This report presents a case study of a company "Dell Computers" that need to improve Marketing Management.
ABSTRACT
Marketing is the business function that deals with managing customer value. The role of Marketing management in organizations is to identify and measure customer needs and wants, determine which target Markets the business can serve, decide on the appropriate products and services to serve these Markets, and determine the optimal methods of pricing, promoting and distributing the products or services. Successful organizations are those that integrate the objectives and resources of the organization with the needs and opportunities in the Marketplace.
This report presents a case study of a company "Dell Computers" that need to improve Marketing Management.
1. DELL INC.
1.1 Business Summary
Dell Computer Corporation is one of the world's largest direct computer systems companies with annual revenues of $32 billion1. In this intensely competitive industry, Dell distinguishes itself by its direct channel policy. By cutting the middleman and building PCs, enterprise products like servers, storage, solutions to order, Dell has revolutionised an industry once inundated with unsold inventory and products that quickly became obsolescent. Dell's integrated supply chain has allowed it to gain market share while remaining profitable.
1.2 Products and Services
Dell continues to promote its PCs as highly stable and manageable, to penetrate all sectors of the market. In a market with little differentiation between vendors, Dell continues to use price and service as a differentiation. Dell's product strategy is based on the standardization of product platforms. The idea is to be a technology follower rather than an innovator. The company offers its customers a full range of computer systems, including desktop computer systems, notebook computers, workstations, network servers and storage products, storage area network, solutions as well as an extended selection of peripheral hardware, computing software and related services. Additionally, the company offers an array of services to support its customers' online initiatives.
1.3 Business Strategy
Dell's business strategy combines its direct customer model with a highly efficient manufacturing and supply chain management organisation and an emphasis on standards-based technologies2. This strategy enable Dell to provide customers with superior value; high-quality, relevant technology; customised systems; superior service and support; and products and services that are easy to buy and use. The important tenets of Dell's business strategy are as follows:
A direct relationship is the most efficient path to the customer. Dell believes the most efficient path to the customer is through a direct relationship. Direct customer relationships provide a constant flow of information about customers' plans and requirements and enable Dell to continually refine its product offerings. Further, the direct model eliminates the need to support an extensive network of wholesale and retail dealers. As a result, Dell reduces customers' prices by avoiding expenditures associated with the retail channel, such as higher inventory carrying costs, obsolescence associated with technology products, and retail mark-ups.
Customers can purchase custom-built products and custom-tailored services. The direct model allows customers to purchase custom-built products and custom-tailored services. Dell believes this is the most effective business model for providing solutions that truly address customer needs. Further, Dell's flexible, build-to-order manufacturing process enables Dell to achieve faster inventory turnover and reduced inventory levels. This allows Dell to rapidly incorporate new technologies and components into its product offerings and to rapidly pass component cost savings directly to its customers.
Dell is the low-cost leader. Dell's highly efficient supply chain management and manufacturing organisation, efficient direct-to-customer model, and concentration on standards-based technologies allow Dell to maintain the lowest cost structure in the industry and to pass those savings to customers. Additionally, Dell's focus on cost control during fiscal 2003 resulted in the lowest operating expense (measured as a percent of net revenue) in Dell's history and the lowest among its major competitors. Dell's relentless focus on reducing its operating costs allows it to consistently provide customers with a superior value.
Dell provides a single point of accountability for its customers. Dell recognises that as technology needs become more complex, it becomes more challenging for customers to efficiently address their computing needs. Dell therefore strives to be the single point of accountability for customers with complex technological challenges. Dell offers an array of services designed to provide customers the ability to maximise system performance, efficiency and return on investment.
Dell believes that standards-based technologies deliver the best value to customers. Dell believes that standards-based technologies are critical to providing customers with relevant, high-value products and services. Focusing on standards gives customers the benefit of extensive research and development from Dell and its entire supply chain, rather than a single company. Unlike proprietary technologies, standards provide customers flexibility and choice while allowing their purchasing decisions to be based on performance, cost and customer service.
1.4 Sales and Marketing
Dell sells its products and services directly to its customers through dedicated sales representatives, telephone-based sales and online sales through www.dell.com. Dell's direct model provides direct and continuous data regarding customer trends and needs3. Based on that information, Dell continually develops and refines products and marketing programs for specific customer segments. This constant feedback, unique to the direct model, allows Dell to rapidly gauge customer satisfaction and introduce new products.
Dell's sales and marketing efforts are organised based on customer needs and characteristics. Dell's customers include large corporations, government agencies, healthcare and educational institutions, small-to-medium businesses and consumers. Within each of Dell's geographic regions, Dell has divided its sales and marketing resources among these various customer groups. No single customer accounted for more than 10% of Dell has consolidated net revenue during any of the last three fiscal years.
For large business and institutional customers, Dell maintains a field sales force throughout the world. Dedicated account teams, which include field-based system engineers and consultants, form long-term relationships to provide each customer with a single source of assistance and to develop specific marketing programs for these customers. For large, multinational customers, Dell offers several programs designed to provide single points of contact and accountability with global account specialists, special global pricing, consistent service and support programs across global regions and access to central purchasing facilities. Dell also maintains specific sales and marketing programs targeted at federal, state and local governmental agencies as well as specific healthcare and educational markets.
Dell markets its products and services to small-to-medium businesses and consumers primarily by advertising on television and the Internet, advertising in a variety of print media, and by mailing a broad range of direct marketing publications, such as promotional pieces, catalogues and customer newsletters. A majority of the sales to small-to-medium businesses and consumers occur online through www.dell.com.
1.5 Competitors
Hewlett Packard (HWP) is a global provider of computing and imaging solutions and services for business and home with 45 billion in annual revenues4. The company provides a broad range of computing systems for the enterprise, commercial, and consumer markets. The company's Information Technology Services Group provides consulting, education, design and installation services, ongoing support and maintenance, proactive services like mission-critical support, outsourcing and utility-computing capabilities. It is yet unclear whether the proposed merger with Compaq will strengthen or weaken HP's position in the market.
International Business Machines (IBM) generates $88.7 billion in annual revenues by using advanced information technology to provide customer solutions. IBM competes very fiercely in Dell's product space (desktops, portables, servers, storage). The Company operates through several operational segments that offer a variety of solutions, including technologies, systems, products, services, and software and financing.
Compaq Computer Corporation (CPQ) is a leading global provider of enterprise technology and solutions. Compaq designs, develops, manufactures and markets hardware, software, solutions and services, including industry-leading enterprise storage and computing solutions, fault-tolerant business-critical solutions, communication products, and desktop and portable personal computers ...
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International Business Machines (IBM) generates $88.7 billion in annual revenues by using advanced information technology to provide customer solutions. IBM competes very fiercely in Dell's product space (desktops, portables, servers, storage). The Company operates through several operational segments that offer a variety of solutions, including technologies, systems, products, services, and software and financing.
Compaq Computer Corporation (CPQ) is a leading global provider of enterprise technology and solutions. Compaq designs, develops, manufactures and markets hardware, software, solutions and services, including industry-leading enterprise storage and computing solutions, fault-tolerant business-critical solutions, communication products, and desktop and portable personal computers that are sold in more than 200 countries. It is yet unclear whether the proposed merger with HP will strengthen or weaken Compaq's position in the market.
Sun Microsystems (SUNW) utilizes open industry standards, the Solaris Operating Environment and the UltraSPARC (Ultra Scalable Processor Architecture) microprocessor architecture. Sun sells scalable computer and storage systems, high-speed microprocessors, and a comprehensive line of high-performance software for operating network-computing equipment with annual revenues of $16 billion. The company also provides a broad range of services, including support, professional services and education. It competes with Dell in the server space.
EMC Corporation (EMC) provides integrated solutions to enable organizations to create an enterprise information infrastructure, which EMC calls an E-Info structure. The company designs, manufactures, markets and supports a wide range of hardware and software products, and provides services for the storage, management, protection and sharing of electronic information. The company generates annual revenues of $ 8 billion from sale of product and services. EMC competes with Dell in the storage line of business, which is most profitable and is projected to have relatively high growth opportunities.
Gateway Corporation (GTW) is a direct marketer of personal computers (PCs) and related products and services to consumers and businesses with annual revenue of 7 billion. Gateway develops, manufactures, markets, and supports a broad line of desktop and portable PCs, servers and workstations used by individuals, families, small and medium businesses, government agencies, educational institutions, and large businesses.
1.6 SWOT Analysis
Dell's strength includes direct route to market its relationship with suppliers and pricing strategy5.
Direct Model: Dell's business model is the envy of many competitors. Most other competitors that are in the process of developing a direct market strategy but the transition from existing sales channel are not simple. Dell continues to gain market share by using its knowledge about its customers.
Supplier Relationships: Dell's integrated supply chain allows it to keep only four days of inventory. Component price in computer industry falls almost 6% a week. The company can provide the component price decline to its customers quickly. In addition, Dell shares demand information with suppliers, so ensuring that inventory is kept to minimum. Dell also enhances cash flow by effectively paying suppliers after customers have settled invoices.
Pricing: Dell has developed a process whereby they can assess the lowest possible price within an hour. Dell's e-commerce infrastructure allows dynamic pricing strategy, whereby the same product and service can be sold at different prices, depending on the buyer.
PC demand is seen as price elastic (prices drop, demand increases). Dell's price cutting strategy aims to keep demand away from competitors. Ultimately, by denying them market share, more consolidation will occur. Gateway's withdrawal from European market and consolidation of HP and Compaq are indications that PC market is in the process of consolidating. In addition, Dell should be able to capitalize on the uncertainty surrounding the early HP/Compaq merger.
Dell's weakness includes limited R&D, its reliance on Microsoft and Intel and its relatively week service business.
R&D: Dell's traditional business model is based on a risk-averse approach to the marketing new products. Dell does not invest significantly in R&D and relies on supplier to provide lowest possible price and inform Dell of developments in product roadmap. Dell's model can be a weakness if it becomes locked out. From an important part of the market.
Reliance on Microsoft and Intel: Majority of PCs is based on platform created by
Microsoft and Intel. New processors and OS do not boost the market demand and hence they rely on vendors to promote new technologies. Dell must look into forming strategic alliances with rivals Linux and AMD, in order to mitigate some of the market power its current suppliers have.
Services: Recently, Dell has rolled out premier enterprise product support for corporate customers. Success in this area is crucial and needs to be monitored. As of today, IBM, Unisys and Gentronics handle most of Dell's customer support for enterprise products. Dell is in the process of capturing more of those revenues by providing the services itself.
Dell's opportunities include expansion in global coverage, enterprise products, services, and complete solutions.
Globalization: Dell's major opportunity is to expand its business models overseas and gain market share from the competition. Partnerships with major resellers should be looked into as a potential opportunity to gain greater share of the market. Sales outside of the United States accounted for approximately 33% of the company's revenues in fiscal year 2001. The company's future growth rates and success are dependent on continued growth and success in international markets. As is the case with most international operations, the success and profitability of those operations are subject to numerous risks and uncertainties, including local economic and labor conditions, political instability, unexpected changes in the regulatory environment, trade protection measures, tax laws (including U.S. taxes on foreign operations) and foreign currency exchange rates.
Enterprise Products: Competition like Compaq, IBM, HP has been subsidizing their PC business with their margins from the enterprise products like Servers and Storage. Dell is a new entrant into this market. Recent collaboration with EMC to sell their mid range storage and with Unisys to sell their Server products is a step towards gaining strength in this area.
Services & Solutions: High margins will never return in the PC business. Complete solutions will be the key to profitability in future. Currently services are 8% of total revenues. Dell has opportunity to grow this business, expand into other areas like consulting, and support.
Major threats to Dell are the margins in the traditional PC business and uncertainty in the lucrative service business
Margins: Perception is that Dell is gaining business by cutting margins. The reality is that Dell is able to reduce price by cutting costs, which enables it to maintain good margins.
Image: Dell has an image of hardware vendor and not service provider. Dell must focus beyond its traditional strength and develop a strong service infrastructure.
1.7 Risks
The major business challenges Dell expects to face in the near future revolve around the growth of the service business, movement towards globalization and increased competition in the computer industry. These trends may lead to heightened competition and decreased margins.
In addition, margins may be affected by high warranty costs to the company6. Recently, the company announced several recalls for batteries and other hardware. This will result in risk to the razor thin margins in the business. In addition, the company has been trying to expand into service business. It will be a challenge to gain business from rivals like IBM who have strong presence and head start in this area.
Systematic risk includes possibility of US economy falling into recession and the risk of downturn in foreign markets, particularly the future states of Japanese and European economies.
2. SALES FORECASTING
2.1 Seven Steps to More Accurate Sales Forecasting
Forecasting sales is never easy7. There are as many reasons why forecasts are missed, as there are customers-the economy, misunderstood sales pipeline, customer budget cuts, competition, market shifts, product inadequacies, supply shortages, etc. Anyone who ever carried a quota can create an explanation of how things did not turn out according to how they were "supposed to". Overachieving the forecast is almost as undesirable as underachieving. Wall Street frowns on management teams that are not in full control of the business, which is demonstrated by missing a forecast by significant amounts-positive or negative. Forecasts drive manufacturing line production, which in turn drive supply and ultimately revenues. Most supply problems result from poor long range forecasting. Creating reasons for missed forecasts is clearly an area that needs no new thinking.
Instead, we could learn more from how forecasts are met. Sales Performance International has been working with sales people and sales managers in the area of sales performance improvement for 15 years. We find that the key to improvement lies as much with sales management as with the sales people. Part of sales performance is sales forecasting and improving sales forecasting accuracy is one of the most appealing results of sales performance improvement-appealing to the top management of the company-and to Wall Street. We have seen the accuracy of sales forecasts improve in our clients to percentages under 5%. We have learned that a handful of factors make this possible. Here is what we have learned:
2.1.1 Who should do the sales forecasting
Sales forecasting is traditionally considered a job of the sales force, usually the sales people. Sales managers take the forecast from the sales people, adjust it, and pass the forecast upward through the sales management chain to the corporation. There are good reasons for this approach:
* The sales people are closest to the prospects and customers and therefore have the best information.
* If they forecast it, they commit to making it happen.
However, these reasons also are reasons for inaccuracy.
* Do not let opinions interfere with the facts.
Sales people are known for their optimism and their belief in them. How many sales people admit there is the slightest possibility they could lose a deal? How many believe they can 'pull it out' although the signs now are not positive? These attitudes are one of the reasons they are in sales-why they were hired. Their opinions-or hope-clouds the facts of the situation. Inaccuracy creeps in, on the upside. Manufacturing inventories are over-planned and revenues fall short of plan.
* Do not ask the very people who are paid on the results to forecast them.
It is human nature to want to succeed. We set goals for ourselves or others do. We have a strong drive to meet these goals, no one more than the typical sales person. The environment of competition, big egos, and payment for results intensifies this drive. The easiest way to ensure we meet our goal is to set a goal that we are sure we can make.
Goal setting should be separate from forecasting. Goals (quotas) are intended to be exceeded, to motivate best efforts. Goals and forecasts have different roles in a company, and should be managed differently although compared periodically. One is the target, the other the prediction. If the sellers create the forecast and the forecast becomes the de facto goal, the tendency is for the forecast to be what the sales person thinks of as 'realistic' (read 'achievable'). Inaccuracy creeps in on the down side.
The conclusion is that the forecast and the goals should be separate responsibilities. Reward the forecaster for accuracy; reward the sales people for exceeding the goals.
The implication of this conclusion is that the facts and pertinent information must be available and reliable. This leads to the next lesson learned.
2.1.2 A sales process is necessary for reliable facts and information.
A sales forecast is a prediction of what revenue will happen and when. An accurate forecast in the weather business is based on:
* Precise measurements of the condition of the environment, both near and far
* Historical information about what weather a particular set of conditions produces
* Historical information about when the forecasted weather will happen under those conditions The more certain these three factors are, the more accurate the weather forecast will be.
An accurate sales forecast rely on the same three factors:
* Precise determination of the status of the pipeline
* Historical information about the odds of winning under a particular set of conditions
* Historical information about when the close happened under those conditions
Similarly, the more certain these three factors are, the more accurate the sales forecast. Let us look at how to make these three factors practically precise.
2.1.3 Precisely define the pipeline and accurately grade the opportunities
A pipeline is a collection of opportunities being worked on. It is two-dimensional-the dollar amount of opportunities vs. how far along the opportunities are on the way to closing.
As opportunities are identified and enter the pipeline they are Milestone 'A' opportunities. As the sell cycle progresses, the opportunities move through the milestones-A to B, B to C, C to D, etc. The dollar amount represents the total amount of revenue for opportunities that are currently at the particular milestone.
In order to draw any conclusions about what the pipeline will produce based on history, there must first be a precise qualitative and quantitative definition of what each milestone means. If the definitions are based on opinions, the result will be imprecise. If they are based on facts, they will be precise because a certain set of facts (the environment) produces consistent results. The easiest way to set these definitions is to use a well-defined sales process, in which the milestones are defined by the facts of what has been accomplished in the sales process and opportunities are religiously graded accordingly. The definitions are unambiguous and consistent from seller to seller and from opportunity to opportunity. Just as weather forecasters depend on precise terminology and accurate meteorology on which to base their forecast, so do sales managers.
2.1.4 Forecast sales volumes based on history
A sales forecast has two elements: Sales volume and sales timing. For sales volume forecasting, 'history' means "What has been the percent of opportunities that actually closed once they have made it to a particular milestone?" Think of this as the win odds. Tracking the experience of a particular sales process over time will give the answer. Many sales processes have a 'starter' percentage that is useful until more experience has been gained. This is a simple parameter to measure if the sales organisation has good Sales Force Automation (SFA). When a well managed sales process has been implemented, these percentages can be derived with several months' experience.
2.1.5 Forecast sales timing based on history
When the revenue will happen, i.e., when the opportunity will close, is again based on history. Specifically, "When will the 'typical' opportunity at milestone A close?" At B? Etc.
2.1.6 Involve customers in the forecasting process
Sales forecasting is, after all, a prediction of what customers will do. Why not involve customers in the forecasting process, especially existing customers? If there is a strong relationship with your customers and you are bringing real value to the relationship, do not hesitate to discuss the future. You might not be comfortable asking the direct question, "How much do you expect to spend?" But there are some non-committing questions that will help you increase the confidence level of your forecast:
* "When will you satisfy all your decision criteria and be able to make the decision?"
* "At this point in time, what do you see as my company's chances of winning?"
* "Are there any new factors that would delay your decision?"
* "Have there been any recent personnel changes or reorganisations that will impact your decision?"
* "How do you view my company as compared with our competition?"
* "Is the current economic environment causing changes in your plans to buy?"
The focus of these questions is to validate the assumptions behind your forecast and determine whether any new factors are coming into play that you do not know.
2.1.7 Forecast at the Pipeline level, not the Opportunity level.
One large company we work with forecasted discretely, i.e., opportunity-by-opportunity. Every opportunity that reaches a certain milestone is, by management definition, "in the forecast" 100%. The resulting forecast for the quarter, created by the sales people, is the total of the revenues from deals that are expected close in the quarter. There are advantages to this approach, and disadvantages.
Advantages: Sales people are personally committed to every discrete opportunity that is in the forecast. Deals that are not closed in the quarter are scrutinised in discussions that are uncomfortable for the sales people.
Disadvantages: Salespeople do not accurately grade opportunities. Until they are certain a deal will close, they will not grade it into the "forecastable" milestone. Management does not have a clear picture of the real pipeline. For larger numbers, the disadvantages of discrete forecasting outweigh the advantages. When there are but a few opportunities in the pipeline-say, less than 25-we must look at them discretely and judge them one-at-a-time. But for larger numbers in the pipeline-say 25 or more-we can use the law of large numbers and make some statistical analyses using the win odds at each milestone. The sales forecast can be aggregated at high levels. The commitment we ask from the sales people is to rigorously use the sales process on every opportunity.
2.1.8 Post-modern the last forecast
As with any process, the forecasting process should be continually be examined to improve it.
* Compare the actual revenue achieved against the forecast.
* Determine whether the assumptions were accurate.
* If the forecast was significantly missed (positive or negative) determine why.
* Modify the forecasting process to minimize these reasons for the miss.
Sales forecasting will always contain elements of factual basis and judgement. We will never eliminate the judgement required. That is the reason we do not have a system or programming that can create a credible sales forecast. The balance between these two factors is the key to improving accuracy. The more the forecast is based on facts, the more accurate is it likely to be. The facts are drawn from: the sales history of the company, what activities have successfully been completed with the customer for each opportunity (milestones), confirmation of our assumptions with our customers, and what we have learned to improve our forecast process.
3. PRICE
Setting the right price is an important part of effective marketing8. It is the only part of the marketing mix that generates revenue (product, promotion and place are all about marketing costs).
Price is also the marketing variable that can be changed most quickly, perhaps in response to a competitor price change.
Put simply, price is the amount of money or goods for which a thing is bought or sold.
The price of a product may be seen as a financial expression of the value of that product.
For a consumer, price is the monetary expression of the value to be enjoyed/benefits of purchasing a product, as compared with other available items.
The concept of value can therefore be expressed as:
(perceived) VALUE = (perceived) BENEFITS - (perceived) COSTS
A customer's motivation to purchase a product comes firstly from a need and a want: e.g.
• Need: "I need to eat
• Want: I would like to go out for a meal tonight")
The second motivation comes from a perception of the value of a product in satisfying that need/want (e.g. "I really fancy a McDonalds").
The perception of the value of a product varies from customer to customer, because perceptions of benefits and costs vary.
Perceived benefits are often largely dependent on personal taste (e.g. spicy versus sweet, or green versus blue). In order to obtain the maximum possible value from the available market, businesses try to 'segment' the market - that is to divide up the market into groups of consumers whose preferences are broadly similar - and to adapt their products to attract these customers.
In general, products perceived value might be increased in one of two ways - either by:
(1) Increasing the benefits that the product will deliver, or,
(2) Reducing the cost.
For consumers, the PRICE of a product is the most obvious indicator of cost - hence the need to get product pricing right.
3.1 Factors Affecting Demand
Consider the factors affecting the demand for a product that are
(1) Within the control of a business and
(2) Outside the control of a business:
3.1.1 Factors within businesses' control include:
• Price (assuming an imperfect market - i.e. not perfect competition)
• Product research and development
• Advertising & sales promotion
• Training and organisation of the sales force
• Effectiveness of distribution (e.g. access to retail outlets; trained distributor agents)
• Quality of after-sales service (e.g. which affects demand from repeat-business)
3.1.2 Factors outside the control of business include:
• The price of substitute goods and services
• The price of complementary goods and services
• Consumers' disposable income
• Consumer tastes and fashions
Price is, therefore, a critically important element of the choices available to businesses in trying to attract demand for Dell's products.
4. PRICE & QUALITY
4.1 Prestige Pricing
Prestige pricing refers to the practice of setting a high price for a product, throughout its entire life cycle - as opposed to the short-term 'opportunistic', high price of price 'skimming'9. This is done in order to evoke perceptions of quality and prestige with the product or service.
For products for which prestige pricing may apply, the high price is itself an important motivation for consumers. As incomes rise and consumers become less price sensitive, the concepts of 'quality' and 'prestige' can often assume greater importance as purchasing motivators. Thus advertisements and promotional strategies focus attention on these aspects of a product, and, not only can a 'prestige' price be sustained, it also becomes self-sustaining.
4.1.1 Price Skimming
The practice of 'price skimming' involves charging a relatively high price for a short time where a new, innovative, or much-improved product is launched onto a market.
The objective with skimming is to "skim" off customers who are willing to pay more to have the product sooner; prices are lowered later when demand from the "early adopters" falls.
The success of a price-skimming strategy is largely dependent on the inelasticity of demand for the product either by the market as a whole, or by certain market segments.
High prices can be enjoyed in the short term where demand is relatively inelastic. In the short term the supplier benefits from 'monopoly profits', but as profitability increases, competing suppliers are likely to be attracted to the market (depending on the barriers to entry in the market) and the price will fall as competition increases.
The main objective of employing a price-skimming strategy is, therefore, to benefit from high short-term profits (due to the newness of the product) and from effective market segmentation.
There are several advantages of price skimming
• Where a highly innovative product is launched, research and development costs are likely to be high, as are the costs of introducing the product to the market via promotion, advertising etc. In such cases, the practice of price-skimming allows for some return on the set-up costs
• By charging high prices initially, a company can build a high-quality image for its product. Charging initial high prices allows the firm the luxury of reducing them when the threat of competition arrives. By contrast, a lower initial price would be difficult to increase without risking the loss of sales volume
• Skimming can be an effective strategy in segmenting the market. A firm can divide the market into a number of segments and reduce the price at different stages in each, thus acquiring maximum profit from each segment
• Where a product is distributed via dealers, the practice of price-skimming is very popular, since high prices for the supplier are translated into high mark-ups for the dealer
• For 'conspicuous' or 'prestige goods', the practice of price skimming can be particularly successful, since the buyer tends to be more 'prestige' conscious than price conscious. Similarly, where the quality differences between competing brands is perceived to be large, or for offerings where such differences are not easily judged, the skimming strategy can work well. An example of the latter would be for the manufacturers of 'designer-label' clothing
4.2 Pre-emptive Pricing
Pre-emptive pricing is a strategy which involves setting low prices in order to discourage or deter potential new entrants to the suppliers market, and is especially suited to markets in which the supplier does not hold a patent, or other market privilege and entry to the market is relatively straightforward10.
By deterring other entrants to the market, a supplier has time to
• Refine/develop the product
• Gain market share
• Reduce costs of production (through sales/ experience effects)
• Acquire name/brand recognition, as the 'original' supplier
4.3 Extinction Pricing
Extinction pricing has the overall objective of eliminating competition, and involves setting very low prices in the short term in order to 'under-cut' competition, or alternatively repel potential new entrants.
The extinction price may, in the short term, be set at a level lower even than the suppliers own cost of production, but once competition has been extinguished, prices are raised to profitable levels. Only firms dominant in the market, and in a strong financial position will be able survive the short-term losses associated with extinction pricing strategies, and benefit in the longer term.
The strategy of extinction pricing can be used selectively by firms who can apply it either to limited geographical markets (making up any losses by increasing prices in other geographical markets), or to certain product 'lines'. In the latter case, the low price of a product at one end of the product range might attract new purchasers to the product line, and sales of different, more profitable items might increase.
5. PRICING NEW PRODUCT
About company's competitive strategy and using price to establish competitive advantage11. It's all about profitability. Set company's prices too low on company's new products and you never make money. Smarter pricing strategy asks what company's products and services are worth to each customer and how company can communicate that value. Price is strategic as well as tactical. Knowing which segments really value what company do lets company approach them with value in mind, not just cost.
5.1 Benefits of Proper New Product Pricing
* Increases profitability of the new product from day one
* Creates closer link between price paid and value received
* Sends a strong message to the market that you believe in the product
* Energises your people by instilling confidence in the new products' value
* Keeps management on board through understanding the real value to the customer of what you have
The factors that businesses must consider in determining pricing policy can be summarised in four categories12:
5.2 Costs
In order to make a profit, a business should ensure that its products are priced above their total average cost. In the short-term, it may be acceptable to price below total cost if this price exceeds the marginal cost of production - so that the sale still produces a positive contribution to fixed costs.
5.3 Competitors
If the business is a monopolist, then it can set any price. At the other extreme, if a firm operates under conditions of perfect competition, it has no choice and must accept the market price. The reality is usually somewhere in between. In such cases, the chosen price needs to be very carefully considered relative to those of close competitors.
5.4 Customers
Consideration of customer expectations about price must be addressed. Ideally, a business should attempt to quantify its demand curve to estimate what volume of sales will be achieved at given prices
5.5 Business Objectives
Possible pricing objectives include:
• To maximise profits
• To achieve a target return on investment
• To achieve a target sales figure
• To achieve a target market share
• To match the competition, rather than lead the market
Price optimisation requires that many complex mathematical models be built and deployed. Moreover, it requires that you look at many factors beyond pricing such as market segmentation, product mix, and feature sets. Furthermore, it requires that your pricing processes be optimised.
BIBLIYOGRAPHY
* J. Edgett, J. Kleinschmidt, G. Cooper, "Portfolio Management for New Products", Perseus Publishing; 2nd edition, 2001
* K. Warren, "Competitive Strategy Dynamics", John Wiley & Sons, 2002
* M. Bosworth, S. Sherman, S. Reese. "Solution Selling: Creating Buyers in Difficult Selling Markets", McGraw-Hill Trade, 1994
* R. Gravlin Cooper, "Winning at New Products: Accelerating the Process from Idea to Launch", Perseus Publishing; 3rd edition,2001
* T. Nagle, R. Holden, "The Strategy and Tactics of Pricing", Prentice Hall, 3rd edition,2002
* web.mit.edu/wysockip/www/535/MIT2001/Dell.pdf
* web.uflib.ufl.edu/cm/business/cases/dell.rt
* http://www.tutor2u.net/business/marketing/pricing_influences.asp
web.mit.edu/wysockip/www/535/MIT2001/Dell.pdf
2 web.uflib.ufl.edu/cm/business/cases/dell.rtf
3 web.uflib.ufl.edu/cm/business/cases/dell.rtf
4 web.mit.edu/wysockip/www/535/MIT2001/Dell.pdf
5 web.mit.edu/wysockip/www/535/MIT2001/Dell.pdf
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8 T. Nagle, R. Holden, "The Strategy and Tactics of Pricing", Prentice Hall, 3rd edition,2002
9 R. Gravlin Cooper, "Winning at New Products: Accelerating the Process from Idea to Launch", Perseus Publishing; 3rd edition,2001
0 K. Warren, "Competitive Strategy Dynamics", John Wiley & Sons, 2002
1 J. Edgett, J. Kleinschmidt, G. Cooper, "Portfolio Management for New Products", Perseus Publishing; 2nd edition, 2001
2 http://www.tutor2u.net/business/marketing/pricing_influences.asp
