MKTG4825 Pricing Strategies and Channel Management Spring 2010 Instructor: Yacheng Sun. Task 2 Preliminary report II

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1 MKTG4825 Pricing Strategies and Channel Management Spring 2010 Instructor: Yacheng Sun Task 2 Preliminary report II Report due date: Tuesday, April 13 th 2010, in class. Deliverable: Typewritten report with a suggested length of 8 double-spaced pages. Distribution: One copy of this project to be submitted to the instructor. Introduction In this report, you conduct additional research for pricing strategies of the focal product / service identified in the first task. Specifically: first, develop a meaningful segmentation scheme of your target customers (which might also include some of the current nonbuyers who are promising prospects); second, propose effective and efficient methods to in order to exercise price customization among price sensitive and insensitive customers; third, provide strategic recommendations on the price levels and price formats of your focal product/service; fourth, use Excel to conduct an empirical estimation of the demand curve (which is essentially a regression analysis of the sales on prices, controlling for other relevant factors that can influence sales, such as seasonality and nonmonetary promotional). Please also make sure to incorporate my previous feedbacks that apply to this task (e.g., what to include or not include in the executive summary; and format issues). Format and Content Title Page MKTG Pricing Strategies and Channel Management Spring semester, 2010 Group Project Task # 2 - Research on Pricing Strategies (Name of the focal product or service) (Section and team number) (Names and addresses of the team members) (Date in which the report is handed in) Executive Summary Provide a non-technical summary that summarize the structure and the major findings and insights discussed in the rest of the report. Be succinct yet comprehensive.

2 Buyer Segmentation Divide the market of your focal product/service into different segments based on the differences in brand loyalty and price sensitivities. The following table provides a reference segmentation scheme. Note that this scheme is conceptual by nature and if your team decides to use it (or adapt it), you must develop a concrete and practicable segmentation scheme (for instance, by identifying the specific consumer demographic information and purchase patterns for each of the segments). Also, this sample segmentation scheme is most appropriate for consumer products (e.g., soft drinks and potato chips) but not necessarily for your specific product/service. In that case make all the necessary changes to accommodate such difference. Table 1 Sample Conceptual Segmentation Scheme of the Buyers Segment Loyal customers General Description Consumers who buy on consistent basis. Notice that the term consistent is a relative one and varies across different product/service categories, for instance, in some categories such as toilet tissue, even the most loyal users may buy a particular brand only 60 percent of the time or less. Switchers Consumers who purchase a variety of brands within a product category. Price buyers Consumers who purchase brands solely on the basis of price, to the extent that they may consistently purchase one brand if it is always the least expensive one in the marketplace. For instance, price buyers may consistently buy generic spaghetti sauce, unless one of the nationally advertised brands has a particular good deal, or matches the generic s price. Nonusers Consumers who don t currently use any product in the product category to which your focal product/service belong.

3 Table 1 Sample Conceptual Segmentation Scheme of the Buyers (continued) Segment Usage Value Price sensitivity Loyal customers Usage level is usually constant at both the category and the brand level. This is due to the fact that these consumers buy from the focal brand consistently. Furthermore it might be possible to increase the usage of loyal customers, or even cross-sell to them. Loyal customers perceive the focal product/service as of superior value to the competitors. Low, as long as the price remains affordable. Switchers The usage at the category level is usually stable; but the usage at the brand level is not. Sometimes switchers may buy different brands within the same category to fulfill different needs or to be consumed on different usage occasions. One classic example of this is the beer drinker who buys Budweiser to consume during the week and Michelob to serve to friends on the weekend. These consumers may evaluate the price/value relationship for each brand in a set of acceptable brands, on each shopping trip; and then choose the brand that appears to be the best buy on that particular occasion. High, because switchers are usually willing to shop around for a better price. Price buyers Nonusers Usage at the brand level is usually not stable; so is the usage at the category level. Price buyers not only willing to trade-down to less expensive brands; but also willing to cut down the expenditure for the entire category, if the category itself is viewed as a discretionary purchase. For example, in tight economic times, many consumers may choose to cook steak at home; rather than patronizing steak restaurants. Currently, these consumers are not using any product in the category. Price buyers view the category as commodity or are unable to tell any difference between the focal product/service and its competitors. In some cases, nonusers don t buy a certain type of product because they believe it to be overpriced. For instance, some people refused to buy convenience products like gourmet frozen dinners because they think they are too expensive and not worth the money. Very high. they either have little disposable income and can t afford to purchase, or attach little importance to the differences between the brands Price sensitivity is zero by definition. Some non-users would like to purchase a particular type of product but cannot afford to do so. For instance, many people may wish they had their own helicopters to commute quickly back and forth from work, but do not have enough money to do so.

4 Based on the above segmentation scheme (or an adapted one that fits your focal product/service), devise a concrete and practicable scheme. Specifically for each of the four above segments, try to construct a complete profile that consists of the (1) demographic characteristics; (2) psychological profile; (3) purchase patterns and (4) any other characteristics that can be easily identified and acted upon. For example, you might find it useful to construct and fill in the following table. Whenever possible, conduct necessary research to back up your segmentation scheme using previous research, which is always preferred over (even an educated) guess! Segment Gend er Table: Practical Segmentation Scheme Demographic Profile Psycholog ical Profile Purchase Patterns Age Educa tion Inco me Purchase occasions Preferred purchase locations Purchase frequency Other Loyal customers Switchers Price buyers Nonusers Price Customization and Promotion Based on above table provide at least three operable price customization strategies. Remember that the golden rule of price customization is simply (1) to give the price discounts to the price-sensitive consumers and (2) to avoid giving the price discounts to the price-insensitive consumers. Here is a (not complete) list of price-promotion methods that are at your disposal: Mail-in Rebate Sampling Loyalty Program (buy X, get 1 free) Seller financing Refund Coupons Price discounts

5 Now, briefly compare and contrasts the advantages and disadvantages of different ways of price promotion make your choice and make a case for your choices are more appealing than the others. Price Levels and Formats Decide which of the following three price levels to adopt for your focal product/service: Skim, Neutral and Penetration pricing strategy. Carefully justify your choice by discussing relevant factors (e.g., the cost structure in terms of fixed and marginal costs, the level of competition that you are facing, the purchase frequency of your products / service, the long-term effect of your introductory price, etc.) that make such a decision reasonable. Also discuss your choice of price formats (e.g., linear pricing with or without price discrimination, bundling/tying, two-part pricing). An easy way to identify the appropriate price format to use is to check out the price format employed by the real company or some close competitors. Finally provide your thoughts to the following questions: What is the current pricing format used by your major competitor(s)? What are the pros and cons for each of the possible price formats? Empirical Analysis For this part, use the built-in regression function of Excel to conduct the empirical estimation of the demand function of your product / service. Step1: Collect the data, which, in the minimum, should contain (1) the dependent variable, sales; (2) price, the key explanatory variable and (3) squared price. Also, include any variables that you believe will also affect the sales (e.g., advertising expenditure, seasonality). In Excel, organize the data in the block format as follows: Table Suggested form of data Observation Quantity Price Price Squared Other Control Variables N If your focal product / service does not yet exist; or you cannot find data of your product/service after substantial efforts, try to find available data of its closest competitor

6 and estimate its demand function instead. Come to see me if you still have problems finding data. Step 2: Estimate three types of models #1 a linear demand model, where sales is the dependent variable; and the explanatory variables include the price and other control variables. #2 a quadratic demand model, where sales is the dependent variable; and the explanatory variables include the price, the squared price and other control variables. #3 a log-log demand model, where the natural log of the sales (you can obtain this using the ln() function in Excel) is the dependent variable; and the explanatory variables include the natural lot of price and other control variables that are also in their natural log forms. Step 3: For each of the three above estimation: tabulate your estimation results as in the following table format (this corresponds to the table for model #2; and the formats for the other two models are similar): Table Estimation results Parameter Point estimate p-value Lower bound of the 95% confidence interval Constant Upper bound of the 95% confidence interval Price coefficient Price square coefficient Control variable # 1 Control variable # 2 Step 4: Briefly explain the meanings of the coefficients for all explanatory variables.

7 Conclusions This part briefly summarizes the current report. Feel free to use bullet points if this helps to increase the clarity of the writing. Format Issues Make sure that the format of the title page conforms to the requirements. Try to eliminate typos and grammar errors from the report; also make sure the use of fonts is consistent. Use the consistent person in narration: since this is a group report, use we instead of I. Avoid using they or we to refer to the focal product/service, instead, use name of the product/service; for example, Tide (the product) has enjoyed dominance of market share in the market of premium detergent Use graphs and tables if as they are more effective for organizing and conveying information. Meanwhile label the graphs and tables; and don t forget to make references to them in the text. Cite your work in a way that strictly follows the Modern Language Association (MLA) standards. A detailed description of the standards can be found at: A Glimpse on the Next Task: Using Excel Solver to Find Optimal Prices and Wrapping up the Final Research Report For the next task (#3), your team will (1) use Excel Solver to identify the optimal prices, based on the results of the empirical estimation in the current task; and (2) synthesize all your work in the final research report.