You can get there
Where do you want to go? You might already be working in a business setting. You may be looking to expand your skills. Or, you might be setting out on a new career path.
Wherever you want to go, Marketing will help you get there. Easy-to-read, practical, and up-to-date, this text not only helps you learn fundamental marketing concepts; it also helps you master the core competencies and skills you need to succeed in the classroom and beyond. The book's brief, modular format and variety of built-in learning resources enable you to learn at your own pace and focus your studies.
With this book, you will be able to:
* Develop an effective marketing plan designed to reach your target audience.
* Assess buying factors and estimate marketing effectiveness in buying situations.
* Learn how to segment and target markets.
* Conduct market research, including primary and secondary research methods, and quantitative and qualitative methods.
* Develop and manage products, and learn how to use product packaging and labeling to your advantage.
* Make the most of marketing channels.
* Implement merchandising and direct marketing strategies.
* Understand the factors to consider when setting prices.
* Pump up marketing communications with great visuals, writing, and attention-getting strategies.
* Choose the best possible advertising options for your marketing plan.
* Learn how to handle public relations tasks, prepare reasonable impact scenarios, and use press releases to tell a story.
* Use the internet to market your products.
Wiley Pathways helps you achieve your goals
When it comes to learning about business, not everyone is on the same path. But everyone wants to succeed. The new Wiley Pathways series in Business helps you achieve your goals with its brief, inviting format, clear language, and focus on core competencies and skills.
The books in this series--Business Communication, Finance, Marketing, Business Math, and Real Estate--offer a coordinated curriculum for learning business. Learn more at www.wiley.com/go/pathways.
Le informazioni nella sezione "Riassunto" possono far riferimento a edizioni diverse di questo titolo.
Alexander Hiam, MBA, is a corporate consultant whose clients include many Fortune 500 companies. He has written numerous books and taught advertising and marketing at the University of Massachusetts at Amherst.
Linda G. Rastelli (Middletown, NJ) has been a professional journalist for 18 years, and has a background in education (MA from Columbia University).
You can get there
Where do you want to go? You might already be working in a business setting. You may be looking to expand your skills. Or, you might be setting out on a new career path.
Wherever you want to go, Marketing will help you get there. Easy-to-read, practical, and up-to-date, this text not only helps you learn fundamental marketing concepts; it also helps you master the core competencies and skills you need to succeed in the classroom and beyond. The book’s brief, modular format and variety of built-in learning resources enable you to learn at your own pace and focus your studies.
With this book, you will be able to:
Wiley Pathways helps you achieve your goals
When it comes to learning about business, not everyone is on the same path. But everyone wants to succeed. The new Wiley Pathways series in Business helps you achieve your goals with its brief, inviting format, clear language, and focus on core competencies and skills.
The books in this series––Business Communication, Finance, Marketing, Business Math, and Real Estate––offer a coordinated curriculum for learning business. Learn more at www.wiley.com/go/pathways.
You can get there
Where do you want to go? You might already be working in a business setting. You may be looking to expand your skills. Or, you might be setting out on a new career path.
Wherever you want to go, Marketing will help you get there. Easy-to-read, practical, and up-to-date, this text not only helps you learn fundamental marketing concepts; it also helps you master the core competencies and skills you need to succeed in the classroom and beyond. The book's brief, modular format and variety of built-in learning resources enable you to learn at your own pace and focus your studies.
With this book, you will be able to:
* Develop an effective marketing plan designed to reach your target audience.
* Assess buying factors and estimate marketing effectiveness in buying situations.
* Learn how to segment and target markets.
* Conduct market research, including primary and secondary research methods, and quantitative and qualitative methods.
* Develop and manage products, and learn how to use product packaging and labeling to your advantage.
* Make the most of marketing channels.
* Implement merchandising and direct marketing strategies.
* Understand the factors to consider when setting prices.
* Pump up marketing communications with great visuals, writing, and attention-getting strategies.
* Choose the best possible advertising options for your marketing plan.
* Learn how to handle public relations tasks, prepare reasonable impact scenarios, and use press releases to tell a story.
* Use the internet to market your products.
Wiley Pathways helps you achieve your goals
When it comes to learning about business, not everyone is on the same path. But everyone wants to succeed. The new Wiley Pathways series in Business helps you achieve your goals with its brief, inviting format, clear language, and focus on core competencies and skills.
The books in this series--Business Communication, Finance, Marketing, Business Math, and Real Estate--offer a coordinated curriculum for learning business. Learn more at www.wiley.com/go/pathways.
Starting Point
Go to www.wiley.com/college/Hiam to assess your knowledge of the basic pricing concepts. Determine where you need to concentrate your effort.
What You'll Learn in This Chapter
* How pricing affects customer perceptions of your product or service
* Factors to consider when setting a price
* How to avoid illegal pricing practices
* Understanding discount structures and general pricing approaches
After Studying This Chapter, You'll Be Able To
* Demonstrate ways to raise prices while increasing sales
* Effectively employ special offers and discounts
* Interpret customer perceptions of pricing
Goals and Outcomes
* Estimate how price sensitive your customers are
* Predict the redemption rate for your marketing offer
* Set prices that take into account multiple factors
INTRODUCTION
Establishing a price is one of the toughest things anybody does in business. In this chapter, we'll take you through the pricing process logically, step by step. Price setting has many factors, including customer perceptions and your own objectives. The pricing process generally has five steps.
9.1 The Facts of Price
Some marketers believe that businesses fail most often for two simple reasons: Their prices are too high, or their prices are too low! Getting the price just right is the hardest task marketers face, but finding the right pricing approach makes success a lot easier. The bottom line of all marketing activities is that the customer needs to pay - willing and, you hope, rapidly - for your products or services.
But how much will they pay? Should you drop your prices to grow your markets? Or would raising the price and maximizing profits be better? What about discounts and special promotional pricing? Getting the price part of your marketing plan right is hard. And several trends have been forcing prices downward:
* Foreign competition has put pressure on American companies. Foreign-made products are often higher in quality but cheaper to produce.
* Competitors try to gain market share by lowering prices. Customers may be more price sensitive than ever.
* New products are far more common today than in the past. Pricing new products is tougher, because there's no history to draw upon.
* Technology has caused rapid turnover of products. Marketers face pressure to price products to recover cost more quickly.
Most companies fall prey to the myth that customers choose a product based only on its list price. They set their list prices lower than they need to. Or when they need to boost sales, they do so by offering discounts or free units. If you insist on selling on the basis of price, your customers buy on me basis of price.
But alternatives always exist. To raise your price and still sell more, you can:
* Build brand equity. Better-known brands command a premium price.
* increase quality. People talk up a good product, and that word of mouth earns it a 5 to 10 percent higher price than the competition.
* Use prestige pricing. Giving your product a high-class image can boost your price 20 to l00 percent.
* Create extra value through time and place advantages. Customers consider the available product worth a lot more than one you cannot get when you need it. (That's why a cup of coffee costs twice as much at the airport - are you really going to leave the terminal, get in a taxi, and go somewhere else to save a couple of bucks?)
Sure, price is important, but it doesn't have to be the only thing - unless the marketer doesn't know this price fact.
9.1.1 Exploring the Impact of Pricing on Sales
You need to estimate how price-sensitive your customers are. Price sensitivity is the degree to which purchases are affected by price level.
The following list is a series of qualitative indicators of price sensitivity. Ask the following questions about your customer, product, and market. Then add up the number of "yes" answers and see which way they lean. This study isn't scientific, but it gives you a good idea.
* Does the customer view the price as reasonable? If you are operating within an expected price range, customers aren't very price sensitive. Outside of the expected price range, they become more sensitized.
* Is the product valuable at (almost) any price? Some products are unique, and customers know that finding a cheaper substitute may be hard. That lowers price sensitivity.
* Is the product desperately needed? I do not care how much fixing a broken arm at the emergency ward of a hospital costs - if my arm is broken! And I'm not too price sensitive about roadside repair and towing services if I've broken down on the highway at night. These products meet essential needs. But if your product is a nonessential, meaning they do not have to have it right now, the customer is more price sensitive.
* Are substitutes unavailable? If the customer purchases in a context where substitute products aren't readily available, price sensitivity is lower. Shopping for price requires that substitutes at different prices be available. (For example, if you are the only local company offering plumbing repairs on weekends, you can command a high price for your services.)
* Is the customer unaware of substitutes? What the customer doesn't know costs him. And shopping is a complex, information-dependent behavior. The Internet makes it easier to compare prices - but not everything is convenient to buy that way. Not everyone is willing to shop around.
* Does the customer find comparing options difficult? Even where options exist, the consumer can have much difficulty comparing some products. What makes one doctor better than another? It's hard to say The technical complexity of their work, plus the fact that you cannot consume medical care until after you make the purchase decision, makes comparing options hard. And that difficulty makes health-care consumers less price sensitive - and doctors richer.
* Does the product seem inexpensive to customers? Customers do not worry too much about price when they feel like they're getting a good value. However, if customers feel the pinch on their pocketbooks when they buy, they pay close attention to prices. That's why you negotiate so hard when you buy a car or a house. Even products that cost far less can seem expensive if they're at the high end of a price range. For example, you are more price sensitive if you shop for a fancy, high-performance laptop computer than for a simple, basic desktop unit because the former probably costs 50 to 100 percent more than the latter, making the laptop expensive by comparison.
The more of these that apply, the less price sensitive your customer is. If more than one is true, you probably can raise prices without hurting sales significantly. You can supplement your estimate of price sensitivity (from this list) with actual tests.
For example, if you think a 5-percent increase in prices won't affect sales, you can try that increase in a test market or for a short period of time, holding the rest of your marketing constant. If you were right, you can roll out the increase in your entire market.
9.1.2 Finding Profits without Changing Prices
When you think about profits, you may assume that your focus should be on the price. But many factors drive your company's cash flows and profits, not just the list price of your products. If your manager tells you to figure out how to raise prices because profits are too low, do not assume she's going at it from the right angle.
Lowering a price is easier than raising it. In general, you want to set price a bit high and see what happens. You can take back any price increase with a subsequent price cut. You can take back price increases much more easily (if they do not work) than price decreases. Customers may not be as price sensitive as you fear. They may tolerate an increase better than you think, and they may not respond to a discount as much as you need them to in order to make that decrease profitable. They may assume that price correlates with quality - in which case, they do not buy your product unless the price is high enough.
Instead of assuming that cutting your price is the only way to boost profits, try experimenting with a price increase. Be a contrarian. If that doesn't work, here are some ways to boost profits without raising prices:
* Check to see how quickly you are making collections - are vendors paying in 65 days? If so, cutting that time by 25 days may make up the needed profits without any price increase.
* All the discounts and allowances your company offers affect its revenues and profits, so you look at these factors before you assume that price is the culprit. Are customers taking advantage of quantity discounts to stock up inexpensively and then not buying between the discount periods? If so, you have a problem with your sales promotions, not your list prices.
* If you are in a service business that charges a base price, plus fees for special services and extras, then look hard at the way you assess fees. Perhaps your company is failing to collect the appropriate fees, in some cases.
* Maybe your fee structure is out of date and doesn't reflect your cost structure accurately. For example, a bank that charges a low price for standard checking accounts, plus a per-check processing fee, may find its profits slumping as customers switch to automated checking over the bank's computers - because banks often set the introductory fees for this service low or waive them to stimulate trials. If so, the problem isn't with the base price of a checking account, it's with the nature of the fee structure.
9.2 Factors to Consider When Setting a Price
Setting prices may seem complicated at first, but when you understand all the factors you need to consider, the process begins to make sense. (Figure 9-1 illustrates the process that you should use.)
9.2.1 Step 1: Figure Out Who Sets Prices
This step isn't obvious. You, as the marketer, can set a list price. But the consumer may not ultimately pay your price. Distributors, wholesalers, and retailers all take their markups. Furthermore, the manufacturer generally doesn't have the legal right to dictate the ultimate selling price. The retailer gets that job. So your list price is really just a suggestion, not an order. If the retailer doesn't like the suggested price, the product sells for another price.
Start by determining who else may be setting prices along with you, and involve them in your decision making by asking some what they think about pricing. You may have constraints to consider that you must know before you start.
For example, if you are setting the price for a new book, you find that the big bookstore chains in the United States expect a 60 percent discount off the list price. Knowing that, you can set a high enough list price to give you some profit, even at a 60 percent discount rate. But if you do not realize that these chains expect much higher discounts than other bookstores, you may be blind-sided by their requirement.
Marketers who operate in or through a multilevel distribution channel (meaning that they have distributors, wholesalers, rack jobbers [companies that keep retail racks stocked], retailers, agents, or other sorts of intermediaries) need to establish the trade discount structure. Trade discounts (also called functional discounts) are what you give your intermediaries.
These discounts are a form of cost to the marketer, so know the discount structure before you move on. Usually, marketers state the discount structure as a series of numbers, representing what each of the intermediaries get as a discount. But you take each discount off the price left over from the discount before it, not off the list price. Here's how to compute prices and discounts in a complex distribution channel:
1. Say that you discover that the typical discount structure in the market where you want to introduce your product is 30/10/5. What does that mean? If you start with a $100 list price, the retailer pays at a discount of 30 percent off the list price (0.30 x $100 = $70). The retailer, who pays $70 for the product, marks it up to (approximately) $100 and makes about $30 in gross profit.
2. The discount structure figures tell you that other intermediaries exist - one for each discount listed. The distributor, who sells the product to the retailer, has a discount of 10 percent off the price that she charges the retailer (that's 0.10 x $70 = $7 of gross profit for the distributor). This distributor must have paid $70 - $7, or $63, for the product to another intermediary (probably a manufacturer's representative or wholesaler). The marketer sells to this intermediary. And the 30/10/5 formula shows that this intermediary receives a 5 percent discount: 0.05 x $63 = $3.15 in profit for him.
3. Subtracting again, you can also determine that the marketer must sell the product to this first intermediary at $63 - $3.15, or $59.85. You, as the marketer, must give away more than 40 percent of that $100 list price to intermediaries if you use this 30/10/5 discount structure. And so you have to calculate any profit you make from a $100list price as costs subtracted from your net of $59.85. That's all you ever see of that $100!
9.2.2 Step 2: Examine Your Costs
How do you know your costs? You may not have accurate information on the true costs of a specific product or service. Take some time to try to estimate what you are actually spending, and remember to include some value for expensive inventories if they sit around for a month or more.
After you examine your costs carefully, you should have a fairly accurate idea of the least amount you can charge. That charge is, at a bare minimum, your actual costs. Sometimes you want to give away a product for less than cost in order to introduce people to it - but do not use this ploy to take customers from competitors or you could be sued for dumping. See Section 9.4.
More often, you need a price that includes the cost plus a profit margin - say, 20 or 30 percent. So that means you have to treat your cost as 70 or 80 percent of the price, adding in that 20 or 30 percent margin your company requires. This cost-plus-profit figure is the bottom of your pricing range (see Figure 9-2). Now you need to see if customers permit you to charge this price - or perhaps even allow you to charge a higher price!
9.2.3 Step 3: Evaluate Customer Perception of Price
Your costs and profit requirements impose a lower limit on price. But your customers' perceptions impose an upper limit. You must define both of these limits to know your possible price range. So you need to figure out what the market will bear.
In Figure 9-2, the price that customers favor is the customers' preference. Note that customer preference may not be the upper limit. If customers aren't too price sensitive, they may not notice or care if you set your price somewhat higher than their preferred price. The indifference zone is the difference between the customer's desired price and a noticeably higher price. Within the indifference zone, customers are indifferent to both price increases and price decreases. However, the zone gets smaller (on a percent basis) as the price goes up.
How big or small is the zone of indifference in your product's case? Go back to the price-sensitivity list. The zone is small if your customers are highly price sensitive, and the zone is large if they aren't that price sensitive. Just make some assumptions that seem reasonable for now. At worst, your errors may be random, in which case they cancel each other out.
(Continues...)
Excerpted from Marketingby Alexander Hiam Copyright © 2006 by Alexander Hiam. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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