Multimedia Marketing/Marketing.iso/market/chapter8.2p

Text File | 1996-08-22 | 15KB | 335 lines

SECTION 8.2  Pricing and Marketing Objectives

INSTRUCTIONS Attempt to frame, in your own mind, the objectives that price
formulators should pursue.

EXAMPLE

Auto detailing--the super cleaning of cars--began in Southern
California but has spread around the country. Detailers clean every
part of the car with an array of tools, including toothbrushes,
cotton-tipped swabs, waxes, electric buffers, and vinyl cleaners.

A typical price is $125 to $150, compared to a simple car wash at
a fraction of that price. And many customers have their car done
twice a year. As Americans buy ever more costly cars and keep them
longer, detailing helps an owner protect his investment.

Detailing has become a prestige element and even has made a mark
among owners of Chevrolets and Fords. Franchises are developing
rapidly, all selling their services at premium prices, and making
high profits.

DETAILS

Before setting a price, management must decide what it wishes to
accomplish with the particular product. If the target market and
market position have been selected carefully, then the marketing
mix strategy, including price, will be relatively straightforward.
for example, auto detailers have targeted themselves at the
customized, top-quality end of the car cleaning market. Accordingly,
they must charge a high price to reflect their time and costs and
to portray a prestige image.

If the company portrays itself as a low-price contender, actual
prices should reflect this objective. Advertisements may carry
the message that the firm offers low prices, but if consumers who
consider the product find that the prices are not especially
competitive, the promotion effect will fail. In fact, considerable
consumer hostility can result when actual prices do not live up to
the status promised in the advertisemets.

At the same time, management may wish to pursue additional objectives.
The clearer management is about its objectives, the easier it is to
set a price. Several common objectives are survival, current profit
maximization, market share leadership maximization, and product/
quality leadership.

Survival can be an important objective. Companies that are plagued
with overcapacity, changing consumer demand patterns, or intense
competition often set survival as an overriding objective. To keep
the plant going and the inventories turning over, companies must set
a low price in the hope that the market demand is price-elastic.
Profits are less important than survival. If it turns out that
demand is not elastic, this strategy will not work and the company
will have to seek out other means of survival--such as creative
advertising or product improvement.

In recent years an automobile producer has offered large rebate
programs in order to survive. As long as their prices cover variable
costs and some fixed costs they can stay in business--at least for
a while. And the price incentives can provide enough momentum to
bring about a recovery, once the period of slack business has been
passed.

PROBLEM 1

A frozen food distributor is worried about survival. The firm can
survive, at least in the short run, if prices will cover.

A. Total variable costs.
B. Variable costs and some fixed costs.
C. Average fixed costs.
D. Average variable costs.

WORKED

A frozen food distributor is worried about survival. The firm can
survive, at least in the short run, if prices will cover variable
costs and some fixed costs. Variable coss are costs that vary as
the firm's volume changes. Hence, if prices can at least cover
these, they are recovering extra charges of producing the units that
are sold. Fixed costs are those that do not change in total as
volume changes. If the food distributor can at least cover a  portion
of these, it may be able to survive for a time. In the long run,
however, all costs must be covered for the firm to continue in
existence.

ANSWER  B
INSTRUCTIONS Attempt to frame, in your own mind, the objectives that price
formulators should pursue.

EXAMPLE

Auto detailing--the super cleaning of cars--began in Southern
California but has spread around the country. Detailers clean every
part of the car with an array of tools, including toothbrushes,
cotton-tipped swabs, waxes, electric buffers, and vinyl cleaners.

A typical price is $125 to $150, compared to a simple car wash at
a fraction of that price. And many customers have their car done
twice a year. As Americans buy ever more costly cars and keep them
longer, detailing helps an owner protect his investment.

Detailing has become a prestige element and even has made a mark
among owners of Chevrolets and Fords. Franchises are developing
rapidly, all selling their services at premium prices, and making
high profits.

DETAILS

Another objective is current profit maximization. Here, management
will attempt to set a price that will maximize short-run profits.
They estimate the demand and costs associated with alternate prices
and choose the price that will generate the largest current profit,
cash flow, or return on investment. This objective places emphasis
on current financial performance rather than long run results.

To achieve this objective, management attempts to forecast the
revenue that will result in the short run by using various prices.
Then it attempts to forecast costs for the short run. The price
that produces the greatest difference between revenue and cost is
the profit maximizing price.

American companies have been accused of excessive reliance on this
objective. In emphasizing the short run, they may be sacrificing
long run profits. Many Japanese firms, in contrast, enter a market
with relatively low prices. They know that they will incur losses for
a time, but will be profitable in the long run.

Market share leadership is another objective. Some companies want
to achieve a dominant market share. They believe that the firm
owning the largest market share will enjoy the lowest costs and the
highest long-run profit. Accordingly, they go after market share
leadership by setting prices as low as possible.

A variation of this objective is to seek a specific market share
gain, such as an increase in market share from 10 to 15 percent in
one year. Management will then choose the marketing program,
including price, that will accomplish this.

Market share leadership is a common objective in oligopolistic
industries. These are dominated by a few firms and they are very
reactive to the moves of others. Often individual companies measure
their achievements by the share of market which they enjoy at any
particular time. The steel and aluminum industries are characterized
by heavy reliance on this objective.

PROBLEM 2

A wholesaler which stocks a wide line of fabrics pursues a current
profit maximization objective. Which of the following are disadvantages
of this objective.

A. It can lead to small profits in the long run.
B. It can lead to excessive reliance on market share as a criterion
   of achievement.
C. It can lead management into choosing prices that are too low
   for company success.
D. It can lead the company into giving too many discounts to retailers.

WORKED

A wholesaler which stocks a wide line of fabrics pursues a current
profit maximization objective. A disadvantage is that it can lead to
small profits in the long run. This objective encourages high prices
for a product or service when lower prices are justified. High prices
may cut the company's sales volume, reducing opportunities for
economies of scale and the learning curve. Further, high prices may
invite competition from other firms that will decide to enter the
industry--they are attracted by the possibility of both short and
long run profits. This objective is especially disadvantageous if
demand is elastic.

ANSWER  A
INSTRUCTIONS Attempt to frame, in your own mind, the objectives that price
formulators should pursue.

EXAMPLE

Auto detailing--the super cleaning of cars--began in Southern
California but has spread around the country. Detailers clean every
part of the car with an array of tools, including toothbrushes,
cotton-tipped swabs, waxes, electric buffers, and vinyl cleaners.

A typical price is $125 to $150, compared to a simple car wash at
a fraction of that price. And many customers have their car done
twice a year. As Americans buy ever more costly cars and keep them
longer, detailing helps an owner protect his investment.

Detailing has become a prestige element and even has made a mark
among owners of Chevrolets and Fords. Franchises are developing
rapidly, all selling their services at premium prices, and making
high profits.

DETAILS

Another posible objective is product/quality leadership. Some
companies adopt the objective of being the quality leader in the
market. They may be pursuing consumers who seek prestige. This
objective normally calls for charging a high price to cover the
high product quality and high cost of R & D. If the company
provides extensive customer services to maintain the brand image,
this cost must be recovered by price.

Sometimes high prices are assessed because consumers believe that
prices and quality are closely associated. This often happens when
consumers perceive that there is risk associated with the product.

The risk might be financial, as when the product is very costly.
Or it might be psychological, as when consumers fear the rejection
or disapproval of others if a poor product choice is made. Another
type of risk is physical. Some products can be physically dangerous.
Also there is time loss risk. When some products fail, we waste time,
convenience, and effort getting them adjusted, repaired, or replaced.
One way to help allay this fear is to "buy the best".

PROBLEM 3

In order to avoid risk, some consumers pay high prices for which
of the following:

A. Automobiles.
B. Candy bars.
C. Work clothing.
D. Magazines.

WORKED

In order to avoid risk, some consumers pay high prices for automobiles.
There is considerable risk associated with these products. They are
expensive. Next to the home this is the greatest expenditure for most
consumers. Also, many people do not have mechanical knowledge and
experience so they have trouble evaluating the product. There is
psychological risk, in that some consumers are looked down upon and
are riduculed because of the kind of car they own. There is an element
of physical risk--some automobiles are safer than others. Overall,
then, avoiding risk by paying a high price is a preferred strategy
for some consumers.

ANSWER  A
INSTRUCTIONS Attempt to frame, in your own mind, the objectives that price
formulators should pursue.

EXAMPLE

Auto detailing--the super cleaning of cars--began in Southern
California but has spread around the country. Detailers clean every
part of the car with an array of tools, including toothbrushes,
cotton-tipped swabs, waxes, electric buffers, and vinyl cleaners.

A typical price is $125 to $150, compared to a simple car wash at
a fraction of that price. And many customers have their car done
twice a year. As Americans buy ever more costly cars and keep them
longer, detailing helps an owner protect his investment.

Detailing has become a prestige element and even has made a mark
among owners of Chevrolets and Fords. Franchises are developing
rapidly, all selling their services at premium prices, and making
high profits.

DETAILS

The product/quality objective is popular among some of the best known
companies and brand names in the United States and abroad. Large
and powerful corporations have taken advantage of their reputation
as producers of premium products. This has protected them from
the efforts of other producers and of private brand intermediaries,
who desire to penetrate the huge markets held by some of the major
corporations. In many cases, however, these large corporations have
been able to retain their market shares, primarily because of the
strong brand loyalty that they have developed among consumers.

A calculator producer has pursued the product/quality objective for many
years. It is a leader in introducing new features, emphasizes
specially designed products to meet the needs of market segments,
and prices its calculators well above others in the market. And
because of this leadership, the firm's success has continued
throughout the turmoil within the calculator industry, where the
"bottom fell out" for other companies.

Firms that pursue the product/quality objective prefer that their
prices be sold at premium prices at the retail level. It can harm
their status if their products are used as "price footballs".
But it is illegal for manufacturers to set retail prices--this is
treated as a type of price collusion. The best that the producers
can legally do is to select intermediaries who are cooperative and
who do not have a track record of discounting.

There are other objectives. Prices might be set low to prevent
competition from entering the market or set at the level of
competition to help stabilize the market. They might be set at a
level to strengthen the loyalty and support of intermediaries, or
they might be set to help avoid governmental intervenion.

It can be difficult to determine the pricing strategy that will
assist in preventing government intervention. If the marketer
sets prices too low, this may drive some competitors out of business
and convince the government to bring charges of monopolizing. On
the other hand, if prices are too high, government officials may
investigate to determine the reason for this. It appears to many
experts that the antitrust laws urge companies to compete, but not
to compete too hard.

Prices might be temporarily set low to generate customer enthusiasm,
or they might be set temporarily high to offset demand for items
in limited supply. Further, prices might be set to help the sales
of other items in the product line. Film prices, for example, could
be at low levels to promote the sale of company cameras. Thus, pricing
may play an important role in helping to accomplish a number of
company goals at many levels.

PROBLEM 4

A manufacturer of motors for industrial washing machines follows
an objective of product/quality leadership. This is likely to
be reflected in:

A. Setting prices low to avoid governmental intervention.
B. Setting prices low to prevent competition from entering the market.
C. Setting prices high to offset demand for items in limited supply.
D. Setting prices high to enhance the company's prestige image.

WORKED

A manufacturer of motors for washing machines follows an objective
of product/quality leadership. This is likely to be reflected in
setting prices high to enhance the company's prestige image.
The manufacturer apparently has the objective of being, or at least
as perceived as being, the quality leader in the market. This,
plus the prestige element requires charging high prices. If the
machines are to be promoted as prestigious, high quality and attendant
high prices are necessary.

ANSWER  D