MARKETING MANAGEMENT MARKETING MIX PRICING & PROMOTION V Srinivasa Rao, AUSIB The Concept of Price “Marketing consists of the full range of activities involved in facilitating commercial exchanges and having all of these activities be guided by a concern for customer needs.” A commercial exchange takes place when a seller provides a product to a buyer in return for something in exchange (usually an amount of money). The product could be something tangible, which is referred to as a good, or the product could be the result of human or mechanical effort, which is referred to as a service. Price is the monetary value of this exchange. Price is essential for the exchange of goods for money. The Concept of Price Pricing as a Marketing Activity Price is part of the marketing-mix, and is related to the other 3 elements as follows. PRODUCT PLACE Create customer value PROMOTION PRICE Harvests value “Price is the marketing-mix element that produces revenue; the others produce costs.” Framework for Pricing Strategy A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area. The firm must decide where to position its product on quality and price. Most markets have three to five price points or tiers. Marriott Hotels is good at developing different brands or variations of brands for different price points: Marriott Vacation Club—Vacation Villas (highest price), Marriott Marquis (high price), Marriott (highmedium price), Renaissance (medium-high price), Courtyard (medium price), TownePlace Suites (medium-low price), and Fairfield Inn (low price). Having a range of price points allows a firm to cover more of the market and to give any one consumer more choices. Framework for Pricing Strategy Toyota: Different Car Types and Price Points Hatchback Toyota Glanza ₹ 6.81 - 10.00 Lakh Sedan Toyota Camry ₹ 46.17 Lakh SUV Toyota Urban Cruiser Hyryder ₹ 10.86 - 19.99 Lakh Toyota Fortuner ₹ 32.98 - 50.74 Lakh Toyota Fortuner Legender ₹ 43.22 - 46.94 Lakh Toyota Land Cruiser ₹ 2.10 Crore Toyota Rumion ₹ 10.29 - 13.68 Lakh Toyota Innova Crysta ₹ 19.38 - 26.05 Lakh Toyota Innova Hycross ₹ 18.82 - 30.26 Lakh Toyota Vellfire ₹ 1.20 - 1.30 Crore Toyota Hilux ₹ 30.41 - 37.89 Lakh MPV/MUV Truck/Pickup Framework/Factors for Pricing Strategy The price the company charges is generally between one that is too low to produce a profit and one that is too high to produce any demand. Factors affecting pricing and pricing decisions can be divided into two main categories — internal, & external. Internal Factors 1. Pricing decisions are directed by Marketing objectives of the firm which, in turn, are governed by the organization’s overall objectives. The Marketing objectives can again be divided into three categories. a) b) c) Profitability objectives Volume objectives Other objectives, including social and ethical considerations, status quo objectives, and image goals. a) Profitability objectives b) Volume objectives c) Profit maximization Profitability RoI Return on Sales Cash flow Sales maximization Market share Other objectives Social and ethical considerations Status quo objectives Company image 2. Cost structure of the firm Fixed Costs Variable Cost Break-even Point Promotion & Advertizing Costs External Factors Price elasticity of demand Customer perceptions, expectations, buying behaviour Channel expectations Competitors’ marketing strategies & pricing Pricing of substitutes / related products Pricing of primary products, and complementary products Legal compliance There are three basic pricing approaches: 1. Cost-based pricing — governed by supply-side considerations 2. Customer / Value oriented pricing — directed by demand-side factors] 3. Competitive / Market-based pricing — based on the demand and supply conditions in the market, and the competition [structure, & strategies] 1. Cost-oriented pricing: Involves setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for its effort and risk. a) Markup Pricing [Cost plus margin method]: The simplest pricing method ─ adding a standard markup to the cost of the product. b) Manufacturers; distributors, retailers, and other intermediaries; service establishments such as restaurants, often find cost-plus pricing method to be easy to administer and time-saving. Let's say you started a retail clothing line. You have invested $250,000 in plant & machinery that can produce 100,000 pairs of jeans per annum. You now need to calculate the selling price for the jeans. Your cost structure is as follows. Variable costs: Material costs: $10; & Labor costs: $30 Total overhead costs: $2,000,000 Unit cost: = [AVC] + AFC + Average OHC = $40 + [$250,000/100,000] + [$2,000,000/100,000] = $62.5 With a markup of 30%, the Selling Price would be, = $62.50 (1 + 0.30) = $81.25 This gives you a Selling Price of $81.25 for each pair of jeans. b) Target-Return Pricing: In this method, the price is set at that level which will yield target rate of return on investment made by the company. c) Target return pricing uses the concept of a break-even chart, which shows the total cost and total revenue expected at different sales volume levels. d) Example: Suppose a toaster manufacturer has invested $1 million in the business, and has the following costs and sales expectations: Variable cost per unit $10 Fixed costs $300,000 Expected unit sales 50,000 e) f) g) h) Now, assume that the toaster manufacturer wants to set a price to earn a 20 percent ROI, which is $200,000. b) c) d) e) f) The target-return price is given by the following formula: Target-return price = unit cost + [(desired return * invested capital)/unit sales] = $16 + [(0.20 * $1,000,000)/50,000] = $20 Target return pricing uses the concept of a break-even analysis, and the corresponding break-even chart, which shows the total cost and total revenue expected at different sales volume levels. 2. Value-based pricing methods: a) Perceived-Value Pricing: This is one of the contemporary pricing method where marketers do not take into account their costs as key consideration in setting their prices, rather they base their price on the customer’s perceived value of their product. Perceived value is made up of a host of tangible and intangible factors, such as the consumer’s perception of the product performance, the channel deliverables, the warranty quality, customer support, the supplier’s image, trustworthiness, and esteem. [Source: Kotler] Caterpillar uses perceived value to set prices on its construction equipment. It might price its tractor at $100,000, though a similar competitor’s tractor might be priced at $90,000. Value perception of the customer: $90,000 is the tractor’s price if it is only equivalent to the competitor’s tractor [plus] $7,000 is the price premium for Caterpillar’s superior durability [plus] $6,000 is the price premium for Caterpillar’s superior reliability [plus] $5,000 is the price premium for Caterpillar’s superior service [plus] $2,000 is the price premium for Caterpillar’s longer warranty on parts = $110,000 [perceived value] – $10,000 [discount] = $100,000 [final price] As per customer’s perception, although he is paying a $10,000 premium, he is actually getting $20,000 extra value. b) Value Pricing: This is another modern method of pricing where high quality products are priced significantly low — offering a higher value to the customers at a lower price. Among the best practitioners of value pricing are IKEA, Target, and Southwest Airlines. FMCG giant P&G also uses this method for some of its product lines. c) Value pricing is not just a matter of setting lower prices compared to competitors, rather it is more about re-engineering the company’s operations to become the low-cost producer without sacrificing quality, and lowering one’s prices significantly so that large number of value-conscious customers are attracted. 3. Market-based pricing: In this case, the pricing methods are governed by the market forces ─ the market structure & competitors’ strategies, costs, prices, and market offerings. a) Going-Rate Pricing. In going-rate pricing, the firm bases its price largely on competitors’ prices. In oligopolistic industries that sell a commodity such as steel, paper, or fertilizer, all firms normally charge the same price. a) Smaller firms “follow the leader,” changing their prices when the market leader’s prices change rather than when their own demand or costs change. b) Sealed-Bid Pricing. This type of pricing method is followed when a firm wishes to win a contract or job. More weightage is given to the probability of winning the contract that firm’s cost structure. Firm’s pricing policies & strategies are governed both by organizational objectives, and market forces. Here’s a discussion on some of these. 1. Market Skimming. In this case, the price charged is intended to be high relative to the average price of major competitors and what customers are accustomed to paying. By following this strategy, the marketer wants to project their product as a premium/quality product to the consumer. Skim-thecream pricing involves selling at a high price to those who are willing to pay before aiming at more pricesensitive consumers. 2. A Skimming price policy can theoretically maximize the profit from each price-level. It is most suitable for products that have short life cycles. 2. Penetration Pricing. Also known as Price Leadership, this strategy involves charging a price that is low relative to the average price of major competitors and what customers are accustomed to paying. This pricing strategy is followed generally in case of new products and where the firm is initially targeting to garner a large market share. While this strategy might erode the margins, it helps firms maximize sales volumes and turnover — thereby making good profits. 3. This pricing strategy works best in case of the convenience goods or other goods which are of dayto-day consumption and meant for the masses. 3. Product Line Pricing. Companies normally develop product lines rather than single products, catering to different price ranges. A men’s clothing store might carry men’s suits at three price levels: $300, $600, and $900, which customers associate with low, average, and high quality respectively. The seller’s task is to establish perceived quality differences that justify the price differences. 4. This pricing strategy works best in case of the convenience goods or other goods which are of dayto-day consumption and meant for the masses. 5. This pricing strategy helps the company maximize turnover and profits — by catering to different markets. 4. Product-Bundling Pricing. Company bundles a set of products or services offers for sale at a lower single price than would be the case if each item were sold separately. 5. Pure bundling occurs when a firm offers its products only as a bundle. Pure bundling occurs when a firm offers its products only as a bundle. In mixed bundling, the seller offers goods both individually and in bundles 6. This strategy is very popular with supermarkets who often adopt BOGO strategy to clear piling inventories of slow-moving stock. 5. Psychological Pricing. In general, consumers perceive high-price as an sign of premium/high quality. Buyers carry in their mind a reference price formed by noticing current prices, past prices, or the buying context. 6. Sellers try to manipulate these reference pricepoints and play with the psyche of consumers by resorting to psychological pricing. They believe that the price should end in an odd number, such as Bata Shoe Company pricing their shoes at Rs.699 rather than Rs.700 or Rs.999 rather than Rs.1, 000. 6. Optional-Feature Pricing. Many companies offer optional products [add-ons, or accessories], features, and services with their main product. 7. This strategy is very popular with the automobile industry. Also, many restaurants price their beverages high and their food low. The food revenue covers costs, and the beverages — especially liquor — produce the profit. 7. Captive-Product Pricing. Some products require the use of ancillary or captive products. Manufacturers of razors often price them low and set high markups on razor blades. Movie theaters and concert venues often make more from food/drinks and merchandise sales than from ticket receipts. This strategy is known as Cross-benefit Pricing, and is used to as a method of pricing complementary products. 8. Two-Part Pricing. Service firms engage in two-part pricing, consisting of a fixed fee plus a variable usage fee. An ISP can charge a base fee that covers downloads upto a limit. Downloads above the limit are chargeable. 9. Geographical Pricing. Refers to the practice of determining the prices based on the geographic location of the buyer. Various factors that influence this decision include shipping costs, tariff structure, purchase contract stipulations, and such. Tariff, also called customs duty, tax levied upon goods as they cross national boundaries, usually by the government of the importing country. The words tariff, duty, and customs can be used interchangeably. PROMOTION Kotler uses the term Marketing Communications instead of Promotion, to refer to the fourth marketing-mix element, consisting of several methods of communicating with and influencing customers. The major tools are Advertizing, Sales Promotion, Personal Selling, Public Relations, and Publicity. “Marketing communications are the means by which firms attempt to inform, persuade, and remind consumers — directly or indirectly — about the products and brands they sell.” The elements of the Promotion-Mix represent the voice of the company and its brands; through which the firm can establish a dialogue and build relationships with consumers. The Role of Promotion Promotion helps the firm communicate with consumers. In specific, Promotion plays a vital role in Marketing, as follows. Communicates how and why a product is used, by whom, where, and when. Who makes the product and what the company and brand stand for, Can motivate consumers to try or use the product. Marketing communications allow companies to link their brands to other people, places, events, brands, experiences, feelings, and things. They can contribute to brand equity — by establishing the brand in memory and creating a brand image — as well as drive sales and even affect shareholder value. Technology and other factors have profoundly changed the way consumers receive, and process communications Promotion Defined “… is a form of communication used to inform, convince or remind the public about the goods, services, image, and community involvement of a person or organization, promotion often has a decisive role in achieving the set goals.” The main communication activity of the company is the promotional mix – the marketing communications program – which consists of the “specific combination of advertising tools, personal sales, sales promotion and public relations used to fulfill its marketing and advertising objectives”. Consumers have more choices and control over what, when, where, and how they consume media, thanks to the proliferation of digital platforms, devices, and formats. This means that marketers need to be more strategic and creative in finding and engaging their audience across multiple touchpoints, and delivering relevant and personalized messages that resonate with their needs, preferences, and behaviors. The Promotion Mix The Promotion Mix is the combination of the methods and techniques used in promotion and coordination of promotional activities in order to achieve the proposed marketing objectives. According to Kotler, The marketing communications mix consists of eight major modes of communication. 1. 2. 3. 4. 5. 6. 7. 8. Advertising Sales promotion Personal selling Public relations and publicity Events, Sponsorships and experiences Direct and database marketing Online and social media marketing Mobile marketing The Promotion Mix 1. Advertising — Any paid form of non-personal presentation and promotion of ideas, goods, or services by an identified sponsor via print media (newspapers and magazines), broadcast media (radio and television), network media (telephone, cable, satellite, wireless), electronic media (audiotape, videotape, videodisk, CD-ROM, Web page), and display media (billboards, signs, posters). “… message paid by a sponsor, in most cases mediated by means of mass communication and has the function of convincing a certain audience” The Promotion Mix 2. Sales Promotion — A variety of short-term incentives to encourage trial or purchase of a product or service including consumer promotions (such as samples, coupons, and premiums), trade promotions (such as advertising and display allowances), and business and sales promotions (contests for sales reps). force Sales Promotion is usually used to attract new customers, introduce new products, sell off existing inventory, and temporarily create demand for sales. The Promotion Mix 3. Personal Selling — Face-to-face interaction with one or more prospective purchasers for the purpose of making presentations, answering questions, and procuring orders. Personal sales offer specific motivations which the other elements of the marketing mix cannot offer specifically. It is complementary to advertising, but its relative importance depends on the nature of the product and the behavior of the consumer. The key advantages: a high level of persuasiveness, opportunities to customize the promotional message, getting immediate feedback, the possibility of selecting the audience while delivering complex information. The Promotion Mix 4. (a) Public relations — Public relations represent a set of activities used to create, maintain, and influence a favorable attitude / behaviour towards the organization, or its products and services. The UK Institute of Public Relation defines PR as “a deliberate, planned and sustained effort to establish and maintain a mutual understanding between the organization and its [various] publics.” This form of promotion is informative, and is actually a personalized tailored communication with a unique and credible message. It carries information through: spokespersons, press conferences, advertising materials, special events associated with sponsorship involvement, donations. The Promotion Mix 4. (b) Publicity — Publicity is a non-paid form of promotion represented by a complex of activities designed to make products or services known or appreciated by consumers/ users, or to form favorable attitudes towards an idea, action, or a theory. Publicity has a broader scope, compared to advertising, and includes free advertising that is delivered through the dissemination of information that increases consumer confidence in the product as well as the prestige of the company through: conferences, articles, reports, posters, media briefings / media releases, senior executives public appearances and such. The Promotion Mix 5. Events, Sponsorships and Experiences — Company-sponsored activities and programs designed to create daily or special brand-related interactions with consumers, including sports, arts, entertainment, and cause events as well as less formal activities. These activities are aimed at increasing the visibility of and generating goodwill for the company. These programs can also establish credibility with a specific target market. The firms can also sponsor events targeting the trade, or even the local communities. Sponsorships can either be commercial, or non-commercial in nature. The Promotion Mix 6. Direct and database marketing — Use of mail, telephone, fax, e-mail, or Internet to communicate directly with or solicit response or dialogue from specific customers and prospects. 7. Online and social media marketing — Online activities and programs designed to engage customers or prospects and directly or indirectly raise awareness, improve image, or elicit sales of products and services. 8. Mobile marketing — A special form of online marketing that places communications on consumer’s cell phones, smart phones, or tablets. Additional promotional tools companies can implement to promote their products or services and themselves include: Trade shows & Consumer Fairs, Newsletters, & Product Brochures. Factors in Setting the Promotion Mix Factors that influence the promotion mix may be grouped into four categories as follows: 1. 2. 3. 4. Product-related, Customer-related, Organization-related, and Situation-related. Consumer marketers tend to spend comparatively more on sales promotion and advertising; business marketers tend to spend comparatively more on personal selling. 1. Product-related factors: a) Extent and complexity of the product information, b) Stage of the product in the product life cycle, and c) Product type and unit price. b) Customer buying behaviour H a) Characteristics of the target market – Generally, non-personal promotion (advertising and publicity) are more suitable for ultimate consumers, and personal selling is relatively more important for organizational buyers. force’s chances of getting a favorable first meeting and early adoption of the product. Product Differentiation 2. Customer-related factors: company’s reputation and improve the sales L Factors in Setting the Promotion Mix Corporate advertising can improve a L Variety Seeking Behaviour Complex Buying Behaviour Habitual Buying Behaviour Dissonance Reducing Buying Behaviour Involvement H Factors in Setting the Promotion Mix 3. Organization-related Factors: a) Budget: Budgetary constraints compel the marketers to choose wisely among the alternatives available within the promotion mix, while maximizing the overall effectiveness of the promotion effort. In general advertizing, and personal selling are considered expensive relative to the other means of promotion. In the introduction stage of the product life cycle, advertising, events and experiences, and publicity have the highest cost-effectiveness, followed by personal selling togain distribution coverage and sales promotion and direct marketing to induce trial. b) Marketing channel and promotion strategies [‘Push’, & ‘Pull’ Strategies]: When marketers of packaged goods — such as food, tobacco, beverages, toiletries, and health and beauty aids — adopt a ‘Pull Strategy’, they build and maintain their market share by generating sales through ‘consumer pull’ created by strong productmarket strategies [brand management] implemented through mass-media advertising, point-of-purchase promotion, and packaging. On the contrary, in ‘Push Strategy’, marketers push inventory into the supply pipeline and depend on aggressive promotion of their products by the trade. Factors in Setting the Promotion Mix 4. Situational Factors: a) Visibility of the firm and its political, legal and social environment: Some companies are better known to the public because of their products, their relative dominance in the industry and their impact on physical, economic or social life of people. Examples could include Amul, Asian Paints, HUL, TATA, ITC, Reliance among others. To maintain their high visibility in the public sphere, these firms spend more money on public relations and publicity, in addition to the money and effort spent on promoting their products and services. The advent of “Big Data” has given marketers the opportunity to learn even more about consumers and develop more personal and relevant marketing communications. b) Competitive pressures: Firms very often have to match or counter the promotional activities of their competitors to maintain or increase their market shares. Hence the promotional effort of such firms is affected and influenced-by the activities of their rivals. While the Cola Wars is an extreme example of this rivalry, pitched battles fought on promotional turf are not uncommon between competing firms is a common phenomenon, specially in consumer goods marketing. INTEGRATED MARKETING COMMUNICATIONS [IMC] “A process of marketing communications [MarComs] planning that recognizes the synergistic benefits of a comprehensive plan that evaluates the strategic roles of a variety of communication disciplines – general advertising, direct response, sales promotion, [marketing-oriented] public relations, sponsorship or social media – and combines these disciplines to provide clarity, consistency, and maximum communication impact.” IMC highlights the importance of having one communications strategy or plan as the unifying element and the integrative factor of the various tools or disciplines employed. 1. IMC is a planning process rather than a concept. It aims to achieve a coordinated execution of a MarComs program. 2. The communication disciplines chosen for an IMC campaign – for example, advertising, direct response, sales promotion, marketing-oriented PR, sponsorship or social media – must complement each other. 3. IMC must be supported by research, and not guesswork. This means using diagnostics or other forms of research to help increase the probability of success. 4. IMC must take the target audience into consideration. This means understanding their decision process, motivations for buying (or not buying) and their media usage habits. Promotion and communication is used synonymously in marketing literature. 5. IMC must be result-driven, which entails being accountable and ensuring a fair return on investment (ROI). 6. It must aim for clarity and consistency in the look, feel and voice of the brand over time, so that there is no confusion in people’s minds. This demands clear and consistent brand positioning in all communication, & collaterals. 7. Media and creative content must support each other in this endeavour. This means that the creative content must be appropriate for the medium. Objectives of MarComs: Informing, Persuading, Reminding, & Reinforcing. As part of its IMC strategy, Nike integrated its app and store communications. The company’s innovative Nike Live stores were designed in tandem with its app. These stores are customized according to data on local customer preferences and behavior. The IMC Process Determining the Promotion Mix Message Strategy Advertizing Identifying the target audience Establishing the Budget Measure the Effectiveness of MarComs Sales Promotion PR Setting Objectives Personal Selling Social Media Media Strategy Manage and Coordinate IMC Process Distinctive Characteristics of the Promotion Mix Elements Distinctive Characteristics of the Promotion Mix Elements Let’s get in touch. AUSIB Andhra University, VISAKHAPATNAM + 91-9704-559-369 shrini.vempali@gmail.com