Price as Seen by Consumers or Users Price equals Something of Value

List price Less: discounts Quantity Seasonal Cash Temporary salesLess: allowances Trade-ins Damaged goodsLess: Rebate and coupon valuePlus: Taxes

Product: Physical good Service Assurance of quality Repair facilities Packaging Credit WarrantyPlace of delivery orwhen available

equals

Price as Seen by Channel Members Price equals Something of Value

List price Less: discounts Quantity Seasonal Cash Trade/functional Temporary dealsLess: allowances Promotion Damaged goods StockingPlus: Taxes and tariffs

Product: Branded--well known Guaranteed Warranted Service--Repair facilities Convenient packagingPlaceAvailability--when and where

PricePrice-level guaranteeSufficient marginPromotion:Promotion to consumers

equals

Exchange Rates for Various Currencies against the U.S.

Dollar Over Time Number of Units Base Currency per U.S. Dollar*

Base Currency 1985 1987 1989 1991 1993 1995 1997 1998

British Pound 0.77 0.61 0.62 0.57 0.67 0.67 0.61 0.60

Thai Bhat 27.20 25.76 25.72 25.53 25.33 24.92 31.07 39.20

German Mark 2.94 1.80 1.88 1.66 1.65 1.43 1.73 1.78

Japanese Yen 238.47 144.60 138.07 134.59 111.08 94.11 121.09 136.20

French Franc 8.98 6.01 6.38 5.65 5.67 4.99 5.83 6.13

Australian Dollar 1.43 1.43 1.26 1.32 1.47 1.35 1.34 1.63

Canadian Dollar 1.37 1.33 1.18 1.15 1.29 1.37 1.38 1.41

* Units shown are the average for each year 1985-1997. For 1998, units shown are for June 16, 1998.

Discount Policies

• DISCOUNTS are reductions from list price that are given by a seller to a buyer who either gives up some marketing function or provides the function himself

• Quantity discounts– Cumulative quantity discounts encourage repeat purchases

and relationships

– Noncumulative encourage large orders

• Seasonal discounts smooth out demand

• Cash discounts encourage early payment

• Trade (functional) discounts go to middlemen

Geographic Pricing Policies

• "Free on Board" (F.O.B) at some place

• Examples:– F.O.B. seller's factory– F.O.B. delivered– F.O.B. factory—freight prepaid

• Zone Pricing: an average freight charge to all buyers within specific geographic areas

• Uniform Delivered Pricing: the same (average) freight charge to all buyers

• Freight Absorption Pricing: seller pays freight cost so delivered price matches competition

Pricing Policies Combine to Impact Customer Value

• Customer value considers total costs and benefits• Costs and benefits are impacted not only by list price but by

– Discounts– Allowances– Delivery terms and geographic pricing policies– Sales and deals– Price flexibility (and transaction costs)

• Value pricing leads to superior customer value– Value pricing is setting a fair price level for a marketing mix

that really gives the target market superior customer value

Robinson-Patman Act

• Regulates price discrimination—selling the same products to different buyers at different prices– if it injures competition

• Cost differences can justify prices differences– analysis must have been done in advance

• You can match a competitor's prices• Functional discounts are usually ok• Does not apply to sales to final consumers

Markups

• Dollar amount added to the cost of the products to get the selling price

• Markup percent is the percentage of selling price that is added to the cost to get the selling price– percent of selling price unless otherwise noted

• Products may be marked up several times through the channel– the sequence of markups is the markup chain

• High markups don't always mean high profits– depends on the stockturn rate

Alternate Approach for Computing Channel MarkupsMANUFACTURER WHOLESALER RETAILER

Selling price $24.00 Selling price $30.00 Selling Price $50.00Cost $21.60 Cost $24.00 Cost $30.00

10% markupon selling

price $2.40

20% markupon selling

price $ 6.00

40% markupon selling

price $20.00

Markup % on cost = markup % on selling price/(100% – markup % on selling price)

Markup % on cost: Markup % on cost: Markup % on cost:= 10% / (100% - 10%) = 20% / (100% - 20%) = 40% / (100% - 40%)= 1/9 = 1/4 = 2/3Dollar Markup: Dollar Markup: Dollar Markup:= 1/9 x $21.60 = $2.40 = ¼ x $24.00 = $6.00 = 2/3 x $30.00 = $20.00

Average-Cost Pricing

• Adds a "reasonable" markup to the average cost of a product

• Simplifies pricing

• Quite common, especially among middlemen

• Usually based on estimates or past records– actual average cost depends on quantity sold!

– quantity sold depends on price

Results of Average-Cost PricingA. Calculation of Planned ProfitIf 40,000 Items Are Sold

B. Calculation of Actual Profit ifOnly 20,000 Units Are Sold

Calculation of Costs: Calculation of Costs:Fixed Overhead Expenses $30,000 Fixed Overhead Expenses $30,000Labor and Materials ($.80 a unit) 32,000 Labor and Materials ($.80 a unit) 16,000

Total Costs $62,000 Total Costs $46,000“Planned” Profit 18,000Total Costs and planned profit $80,000

Calculation of profit (or loss): Calculation of profit (or loss):Actual unit sales X price ($2.00) $80,000 Actual unit sales X price ($2.00*) $40,000Minus: total costs 62,000 Minus: total costs 46,000 Profit (loss) $18,000 Profit (loss) ($6,000)

Result: Result:Planned profit of $18,000 is earned if 40,000items are sold at $2.00 each

Planned profit of $18,000 is not earned. Instead,$6,000 loss results if 20,000 items are sold at$2.00 each.

Cost Structure of a FirmQuantity

(Q)

TotalFixedCosts(TFC)

AverageFixedCosts(AFC)

AverageVariable

Costs(AVC)

TotalVariable

Costs(TVC)

TotalCost(TC)

AverageCost(AC)

0 $30,000 -- -- -- $30,000 --10,000 30,000 $3.00 $0.80 $8,000 38,000 $3.6020,000 30,000 1.50 0.80 16,000 46,000 2.3030,000 30,000 1.00 0.80 24,000 54,000 1.8040,000 30,000 0.75 0.80 32,000 62,000 1.5550,000 30,000 0.60 0.80 40,000 70,000 1.4060,000 30,000 0.50 0.80 48,000 78,000 1.3070,000 30,000 0.43 0.80 56,000 86,000 1.2380,000 30,000 0.38 0.80 64,000 94,000 1.1890,000 30,000 0.33 0.80 72,000 102,000 1.13

100,000 30,000 0.30 0.80 80,000 110,000 1.10

Experience Curve Pricing

• A type of average-cost pricing using an estimate of future average costs

• Often leads to low prices if future economies of scale are expected– costs may drop with accumulated production experience

• Can be very risky if costs do not drop, or if expected volume is not achieved

Break-Even Analysis

• Used to evaluate whether the firm will be able to cover costs (break even) at a particular price

• Indicates the break-even point—sales (units or dollars) needed to break even

• Can be modified to incorporate a target return

• Problems:– assumes any quantity can be sold at a given price– total cost curve is assumed to be a straight line

Revenue, Cost, and Profit at Different Prices for a Firm

(1)Quantity

Q

(2)Price

P

(3)Total

RevenueTR

(4)Total

VariableCostTVC

(5)TotalCostTC

(6)Profit(TR-TC)

(7)MarginalRevenue

MR

(8)Marginal

CostMC

(9)Marginal

Profit(MR-MC)

0 $150 $0 $0 $200 $-2001 140 140 96 296 -156 $140 $96 $+442 130 260 116 316 -56 120 20 +1003 117 351 131 331 +20 91 15 +764 105 420 144 344 +76 69 13 +565 92 460 155 355 +105 40 11 +296 79 474 168 368 +106 14 13 + 17 66 462 183 383 + 79 -12 15 - 278 53 424 223 423 + 1 -38 40 - 789 42 378 307 507 - 129 -46 84 -130

10 31 310 510 710 - 400 -68 203 -271

Marginal Revenue and Price(1)Quantity

Q

(2)Price

P

(3)Total Revenue(1) x (2) = TR

(4)MarginalRevenue

MR0 $150 $01 140 140 $1402 130 260 1203 117 351 914 105 420 695 92 460 406 79 474 147 66 462 -128 53 424 -389 42 378 -4610 31 310 -68

Cost Structure for Individual Firm (fill in the missing

numbers)(1)

QuantityQ

(2)TotalfixedcostTFC

(3)

Averagefixed cost

AFC

(4)Total

variablecost

TVC

(5)AverageVariable

CostAVC

(6)

Total cost(TFC+TVC=TC)

TC

(7)Average

Cost(AC=TC/Q)

AC

(8)Marginal

Cost(per unit)

MC

0 $200 $0 $0 $0 $200 Infinity1 200 200 96 96 296 $296 $962 200 100 116 58 316 _______ 203 200 ______ _______ ______ 331 110.33 _______4 200 50 _______ ______ _______ _______ _______5 200 40 155 31 _______ 71 116 200 ______ 168 ______ _______ 61.33 137 ______ ______ 183 ______ _______ _______ 158 ______ ______ 223 ______ _______ _______ _______9 ______ ______ 307 ______ 507 56.33 _______

10 ______ 20 510 51 710 71 203

Cost Structure for Individual Firm (with missing numbers

filled in)(1)

QuantityQ

(2)TotalfixedcostTFC

(3)

Averagefixed cost

AFC

(4)Total

variablecost

TVC

(5)AverageVariable

CostAVC

(6)

Total cost(TFC+TVC=TC)

TC

(7)Average

Cost(AC=TC/Q)

AC

(8)Marginal

Cost(per unit)

MC

0 $200 $0 $0 $0 $200 Infinity1 200 200 96 96 296 $296 $962 200 100 116 58 316 158 203 200 66.66 131 43.66 331 110.33 154 200 50 144 36 344 86 135 200 40 155 31 355 71 116 200 53.33 168 28 368 61.33 137 200 28.57 183 26.14 383 54.71 158 200 25.00 223 27.87 423 52.88 409 200 22.22 307 34.11 507 56.33 84

10 200 20 510 51 710 71 203

Demand-Oriented Pricing Approaches

• Evaluating a Customer’s Price Sensitivity

• Value-in-use pricing

• Auctions – including online

• Reference prices

• Leader pricing

• Bait pricing

• Psychological pricing– odd-even pricing– price lining

• Demand-backward pricing

• Prestige pricing

• Full-line pricing– complementary pricing– bundle pricing

Evaluating a Customer’s Price Sensitivity

• Are there substitute ways of meeting a need?

• Is it easy to compare prices?

• Who pays the bill?

• How great is the total expenditure?

• How significant is the end benefit?

• Is there already a sunk investment related to the purchase?

Value in Use Pricing

• Sets prices that will capture some of what customers will save by substituting the firm's product for the one the customer is currently using

• Example: A construction firm that buys a new, more efficient bulldozer at a higher price might still save money on: – labor (operator) expenses

– "down-time" for repairs

– fuel consumption

– maintenance costs

Implementation and Control

• Faster feedback (because of information technology) is resulting in more rapid changes

• Marketing manager must take charge to get information that is needed– Can be a source of competitive advantage

• Good implementation means that plans work as intended– Builds relationships with customers

Implementation Objectives

• Innovative thinking and approaches may help the marketing manager overcome challenges and better achieve major implementation objectives– Better, so customers really get superior value as

planned

– Faster, to avoid delays that cause customers problems

– Lower cost, without wasting money on things that don't add value for the customer

Examples of Approaches to Overcome Specific Marketing

Implementation ProblemsMarketing

Mix DecisionArea Operational Problem Implementation Approach

Product Develop design of a new productas rapidly as possible withouterrors

Use 3-D computer sided designsoftware

Pretest consumer response todifferent versions of a label

Prepare sample labels with PCgraphics software

Place Coordinate inventory levels withmiddlemen to avoid stock-outs

Use bar code scanner, EDI, andcomputerized reorder system

Promotion Quickly distribute TV ad to localstations in many different markets

Distribute final video version ofthe ad via satellite link

Answer final consumers’ questionsabout how to use a product

Put a toll-free telephone numberand web site address on productlabel

Price Identify frequent customers for aquantity discount

Create a “favored customer” clubwith an ID card

Figure out if price sensitivityimpacts demand for a product;make it easier for customers tocompare prices

Show unit prices (for example, peroz.) on shelf markers; set differentprices in similar markets and tracksales, including sales of competingproducts

Total Quality Management

• Everyone in the organization is concerned about quality, throughout all of the firm's activities, to better serve customer needs

• The cost of poor quality is lost customers

• Achieving quality requires continuous improvement—a commitment to constantly make things better one step at a time

• Uses statistical process controls to identify problems. Examples:– Pareto charts– Fishbone diagrams

• "Slay the dragons first"... to get a return on quality

• Specify jobs and benchmark performance

Building Quality into Services

• Every firm must implement service quality as part of its plan, whether its product is primarily a service, primarily a physical good, or a combination of both

• Can't simply "inspect in" quality—must be there from the start

• Ongoing training is critical (plan for the special)

• Empower employees to correct a problem without first checking with management

Marketing Control

• Feedback process that helps the marketing manager learn– how ongoing plans and implementation are working– how to plan for the future

• Sales Analysis looks at details of where sales come from– customers– products– territories, etc.

• Performance Analysis compares actual with targets

• Cost Analysis controls spending

Some Bases for Sales, Cost, or Profit Analysis

• Geographic region• Product (package size, style, etc.)• Customer size• Customer type or class of trade• Price or discount class• Method of sale• Cash or charge (financial arrangement)• Size of order• Commission class

Development of a Measure of Sales Performances (by region)

Regions

(1)

Populationas Percent ofUnited States

(2)Expected

Distribution ofSales Based

on Population

(3)

ActualSales

(4)

PerformanceIndex

Northeastern 20 $200,000 $210,000 105Southern 25 250,000 250,000 100

Midwestern 35 350,000 420,000 120Western 20 200,000 120,000 60 Total 100 $1,000,000 $1,000,000

Cost Analysis

• Must understand costs to control them• Analyzing and dealing with fixed costs can

be a challenge– full-cost approach allocates fixed costs

– contribution-margin approach is an alternative

– two approaches have different benefits, limitations

Profit and Loss Statement by Department

Totals Dept. 1 Dept. 2 Dept. 3

$100,000 $50,000 $30,000 $20,000Cost of sales 80,000 45,000 25,000 10,000

Gross Margin 20,000 5,000 5,000 10,000Other expenses

Selling expenses 5,000 2,500 1,500 1,000 Administrative expenses 6,000 3,000 1,800 1,200

Total other expenses 11,000 5,500 3,300 2,200Net Profit of (loss) 9,000 (500) 1,700 7,800

Profit and Loss Statement by Department if Department 1

Were EliminatedTotals Dept. 2 Dept. 3Sales $50,000 $30,000 $20,000Cost of sales 35,000 25,000 10,000Gross margin 15,000 5,000 10,000Other expenses Selling expenses 2,500 1,500 1,000 Administrative expenses 6,000 3,500 2,400Total other expenses 8,500 5,100 3,400

Net profit or (loss) 6,500 (100) 6,600

Contribution-Margin Statement by Departments

Totals Dept. 1 Dept. 2 Dept. 3

Sales $100,000 $50,000 $30,000 $20,000Variable costs: Cost of sales 80,000 45,000 25,000 10,000 Selling expenses 5,000 2,500 1,500 1,000Total variable costs 85,000 47,500 26,500 11,000Contribution margin 15,000 2,500 3,500 9,000Fixed costs and

administrative expenses 6,000Net profit 9,000

Planning and Control Chart for Cindy's Fashions

Contribution to Store

Dept. A Dept. B Dept. C Dept. D TotalStore

ExpenseOperating

Profits

Cum.Operating

ProfitJanuaryPlanned 27,000 9,000 4,000 -1,000 39,000 24,000 15,000 15,000

ActualVariation

FebruaryPlanned 20,000 6,500 2,500 -1,000 28,000 24,000 4,000 19,000

Variation----------- ----------- ----------- ----------- ----------- ---------- --------- ----------- -----------

NovemberPlanned 32,000 7,500 2,500 0 42,000 24,000 18,000 106,500

VariationDecember

Planned 63,000 12,500 4,000 9,000 88,500 32,000 56,500 163,000Actual

VariationTotal 316,000 70,000 69,000 -4,000 453,000 288,000 163,000 163,000

*the objective of minus $4,000 for this department was established on thesame basis as the objectives for the other departments- that is, it representsthe same percentage gain over last year, when Department D’s loss was$4,200. Plans call for discontinuance of the department unless it showsmarked improvement by the end of the year.

Example of a Planning and Control Chart: Cindy’s Fashions

- Dept. BDirect Expense

SalesGrossProfit Total Fixed Variable

Contributionto Store

CumulativeContribution

to StoreJanuaryPlanned 60,000 18,000 9,000 6,000 3,000 9,000 9,000

Actual 46,000 16,300 8,300 6,000 1,150 8,000 8,000Variation -14,000 -1,700 700 0 700 -1,000 -1,000

FebruaryPlanned 50,000 15,000 8,500 6,000 2,500 6,500 15,500

ActualVariation------------ ---------- ------------ --------- --------- ----------- ------------- -------------

NovemberPlanned 70,000 21,000 13,500 10,000 3,500 7,500 57,500

ActualVariation

DecemberPlanned 90,000 27,000 14,500 10,000 4,500 12,500 70,000

ActualVariation

TotalPlanned 600,000 180,000 110,000 80,000 30,000 70,000 70,000

ActualVariable

Marketing Audit

• A systematic, critical, and unbiased review and appraisal of the basic objectives and policies of the marketing function—and of the organization, methods, procedures, and people employed to implement the policies

• Should not be necessary, but usually is

• May require objective, outside experts

Marketing's Link with Other Functional Areas

• Link with other functional areas affects strategy planning as well as implementation and control

• Finance– Money for initial investment and ongoing expenses

• Production– Flexibility, costs of products offered

• Accounting– Understanding costs and profits of decisions

• Human resources– People to do the work that needs to be done

Finance Function Manages Capital

• Capital is the money invested in a firm– Investments in fixed assets (facilities, etc.)– Working capital: money to pay for short term

expenses such as salaries, advertising, marketing research, etc.

• Capital may come from internal or external sources– External funding (investors): sales of stock or debt– Internal funding: profits and cash flow

Coordinate Marketing Plan and Production

• Production capacity takes many forms– Quantity and quality of specific goods or services the firm is

able to produce

• Production flexibility may limit or increase opportunities

• Virtual corporation– Perhaps more flexibility but less control

• Mass customization– Tailors production to needs of individual customers

• Price must cover production costs– Cut costs that don't add value for customers

Accounting Data Helps to Understand Costs and Profit

• Traditional accounting data often are not helpful for making strategy planning decisions

• Activity-based accounting may help– Allocates costs from natural accounts to functional accounts

• Natural accounts– Categories to which costs are charged in the normal accounting

cycle

– Often of limited value for marketing control

• Functional accounts– Shows costs arranged by the purpose for which expenditures were

made

Profit and Loss Statement, One MonthProfit and Loss Statement, One Month

Sales $17,000Cost of sales 11,900Gross Margin 5,100Expenses: Salaries $2,500 Rent 500 Wrapping Supplies 1,012 Stationery and Stamps 50 Office equipment 100

4,162Net profit $ 938

Spreading Natural Accounts to Functional AccountsFunctional Accounts

NaturalAccounts Cost

Sales Packaging Advertising Billing andCollection

Salaries $2,500 $1,000 $900 $300 $300Rent 500 400 50 50Wrapping supplies 1,012 1,012Stationery & stamps 50 25 25Office equipment 100 _______ _______ 50 50Total $4,162 $1,000 $2,312 $425 $425

Basic Data for Cost and Profit Analysis Example

Products Cost/UnitSelling

Price/Unit

Number ofUnits Soldin Period

SalesVolume

In Period

Relative“Bulk”

per UnitPackaging

“Units”A $ 7 $ 10 1,000 $10,000 1 1,000B 35 50 100 5,000 3 300C 140 200 10 2,000 6 60

1,110 $17,000 1,360

Customers Number of Sales Callsin Period

Number of OrdersPlaced in Period

Unitsof A

Unitsof B

Unitsof C

Smith 30 30 900 30 0Jones 40 3 90 30 3

Brown 30 1 10 40 7 Total 100 34 1,000 100 10

Functional Cost Account Allocations

Sales calls $1,000/100 calls = $10/callBilling $425/34 orders = $12.50/orderPackaging units costs $2,312/1,360

packaging units= $1.70/packaging unit

or $1.70 for Product A $5.10 for Product B $10.20 for Product C

Advertising $425/10 units of C = $42.50/unit of C

Profit and Loss Statements for CustomersSmith Jones Brown Whole

CompanySales

A $9,000 $900 $100B 1,500 1,500 2,000C 600 1,400

Total Sales $10,500 $3,000 $3,500 $17,000Cost of Sales

A 6,300 630 70B 1,050 1,050 1,400C 420 980

Tot. Cost of Sales 7,350 2,100 2,450 11,900Gross margin 3,150 900 1,050 5,100Expenses:

Sales call ($10 ea.) 300 400.00 300.00Order costs ($12.50 ea.) 375 37.50 12.50

Packaging CostsA 1,530 153.00 17.00B 153 153.00 204.00C 30.60 71.40

Advertising _____ 127.50 297.50Total of Expenses $2.358 901.60 902.40 4.162Net profit (or loss) $792 $(1.60) $147.60 $938

Human Resources: People Put Plans into Action

• Traditional issues include selection, training, supervision, motivation, and compensation

• New strategy usually requires people changes

• New strategy must be communicated

• Rapid change may cause strain– Time for training– Time for required activities

Factors that Affect Marketing Mix Planning

• Product classes—how are products that consumers see in the same way typically marketed?

• Stage of product life cycle• Size and geographic concentration of customers

• Value of item and frequency of purchase

• Preferences for personal contact• Perishability• Technical complexity

Typical Changes in Marketing Variables over the Product Life

Cycle• Competition: becomes more intense, moves toward

pure competition

• Product: typically moves toward more variety, and then less variety in decline stage

• Place: typically moves toward more intensive distribution

• Promotion: emphasis changes from primary demand to selective demand, and becomes more frantic

• Price: moves toward more price cutting and dealing

Market Potential and Sales Forecast

• Market Potential—what a whole market segment might buy

• Sales Forecast—an estimate of how much an industry or firm hopes to sell to a market segment

Approaches to Forecasting

• Extending past behavior– Trend extension

– Assumes future patterns will be like past patterns

• Factor method– Based on finding a variable (a factor) that is related to the

variable being forecast

– Multiple factors may be helpful

– Example: Buying Power Index

• Leading series– Factors that move in advance of what is being forecast

Sample of Pages From Sales & Marketing Management's Survey

of Buying Power

Estimated Market for Corrugated and Solid Fiber Boxes for Industry

Groups, Phoenix, Arizona, Metropolitan Statistical Area

National Data Mariposa County

NAICSCode

MajorIndustryGroup

(1)

Value of BoxShipments

byEnd Use($000)*

(2)

Employmentby Industry

Group

(3)Value of

Shipmentsper

Employee byIndustryGroup

(1 divided by 2)

(4)

Employmentby Industry

Group

(5)

EstimatedSales In

This Market(3X4)($000)

311 Food andKindredProducts

$586,164 1,578,305 $371 4,973 $1,845

337 Furniture andFixtures

89,341 364,166 245 616 151

327 Stone, Clay, andGlass Products

226,621 548,058 413 1,612 666

331 Primary MetalIndustries

19,611 1,168,110 16 2,889 46

332 Fabricated MetalProducts

130,743 1,062,096 123 2,422 298

333 Machinery(exceptelectrical)

58,834 1,445,558 40 5,568 228

335 ElectricalMachinery,Equipment andSupplies

119,848 1,405,382 85 6,502TOTAL

553$3,787

A Spreadsheet Comparing the Estimated Sales, Costs, and Profits of Four "Reasonable" Alternative

Marketing MixesMarketing Selling Advertising Total Sales Total Total

Mix Price Cost Cost Units Revenue Cost Profit

A $15 $20,000 $5,000 5,000 $75,000 $70,000 $5,000

B $15 $20,000 $20,000 7,000 $105,000 $95,000 $10,000

C $20 $30,000 $30,000 7,000 $140,000 $115,000 $25,000

D $20 $40,000 $40,000 5,000 $125,000 $125,000 $0

Response Functions

• Show how a target market is expected to react to changes in marketing variables

• Hard to estimate, but that doesn't mean they can be ignored

• Might be used to evaluate– a firm's whole marketing mix– elements of a marketing mix– how customers respond to competitors– differences among market segments

A Spreadsheet Analysis Showing How a Change in Price Affects

Sales, Revenue, and Profit

Marketing Selling Advertising Total Sales Total TotalMix Price Cost Cost Units Revenue Cost Profit

C $19.80 $30,000 $30,000 7,000 $138,600 $115,000 $23,600

$19.90 $30,000 $30,000 7,000 $139,300 $115,000 $24,300

$20.00 $30,000 $30,000 7,000 $140,000 $115,000 $25,300

$20.10 $30,000 $30,000 7,000 $140,700 $115,000 $25,700$20.20 $30,000 $30,000 7,000 $141,400 $115,000 $26,400

(Note: spreadsheet is based on Marketing Mix C from Exhibit 21-7)

Summary Outline of Different Sections of Marketing Plan--Part

A• Name of Product-Market• Analysis of Other Aspects of External Market

Environment (favorable & unfavorable factors and trends)• Customer Analysis (organizational and/or final consumer)• Competitor Analysis• Company Analysis• Marketing Information Requirements• Product

Summary Outline of Different Sections of Marketing Plan--Part

B• Place• Promotion• Price• Special Implementation Problems to Be

Overcome• Control• Forecasts and Estimates• Timing

Exporting

• Selling some of what the firm is producing to foreign markets– a market development type opportunity– some changes in product may be required

• Usually a low risk way to get into international marketing• "Red tape" is real, but usually worth the hassles• International agents and merchant wholesalers can be a

big help• Relationships may take time to build

Multinational Corporations

• Have a direct investment in several countries

• Run the business depending on the choices available anywhere in the world– selecting vendors

– locations for production

– target markets to go after

• Takes a world view, not just the view of home country

• More companies are looking at worldwide competition

Causes of Micro-Marketing Inefficiency

• Lack of interest in or understanding of consumers– consumer preferences may change rapidly and often

– improper blending of the four Ps

– overemphasis on production and/or internal problems rather than customer needs

• Lack of understanding of—or adjustment to—the marketing environment, especially what competitors do

Evaluating Macro-Marketing Effectiveness

• Depends on the social and economic objectives of the country

• Difficult to compare marketing systems across countries with different objectives

• Is consumer satisfaction the criterion?– in the United States, yes– in other countries, often it's not

Some Important Changes and Trends Affecting Marketing Strategy Planning - Communication

Technologies• The Internet and intranets

• Satellite communications

• E-mail and fax communications

• Teleconferencing and Internet telephone

• Cellular telephones

Some Changes and Trends (cont.) - Role of Computerization• Personal computers and laptops

• Spreadsheet analysis

• Computer networks

• Scanners and bar codes for tracking

• Better, easier to learn and use software

Some Changes and Trends (cont.)—Marketing Research

• Search engines• Growth of marketing information systems• Decision support systems• Multimedia data• Single-source data (and scanner panels)• Data warehouses and data mining• Multimedia questionnaires (PC, CD, Internet)• Statistical packages and elaborate graphics software

Some Changes and Trends (cont.) - Demographic Patterns

• "Wired" households

• Explosion in teen and ethnic submarkets

• Aging of the baby boomers

• Population growth slow-down

• Geographic shifts in population

• Slower real income growth in U.S.

Some Changes and Trends (cont.) - Business and

Organizational Customers• Closer buyer-seller relationships• Just-in-time inventory systems/EDI• Internet sourcing• More single-vendor sourcing• Shift to NAICS• ISO 9000• Supply chain management

Some Changes and Trends (cont.) - Product

• More attention to "really new" products

• Faster new-product development

• Computer-aided design (CAD)

• R&D teams with market-driven focus

• More attention to quality

• More attention to services

• Advances in packaging

• Extending established brand names

Some Changes and Trends (cont.) - Channels and Logistics

• Internet selling (wholesale and retail)• More vertical market systems• Larger, more powerful retail chains• More attention to distribution service• Better inventory control• Rapid response, JIT, and ECR• Automated warehousing and handling• Cross-docking at distribution centers• More competition among transporters• Cross-channel logistics coordination• Growth of mass-merchandising

Some Changes and Trends (cont.) - Sales Promotion

• Database-directed promotion

• Point-of-purchase promotion

• Trade promotion is more sensible

• Event sponsorships

• Stocking allowances

Some Changes and Trends (cont.) - Personal Selling

• Electronic slide presentations

• Automated order-taking

• Use of laptop computers

• More specialization– Major accounts

– Telemarketing

– Team selling

• Use of voice mail and email

Some Changes and Trends (cont.) - Mass Selling

• Interactive media (like web sites)• Integrated marketing communication• More targeted media

– Pointcasting– Specialty publications– Cable, satellite TV, teletext– Specialty radio and (cable) TV– Point-of-purchase

• Growth of interactive agencies• Global agencies• Changing agency compensation• Direct-response advertising• Shrinking media budgets

Some Changes and Trends (cont.) - Pricing

• Electronic bid pricing and auctions• Value pricing• Overuse of sales and deals for temporary price

cuts• Bigger differences in functional discounts• More attention to exchange rate effects• Lower markups on higher stockturn items• Spreadsheets for marginal analysis

Some Changes and Trends (cont.) - International Marketing

• Collapse of communism worldwide• More international market development• Global competitors—at home and abroad• Global communication over Internet• New trade rules (NAFTA, WTO, EU, etc.)• More attention to exporting by small firms• International expansion by retailers• Growth of multinational corporations• Growing role of airfreight

Some Changes and Trends (cont.) - General

• Explicit mission statements

• S.W.O.T. analysis

• Benchmarking and total quality management

• More attention to positioning and differentiation

• Less regulation of business

• More attention to marketing ethics

• Shift away from diversification

• More attention to profitability, not just sales

• Greater attention to superior value advantage

• Addressing environmental concerns

Demand Schedule for Potatoes (10-pound bags)

Point

(1)Price ofPotatoesper Bag

(P)

(2)Quantity

Demanded(bags per month)

(Q)

(3)Total

Revenueper Month(P x Q=TR)

A $1.60 8,000,000 $12,800,000B 1.30 9,000,000 -------------C 1.00 11,000,000 11,000,000D 0.70 14,000,000 -------------E 0.40 19,000,000 -------------

Demand Curve for Potatoes (10-pound bags)

Demand

Quantity (millions of bags per month)

Pri

ce (

$ p

er b

ag)

$1.60

1.30

1.00

0.70

0.40

0.000 10 20 30

Demand Schedule for 1-Cubic-Foot Microwave Ovens

Point

(1)Price per

Microwave Oven(P)

(2)Quantity

Demandedper Year

(Q)

(3)Total

Revenueper Year

(P x Q = TR)A $300 20,000 $6,000,000B 250 70,000 15,500,000C 200 130,000 26,000,000D 150 210,000 31,500,000E 100 310,000 31,000,000

Demand Curve for 1-Cubic Foot Microwave Ovens

Demand

Quantity (000)

Pri

ce (

$)

300

250

200

150

100

50

0 50 100 150 200 3002500

A

B

C

D

E

Elastic and Inelastic Demand

• Elastic Demand: if prices are dropped, the quantity demanded will increase enough to increase total revenue

• Inelastic Demand: if prices are dropped, the increase in the quantity demanded is not enough to result in an increase in total revenue

• Unitary Elasticity: the special case that occurs when a change in price results in the same total revenue

Demand Curve for Hamburger (a product with many substitutes

Pri

ce (

$)

Quantity

Relevant Range

Current Price Level

P

0

Demand Curve for Motor Oil (a product with few substitutes

Pri

ce (

$)

Quantity

Relevant Range

Current Price Level

P

0

Consumers buy less often when price goes above this level

Factors that Affect Elasticity of Demand

• Availability of substitutes (i.e., the buyer has a choice)

• Importance of the purchase in the customer's budget

• Urgency of the need, and its relationship to other needs

Supply Schedule for Potatoes (10-pound bags)

Point

PossibleMarket Priceper 10-lb. Bag

Number ofBags SellersWill Supply

per Month atEach PossibleMarket Price

A $1.60 17,000,000B 1.30 14,000,000C 1.00 11,000,000D 0.70 8,000,000E 0.40 3,000,000

Supply Curve for Potatoes (10-pound bags)

Supply

Quantity (millions of bags per month)

Pri

ce (

$ p

er b

ag)

$1.60

1.30

1.00

0.70

0.40

0.000 10 20 30

Equilibrium of Supply and Demand for Potatoes (10-pound bags)

Demand

Supply

Equilibrium point

Quantity (millions of bags per month)

Pri

ce (

$ p

er b

ag)

$1.60

1.30

1.00

0.70

0.40

0.000 10 20 30

Interaction of Demand and Supply in the Potato Industry and the Resulting

Demand Curve Facing Individual Potato Farmers

Firms (each producing about1/10,000 of industry output)

Demand

Supply

Pri

ce

($

pe

r b

ag

)

$1.60

1.30

1.00

0.70

0.40

0.000 10 20 30

Demand

Quantity (millions of bags per month)

Pri

ce

($

pe

r b

ag

)

$1.60

1.30

1.00

0.70

0.40

.000 500 1,000 1,500

Quantity (millions of bags per month)

Equilibrium point

Whole Industry

Oligopoly Situation with Kinked Demand CurveA. Industry Situation B. Each firm’s view of

its demand curve

Quantity Quantity(smaller than industry quantity)

Market price

Pri

ce

($)

P

0

Supply

Demand

Pri

ce

($)

P

0Q Q

Monopolistic Competition

• Sellers in the market feel they have some competition

• Customers view competing products as heterogeneous, not homogeneous

• Firms may vary their marketing mixes to further differentiate them

• Thus, customers can choose among "substitute" offerings, but the different offerings are not exact substitutes

Basic Operating Statement Relationships

Gross sales

- Returns and Allowances

= Net sales

Net sales

- Cost of sales

= Gross margin

Gross margin

- Expenses

= Net profit

An Operating Statement (Profit and Loss Statement)

Gross Sales $540,000Less: Returns and allowances 40,000Net Sales $500,000Cost of sales:Beginning Inventory at cost $310,000Purchases at billed cost 40,000 Less: Purchase discounts 270,000 Plus freight-in 20,000Net cost of delivered purchases 290,000Cost of products available for sale 370,000Less: Ending inventory at cost 70,000Cost of sales 300,000Gross margin (gross profit) 200,000Expenses: Selling expenses: Sales salaries 60,000 Advertising expense 20,000 Delivery expense 20,000 Total Selling expense 100,000Administrative expense: Office salaries 30,000 Office supplies 10,000 Miscellaneous administrative expense

5,000

Total administrative expense 45,000General expense: Rent expense 10,000 Miscellaneous general expense 5,000 Total general expense 15,000Total expenses 160,000Net profit from operation $40,000

Cost of Sales Section of An Operating Statement for a

Manufacturing Firm

Cost of Sales Section of an Operating Statement for a Manufacturing Firm

Cost of Sales:Finished productsinventory (beginning)

$20,000

Cost of production(Schedule 1)

100,000

Total Cost of Finishedproducts available forsale

120,000

Less: Finished productsinventory (beginning)

30,000

Cost of Sales $90,000Schedule 1, Schedule of cost of productionBeginning work inprocess inventory

15,000

Raw materials:Beginning raw materialsinventory

10,000

Net cost of deliveredpurchases

80,000

Total cost of materialsavailable for use

90,000

Less: Ending rawmaterials inventory

15,000

Cost of materials placedin production

75,000

Direct labor 20,000Manufacturingexpenses:Indirect Labor $4,000Maintenance and repairs 3,000Factory Supplies 1,000Heat, light and power 2,000Total Manufacturingexpenses

10,000

Total Manufacturingcosts

105,000

Total work in processduring period

120,000

Less: ending work inprocess inventory

20,000

Cost of production $100,000

Three Methods to Compute Stockturn Rate

1. (Cost of sales) / (Average inventory at cost)

2. (Net sales) / (Average inventory at selling price)

3. (Sales in units) / (Average inventory in units)