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BRAND MANAGEMENT AND
NEW PRODUCT DEVELOPMENT
SECTION 11B
Brand Management and the Firm
Brands: Pricing Strategies, Tactics, and Laws
ALAN L. WHITEBREAD
THE PRICE-SETTING PROCESS*
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Select strategic objectives and price strategy
Estimated demand and its price elasticity
Examine the cost-volume relationship
Examine competitive prices and strategies for
comparable and functionally similar products
• Set the price schedule
– EXAMPLES: 3M, Xidex
PRICE STRATEGIES
-COMPETITION BASEDGOING – RATE
Based on what competitors
are charging
EQUAL TO
PRODUCT LEADER
ALCOA, metals
SEALED BID
Expected prices [volume]
[government; war board]
SOLE SOURCE
LIFE-CYCLE
Capital equipment
PRICE STRATEGIES
-NEW PRODUCT*MARKET PENETRATION
Initial low price for volume
Wal-Mart
MARKET SKIMMING
Initial high price followed
by price decreases - drugs
STAIRSTEP
Planned reductions
Computers
PRICE STRATEGIES
-PRODUCT MIXPRODUCT LINE*
Steps between items in line
Consumer electronics
BY-PRODUCT
Plastic lumber
OPTIONAL PRODUCT*
PRODUCT BUNDLE*
Auto accessories
Season tickets
CAPTIVE PRODUCT*
• Be very careful of bundling
products!
Razor blades, film
• Forcing the purchase of A to
get B is often illegal.
PRICE ADJUSTMENT STRATEGIES
• Adjusting
Prices for a
Psychological Effect
Psychological Pricing
•
Price as a Quality Indicator
•
Reference Prices
[buyer’s perspective Clothing]
•
Odd & Even
•$9.95 vs. $10
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Price Lining*
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Prestige Pricing
PSYCHOLOGICAL PRICING
Price lining
Price
Prestige pricing
$395
Price
per
per
unit
unit
$349
Units sold
Units sold
Demand is inelastic over range: appliances
Labor; Chia Pet
PRICE ADJUSTMENT STRATEGIES
• Adjusting
Prices for a
Psychological Effect
Promotional Pricing
•
Loss leader [milk]
•
Temporary reductions
•
Coupons*
•Free standing
redemption rate of 1%2%
PRICE ADJUSTMENT STRATEGIES
Geographical Pricing*
• Adjusting
Prices to Account
for the Geographical Location
of Customers
•
Zones (UPS)
•
FOB (destination = dangerous)
PRICE ADJUSTMENT STRATEGIES
[PRICE FLEXING]
Discount & Allowance
Reducing Prices to Reward
Customer Responses such as
Paying Early or Promoting
the Product.
Segmented*
Adjusting Prices to Allow
for Differences in Customers,
Products, and Locations.
Cash Discount / Rebate
Customer
Quantity Discount
Product-Form
Functional Discount
Location* Pizza Hut
Seasonal Discount
Time* Fed Ex
Trade-In Allowance
Channels* Stanley
Promotional Allowance
PRICE STRATEGIES
-PRICE ADJUSTMENTUNIT PRICING
-By size, ounce
Detergents
PRICE UMBRELLA
LEADERSHIP
INTEL
COST PLUS
Dangerous!
COST-PLUS PRICING
• PROVIDES A SET MARKUP OR MARGIN
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Must understand cost structure in depth
Seller perceives price fairness
Seller perceives less price competition
Unrelated to market conditions
No customer orientation
$
No confidence in acceptance rate
Dangerous volume assumptions
QUANTITY
THE COST – PRICE RELATIONSHIP
“You have to know the cost so you can
understand the profitability implications of
price but not for the purpose of setting
price.”
Kent Moore, University of Illinois, FAST COMPANY, March, 2003 p. 94.
Cost in Dollars (millions)
BREAK-EVEN ANALYSIS
Total Revenue
Target Profit
($2 million)
12
10
8
6
4
2
Variable Cost
Fixed Cost
200
400
600
800
Sales Volume in Units (thousands)
1,000
Total Cost
COMPETITIVE RESPONSE
Has Competitor Cut
Price?
No
Hold Current Price;
Continue to Monitor
Competitor’s Price.
Yes
Will Lower Price
Negatively Affect Our
Market Share & Profits?
No
Reduce Price
No
Raise Perceived
Quality
Yes
Improve Quality
& Increase Price
Yes
Can/ Should Effective
Action be Taken?
Launch Low-Price
“Fighting Brand”
PRICING CHALLENGES
• Economic Value-Added [EVA]
– After-tax operating profit – capital*cost of capital
– Positive number indicates you are increasing shareholder
value
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Pricing innovative products
Pricing in rapidly growing markets
Pricing in mature markets
Appealing to all four customer price/value
segments
CONSUMER PRICE/VALUE
SEGMENTS
High
Price Sensitive
Segment
Pain
Of
Value-Seeking
Segment
Multi-brand strategy?
Expen
diture
Convenience-Seeking
Segment
Loyal
Segment
Low
Low
High
Value of differentiation
THE ECONOMY & PRICING
INFLATION
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Shrink product lines
Delayed price changes
Escalator pricing
Unique offerings
Change package or
offering size
• …
RECESSION
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Value-based pricing
Larger package
Bundling or unbundling
New products
Renegotiate contracts
Pressure suppliers
Reduce number of
suppliers
THE LEGAL SIDE OF PRICING
Price Fixing
-restraint of trade
(Sherman Act 1890)
Treble damages on provable actual
loss
Price Discrimination
-Exclusives; Tying
(Clayton Act 1914)
-resellers
(Robinson-Patman Act (1936)
LEGISLATION – ROBINSON-PATMAN [1936]
• Probably the most misunderstood piece of
reseller legislation.
– “goods of like [grade and] quality”,
• case law recognizes brand price differentials;
– where the effect “may substantially lessen
competition or tend to create a monopoly”;
– slotting allowances
• paid by manufacturers to get the product on the
retail shelf;
– in any line of commerce; or to
– injure, destroy, or prevent competition
ROBINSON-PATMAN - PREDATORY PRICING:
Chicago Board of Trade vs. U.S.
A Robinson-Patman Primer, 2nd Ed., Macmillan Publishing Co., Inc., © 1979, p. 127.
The courts seem to have found competitive injury
wherever predatory behavior has been found, thus
implying a per se approach. … it may be that the judge
or a jury can find that a reasonable possibility of
substantial competitive injury is all the Act requires, …
automatically follows from predatory pricing..
Intent to harm
ROBINSON-PATMAN - INTENT TO HARM:
E. B. Muller & Co.
A Robinson-Patman Primer,
2nd
Ed., Macmillan Publishing Co., Inc., © 1979, p. 133.
… the respondent was charged with cutting the price of
chicory, frequently below cost, in the single area where
its sole domestic competitor marketed, while
maintaining higher prices elsewhere. …
Correspondence between Muller’s offices was
introduced that revealed a plan to “ultimately curb this
competition if we should not succeed in eliminating it
entirely.” Taken together, these factors evidenced a
predatory intent …
Limited competition + higher prices elsewhere + intent
to harm
ROBINSON-PATMAN - INTENT TO HARM:
Fry Roofing.
A Robinson-Patman Primer,
2nd
Ed., Macmillan Publishing Co., Inc., © 1979, p. 135.
… the price leader and dominant competitive factor in
the sale of roofing products in the areas served by the
two small competitors, had occasioned competitive
injury … by selling asphalt felt in that area at prices
below the price at which the two smaller firms could
profitably operate and by maintaining its prices at or
below this level for over two years, while selling at
substantially higher prices elsewhere.
Prices below competition + for a long time + higher
prices elsewhere = intent to harm
ROBINSON-PATMAN AND
PURCHASING
• “…with any person who either grants or
knowingly receives benefit of such
discrimination.”
– Purchasing requests
– Price discrimination
– Promotional allowances, …
• Meeting the competition
– Good Faith – Bad Faith standard
ROBINSON-PATMAN CASE LAW
• Price discrimination must have a
significant effect on sales or market share
to be illegal.
• Permits the rationalization of quantity
discounts.
• Allows you to offer different prices to
different types of resellers.
ROBINSON-PATMAN
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ESCAPE PROVISIONS
1. obsolete or perishable merchandise
2. differences in the cost of manufacture, sale,
or delivery
3. effected in good faith to meet a competitors
price
THE LEGAL SIDE OF PRICING
Price Fixing
-restraint of trade
(Sherman Act 1890)
Price Discrimination
-exclusive; tying
(Clayton Act 1914)
-resellers
(Robinson-Patman Act (1936)
FTC / False and deceptive practices
Deceptive Practices
(Wheeler-Lea Act 1936)
CONTRIBUTION MARGIN
• Contribution margin is the difference between the
ongoing directly attributable costs and the ongoing
revenue from that activity.
CM = [P - VC] * Q – AC
• The contribution margin [CM] equals the
– price [P] less the variable cost [VC] per item
– times the quantity sold [Q]
– Less ongoing other directly attributable costs [AC]
TERMS AND CONDITIONS OF SALE