Functional Management

Lecturer : Ulian Taurin Malik Group Team Member :

Agus Winarta 1906329606

Theory : Product Decisions & Pricing Decisions
Exval Mahendra S 1906419993

Case: H&M Marketing Mix

Nadya Rachmatul Putri 1906330394

Marketing Challenges

Prices set solely on the basis of cost or competitive considerations may not reflect customer value: the
customer’s perception of what the product or service is really worth.

The price may be higher than the customer is willing to pay, resulting in a loss of potential sales and
market share. Alternatively, the price may be much lower than customers think the product is worth,
resulting in low margins and the sacrifice of potential profits.

While pricing a product below its perceived value may delight customers and stimulate short-term
demand, it may also depress the earnings the firm needs to compensate its employees, fund capital
investments, and pay for the product development and other marketing activities necessary for long-
term growth.
Price-Setting Decision Process
Strategic Pricing Objectives
Estimating Demand and Perceived Value

Factors Affecting Customers’ Sensitivity to Price

Estimating Demand and Perceived Value

The larger the proportion of price-sensitive customers in a product’s market, the more sensitive overall demand is
to a change in the product’s price.

Price elasticity of demand formula :

1. If PED > 1, indicating price elasticity is elastic

% Demand -6%
PED = = = -3
% Price 2%
* the minus sign reflecting the inverse relationship between price and demand

2. If PED = 1, indicating price elasticity is unitary

% Demand -2%
PED = = = -1
% Price 2%
* the minus sign reflecting the inverse relationship between price and demand

3. If PED 0 < x < 1, indicating price elasticity is inelastic

% Demand -1%
PED = = = -0.5
% Price 2%
* the minus sign reflecting the inverse relationship between price and demand
Estimating Demand and Perceived Value

Method for Estimating Demands

Ways to estimate a product’s demand curve :

1. Survey a sample of consumers, or bring them into a laboratory setting, and ask them how much of
the product they would buy at different possible prices.
2. Estimating the price–quantity relationship via the regression analysis of historical sales using
consumer panel data, in-store experiments, or multiple test markets.

Problems to estimate a product’s demand curve :

1. Laboratory or test-market experiments can provide insights into the price–demand relationship for
a product, but do not reflect the likely reactions of competitors to different prices or changes in
price over time.
2. Effects of nonprice factors, such as changes in economic conditions or in other components of the
marketing mix, must be controlled or measured.
Estimating Cost

Measuring Cost

Total Cost = Fixed Costs + Variable Costs

Activity-based costing systems —which allocate costs across individual products by directly observing
the level of various functional activities often generate different estimates of the total costs than
standard cost control system.

Activity-based costing systems are often more useful for making strategic marketing decisions, such as
setting prices, because they reduce some of the distortions inherent in the allocation of indirect costs
within standard cost accounting systems.

Cost and Volume Relationships

Economies of scale. In the short run, scale economies result from more complete use of available
capacity. In the long run, companies can gain further economies by constructing larger and more
efficient facilities.

Experience curve —the fall in production and marketing costs per unit as a firm gains accumulated
experience.
Methods Managers Use to Determine an Appropriate Price Level

Cost Oriented Methods

The simplest and most commonly used pricing method is to add a standard markup to the cost of the
product.

Example: a small-appliance manufacturer produces a line of electric coffeemakers and expects to sell
50,000 in the coming period. Fixed costs of $500,000 are associated with producing the coffeemakers,
and variable costs are $10 per unit. The unit cost for each coffeemaker would be :
Methods Managers Use to Determine an Appropriate Price Level

Cost Oriented Methods

Rate-of-return, or target return, pricing is similar in principle to markup pricing but brings one more
cost element into the pricing. The objective is to set a price yielding a target rate of return on
investment.

Example: Suppose our small-appliance manufacturer has invested $1 million in facilities and equipment
to produce and distribute its coffeemakers and wants to make a 20 percent return on that investment.
The target return price for each coffeemaker would be :
Methods Managers Use to Determine an Appropriate Price Level

Cost Oriented Methods

Break-even analysis. Suppose our appliance manufacturer decided to price its coffeemakers at $26.
With variable costs of $10 per unit and fixed costs of $500,000, the break-even chart in Exhibit 11.4
indicates that the product’s break-even volume is 31,250 units—the volume necessary to just cover
total costs. To calculate this result, use the following formula:

Break-Even Chart Showing Break-Even and Target Return Volume

Methods Managers Use to Determine an Appropriate Price Level

Competition Oriented Methods

Firms that pursue competition-oriented pricing approaches do not ignore cost or returnon-investment
considerations. Instead, they try to control costs to make adequate returns at prices consistent with
those of competitors.
Firms adopt a going-rate, or competitive parity, pricing approach, where they try to maintain prices
equal to those of one or more major competitors. discount or premium price policies usually reflect
differences in positioning strategies.

Sealed bidding is common in some businesses, especially in dealing with governments. In such
situations buyers request a formal bid with no later opportunity for change. In public procurement the
bids are opened publicly, enabling bidders to learn what competitors bid.
Such is not typically the case with private bidding. One approach used to set a bid price is an expected
value model based on the following formula:
Methods Managers Use to Determine an Appropriate Price Level

Customer Oriented Methods

the key concept in setting a price is the notion of perceived value. Whether the product offering is an
industrial product or service that delivers primarily economic and functional benefits or a consumer
item whose benefits are more psychological, potential customers usually have some idea of what
constitutes a good or bad price
Methods for Estimating Perceived Customer values
Methods Managers Use to Determine an Appropriate Price Level

Estimating Customer Value by Assessing Value-in-Use

One of the most useful ways to estimate customer value, particularly for industrial products and
consumer durables, is by assessing the product’s value-in-use
Methods Managers Use to Determine an Appropriate Price Level

Perceived Value Can Change but Prices Are Sticky

The perceived value of a product—and therefore the demand for that product at a given price—often
varies with changes in economic and social conditions. For instance, more expensive national brands of
consumer goods tend to lose market share to cheaper private labels during economic recessions.
Ideally, a company and the firms in its distribution channel should adjust a product’s price from time to
time to reflect changes in its perceived value.
Methods Managers Use to Determine an Appropriate Price Level

Other Perceptual Pricing Issues

Often, a number of psychological factors can influence customers’ perceptions of the relationship
between a product’s price and its value. Thus, many firms use such practices as customary pricing, price
lining, psychological pricing, and promotional pricing
Costumary price : When increasing costs put pressure on manufacturers’ margins, they
elected to reduce the size of the bar rather than upset customers’ expectations
by raising the price.
Price lining is another common customer-oriented pricing practice, especially among
retailers. It involves selling all products in a category at one of several
predetermined “price points” or levels. Each price line represents a different
level of quality
Psychological pricing the firm takes advantage of the fact that many consumers use price as
an indication of quality
Promotional pricing to transmit a message about the product in conjunction with, or
sometimes in lieu of, advertising or other forms of promotional activity
Deciding on a Price Structure: Adapting Prices to Market Variations

Geographic Adjustments

The manufacturer places the goods “free on board” a transportation carrier. At this point the title and
responsibility passes to the customer, who pays the freight from the factory to the destination

freight absorption pricing the seller picks up all or part of the freight charges

uniform delivered pricing is when a standard freight charge—equal to the average freight cost across all
customers—is assessed every customer, regardless of location

Zone pricing is another compromise approach that falls between FOB and uniform delivered pricing
Deciding on a Price Structure: Adapting Prices to Market Variations

Global Adjustment

Geographic adjustments become even more complicated when the geographic areas involve different
countries. In addition to reflecting transportation costs, prices in different countries may also have to be
adjusted for different exchange rates, variations in competition, market demand, or strategic objectives
(volume growth versus profit generation), and different governmental tax policies or legal regulations.

Countertrade An additional pricing problem often arises when selling to customers in developing
economies, which may lack sufficient hard currency to pay for their purchases. Such customers may
offer items other than money as payment
Deciding on a Price Structure: Adapting Prices to Market Variations

Discounts and Allowances

Firms relying on independent wholesalers and retailers to distribute their products must adjust their list
prices to motivate and reward these firms to perform needed marketing activities

Trade Discounts To induce wholesalers and/or retailers to carry a product and perform
their usual marketing activities in its support, manufacturers offer trade (or functional )
discounts from the suggested retail list price.
Quantity Discounts To encourage channel members, or even ultimate customers, to
purchase more of the product, a manufacturer might offer a price reduction for
ordering in large quantities.
A cash discount is a price reduction to encourage customers to pay their bills
promptly
Price off promotions This is one of the simplest kinds of sales promotion since all
that’s involved is a temporary reduction in the product’s price
Allowances are similar to discounts in that they are inducements to encourage
channel members or final customers to engage in specific behaviors in support of the
product
Coupons, Rebates, and Refunds
Deciding on a Price Structure: Adapting Prices to Market Variations

Differential Pricing

Differential pricing (also known as discriminatory pricing) occurs when a firm sells a product or service
at two or more prices not determined by proportional differences in cost.

Time pricing. Prices might be adjusted seasonally, across days of the week, or across
hours of the day to capitalize on predictable fluctuations in demand over time.

Location pricing. The same product or service might be priced differently at

various retail locations to capitalize on local demand or the intensity of
competition
Customer segment pricing. Perhaps the most common differential pricing practice is to
charge different prices to customer segments that vary in their willingness or ability to
buy
It is not always possible or wise to set different prices for essentially the same product. For such a
differential pricing policy to work, first there must be identifiable customer segments with different
price sensitivities. Second, the customer segments must either be physically separated from one
another or the firm must institute control procedures to ensure that the segment paying the lower
price cannot resell the product to customers paying the higher price
Deciding on a Price Structure: Adapting Prices to Market Variations

Product-Line Pricing Adjustments

Pricing decisions become even more complicated when a firm produces a line of several models or
styles that potential customers perceive as bearing some relationship to one another. In such cases,
firms need to adjust the prices of various models to reflect customers’ perceptions of their relative
value