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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
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
14
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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23
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