The Marketing Mix. marketing mix. Refers to the levers that marketing managers can pull to create and implement a marketing plan. often called the 4Ps

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1 The Marketing Mix Chapter 7 marketing mix Refers to the levers that marketing managers can pull to create and implement a marketing plan. often called the 4Ps Product: (Chapter 6, product design) Price Place Promotion 1

2 To influence customer demand advertising Price promotions Delayed effects (spending now may affect demand in the future) competitive effects (current actions may cause or be driven by competitive actions), product line, geographic, and channel considerations What Is a Price? Price is the amount of money charged for a product or service. It is the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service. 2

3 What Is a Price? Price is the only element in the marketing mix that produces revenue; all other elements represent costs PRICING DECISIONS Profit= (unit price unit cost)x quantity sold 3

4 The Classical Economics Approach Law of Demand The quantity demanded per period (also known as the time rate of demand) is negatively related to price. ME Pricing

5 The normally inverse relationship between price and demand is captured in a demand curve The higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopes upward. Many consumers use price as an indicator of quality. Demand/Price Functions Linear Q Quantity Q = a bp P Price ME Pricing

6 Price elasticity The ratio of the percentage change in demand to a percentage change in price Fraction Change in demand Elasticity E Fraction change in price Elasticity Price elasticity Q Q / Q Q / Q Q P dq P P P P P P P Q dp Q eqp 1 0 / 0 / e qp = elasticity of quantity demanded with respect to change in price Q 1 = quantity demanded after price change; Q 0 = quantity demanded before price change; P 1 = new price; P 0 = old price; 6

7 Inelastic & Elastic Demand In most cases price elasticities are negative. A price elasticity = 1.0 (absolute value) means that demand (or ) by the same %tage that price (or ). Total revenue is not affected. 7

8 In most cases price elasticities are negative. A price elasticity > 1 (absolute value) means that demand (or ) by more than the price (or ) in %tage terms Total revenue (or ). In most cases price elasticities are negative. A price elasticity < 1 (absolute value) means that Demand (or ) by less than the price (or ) in %tage terms Total revenue (or ). 8

9 Example The XYZ Corp. sells 1,000 units of a product at $10 per unit, which costs the company $5 to produce and market. 1. Calculate the gross profit: The corp. is considering a price increase of $1 to $11 per unit, if the price elasticity is What would be the new demand? 3. What would be the new profit? If the market were more price sensitive (price elasticity is 2.0) 4. What would be the new demand? 5. What would be the new profit? Factors Leading to Less Price Sensitivity The product is more distinctive Buyers are less aware of substitutes Buyers cannot easily compare the quality of substitutes Expenditure is a smaller part of buyer s total income Expenditure is small compared to the total cost Part of the cost is paid by another party Product is used with previously purchased assets Product is assumed to have high quality and prestige Buyers cannot store the product Copyright 2012 Pearson Education 18 9

10 Customer interpretation of Price changes READ FROM THE BOOK Major Pricing Strategies 10

11 Pricing Strategies Cost oriented Cost Plus Pricing (Mark-up Price) Break-Even Analysis and Target Profit Pricing Demand oriented Competition oriented Cost Oriented: Mark-up Price Many firms set their prices largely or even wholly on the basis of their costs. Typically they count all costs, including an allocation for overhead based on expected operating levels. 11

12 Cost Oriented: 1. Mark-up Price The most elementary examples of costoriented pricing are (markup and cost plus) pricing. They are similar in that price is determined by adding either a fixed amount or a fixed percentage to the unit cost. Major Pricing Strategies 12

13 Major Pricing Strategies Cost-Based Pricing Fixed costs Types of costs Variable costs Total costs Major Pricing Strategies Cost-Based Pricing Fixed costs are the costs that do not vary with production or sales level Rent Heat Interest Executive salaries 13

14 Major Pricing Strategies Cost-Based Pricing Variable costs are the costs that vary with the level of production Packaging Raw materials Major Pricing Strategies Cost-Based Pricing Total costs are the sum of the fixed and variable costs for any given level of production 14

15 Major Pricing Strategies Cost-Plus Pricing Cost-plus pricing adds a standard markup to the cost of the product Benefits Sellers are certain about costs Prices are similar in industry and price competition is minimized Buyers feel it is fair Disadvantages Ignores demand and competitor prices Example: Selling Coffee Every cup uses 1.00 JD of materials and labour roughly costs 0.25 JD to make one You must charge at least 1.25 JD to break-even 15

16 Cost oriented Pricing: 2. Break-Even Analysis and Target Profit Pricing Break-even pricing is the price at which total costs are equal to total revenue and there is no profit Target profit pricing is the price at which the firm will break even or make the profit it s seeking Major Pricing Strategies Break-Even Analysis and Target Profit Pricing 16

17 Does the use of a rigid, customary markup over cost make logical sense in pricing products? Generally the answer is no. Any procedure that ignores current elasticity of demand in setting prices is not likely to lead, except by chance, to maximum profits, either in the long or in the short run. Demand-oriented pricing Cost-oriented approaches to pricing center on the costs of producing and distributing the product. Demand-oriented approaches look at the demand for the product at various price levels: they focus on customer value. 17

18 Value based pricing The price for a product should be related to the value that product brings to a particular customer. Customer Value-Based Pricing 18

19 Customer Value-Based Pricing Understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value Customer Value-Based Pricing Uses the buyers perceptions of value, not the sellers cost, as the key to pricing. Price is considered before the marketing program is set. Value-based pricing is customer driven Cost-based pricing is product driven 19

20 Customer Value-Based Pricing Value-added pricing attaches value-added features and services to differentiate offers, support higher prices, and build pricing power Major Pricing Strategies Competition-based pricing Setting prices based on competitors strategies, costs, prices, and market offerings. Consumers will base their judgments of a product s value on the prices that competitors charge for similar products. 20

21 Other Internal and External Consideration Affecting Price Decisions Competition Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Pure competition The market consists of many buyers and sellers trading in a uniform commodity, such as wheat, copper, or financial securities. No single buyer or seller has much effect on the going market price. In a purely competitive market, marketing research, product development, pricing, advertising, and sales promotion play little or no role. Sellers in these markets do not spend much time on marketing strategy. 21

22 Monopolistic competition The market consists of many buyers and sellers who trade over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers. Oligopolistic competition The market consists of a few sellers who are highly sensitive to each other s pricing and marketing strategies. Because there are few sellers, each seller is alert and responsive to competitors pricing strategies and moves. 22

23 Considerations in Setting Price Price-Adjustment Strategies Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost 23

24 Price Discrimination The three types of segmented pricing are: 1.Customer segment Pricing 2.Product form segment Pricing 3.Location Pricing 4.Time Pricing Price Discrimination Customer segment pricing: is when different customers pay different prices for the same product or service. Museum: Students, senior citizens Cinema: 24

25 Product form segment pricing is when different versions of the product are priced differently but not according to differences in cost. Location pricing is when the product sold in different geographic areas is priced differently even though the cost is the same. 25

26 Revenue Management READ FROM THE BOOK Price discrimination difficulties: Page

27 New-Product Pricing Strategies Pricing Strategies Market-skimming pricing Market- penetration pricing New-Product Pricing Strategies Market-skimming pricing is a strategy with high initial prices to skim revenue layers from the market Product quality and image must support the price Buyers must want the product at the price Costs of producing the product in small volume should not cancel the advantage of higher prices Competitors should not be able to enter the market easily 27

28 New-Product Pricing Strategies Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share Price sensitive market Inverse relationship of production and distribution cost to sales growth Low prices must keep competition out of the market Place Simply refers to how & where you are going to sell the product to the consumer Direct Distribution: selling your product directly to the consumer Brick & Mortar vs. Virtual Store Indirect Distribution: sold through a 3 rd party What retailers are the best for reaching your Target Market? Example: Selling protein powder where do I sell? 28

29 Place For a service : where are you going to locate in order to best reach your target market You want to be in an area that your target market frequents Says something about your business Example Car dealerships Promotion A successful product or service means nothing unless the benefit of that product/service can be communicated to the Target Market There are many ways to get the (word out) How many can we think of... 29

30 Promotion Public Relations Advertising Sales Buzz Advertising Paid non-personal presentation and promotion of ideas, goods, or services by an identified sponsor 2012 Pearson Education 30

31 Advertising Objectives Informative Persuasive Reminder Sales Promotion Short-term incentives used to encourage the purchase of a product or service 2012 Pearson Education 31

32 Public Relations Building good relations with the company s publics through favorable publicity, a good corporate image, and effective handling of unfavorable news 2012 Pearson Education Public relations is very believable news stories, features, sponsorships, and events seem more real and believable to readers than ads do. Can reach many prospects that avoid salespeople and advertisements the message gets to the buyers as news rather than as a sales-directed communication. Marketers tend to underuse public relations or to use it as an afterthought. 32

33 Personal Selling Personal presentation by the sales force used to enhance sales and customer relationships 2012 Pearson Education Personal channels Word-of-mouth Opinion leadership Buzz 2012 Pearson Education 33