constraints: these vary by product characteristics, company strengths and the environment.
3. Identify the main alternatives: the types of intermediaries (own sales force, agents, distributors, retailers, internet), the number of intermediaries and the terms and responsibilities of each member.
4. Evaluate the alternatives: economic criteria (sales, cost), control and adaptability.

Number of intermediaries

Terms and responsibilities cover price policy, conditions of sale, distributors’ territorial rights and mutual services. Both sides should be clearly informed. McDonald’s, for example, gives franchisees the building, promotion and training, and in return they follow rules on quality and pay fees.

2.4 Channel-management decisions

• Selecting channel members: good producers attract good intermediaries. Criteria include years in business, other lines carried, growth and profit record, solvency, cooperativeness and reputation.
• Training and motivating members: treat intermediaries as partners, not just as customers. Aim for a long-term relationship that is profitable for all.
• Evaluating members: assess sales quotas, average inventory levels, delivery time, treatment of damaged goods and cooperation in promotions.
• Modifying channel design and arrangements: as markets change, channels need adjustment.
• Deciding on channel modifications: add or drop members, add or drop channels, or redesign the whole system.

Types of channel power

Coercive and reward power are the most objective; legitimate, expert and referent power are more subjective.

2.5 Channel dynamics

Vertical marketing systems (VMS)

A conventional channel has independent members that each try to maximise their own profit, even at the expense of the system as a whole. A vertical marketing system instead acts as a unified system, with the channel members working together. There are three types:

Horizontal marketing systems and multichannel marketing

• Horizontal marketing system: two or more unrelated companies join forces to pursue a new opportunity (for example, a supermarket with a bank branch inside).
• Multichannel (integrated) marketing: a single firm uses two or more channels to reach one or more customer segments. This increases coverage and lowers cost, but can create conflict between channels, so the firm must integrate carefully.

2.6 Channel conflict and cooperation

Channels are prone to conflict. Types:

• Vertical conflict: between different levels of the same channel (manufacturer and retailer).
• Horizontal conflict: between members at the same level (dealer versus dealer).
• Multichannel conflict: when the manufacturer builds several channels that sell to the same customers.

Causes include goal incompatibility, poorly defined roles and rights, differences in perception and interdependent relationships. Managing conflict can use strategic justification, dual compensation, superordinate goals, employee exchanges, joint membership in trade associations, co-optation, diplomacy, mediation and arbitration, or in the extreme, legal recourse.

Legal and ethical issues

Firms are generally free to choose their channels but must watch for exclusive dealing, exclusive territories, tying agreements (forcing dealers to buy other products) and dealers’ rights (a manufacturer cannot arbitrarily terminate dealers).

2.7 E-commerce and m-commerce

Online selling is well established, and many firms use a “brick-and-click” approach that combines physical stores and the internet. M-commerce (selling through smartphones and tablets) is growing quickly. One challenge is showrooming, where shoppers inspect products in stores and then buy online at a lower price. The answer is channel integration: recognising the strengths of online, offline and mobile and making sure they work together so the customer gets a seamless experience.

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