BE 604 – Marketing Management

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Recap Price Promotion
Agenda

BE 604 – Marketing Management

BE 604 – Marketing Management
Five Product Levels
CORE BENEFIT
- Most fundamental benefit customer is buying.
- Heart of the system.
Refrigerator
- Basic purpose - Preservation.
- To preserve you need a compressor and cooling system.

BASIC PRODUCT
- Do you buy compressor?
- You buy a basic product
- Formal
Refrigerator
- Compressor is mounted on a body /cabinet.
- There is a door, shelves, trays

EXPECTED PRODUCT
- A set of attributes and conditions customers expect. This depends on the chosen target
audience.
- This is expected from a marketer.
Refrigerator
- Freezer.
- Bulb.
- Thermostat.
- Quiet not noisy.
- Different types of shelves.
- Antirust system.

AUGMENTED PRODUCT
- Prepare a product that exceeds customer expectation. Is the reason to buy.
- Add further attributes
- Each attribute adds cost
- Will customer pay enough to cover the extra cost?
Refrigerators
- Easy financing scheme
- Four year warranty on compressor
- Free rice – cooker with every refrigerator purchased.

POTENTIAL PRODUCT
- Companies search for new ways to satisfy customers and distinguish their offer.
Refrigerator
• Connected Fridge
 Consumption Effects Define Newness

LOW DEGREE OF CHANGE BEHAVIOR AND LEARNING NEEDED BY CONSUMER HIGH

BASIS OF CONTINUOUS DYNAMICALLY CON- DISCONTINUOUS

COMPARISON INNOVATION TINUOUS INNOVATION INNOVATION

Definition Requires no new Disrupts consumer’s Establishes new

learning by normal routine but consumption
consumers does not require patterns among
totally new learning consumers

Examples Gillette Sensor Electric toothbrush,

VCR, PDA, ATMS
New Improved Tide compact disk player,
and home
and automatic flash
computer
for cameras

Marketing AWARENESS DIFFERENTIATION EDUCATION

emphasis
 Consumer Acceptance of New Products

• Relative advantage
• The degree to which potential consumers perceive a new
product is superior to existing substitutes
Compatibility
• The degree to which potential consumers feel a new
product is consistent with their present needs, values and
practices
Complexity
• The degree to which a new product is difficult to understand
or use
Trialability
• The degree to which a new product is capable of being
tried on a limited basis
Observability
• The ease with which a product’s benefits can be
observed, imagined or described to potential consumers
 Consumer Acceptance of New Products
• Diffusion of innovation occurs over time, and different
innovations are adopted at different rates.
• In any given social system, there are different categories of
adopters who adopt innovations differently.

Categories of
Adopters
• Innovators – 2.5%
• Early adopters – 13.5%
• Early majority – 34%
• Late majority – 34%
• Laggards – 16%
 Pick a
beachhead

Dominate
with a
whole
product
thinking

Compare
and
contrast

BE 604 – Marketing Management

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BE 604 – Marketing Management
BE 604 – Marketing Management
 Pricing Strategy
It is a strategic tool that organizations use to differentiate their products from
competitors and thereby gain the competitive edge to capture the market.

Product
Form, Time, Place,
CREATE
Place
(Distribution) Possession, Information VALUE
Promotions

Pricing
“Harvests”
Strategy VALUE

BE 604 – Marketing Management

Cost Competition Customer

Common Pricing Practices

BE 604 – Marketing Management
 Cost Based Pricing - Recovery
(1) You have to know all costs.
A baby sleep suit company made a loss despite engaging in cost-plus pricing, because they did not realize
how much their packaging cost. You need to be able to estimate the costs of everything.
(2) Costs are a function of sales which are in turn a
function of prices
This makes such calculations circular. Imagine a firm whose average costs decrease with sales.
If they sell less, their costs go up. But is a time of declining sales really the right environment to increase
prices?
(3) Cost-based pricing is misplaced in industries where
there are high fixed costs and near-zero marginal costs.
Activity-based pricing is where the customer agrees to pay the price when the cost is determined with an
agreed mark-up based on the contribution to fixed costs. Activity-based pricing is better than regular cost-
based pricing in such situations.
(4) Ignoring the value you create leads to under pricing
Rather than asking what prices firms need to charge in order to cover their costs
and achieve their profit objectives, firms should ask how their pricing strategy will
affect their cost structure.

BE 604 – Marketing Management

 Competition Based Pricing – Market Share
(1) It encourages firms to
ignore their unique value
proposition
A radiology software firm with a unique 3D
capability lost millions because they priced at the
same price as the marketing leader.
(2) It can lead to price wars
For example, the 2005 price war between Anheuser-
Busch and Miller was provoked by flat sales.
(3) Focusing on market share
does not necessarily lead to
maximum profits
Even in industries with large economies of scale, some
segments of the population are more profitable to serve.
In the UK, cable companies have often ignored this and
focused on extending their market share to rural villages.

Instead of setting market share objectives, firms should focus on identifying the
most profitable segments to serve, of and finding ways of serving them while
protecting themselves from price wars.

BE 604 – Marketing Management

 Customer Based Pricing – Make ‘em happy
(1) Customers may not reveal how much they value the
product
Radiohead launched a ‘pay what you want’ scheme for their album ‘In Rainbows’ in 2007. 62 percent paid
nothing. Average price of $2.26 an album.

(2) Customers need to be educated about the value of the

product
For example, it was hard for customers to understand what TiVo offered over a traditional VHS recorder.

(3) When customers are used to being in control of a firm’s

pricing, they revolt at price changes

Instead of asking themselves what their customers would pay, firms should ask themselves
what are the prices at which they can convince their customers about the product’s value.

BE 604 – Marketing Management

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How do I ….

BE 604 – Marketing Management

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BE 604 – Marketing Management
 EVC Analysis
➢ Economic value to the customer (EVC): the maximum amount a
customer should be willing to pay, assuming that s/he is fully
informed about the benefits of the product and the offerings of
competitors
➢ EVC = Reference Value + Differentiation Value

➢ Reference value: the price of perceived closest substitute

adjusted by difference in quantity used
➢ Differentiation value: value of a product’s attribute difference
between your offering and the closest substitute (+ or -)
➢ Value drivers: Could be tangible as well as intangible

BE 604 – Marketing Management

 EVC Analysis
Negative ❑Differentiation Value
Differentiation value
❑Superior performance
Positive ❑Better reliability
Differentiation
Value EVC
EVC ❑Additional warranty
❑Lower maintenance
cost
Reference
Value ❑Slower service
❑Competitor price

BE 604 – Marketing Management

 ➢ A magazine publisher consistently encountered price
resistance from media buyers.
➢ Since the magazine generated 11% more circulation than
its nearest competitor (1,550,000 vs. 1,400,000) media
buyers would pay no more than an 11% premium to run
an advertisement
➢ They argued that the value of the magazine’s quality was
reflected in the number of subscribers drawn to it.
➢ The nearest competitor charges $25,000 for a full-page
advertisement.

Differentiation
RESEARCH
Value: Case
➢ Further investigation suggested that the magazine had
better writers and more interesting articles, nicer
photography generating more interests in ads, and a
more motivated customer base (2.1 versus 1.8 readers
per copy, 14.5% versus 9.2% interest in ads, 2.2% versus
1.6% motivated to act upon seeing ads) and wealthier
readership ($200 versus $180 sales per customer. It was
also generally understood that, for magazines, 20% of all
motivated customers would actually end up buying the
advertised products. Margins on sales generated via
magazines are typically in the 20%-40% range.

BE 604 – Marketing Management

 Let’s work the numbers!
Competing Magazine Our Magazine Advantage
Circulation 1400000 1550000
Readers Per Copy 1.80 2.10
Readership

% Interest in Ads 9.2% 14.5%

% Motivated/ Ad Seen 1.6% 2.2%
% Sold / Motivated 20.0% 20.0%
# Sold to Readers

Sales Per Customer $180 $200

Gross Margin 0.3 0.3
Value of Ad $0.00 $0.00
Cost of Ad $25,000

WTP 27,750
EVC

BE 604 – Marketing Management

 The Numbers!
Aspects Competing Magazine Our Magazine Advantage Outcome
Circulation 1400000 1550000 11%
Readers Per Copy 1.8 2.1 17%
Readership 2520000 3255000 29%

% Interest in Ads 9.20% 14.50% 58%

% Motivated/ Ad Seen 1.60% 2.20% 38%
% Sold / Motivated 20.00% 20.00% 0%
# Sold to Readers 742 2077 180%

Sales Per Customer $180 $200 11%

Gross Margin 0.3 0.3 0%
Value of Ad $40,061.95 $124,601.40 211%

Cost of Ad $25,000 Differentiation Value $84,539.45

WTP 27,750

EVC $109,539
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EVC Pricing

BE 604 – Marketing Management

 Punch-line

Pricing’s impact on profitability

Pricing is the only element of is often more significant and
the marketing mix whose cost more immediate than the
is getting it wrong. impact of other elements of
the marketing mix.

Avoid the 3 C based pricing Focus on EVC = Reference value

strategies + Differentiation value
The Role of Marketing Communications

Communication by marketers that

informs, persuades, and reminds
potential buyers of a product in
order to influence an opinion or
elicit a response.

BE 604 – Marketing Management

 The AIDA Concept

Model that outlines the process

for achieving promotional goals Action
in terms of stages of consumer
involvement with the message
Conative (doing)
Desire

Interest Affective (feeling)

Attention Cognitive (thinking)

BE 604 – Marketing Management

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 The Communication Process

Noise

Encoding Message Decoding

Sender Receiver
Message Channel Message

Feedback
Channel

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 MC Mix

Advertising

Personal Target Public

Selling Market Relations

Sales
Promotion

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BE 604 – Marketing Management
The “New” AIDA Concept

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 Core Concept #1
• “Everything an organization does communicates to stakeholders.”
• Marketing Communications cannot be managed in isolation.

• “What commonality can we find

that everyone will understand to
guide actions?”

BE 604 – Marketing Management

 Today…..
• 70% of “tangible” innovations are copied
by competitors within 1year
• so… physical attributes will get you in to
a market but it’s not a sustainable
competitive advantage
• consumers may not be able to detect the
differences in performance
– (EG. How do you know your
detergent leaves clothes cleaner?)
• SO … often a psychological component
to the product

BE 604 – Marketing Management

 As consumers…

• We “believe” that brand performs

better
• We “trust” the performance
claims of the brand
• We buy “benefits” not products
• Charles Revson…. “In the
factory we make cosmetics.
In the store we sell hope.”

BE 604 – Marketing Management

 Hence…

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Core Concept # 2 – Creative Strategy

BE 604 – Marketing Management