Marketing_Management_14th_Edition-min

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DEVELOPING PRICING STRATEGIES AND PROGRAMS | CHAPTER 14 389 Setting the Price 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, and when it enters bids on new contract work. 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). Firms devise their branding strategies to help convey the price-quality tiers of their products or services to consumers. 30 The firm must consider many factors in setting its pricing policy. 31 Table 14.2 summarizes the six steps in the process. Step 1: Selecting the Pricing Objective The company first decides where it wants to position its market offering. The clearer a firm’s objectives, the easier it is to set price. Five major objectives are: survival, maximum current profit, maximum market share, maximum market skimming, and product-quality leadership. Marriott’s hotel brands differ in price points and the levels of service they offer. SURVIVAL Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business. Survival is a short-run objective; in the long run, the firm must learn how to add value or face extinction. MAXIMUM CURRENT PROFIT Many companies try to set a price that will maximize current profits. They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment. This strategy assumes the firm knows its demand and cost functions; in reality, these are difficult to estimate. In emphasizing current performance, the company may sacrifice long-run performance by ignoring the effects of other marketing variables, competitors’ reactions, and legal restraints on price. MAXIMUM MARKET SHARE Some companies want to maximize their market share. They believe a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive. Texas Instruments (TI) famously practiced this market-penetration pricing for years. TI would build a large plant, set its price as low as possible, win a large market share, experience falling costs, and cut its price further as costs fell. The following conditions favor adopting a market-penetration pricing strategy: (1) The market is highly price sensitive and a low price stimulates market growth; (2) production and distribution TABLE 14.2 Steps in Setting a Pricing Policy 1. Selecting the Pricing Objective 2. Determining Demand 3. Estimating Costs 4. Analyzing Competitors’ Costs, Prices, and Offers 5. Selecting a Pricing Method 6. Selecting the Final Price
390 PART 5 SHAPING THE MARKET OFFERINGS costs fall with accumulated production experience; and (3) a low price discourages actual and potential competition. Apple created an uproar among its early-adopter customers when it significantly lowered the price of its iPhone after only two months. MAXIMUM MARKET SKIMMING Companies unveiling a new technology favor setting high prices to maximize market skimming. Sony is a frequent practitioner of market-skimming pricing, in which prices start high and slowly drop over time. When Sony introduced the world’s first high-definition television (HDTV) to the Japanese market in 1990, it was priced at $43,000. So that Sony could “skim” the maximum amount of revenue from the various segments of the market, the price dropped steadily through the years—a 28-inch Sony HDTV cost just over $6,000 in 1993, but a 40-inch Sony HDTV cost only $600 in 2010. This strategy can be fatal, however, if a worthy competitor decides to price low. When Philips, the Dutch electronics manufacturer, priced its videodisc players to make a profit on each, Japanese competitors priced low and rapidly built their market share, which in turn pushed down their costs substantially. Moreover, consumers who buy early at the highest prices may be dissatisfied if they compare themselves to those who buy later at a lower price. When Apple dropped the iPhone’s price from $600 to $400 only two months after its introduction, public outcry caused the firm to give initial buyers a $100 credit toward future Apple purchases. 32 Market skimming makes sense under the following conditions: (1) A sufficient number of buyers have a high current demand; (2) the unit costs of producing a small volume are high enough to cancel the advantage of charging what the traffic will bear; (3) the high initial price does not attract more competitors to the market; (4) the high price communicates the image of a superior product. PRODUCT-QUALITY LEADERSHIP A company might aim to be the product-quality leader in the market. Many brands strive to be “affordable luxuries”—products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach. Brands such as Starbucks, Aveda, Victoria’s Secret, BMW, and Viking have positioned themselves as quality leaders in their categories, combining quality, luxury, and premium prices with an intensely loyal customer base. 33 Grey Goose and Absolut carved out a superpremium niche in the essentially odorless, colorless, and tasteless vodka category through clever on-premise and off-premise marketing that made the brands seem hip and exclusive. 34 OTHER OBJECTIVES Nonprofit and public organizations may have other pricing objectives. A university aims for partial cost recovery, knowing that it must rely on private gifts and public grants to cover its remaining costs. A nonprofit hospital may aim for full cost recovery in its pricing. A nonprofit theater company may price its productions to fill the maximum number of seats. A social service agency may set a service price geared to client income. Whatever the specific objective, businesses that use price as a strategic tool will profit more than those that simply let costs or the market determine their pricing. For art museums, which earn an average of only 5 percent of their revenues from admission charges, pricing can send a message that affects their public image and the amount of donations and sponsorships they receive. Step 2: Determining Demand Each price will lead to a different level of demand and have a different impact on a company’s marketing objectives. The normally inverse relationship between price and demand is captured in a demand curve (see Figure 14.1): The higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopes upward. One perfume company raised its price and sold more rather than less! Some consumers take the higher price to signify a better product. However, if the price is too high, demand may fall. PRICE SENSITIVITY The demand curve shows the market’s probable purchase quantity at alternative prices. It sums the reactions of many individuals with different price sensitivities. The first step in estimating demand is to understand what affects price sensitivity. Generally speaking, customers are less price sensitive to low-cost items or items they buy infrequently. They are also less price sensitive when (1) there are few or no substitutes or competitors; (2) they do not readily
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Marketing Management 14 PHILIP KOTL
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This book is dedicated to my wife a
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Kevin Lane Keller is widely recogni
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Contents Preface PART 1 CHAPTER 1 x
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Maximizing Customer Lifetime Value
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PART 5 Expanding Total Market Deman
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CHAPTER 16 Managing Retailing, Whol
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Managing the Development Process: C
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even part of the marketing vocabula
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• Interactive Elements—A wealth
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We are indebted to the following co
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Marketing Management
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Defining Marketing for the 21st Cen
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DEFINING MARKETING FOR THE 21ST CEN
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Developing Marketing Strategies and
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DEVELOPING MARKETING STRATEGIES AND
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Collecting Information and Forecast
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COLLECTING INFORMATION AND FORECAST
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Conducting Marketing Research Good
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CONDUCTING MARKETING RESEARCH | CHA
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Creating Long-term Loyalty Relation
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CREATING LONG-TERM LOYALTY RELATION
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Analyzing Consumer Markets The aim
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ANALYZING CONSUMER MARKETS | CHAPTE
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Analyzing Business Markets Business
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ANALYZING BUSINESS MARKETS | CHAPTE
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Identifying Market Segments and Tar
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IDENTIFYING MARKET SEGMENTS AND TAR
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Creating Brand Equity One of the mo
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CREATING BRAND EQUITY | CHAPTER 9 2
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Crafting the Brand Positioning No c
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CRAFTING THE BRAND POSITIONING | CH
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Competitive Dynamics To be a long-t
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COMPETITIVE DYNAMICS | CHAPTER 11 3
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Setting Product Strategy At the hea
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SETTING PRODUCT STRATEGY | CHAPTER
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Managing Retailing, Wholesaling, an
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Designing and Managing Integrated M
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Managing Mass Communications: Adver
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MANAGING MASS COMMUNICATIONS | CHAP
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Managing Personal Communications: D
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MANAGING PERSONAL COMMUNICATIONS |
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Introducing New Market Offerings Ne
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INTRODUCING NEW MARKET OFFERINGS |
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Tapping into Global Markets With ev
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TAPPING INTO GLOBAL MARKETS | CHAPT
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Managing a Holistic Marketing Organ
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MANAGING A HOLISTIC MARKETING ORGAN
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APPENDIX | CHAPTER 22 653 • Marke
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APPENDIX | CHAPTER 22 655 Step 1: I
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APPENDIX | CHAPTER 22 657 keeping a
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Appendix SONIC MARKETING PLAN AND E
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Targeted Segment Customer Need Corr
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Samsung Galaxy S - Captivate Apple
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in February. Also, we will create b
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Chapter 4 Your next task is to cons
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• As a start-up company, what com
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Chapter 20 Knowing that the smart p
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Endnotes Chapter 1 1. Michael Learm
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Harvard Business School Press, 2004
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30. Queena Sook Kim, “Fisher-Pric
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Tabor, “Contributing Factors; Sev
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29. For an empirical comparison of
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75. Michael D. Johnson, and Fred Se
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Perspectives in Consumer Behavior (
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Theory and Measurement (New York: J
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25. Piet Levy, “Reeling in the Hu
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Chapter 8 1. Jonathan Schneider,
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57. Jerry Harkavy, “Colgate Buyin
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in-depth examination of how brand n
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79. John Milewicz and Paul Herbig,
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22. Kerry Capell, “Thinking Simpl
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29. Theodore Levitt, “Innovative
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Chapter 12 1. John Frank, “Beep!
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Room for Growth in Printer Market,
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23. W. Earl Sasser, “Match Supply
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Jaishankar Ganesh, Mark J. Arnold,
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Cosmetics,” Journal of Economic P
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72. For an interesting discussion o
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29. “Nike Says No to Blue-Light S
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80. Susan Fournier and Lara Lee,
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43. Ben Paynter, “Happy Hour,”
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22. Michael R. Solomon, Consumer Be
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Tribune, May 12, 2007; Avery Johnso
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Split Cable T.V. Advertising Experi
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29. Julia Angwin and Tom McGinty,
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Marketing?” Marketing NPV 3 (2006
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9. Stefan Wuyts, Shantanu Dutta, an
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Innovations,” Journal of Marketin
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89. Jordan Robertson, “How Nike G
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41. For some research method issues
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Global Strategies: A Contingency Mo
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Takes on Coffee Giants Cup by Cup,
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Metrics: 50+ Metrics Every Executiv
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Glossary A activity-based cost (ABC
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customer lifetime value (CLV) the n
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J jobbers small-scale wholesalers w
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personal communications channels tw
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target market the part of the quali
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Image Credits Chapter 1 page 2: New
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Free; page 619: Lou Linwei/Alamy Im
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Index Name Aaker, David A., 203 Aak
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McCausland, Tom, 7 McDonald, Bob, 6
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Andersen Consulting, 208, 209 Andro
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Disney Channel, 44, 178, 179 Disney
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IKEA, 5, 35, 37, 83, 179-80, 219, 2
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Nordstrom Rack, 148 North American
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StubHub, 73, 74, 412 Suave, 306 Sub
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African Americans, 77, 224 Age in d
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Channel integration and systems, 41
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Customer relationship in services,
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Family of procreation, 154 Farm pro
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Legal issues in advertising campaig
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Master brand, 260 Master franchisee
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Price, selecting final, 402-3 compa
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Retail sector, 356 Retail store, de
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Telemarketers, 558 Telemarketing, 5
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