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Brand Management

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Brand Management (MKT624)
VU
Lesson 38
PRICING
Introduction
We have seen how a premium pricing model works, but then not all situations are conducive to
charging a premium pricing. Not all companies at all times can charge a premium or a decently
high level of pricing. There are different models that cope with different situations and this
lecture makes an attempt to explain those.
The pricing models are grouped into two pricing bases. The discussion centers on both the
bases of pricing ­ market-based pricing and cost-based pricing.
Market-based pricing
Market-based pricing starts with the customer, competition, and company positioning. Keeping
in view customer needs, price sensitivity, and competing products, a price is worked out to
offer customers a superior value1. The price is worked out in the market.
This pricing model is just not possible without having a focus both on customer needs and
competition (market intelligence). Concentration on one to the exclusion of the other is not
going to enable you to come up with the right price.
Price, under this model, therefore is set in the market and not internally within the marketing
and finance departments2. Market-based pricing model can be executed with different strategies
relating product life-cycle stage. Those are briefly discussed for your renewed understanding3:
Skim Pricing: It works under the circumstances of high differentiation that gives you a
sustainable advantage in quality-conscious market. The business charges a premium for
delivering superior customer value until competition catches up.
Value-in-use Pricing: This model basically applies to consumer durables or industrial
products that stay with customers for a certain period. From the time the product is
bought to the time of the completion of the life-cycle of the product, the customers have
to incur certain costs. Those certain costs could be anything from installation to
maintenance to resale of the product.
If customers perceive that the economic benefit that they get out of buying such product
is higher than that of competition, they will be willing to pay premium for your product.
Examples are air conditioners and cars. Customers will pay more for brands they think
offer them better value-in-use.
Segment pricing: One of the goals of segmentation is market-based pricing. Different
customers in different segments have different product needs and different pricing
priorities and sensitivities. This pricing model offers opportunity to set different levels
of pricing for different needs. An example could be different packages offered by cell
phone companies.
One thing must not be overlooked that the concept of economic value remains in force
while working out pricing for your products belonging to different segments.
Strategic Account Pricing: Large customers are important customers to any business
and therefore taken in a strategic light. The underlying assumption is always to maintain
a long-term relationship with such customers with focus on meeting their needs. To
maintain the strategic relationship, you may offer a special price to such customers,
while general prices are on the higher side.
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Brand Management (MKT624)
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By the same token, you may also make them pay you higher prices, while the overall
conditions generally slacken and prices register a fall. Since the objective is to serve the
customers with a long term perspective, offering them economic value that surpasses
the one that may be offered by competition, the model works well.
Plus-One pricing: This model applies in mature market conditions, in which all
products carry good benefits for customers. For those brands that are bent upon
differentiating themselves from the rest of the crowd, they position themselves as a
"plus-one" brand.
A "plus-one" position allows the business to charge a market-based premium price on
the basis of that one feature which competition does not offer. Examples are Volvo for
safety, BMW and Lexus for performance, and Mercedes for overall reputation of
performance, luxury, and dependability.
What is important is an understanding of all the cost drivers and the full value of the
product. Realizing the full value of the product that the customer perceives getting may
offer an opportunity to charge more than what the traditional cost-based mechanism may
present you. Attentions to product benefits and value for customer enable you to charge
more, earn more and hence achieve more.
Cost-based pricing
Cost-based is adding your desired margin to the actual cost, and then adding to that margin
of every member of the channel to arrive at the final selling price. Most businesses engage
in cost-based pricing for their products. You may end up doing that, but you must not start
with that.
Market-based pricing may look like the preferred approach to pricing, but it may not be
ideal in many situations that may call for cost-based pricing. A cost-based model starts at
the company with manufacturing costs in view. Desired margin is added and the product
goes through successive channels with the same mechanism of added margins at every
stage till it reaches the customer with the final price.
This pricing is applied mostly in the markets where differentiation is minimal. Let's discuss
a few models in practice.
Floor pricing: As the name suggests it is the lowest possible price a company can
charge. As a means for achieving certain financial objectives like margins or return on
investment, companies set to themselves certain benchmarks. For example, we have to
have 20% margin or 30% return on investment.
Such pricing is not a reflection of the reality of the market; it is a benchmark that
indicates that at the established price, the company will remain a viable concern by
achieving its basic goals. It should be avoided.
Cost-plus pricing: This is what is generally referred to as cost-based pricing. It is
essentially mark-up based. A mark-up is added at every stage of the cost. The channel
works on this basis and the final price is the consumer price. What is important for
businesses is to increase their volumes and lower their costs at the manufacturing end.
Reduced costs mean higher margins. However, the margins to other members of the
channel should stay the same.
Penetration pricing: This model is applicable in situations of growth. You want to
increase your volume and in a bid to do that you lower the price. High volumes bring
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the costs down. This model is workable in markets with minimal differentiation, price
sensitivities, a large number of manufacturers, a large number of substitutes, and easy
entry.
The one with the highest volume and share is in a position to cause a shake out and
hence discourage new entrants from coming in.
Harvest pricing: This model applies to products at the decline stage when volumes are
falling. You increase the price and try to reap higher margins on costs. When volumes
further slide, margins compensate for that until the product fades away and makes way
for another one.
We have seen that market-based pricing starts with the market, competitive situation, and
product positioning and from there it works backward to arrive at margins.
Cost-based pricing starts from the company and reaches its final stage by adding mark-ups at
every stage of the chain.
It is wonderful to command a premium price and make more margins, but volumes may not be
that high. Conversely, it is prudent to follow a conservative approach that generates
benchmarks for the company to charge prices almost bare minimum. But then, you may be
grossly under-pricing and denying yourselves the opportunity of charging the right price.
There is no one answer to a variety of situations you may find yourselves in while pricing your
brand. However, following are a few guidelines for you to be sensible in pricing your brand.
Differentiation: Level of differentiation does offer guidance into the kind of model you
should follow. Market-based model for differentiated products and cost-based model for
those with minimum differentiation seem to be one guideline.
Touch both the bases: Within the generalized guidelines, you should look into the
positive aspects relating both the bases while pricing your brands.
Don't forget contribution: One important factor that you must not lose sight of is that
of total contribution. You have to arrive at a combination of volume and margin that
increases businesses' total contribution.
High volume and low price affect contribution negatively: Going for high market
share and high volumes at the cost of price may not be a good strategy, for it affects
contribution negatively. However, if there is a pressing argument for doing so, then
consensus among marketing and other colleagues must be achieved to make the best
possible decision.
Assess the perceived value: The perceived value your brand offers to your customers
must neither be over-estimated nor under-estimated.
Stay within the mainstream price: Customers will never pay a price they think is
beyond what they assess as the added-value your brand carries. Staying within the
mainstream price is the answer. You should try to see how close or far off that is from
both the models and what kind of contribution that offers. Subsequent to that consider
the factor of contribution margin to have confidence in your decision.
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Summary
Both the models have their attractions and distractions. The objective should be to come up
with the optimal level of pricing that offers the brand value and the company decent
profitability. Based on your brand vision, you must come up with the model most
compatible with it.
Bibliography:
1. Roger J. Best: "Market-Based Management ­ Strategies for Growing Customer Value
and Profitability", Prentice Hall (241)
2. Roger J. Best: "Market-Based Management ­ Strategies for Growing Customer Value
and Profitability", Prentice Hall (241)
3. Roger J. Best: "Market-Based Management ­ Strategies for Growing Customer Value
and Profitability", Prentice Hall (241-251)
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Table of Contents:
  1. UNDERSTANDING BRANDS – INTRODUCTION:Functions of Brand Management, Sales forecast, Brand plan
  2. INTRODUCTION:Brand Value and Power, Generate Profits and Build Brand Equity
  3. BRAND MANIFESTATIONS/ FUNDAMENTALS:Brand identity, Communication, Differentiation
  4. BRAND MANIFESTATIONS/ FUNDAMENTALS:Layers/levels of brands, Commitment of top management
  5. BRAND CHALLENGES:Consumer Revolt, Media Cost and Fragmentation, Vision
  6. STRATEGIC BRAND MANAGEMENT:Setting Objectives, Crafting a Strategy, The Brand Mission
  7. BRAND VISION:Consensus among management, Vision Statement of a Fast Food Company, Glossary of terms
  8. BUILDING BRAND VISION:Seek senior management’s input, Determine the financial contribution gap
  9. BUILDING BRAND VISION:Collect industry data and create a brand vision starter, BRAND PICTURE,
  10. BRAND PICTURE:Brand Value Pyramid, Importance of being at pinnacle, From pinnacle to bottom
  11. BRAND PERSONA:Need-based segmentation research, Personality traits through research
  12. BRAND CONTRACT:The need to stay contemporary, Summary
  13. BRAND CONTRACT:How to create a brand contract?, Brand contract principles, Understand customers’ perspective
  14. BRAND CONTRACT:Translate into standards, Fulfill Good Promises, Uncover Bad Promises
  15. BRAND BASED CUSTOMER MODEL:Identify your competitors, Compare your brand with competition
  16. BRAND BASED CUSTOMER MODEL:POSITIONING, Product era, Image Era, An important factor
  17. POSITIONING:Strong Positioning, Understanding of components through an example
  18. POSITIONING:Clarity about target market, Clarity about point of difference
  19. POSITIONING – GUIDING PRINCIPLES:Uniqueness, Credibility, Fit
  20. POSITIONING – GUIDING PRINCIPLES:Communicating the actual positioning, Evaluation criteria, Coining the message
  21. BRAND EXTENSION:Leveraging, Leveraging, Line Extension in detail, Positive side of line extension
  22. LINE EXTENSION:Reaction to negative side of extensions, Immediate actions for better managing line extensions
  23. BRAND EXTENSION/ DIVERSIFICATION:Why extend/diversify the brand,
  24. POSITIONING – THE BASE OF EXTENSION:Extending your target market, Consistency with brand vision
  25. DEVELOPING THE MODEL OF BRAND EXTENSION:Limitations, Multi-brand portfolio, The question of portfolio size
  26. BRAND PORTFOLIO:Segment variance, Constraints, Developing the model – multi-brand portfolio
  27. BRAND ARCHITECTURE:Branding strategies, Drawbacks of the product brand strategy, The umbrella brand strategy
  28. BRAND ARCHITECTURE:Source brand strategy, Endorsing brand strategy, What strategy to choose?
  29. CHANNELS OF DISTRIBUTION:Components of channel performance, Value thru product benefits
  30. CREATING VALUE:Value thru cost-efficiency, Members’ relationship with brand, Power defined
  31. CO BRANDING:Bundling, Forms of communications, Advertising and Promotions
  32. CUSTOMER RESPONSE HIERARCHY:Brand-based strategy, Methods of appropriations
  33. ADVERTISING:Developing advertising, Major responsibilities
  34. ADVERTISING:Message Frequency and Customer Awareness, Message Reinforcement
  35. SALES PROMOTIONS:Involvement of sales staff, Effects of promotions, Duration should be short
  36. OTHER COMMUNICATION TOOLS:Public relations, Event marketing, Foundations of one-to-one relationship
  37. PRICING:Strong umbrella lets you charge premium, Factors that drive loyalty
  38. PRICING:Market-based pricing, Cost-based pricing
  39. RETURN ON BRAND INVESTMENT – ROBI:Brand dynamics, On the relevance dimension
  40. BRAND DYNAMICS:On the dimension of knowledge, The importance of measures
  41. BRAND – BASED ORGANIZATION:Benefits, Not just marketing but whole culture, Tools to effective communication
  42. SERVICE BRANDS:The difference, Hard side of service selling, Solutions
  43. BRAND PLANNING:Corporate strategy and brands, Brand chartering, Brand planning process
  44. BRAND PLANNING PROCESS:Driver for change (continued), Brand analysis
  45. BRAND PLAN:Objectives, Need, Source of volume, Media strategy, Management strategy