SMELLERATOR By Larra Hall & Ali Sarvarian. AUDIENCE Internet Users Producers Online consumers.
Price as Seen by Consumers or Users
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Transcript of Price as Seen by Consumers or Users
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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?
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Sample of Pages From Sales & Marketing Management's Survey
of Buying Power
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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
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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
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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
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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)
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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
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Summary Outline of Different Sections of Marketing Plan--Part
B• Place• Promotion• Price• Special Implementation Problems to Be
Overcome• Control• Forecasts and Estimates• Timing
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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Some Changes and Trends (cont.) - Sales Promotion
• Database-directed promotion
• Point-of-purchase promotion
• Trade promotion is more sensible
• Event sponsorships
• Stocking allowances
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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
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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
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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
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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
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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
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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 -------------
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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
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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
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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
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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
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Demand Curve for Hamburger (a product with many substitutes
Pri
ce (
$)
Quantity
Relevant Range
Current Price Level
P
0
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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
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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
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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
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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
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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)
$1.60
1.30
1.00
0.70
0.40
0.000 10 20 30
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Interaction of Demand and Supply in the Potato Industry and the Resulting
Demand Curve Facing Individual Potato Farmers
Firms (each producing about1/10,000 of industry output)
Demand
Supply
Pri
ce
($
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
)
$1.60
1.30
1.00
0.70
0.40
.000 500 1,000 1,500
Quantity (millions of bags per month)
Equilibrium point
Whole Industry
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Oligopoly Situation with Kinked Demand CurveA. Industry Situation B. Each firm’s view of
its demand curve
Quantity Quantity(smaller than industry quantity)
Market price
Pri
ce
($)
P
0
Supply
Demand
Pri
ce
($)
P
0Q Q
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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
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Basic Operating Statement Relationships
Gross sales
- Returns and Allowances
= Net sales
Net sales
- Cost of sales
= Gross margin
Gross margin
- Expenses
= Net profit
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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
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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
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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)