MARKETING MANAGEMENT

Mustafa Karataş

4P's: Place and Price

2022
 Chase Sapphire
• How do you evaluate the “Reserve” card?
• What values/benefits does the product offer to customers?
• Does it provide a competitive advantage of over competitors’ similar
offers? Which benefit is likely to provide a competitive advantage?
• How do you assess it in terms of Roger’s five criteria of product
adoption?

• Are different card types in the bank’s portfolio differentiated enough?

• Annual spending of “transactors,” “revolvers,” and “dormants” are 12,000

USD, 7,500 USD, and 2,500 USD, respectively. While transactors and
dormants pay their debt every month fully, revolvers generally pay only 60% of
their spending at the end of the month. They continue paying interest for the
remaining 40%. Based on this information, is giving away 100,000 sign-up
bonus good idea? Would you prioritize one of these segments over others?

• What would you do to increase profitability? Do you suggest any changes to

 Chase Sapphire
• How do you evaluate the “Reserve” card?
• What values/benefits does the product offer to customers?
• Does it provide a competitive advantage of over competitors’ similar
offers? Which benefit is likely to provide a competitive advantage?
• How do you assess it in terms of Roger’s five criteria of product
adoption?

• Are different card types in the bank’s portfolio differentiated enough?

• Annual spending of “transactors,” “revolvers,” and “dormants” are 12,000

USD, 7,500 USD, and 2,500 USD, respectively. While transactors and
dormants pay their debt every month fully, revolvers generally pay only 60% of
their spending at the end of the month. They continue paying interest for the
remaining 40%. Based on this information, is giving away 100,000 sign-up
bonus good idea? Would you prioritize one of these segments over others?

• What would you do to increase profitability? Do you suggest any changes to

 1) Product benefits and competitive advantage
• Economic value
• Rewards: 3 points per dollar spent on dining and travel;
1.5% points-to-dollar conversion
• Sign-up bonus of 100K (significantly higher than those of
Amex Platinum and Citi Prestige)
• Self-expressive value
• An identity-marker for "cool" millennials
• Reflect a specific lifestyle admired by the target market
• Experiential value
• Easy use of points through Ultimate Rewards program
• Social value
• A sense of being part of other millennials
 Economic value…
• What is the actual economic value if a customer
spends $4,000 on dining and travel…
 Economic value – Reserve
• If a customer spends $4,000 on dining and travel…
• Total cost = 4000 + 450 (annual fee) = 4,450 USD

• Total points earned = 100,000 (sign-up bonus) +

12,000 (x3 points)
= 112,000
• Points in USD = 112,000 * 1.5% = 1,680 USD
• Additional benefits = 300 USD (travel credit)

• Total benefits = 1,980 USD

• The difference = 4,450 – 1,980 = 2,470

 Economic value – Amex
• What if s/he used Amex Platinum (before the
Reserve)…
• Total cost = 4,000 + 450 (annual fee) = 4,450 USD

• Total points earned = 40,000 (sign-up bonus) +

4,000 (x1 points)
= 44,000
• Points in USD = 44,000 * 1% = 440 USD
• Additional benefits = 200 USD (travel credit)

• Total benefits = 640 USD

• The difference = 4,450 – 640 = 3,810

 Economic value – Citi
• What if s/he used Citi Prestige (before the Reserve)
…
• Total cost = 4,000 + 450 (annual fee) = 4,450 USD

• Total points earned = 30,000 (sign-up bonus) +

7,500 (x3 travel; x2 dining)
= 37,500
• Points in USD = 43,000 * 1.5% (app.)= 645 USD
• Additional benefits = 250 USD (travel credit)

• Total benefits = 895 USD

• The difference = 4,450 – 895 = 3,555

 Economic value – Reserve (after Jan '17)
• If a customer spends $5,000 on dining and travel…
• Total cost = 5,000 + 450 (annual fee) = 5,450 USD

• Total points earned = 50,000 (sign-up bonus) +

15,000 (x3 points)
= 65,000
• Points in USD = 65,000 * 1.5% = 975 USD
• Additional benefits = 300 USD (travel credit)

• Total benefits = 1,275 USD

• The difference = 5,450 – 1,275 = 4,175

 Economic value – Amex (after Reserve)
• What if a customer spends $5,000 on dining and
travel using Amex after the launch of Reserve…
• Total cost = 5,000 + 550 (annual fee) = 5,550 USD

• Total points earned = 60,000 (sign-up bonus) +

15,000 (x5 travel; x1 dining)
= 75,000
• Points in USD = 75,000 * 1% = 750 USD
• Additional benefits = 400 USD (travel credit)

• Total benefits = 1,150 USD

• The difference = 5,550 – 1,150 = 4,000

 Economic value – Citi (after Reserve)
• What if s/he used Citi Prestige after the launch of
Reserve…
• Total cost = 5,000 + 450 (annual fee) = 5,450 USD

• Total points earned = 50,000 (sign-up bonus) +

12,500 (x3 travel; x2 dining)
= 62,500
• Points in USD = 62,500 * 1.25% = 781.25 USD
• Additional benefits = 250 USD (travel credit)

• Total benefits = 1,031.25 USD

• The difference = 5,450 – 1,031.25 = 4,418.75

 1c) Product adoption (and renewal)
• Relative advantage

• Compatibility

• Complexity

• Observability

• Trialability
 1c) Product adoption (renewal)
• Relative advantage
• Economic advantage is initially high; but no longer
significant after Jan 2017
• Compatibility
• Highly compatible with the lifestyles of millennials—the
target market
• Complexity
• Low
• Observability
• All benefits (economic, social, identity, etc) are highly
visible
• Trialability
• High as there are no barriers to sign up for the card and
claim bonuses
2) Differentiation of different cards
 2) Differentiation of different cards
• Issues
• Discontinue the Saphhire card?
• How many revolvers are there? What is the interest
revenue?
• The differentiation between Preferred and Reserve is not
sufficient
• In fact, Preferred provides better economic value than
Reserve. So, retaining customers is an issue.
• If the company is unlikely to retain Reserve customers,
then one solution might be discontinuing the Preferred
card.
 3) Profitability of different segments
• Transactors
• Annual spend of 12,000 USD; pay on time
• Revolvers
• Annual spend of 7,500 USD; spend 60% on time
• Dormants
• Annual spend of 2,500 USD; pay on time
 4) Some recommendations
• Encouraging more frequent use of cards by introducing
additional categories
• Monthly minimum spend amounts for higher rewards
• Designing customized offers by sending personal offers when
spending decreases
• Additional rewards for frequent users at the end of the year to
increase the likelihood of retention
• …
 Biocon
• $25M spent for manufacturing
• Of the sales, 25% is CGS, 15% R&D, and 27%
marketing
• The owner insists for a $1,000 retail price.
• CFA mark-up is 1-2%, distributor 10%, and pharmacy
10-15%
• Erbitux planning to enter the market with a $4-5K price
Biocon
 Biocon
• 3C Analysis as it relates to the immediate launch of the
new product?
• Company strengths and weaknesses?
• Competition- and industry-related factors?
• Customers?
 Biocon
• 3C Analysis as it relates to the immediate launch of the
new product?
• Company strengths and weaknesses?
• Competition- and industry-related factors?
• Relative advantages of the product over Erbitux
• Customers?
• Purchasing power
• Decision making process-–who makes the decision?
Biocon
Biocon
Biocon
 4P's: Product and Promotion

ANALYSI DECISIONS
S
Aspiration Decisions

• Segmentation
Company • Targeting
• Positioning
Customer
Action Plan
Competitors
Marketing Mix Decisions: 4P's
• Product
• Promotion
• Place
• Price
 Place

The role of distribution channels

• Access to markets

• Operations management
• Inventory control, maintenance, warranty service,
risk-sharing

• Information gathering/sharing

• Branding and promotion

 Place

• Distribution channel as a promotion tool

 Channel Structures

Manufacturer Manufacturer Manufacturer

Retailer(s) Retailer(s)

Customers Customers Customers

Indirect Direct Mixed

 Channel Structures

Manufacturer

Vertical
conflict

Retailer(s)

Customers
 Horizontal Conflict

Manufacturer

Retailer 1 Retailer 2

Customers
 Horizontal Conflict

Manufacturer • High price, high service

retailers hurt by low price,
low service retailers

Retailer 1 Retailer 2 • Showrooming

• Fewer incentives to invest

in brand promotions
Customers
 Horizontal Conflict
Solutions
Manufacturer
• Subsidize service costs

• Do not reward high sales

Retailer 1 Retailer 2
• Encourage coordination
between retailers (e.g.,
joint inventory control)
Customers
• Price floors (if legal)
 Exclusive Territories

• Why do firms use exclusive distributors?

 Exclusive Territories

Customers Customers

iPhone introduced to the market 2010

(2007)
Exclusive agreement with AT&T
 Direct Channel

Advantages
• More control
• Higher revenue
• Avoid vertical conflict
• More information about the market
• Stronger relationship with customers

Disadvantages
• Costly
• Requires expertise
 Horizontal Conflict in Direct Channels

• Horizontal conflict exists

even in direct channels

• Pricing between channels

• Product assortment in each

channel
 Multichannel distribution

• Allows to mitigate both Manufacturer

horizontal and vertical
conflict for the company

• Setting up and managing the Retailer(s)

direct channel only might be

costly for the company
Customers
 Choosing a channel structure

• Cost

• Brand/product recognition

• Competitor reaction

• Consumer preferences/loyalty
• Are consumers loyal to the retailer or to the
manufacturer?
4P's: Price
 How to set a price?
Step 1. Pricing objective

• Survival

• Maximum current profits

• Market share

• Market skimming

• Product-quality leadership
 How to set a price?
Step 2. Determining demand
• How sensitive is demand to price?
• Product uniqueness
• Few competitors
• The price is a small share of income
• Switching costs
 How to set a price?
Step 2. Determining demand
• How sensitive is demand to price?
• Product uniqueness
• Few competitors
• The price is a small share of income
• Switching costs

• Price elasticity of demand: Percent change in demand

caused by 1% change in prices

• How to estimate demand

• Surveys and experiments
• Data analysis
 How to set a price?
Step 3. Estimate costs

• Need to know the price floor

• Economies of scale

• Learning by doing
 How to set a price?
Step 4. Competitor analysis

• What is the competitor's offers

• What is the competitor's cost
• Try to anticipate competitors' actions
 How to set a price?
Step 5. Choosing a pricing method
• Mark-up pricing
 How to set a price?
Step 5. Choosing a pricing method
• Mark-up pricing

Example
• Variable cost per unit = 100
• Fixed cost = 15,000
• Expected unit sales = 5,000 – 20p
• Target mark-up = 20%
 How to set a price?
Step 5. Choosing a pricing method
• Mark-up pricing
Example
• Variable cost per unit = 100
• Fixed cost = 15,000
• Expected unit sales = 5,000 – 20p
• Target mark-up = 20%
Solution
• Unit cost = 100 + [ (15000) / (5,000 – 20p) ]
• Solve
• p = 133
 How to set a price?
Step 5. Choosing a pricing method

• Value pricing
 How to set a price?
Step 5. Choosing a pricing method

• Perceived value pricing

• Competitor's price is 90,000; Cat's price is 100,000.
Why is the price difference?
 Perceived value pricing
• Perceived value pricing can help avoid price wars

• In 1991, P&G switched to perceived value pricing to

avoid reducing its prices too much due to competitive
pressure

Marketing Mix Variable P&G

Advertising +20.7%
Deals −15.7%
Coupons −54.3%
Net price +20.4%
 Perceived value pricing
Competitor's Reaction to P&G

Marketing Mix Variable P&G Competitors

Advertising +20.7% +6.2%
Deals −15.7% +12.6%
Coupons −54.3% −17.3%
Net price +20.4% +8.4%
 Perceived value pricing
Competitor's Reaction to P&G

Marketing Mix Variable P&G Competitors

Advertising +20.7% +6.2%
Deals −15.7% +12.6%
Coupons −54.3% −17.3%
Net price +20.4% +8.4%

• Effect of perceived-value pricing

• 16% lower market share
• $1.09 billion increase in net profits
• Lost market share, but increased profits!
 How to set a price?
Step 5. Choosing a pricing method
• Economic value pricing
• Pricing your product at the economic savings implied
by your product

Brightness: 800 lumens Brightness: 800 lumens

Estimated energy cost: Estimated energy cost:

1.26 USD per year 6.02 USD per year
 How to set a price?
Step 5. Choosing a pricing method
• Economic value pricing
 How to set a price?
Step 5. Choosing a pricing method
• Economic value pricing
 How to set a price?
Step 5. Choosing a pricing method
• Competitive parity pricing
• Pricing your product at a level that is at par as the
economic value implied by your next best alternative

Competitive parity price = (Total cost of the next best

alternative – savings)
 How to set a price?
Step 6. Final price

• Consider additional factors

• Competitors’ objectives and strategies
• Market trends
• Consumers’ behavior
• Long-term goals
 Pricing

• Price targeting

• Price matching guarantees

• Price signaling quality

Price targeting

$$$ $
 Price targeting

Charge high
price Charge low
price

$$$ $

• IP address comes from a rich

neighborhood • IP address comes from an
• Uses Mac OK neighborhood
• Before visiting us, was • Before visiting us, was
checking some high-end checking discount stores
retailers
 Price targeting

$$$ $
“The study, performed by researchers in Spain, found that if Internet
visitors came from a discount site such as Nextag.com, they would at
times receive prices as much as 23% lower than others. Their study of
200 stores found Amazon, Staples and videogame store Steam
among those varying price by geographic location by as much as
166%.”
 Price targeting

• Is price targeting always good?

$$$ $
 Price targeting

• Is price targeting always good? No.

• It may intensify price competition

• Psychological effects: betrayal and jealousy

$$$ $
Price matching guarantees

$$$ $
 Price matching guarantees

• How do PMG’s affect firms incentives to reduce

prices?

• Do consumers benefit from PMG’s?

$$$ $
• Psychological effect of offering PMG
Price signaling quality

$$$ $
 Price signaling quality

• If high price means high quality, why don’t

low-quality manufacturers charge a high price?

• Cost structure matters! When costs are similar,

price is not a good signal
$$$ $
Price signaling quality

• High price of the

top product creates
a luxury image for
the rest of the
$$$ $ product line

• The high-price
product need not
be the profit-
maker