Seminar 7

Managing Marketing Processes----Value Creation and Price Setting

Robin TeiglandMaster of General ManagementStockholm School of Economics

September 19, 2013

Seminar 7 Overview

Guest Speaker, Karin Krook Sales and Marketing Director Elite Hotels

American Airlines' Value Pricing - A

Group Presentations

2

Case Study: American Airlines

Questions: What is “Value Pricing” and why did AA

introduce it? What results did AA expect from this plan?

What are the implicit assumptions in these estimates?

What is the likely reaction of each of the competitors? In the face of the likely competitive reaction, what should AA do?

3

1. Long-term goal (objective)

1. Scope of the firm (customer or offering, geographic location, vertical integration

1. Competitive advantage

Components of business strategy

Collis & Rukstad 2008 4

5

Porter’s five forces of competition

ENTRANTS

SUPPLIERS BUYERS

SUBSTITUTES

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Threat of new entrants

Threat of substitutes

Bargaining

power of suppliers

Bargaining

power of buyers

http://www.youtube.com/watch?v=mYF2_FBCvXw&feature=channel

Porter, 2008

6

Generic Strategies in the Auto Industry

Scope(Customer/

variety)

Type of competitive advantage

Broad

Narrow

Differentiation Low cost

Mercedes(Differentiation)

Nissan(Cost leadership)

BMW(Differentiation-

based focus)

Lada(Cost-based

Focus)

Avoid being stuck in the middle

Market share

Return oninvestment

High

HighLow

Low

Differentiation Cost leadership

Porter 7

CHP: 8&10-8

Segmentation, Targeting, and Positioning

Market Segmentation1. Identify bases for segmenting market2. Develop segment profiles

Market Segmentation1. Identify bases for segmenting market2. Develop segment profiles Market Targeting

3. Develop measure of segment attractiveness4. Select target segments

Market Targeting3. Develop measure of segment attractiveness4. Select target segments

Market Positioning5. Develop positioning for target segments6. Develop marketing mix for each segment

Market Positioning5. Develop positioning for target segments6. Develop marketing mix for each segment

Copyright © 2011 Pearson Education, Inc.  Publishing as Prentice Hall

7-9

What is a Market Segment?

A market segment consists of a group of customers who share a similar set of needs and wants.

Copyright © 2011 Pearson Education, Inc.  Publishing as Prentice Hall

7-10

Approaches to Segmenting Consumer Markets

Geographic

Demographic

Psychographic

Behavioral

1. Descriptive: Start with consumer

and then look at needs

2. Behavior & Attitudes:Start with product and

then look at descriptives

CHP: 8&10-11

Segment 1Segment 1

Segment 2Segment 2

Segment 3Segment 3

Segment 1Segment 1

Segment 2Segment 2

Segment 3Segment 3

CompanyMarketing

Mix

CompanyMarketing

Mix

CompanyMarketing

Mix

CompanyMarketing

Mix

CompanyMarketing Mix 1

CompanyMarketing Mix 1

CompanyMarketing Mix 2

CompanyMarketing Mix 2

CompanyMarketing Mix 3

CompanyMarketing Mix 3

MarketMarket

A. Undifferentiated Marketing

B. Differentiated Marketing

C. Concentrated Marketing

Market TargetingMarket Coverage Strategies

Targeting Strategies

12http://www.globalspec.com/reference/47105/203279/undifferentiated-concentrated-and-differentiated-targeting-strategies

The Marketing Mix

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1-13

Setting Pricing Policy

1. Selecting the pricing objective2. Determining demand3. Estimating costs4. Analyzing competitors’ costs,

prices, and offers5. Selecting pricing method6. Selecting the final price

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Step 1: Selecting the Price Objective

Survival Short-term objective

Maximum current profit Short term over long term performance?

Maximum market share Market penetration

Maximum market skimming High current demand

Product-quality leadership Affordable luxury

Step 2: Determining Demand

Price sensitivity Total Cost of Ownership (TCO)

Estimating demand curves Price elasticity of demand

16-16

Estimating Current Demand: Total Market Potential

Calculations Multiple potential number of buyers by

average quantity each purchases times price Chain-ratio method

Copyright © 2011 Pearson Education, Inc.  Publishing as Prentice Hall

3-17

Step 3: Estimating Cost

Types of Cost and Levels of Production Fixed costs (overhead) Variable costs Total cost Average cost

Accumulated Production Experience curve (Learning curve)

Differentiated Marketing Offers Activity-based cost (ABC) accounting

Target Costing

Step 4: Analyzing Competitors’ Cost, Prices, and Offers

Positioning in relation to competition Costs Prices Possible price or other reactions

More Same Less

Step 5: Selecting a Pricing Method Markup Pricing

Unit Cost = variable cost + (fixed cost/unit sales)Markup Price= unit cost/ (1 – desired return on sales)

Target-return PricingTarget-return price = unit cost + (desired return X investment capital)/unit sales

Perceived-value PricingPrice buyers, value buyers, loyal buyers

Value PricingReengineering operations to become low cost without

sacrificing quality while reducing prices Going-rate Pricing

Based on competitors’ prices Auction-type Pricing

English, sealed bids

Step 6: Selecting the Final Price

Influence of the Other Marketing Elements Brands with average relative quality but high relative

advertising budgets charged premium prices Brands with high relative quality and high relative

advertising budgets obtained the highest prices The positive relationship between high advertising budgets

and high prices held most strongly in the later stages of the product life cycle for market leaders

Company Pricing Consistent with company pricing policies

Gain-and-risk-sharing Pricing Perceived level of risk by consumer?

Impact of prices on other parties (stakeholders)

Dynamic pricing

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Exploiting differences, not doing the same!

Competitive advantage:Ability to outperform

others due to exploiting unique features of firm’s

resources and capabilities

Grant 2008

16-24

Sell value, not price.

Kotler on Marketing