3.1.b Marketing Analysis.
The new type of bike could broadens an existing market and therefore it is important to analyse its potential in the market. In order to achieve this, the ATB company has done primary and secondary research to obtain more information on the new project:
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reaction of consumers to the new product. For sometime now there has been a patent demand for this type of bike among the over 35 years old, which accounts for 40% of the market (men and women).
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The market size. Bogaert’s company and other supplier controlled over 50% of the UK bicycle market, but there are other competitors and importers of low priced bikes. It is difficult to predict the sustainability of this market size.
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The promotion. At this stage the promotion should be intensive to make consumers aware of the new product: Special introductory prices, advertising, display of new range of bikes in normal retailing shops and in out of town stores, availability of the product.
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Additional features. To have an advantage over the competitors it is important to promote: quality, technical leadership, variety, easy terms of payment (direct debit with no deposit over a period of months etc.), new enclose ‘hub gears’, free delivery ?, one year warranty and extended warranties, money-off tokens to spend on other products and a specific brand name for the new bike.
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The price. What pricing strategy should be adopted? I will answer this important question later in the report.
The launch and commercialisation of the new bicycle is one of the most important and exiting time of its life cycle. The major part of the advertising budget will be spent in the pre-launch and launch period to create maximum impact. It is crucial to make potential customers widely aware of the new product, hence the importance of training the retailers for them to deliver the most efficient information about the product. The new bicycle must have the ability to satisfy customer needs and to reflect a positive approach to innovation.
3.1.c Brand Power
The reputation of this particular producer of ATB bicycles may encourage customers to buy its newly launched product without considering other competing makers. This brand is, in itself, a form of product differentiation which communicates effectively the product range.
The brand provides consumers and producers certain advantages:
to the consumer it means a product the can rely upon -reducing the importance of price competition. It also helps to foster consumer’s loyalty.
To the producer it means that the popular brands can be sold at higher prices than their competitors. It may also avoid some difficulties in personal selling and allowing manufactures to obtain display space for the product in large stores.
Branding provides the Unique Selling Point which help to differentiate this type of bike from other similar brands and can be an essential item for the retailers to stock, solving the problem of distribution.
The ATB brand is a manufacturer’s brand. In this case, the producers are involved in the promotion, distribution and the pricing of the product. With the new bicycle, there is a need to create a brand image that fits well with the demands of its customers, hence the importance of product positioning.
The intangible nature of a brand influence individuals in their choice. When making a purchase, the consumer tends to match the brand image with the self-image, having a symbolic value for the purchaser. It is crucial at this stage to understand how the potential customers wish to be perceived in terms of image. This could be achieved by creating a product mapping, showing the key features and benefits of that particular type of bicycle.
The new ATB bicycle could be positioned in relation to a specific target market: ladies over 35 years old who wish to have a modern looking bike, with all the comforts of an ‘on-road’ (the saddle, the hub gears etc.) but also with a sportive image. The name should not be effeminate, in order to include the population over 45 in general and to attract some of the young 15 to 19 core group: the ATB “Dextra” or “Monix” (these are names which do not automatically imply a pink colour ladies-only bike with three gears and a shopping basket at the front!)
3.2 Pricing Process
Selecting the right price for a product is one of the most critical decisions to be taken in the marketing mix. Monica Bogaert has to decide the pricing strategy for the new bicycle, taking into consideration the other elements of the marketing mix. In the case of the new bicycle ready to be launched, the price needs to be set for the first time but with the added advantage that the product in itself is not new -there is already a pricing structure in this type of market.
There are two different influences on the pricing process: internal and external influences. The company has taken into consideration the marketing strategies, using the marketing mix for the new product (except the final decision about price), the positioning and group target. It has researched the market in order to develop the new product and it has produced a study of the potential costs involved. In the external influences, the company is aware of competition and the potential demand for this new type of bicycle. There are, however, other factors and influences that should be taken into consideration in the pricing process:
Internal Influences
Marketing Strategies:
- objectives of organisation
- positioning
- marketing mix
- research and development
Financial Strategies:
- pattern of costs
- existing prices of similar products
- financial objectives.
External Influences
Customers:
- elasticity of demand
- motivations and perceptions
Market:
- competitors
- conditions in different markets
Environment:
- government policies
- suppliers and intermediaries
- economic atmosphere.
3.2.1 The power of Internal Influences
Of all internal influences that can be taken into consideration, there are several areas which can affect the price of the new product.
The product and its target group: mostly female (but not exclusively) over 35 years of age.
The position of the product in the market map: high quality and top technical development.
The marketing mix strategies: these need to be considered when making a decision about price (place, promotion and also the timing of the launch).
The financial (or pricing) objectives of the company:
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Profit maximisation - not simply a short-term maximised profit but looking for profit targets that can be realistic for the long term survival of the company.
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Price competition - not necessarily a price lower than that of a rival, but a relatively higher price yet more competitive due to the quality of the product. Because of the size of the company, they may feel incline to keep prices relatively low in order to secure long-term market dominance.
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Sales maximisation: high sales may also give a good profile in a particular market. In order to do this, there may be the requirement to obtain brand leadership. The new bicycle may be launched at a low price in order to develop a high share of a developing market. On danger of this strategy is that, although market share may be increasing, unit sales may be falling in a market declining in size.
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Survival: could be another pricing objective where prices may simply be designed to ensure that the company survives in the market, even if losses are made in the short term.
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Product quality: if the producers of ATB have a reputation for its high quality products, there is a need to ensure that customers are totally satisfied with the product, therefore pricing may reflect higher production and other costs involved in this process.
The ATB producers need to have clear financial objectives before setting the task of fixing a price to the new product. This could be one of the most influential internal factors, in particular the price competition objective, which could provided the company with the competitive edge in the market, together with an intense promotion campaign to highlight the product’s quality.
There is however, the financial structure of the company which determines the cost base of the new product to be priced - the quantity of units sold is a critical factor in the success of the business. There are two kinds of costs: fixed (indirect) costs and variable (direct) costs. The difference between the variable costs of each unit of product and the price paid by the customer is the gross margin and this can provide a guideline in the pricing process, in order for the company to establish the minimum levels.
The company has to cover costs either trough sales or from other sources of funding. Costs therefore represent an important determinant of pricing techniques for both the long and short term. There are two generally accepted pricing techniques based on the use of costs: Costs-plus pricing and Contribution Pricing.
Costs-Plus Pricing. It is simply adding a margin to the unit cost. This technique is very popular with both large and small businesses using the method on either all of their products or on some of them only. Nevertheless, there are a few disadvantages with this technique:
- If price is too high, sales may fall short of expectations, and if the price is too low it could affect the revenue.
- This technique indicates a production-orientated marketing rather than consumer’s perception of the product.
- This type of pricing does not look at a profit goals or the market share.
- It can also be inflexible, not taking into consideration changes in the market and the competition.
- This technique ignores price elasticity of demand which is an indicator of the effect of any price increase or decrease on revenue.
Contribution Pricing. This technique is seen as a more marketing-orientated pricing approach. In this case, the company separates the different products in its portfolio and charge individual prices which are appropriate to each product’s share in total costs. To calculate the profit using the contribution pricing, it takes into account the revenue from an individual product less the variable costs of the product giving the contribution of the individual product. This is done with all the different products in the company. At the end, the total contributions less the total fixed costs will give the total profit.
One way of showing visually how this type of pricing works is through the break-even analysis, which I will analyse with more detail in the recommendation’s section in this report. It will also show how contribution pricing method has more advantages for Monica Bogaert’s company as it analyses individual products in terms of their ability to cover variable costs which can be attributed to them.
3.2.2 The Power of External Influences.
Internal influences may help the company to establish their pricing strategies but it is the external influences which will eventually determine if the final price of the new product is accepted in the market place.
As mentioned before in this report, there are several external factors which influence any marketing decision on pricing:
Consumers demand. The demand curve for most products is continuously shifting as a result of pressures such as changes in tastes and fashion. It is possible to measure consumer’s response to prices by studying the elasticity of demand for products. There are two indicators:
- Inelastic demand -means that sales will not be affected dramatically by a change (up or down) in price.
- Elastic demand -means that sales will be significantly affected by any change (up or down) in price.
Competitors. They play an important role determining prices. In the cycling market there is a so called Monopolistic competition where there is a range of prices for similar products. In this case, the brand represents an important factor when setting a price, as it will command a price premium over other goods (branded or not) because of its higher perceived differences.
Distributors. They may insist on high margins and thus resist price-cutting. However, most retailers have only marginal influence on pricing levels.
VAT. Taxes on goods can act as a deterrent for manufactures when planning a rise on prices. It also constrains pricing strategies. VAT is added to the final price that the consumer will eventually pay.
Distributors, intermediaries and VAT play a crucial part when determining pricing strategies and ATB producers have to take them into consideration when making a break even analysis for the new product: the break even point is the area at which an organisation makes no profit and no loss. If sales are beyond the break- even point profits are made and if they are below this point, losses are made.
3.3 Pricing Strategies
Monica Bogaert in her study has to recommend a pricing strategy for the new type of bicycle ready to be launched by her company. Bogaert’s has mentioned two types of strategies: Skimming and Penetration.
Skimming. At the launch of a new product, there will relatively be little competition in the market therefore the demand for the product may be generally inelastic. Consumers will have little knowledge of the product. Skimming involves setting a reasonably high initial price in order to obtain high initial return from those consumers willing to buy the new type of bicycle.
Once the first group of customers has been satisfied (and if sales began to fall), the producers can lower the price in order to make sales to new group of customers. This process can be continued until all potential markets are satisfied (or saturated!). By operating in this way, the business removes the risk of underpricing the product.
The advantages and disadvantages of this pricing strategy can be summarised as follows:
Advantages Disadvantages
Fast returns on investments Competitors encouraged
in research and technology. to enter the market.
High profits and low competition. Diseconomies of scale as
sales kept low.
Prices can be gradually reduced.
Positive brand image Limitation on sales potential.
perceived with high prices.
Penetration. Whilst skimming may an appropriate policy when the seller is not sure of the elasticity of demand for the product, penetration pricing is suitable when the seller knows that demand is likely to be elastic. In this case a low price may be recommended to attract customers to the product. This strategy is usually associated with the launch of a new product for which the market needs to be penetrated.
The product may initially make a loss as price is kept low. Hopefully this stage can change as consumer awareness is increased. This strategy could be used where economies of scale can be employed to produce large volumes at lower unit cost. It is crucial to spread the fixed costs over a large volume of output. Penetration pricing can be used to deter strong competition from rivals of similar products.
The advantages and disadvantages of the Penetration pricing policy can be summarised as follows:
Advantages Disadvantages
Fast sales growth Reduced profits
Wide product awareness Difficult to increase prices
Strong market position Large investment required
Economies of scale
Deter new entrants
3.4 Pricing Methods.
To determine the optimum price to offer the customer, it is needed to consider certain techniques that will help to put into practice the pricing decisions. In this report I have looked at some of this methods such as cost-base pricing which include cost-plus pricing and gross margin pricing. But both methods have certain disadvantages and limitations as they do not take into account competitive pricing (or what the consumer is prepare to pay), they do not allocate individual costs to specific products (the fluctuations in volume) and they tend to ignore capital and return on investment. Therefore, when using cost-base pricing it is important to use a break-even analysis which will cover all the other areas that determine the final price, such as relationship between costs and volume of sales.
With the financial information given by Monica Bogaert’s organisation I will draw a break-even analysis of the new ATB product, taking into consideration other important external influences -retailers, VAT, distributors etc.- which will eventually produce a relatively accurate price for the new product.
3.4.1 Break Even Analysis
Assuming an order of 10,000 units for the first year, the financial situation in the company could be seen as follows:
The variable cost of each bicycle is £110; if the company set a price of £190 per unit to the retailer, the break even point would be as follows:
Fixed Costs £500,0000
= 6,250 units
Contribution per Unit £190 - £110= £80
It means that the company needs to sell 6,250 bicycles at £190 each to the retailer to break even (break even point -sales value in £):
Fixed Costs £500,000
X Sales Price X £190 = £1,187,500
Contribution per Unit (per unit) £80
Cost of production 6,250 units @ £110 £687,000
Fixed Costs £500,000
Total Cost of Production £1,187,5000
If the producers manage to sell the 10,000 units ordered, the company could be making a profit which it would give them a margin of profit:
Cost of production 10,000 units @ £110 £1,100,000
Fixed costs £500,000
Total Cost £1,600,000
Selling 10,000 @ £190 £1,900,000
Profit £300,000
When the new product arrives at the retailer ready to be sold to the customer, the retailer is going to add a mark-up of between 35 and 45% to the producer’s price. On top of this new price, VAT (at 17.5%) must be added. The final price for the consumer could be as follows:
Producer’s price 190.00 190.00
Retailers mark-up of 35% 66.50 and of 45% 85.50
Total 256.50 275.50
VAT 17.5% 45.00 49.00
Total price to the customer 301.50 324.50
Basically, a final price between £302 and £325 depending on the retailer’s mark-up.
4 RECOMMENDATIONS
Having analysed the situation in regard of the new product ready to be launched, I have identified three important areas to be considered before deciding which price strategy would be appropriate for this new bicycle model in order to make a decision on the specific price for each unit of production:
- The impact of external and internal influences on pricing decisions.
- The selection of a pricing policy.
- The selection of a pricing method.
1. The most important Internal influences in Monica Bogaert’s company have been to establish the target group (in this case the over 35 female consumer), together with an accurate position in the marketing map (high quality and technical developments). The company has been able to pin-point these elements with the use of a suitable marketing mix. The financial objectives of the company could be described as aiming at a price competition, which can provide them with a competitive edge in the market, together with an emphasis in product quality to differentiate them from the competitors.
Contribution price is a technique which can help to achieve the financial objectives of the company. It means that the company has a portfolio of products and each is charged with individual prices. With a break even analysis it is possible to visualise how the new product responds to various changes in price in order to cover its variable production costs.
The External influences that affected the company have had an obvious impact on the company’s pricing strategies, specially consumer’s demand. This can be seen as a result of elasticity of demand (forecast) with the new product, where variations in price could have an effect on sales. Other external factor to be considered is the role of the distributor or retailer, who adds a mark-up price to the producer’s own price. It is important to take into consideration the range of percentage added to the product, which can vary between 35 and 45%. In order to forecast a more accurate picture on how these added figures could affect the final price, I have included the minimum and the maximum percentage in the financial calculation. An environmental factor which (unfortunately) has to be taken into account is VAT at the current rate of 17.5% and is added to the product recommended price.
Finally, competitors play an important part in the external influences, specially if selecting a high price for the product, the competition may feel encouraged to enter the market.
2. Bogaert has to make a decision on the pricing strategy for the new product. She has mentioned two possible policies: on the one hand is the strategy of low price, long term profits, penetration to more segments of the market and expanding the market share; on the other hand is the pricing up, fast returns and targeting a specific group. Basically, Skimming and Penetration strategies have both advantages to the producer. However, Skimming offers important advantages that can outweigh the disadvantages: it provides a fast return of investment and research carried out on the new technology; prices could eventually be reduced if sales prove popular and it portrays a positive brand image, as ATBs are associated with high quality and fashionable trends. This brand has traditionally encouraged brand loyalty among customers.
3. As I have mentioned before, the break even analysis carried out on the product shows how the relationship between prices and sales, enables the company to visualise a budgeted profit on this individual product:
The vertical axis represents the costs and revenue and the horizontal axis represents production and sales in units. The fixed costs at £500,000 are the same in total and the variable costs are the same per unit at all levels of production. The production of 10,000 units (at £110) costs the company £1,600,000.
The break even point is where total costs are matched exactly by total revenue. This can be proved mathematically as: fixed costs = £500,000 = 6,250 units
contribution per unit £80
The amount of units (6,250) selling at £190 to the retailer has the same costs as the revenue (£1,187,000). Obviously, the company starts making a profit when sales expand beyond this point.
5 CONCLUSION
To prolong the life cycle of the ATBs products, the company has to inject new life into the growth period by means of readjusting the ingredients of the marketing mix. This could be done by changing or modifying a core product in order to keep ahead of competition. The introduction of the new type of bicycle opens up a new segment of the market, with the potential of broadening the existing market share.
In order to achieve this, the company has to look at the changes in the product, its promotion, the place and other distribution policies, and the price. In the area of pricing the new product, Monica Bogaert has to consider the following steps:
1. Establish pricing objectives by looking at the internal and external influences. One of the most important areas of internal influences is the correct targeting of a segment of the market (in this case the over 35 female group) and to establish financial objectives, in this case pricing the product fairly high in order to achieve short-term profits and to recover the costs of research and technical development.
2. Asses customer needs and demand. This external influence has a direct impact on pricing. In this report I have established the potential elasticity of demand of the product, which can demonstrate that changes in price could have an effect on sales. However, high quality and the brand may justify its relatively high price.
3. Calculate costs. It has been established the fixed costs of the company and the variable costs per unit of production. There is also a need to calculate the minimum profit margin per unit (10%) and other environmental factors which influence the price, such retailers mark-up (between 35-45%) and VAT. This is the reason why a sell price of £190 per unit represents an optimum figure for the company.
4. Consider competitor prices. There are cheaper versions of ATBs bicycles, but their brands are not well established in the market and they lack the latest technological advances. It is important to enter the new segment of the market with a good branded product and with a price that promotes both quality and fashion.
5. Select a pricing policy. A pricing strategy to follow could be Skimming, as the new product has distinctive advantages (new technology, new features and perhaps credit, warranty, after sales service etc.) which differentiates it from competitors.
6. Determine a pricing method. This could be cost-base pricing, taking into account the costs of production and supply. These costs, prices and volume of sales are exposed in a break even analysis.
7. Decide on specific price. Finally, with all the factors considered it is possible to specify a price guide. As I have mentioned before, a figure of £190 per unit is a price that can satisfy the producer’s expectations. The customer will be expected to pay from a reputable retailer a figure between £305 and £325, depending on the added cost and the product’s features. A psychological price could be used here, where the cheapest new model could sell at £299 and the more sophisticated one at £329.
