Marketing – Back to Basics 2

1) What are different types of Pricing Strategies?

Markup pricing-

Markup pricing is the most elementary method of pricing. Method is to add standard markup to
the product’s cost and adding markup to the profit. Lawyers and accountants typically price by
adding a standard markup on their time and cost.

Let’s take an example

Variable cost : Rs. 10

Fixed costs : Rs.300,000

Expected unite sales: 50,000

Suppose a toaster manufacturer has the following costs and sales expectations:

Unit cost= variable cost+ (fixed cost/unit sales)= Rs. 10+(300000/50000) = Rs. 16

Assuming manufacturer wants to earn 20 percent markup on sales. The manufacturer’s markup
price is given by:

Markup price= unit cost/(1-desired return on sales) = Rs.16/(1-0.2) = Rs.20

The manufacturer will charge dealers Rs.20 per toaster and make profit of Rs. 4. If dealer wants
to earn 50 percent on their selling price they will markup the toster 100 percent to Rs.40.

Target- return pricing:

The process of setting an item's price by using an equation to compute the price that
will result in a certain level of planned profit given the sale of a specified amount of items. By
using a target return pricing method, a business is able to set its products' prices at such levels
that its corporate profit objectives are likely to be met if sales continue to run at or above the
amount specified.

Perceived value pricing :

The valuation of good or service according to how much consumers are willing to pay for it,
rather than upon its production and delivery costs. Using a perceived
value pricing technique might be somewhat arbitrary, but it can greatly assist in
the effective marketing of a product since it sets product pricing in line with its perceived value
by potential buyers.

Value based pricing:

Value-based pricing (also value optimized pricing) is a pricing strategy which sets prices
primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than
on the cost of the product or historical prices. Where it is successfully used, it will improve
profitability due to the higher prices without impacting greatly on sales volumes.

Value-based pricing is predicated upon an understanding of customer value. In business-to-

consumer markets, sellers should understand the impact their products or services have on end
user utility. In the business-to-business environment, companies must know how their offering
helps customers, that is other businesses, become more profitable. In many settings, gaining
this understanding requires primary research. This may include evaluation of customer
operations and interviews with customer personnel. Survey methods are sometimes used to
determine the value a customer attributes to a product or a service. Purchase intent, won/loss
analysis and financial value measurement are examples of basic research methods that can
unearth customer insights during the pricing process. The results of such surveys often depict a
customer's 'willingness to pay.'
Going rate pricing:

In going rate pricing, the firm sets its price largely on the competitor’s prices. In oligopolistic
industries that sell a commodity such as steel, paper or fertilizer all firms normally charge the
same price. Smaller firms “follow the leader”, changing their prices when the market leader’s
prices change rather than when their own demand or cost change.

Auction type pricing:

An auction is a process of buying and selling goods or services by offering them up for bid,
taking bids, and then selling the item to the highest bidder. In economic theory, an auction may
refer to any mechanism or set of trading rules for exchange.

 English auction, also known as an open ascending price auction. This type of auction is
arguably the most common form of auction in use today. Participants bid openly against
one another, with each subsequent bid required to be higher than the previous bid. An
auctioneer may announce prices, bidders may call out their bids themselves (or have a
proxy call out a bid on their behalf), or bids may be submitted electronically with the
highest current bid publicly displayed. In some cases a maximum bid might be left with the
auctioneer, who may bid on behalf of the bidder according to the bidder's instructions.
The auction ends when no participant is willing to bid further, at which point the highest
bidder pays their bid. Alternatively, if the seller has set a minimum sale price in advance
(the 'reserve' price) and the final bid does not reach that price the item remains
unsold. Sometimes the auctioneer sets a minimum amount by which the next bid must
exceed the current highest bid. The most significant distinguishing factor of this auction
type is that the current highest bid is always available to potential bidders. The English
auction is commonly used for selling goods, most prominently antiques and artwork, but
also secondhand goods and real estate.
 Dutch auction also known as an open descending price auction. In the traditional Dutch
auction the auctioneer begins with a high asking price which is lowered until some
participant is willing to accept the auctioneer's price. The winning participant pays the
last announced price. The Dutch auction is named for its best known example, the
Dutch tulip auctions. ("Dutch auction" is also sometimes used to describe online auctions
where several identical goods are sold simultaneously to an equal number of high bidders.)
In addition to cut flower sales in the Netherlands, Dutch auctions have also been used for
perishable commodities such as fish and tobacco. The Dutch auction is not widely used.
 Sealed first-price auction, also known as a first-price sealed-bid auction (FPSB). In this type
of auction all bidders simultaneously submit sealed bids so that no bidder knows the bid of
any other participant. The highest bidder pays the price they submitted. This type of
auction is distinct from the English auction, in that bidders can only submit one bid each.
Furthermore, as bidders cannot see the bids of other participants they cannot adjust their
own bids accordingly. This kind of bid produces the same outcome as Dutch auction. What
are effectively sealed first-price auctions are commonly
 called tendering for procurement by companies and organisations, particularly for
government contracts and auctions for mining leases.

2) What is the role of “Place” in a Marketing Mix? What is a VMS and an HMS? What are
different format of retail stores found in India? (You may refer to my class slides of RMS)

Role of Place:
The important factor to note about the importance of place in the marketing mix is that it does
not refer to the location of the business itself, but rather to the location of the customers. The
place deals with strategies the business can employ to get its goods from its present location to
the location of the customers. Such a project must of necessity entail a study of the
demographic that constitutes the customers with the aim of finding out their location. In an
increasingly global economy, the location of the customers of a company located in Singapore
could span the different continents of the world.
As such, the company must figure out the best way to channel its products from Singapore to
its customers in Africa, Europe and other continents. In this way, it is easy to see the role of
place in the marketing mix. This allows such companies to come up with the best methods for
achieving maximum distribution of goods to the customers. One of the examples of a place or
channel includes the retailer. After identifying the target market, retail stores located nearby
could serve as a place for reaching these customers.
Another element that could serve as a place for reaching the customers is the Internet. If the
company is located in an industrialized country, then it is logical to assume that a large number
of its customers use the Internet in some form. This element illustrates the importance of place
in the marketing mix because such customers can order from the company directly through
Web sites, which the company has set up in advance for such a purpose. In this sense, the
Internet serves as a place for the purpose of reaching the customers. The place could also refer
to the methods and channels for the effective and expeditious distribution of the product to the
target customers. Such channels may include the distributors of the product. It may also include
well-coordinated methods for the transportation of the goods to the final consumers.

VMS : Vertical Marketing system

A vertical marketing system (VMS) is one in which the main members of a distribution channel—
producer, wholesaler, and retailer—work together as a unified group in order to meet consumer
needs. In conventional marketing systems, producers, wholesalers, and retailers are separate
businesses that are all trying to maximize their profits. When the effort of one channel member
to maximize profits comes at the expense of other members, conflicts can arise that reduce
profits for the entire channel. To address this problem, more and more companies are forming
vertical marketing systems.

Vertical marketing systems can take several forms. In a corporate VMS, one member of the
distribution channel owns the other members. Although they are owned jointly, each company in
the chain continues to perform a separate task. In an administered VMS, one member of the
channel is large and powerful enough to coordinate the activities of the other members without
an ownership stake. Finally, a contractual VMS consists of independent firms joined together by
contract for their mutual benefit. One type of contractual VMS is a retailer cooperative, in which
a group of retailers buy from a jointly owned wholesaler. Another type of contractual VMS is a
franchise organization, in which a producer licenses a wholesaler to distribute its products.

The concept behind vertical marketing systems is similar to vertical integration. In vertical
integration, a company expands its operations by assuming the activities of the next link in the
chain of distribution. For example, an auto parts supplier might practice forward integration by
purchasing a retail outlet to sell its products. Similarly, the auto parts supplier might practice
backward integration by purchasing a steel plant to obtain the raw materials needed to
manufacture its products. Vertical marketing should not be confused with horizontal marketing,
in which members at the same level in a channel of distribution band together in strategic
alliances or joint ventures to exploit a new marketing opportunity.

HMS – Horizontal Marketing system

A horizontal marketing system is a distribution channel arrangement whereby two or more

organizations at the same level join together for marketing purposes to capitalize on a new
opportunity. For example: a bank and a supermarket agree to have the bank’s ATMs located at
the supermarket’s locations, two manufacturers combining to achieve economies of scale,
otherwise not possible with each acting alone, in meeting the needs and demands of a very
large retailer, or two wholesalers joining together to serve a particular region at a certain time
of year.
According to businessdictionary.com, Horizontal Marketing System is a merger of firms on the
same level in order to pursue marketing opportunities. The firms combine their resources such
as production capabilities and distribution in order to maximize their earnings potential.
An example is of Apple and Starbucks announced music partnership in 2007. The purpose of
this partnership was to allow Starbucks customers to wirelessly browse, search for, preview,
buy, and download music from iTunes Music Store onto their iPod touch, iPhone, or PC or Mac
running iTunes. Apple’s leadership in digital music together with the unique Starbucks
experience synergized a partnership to offer customers a world class digital music experience.
Apple benefits from this partnership with higher iTunes sales because Starbucks has a lot of
mug punters. When Apple first introduced its iTunes music store, it hoped to sell one million
songs in six months, but to its surprise, Apple sold over one million songs within the first six
days of its iTunes music store opening. With such loyal online music consumers, Starbucks
benefit’s from higher sales, increase in market share, and stronger customer loyalty. This
example demonstrates how two companies can join forces to follow a new market opportunity.
 This opportunity allowed Starbucks and Apple to both gain something of greater, than
otherwise would be possible if they somehow attempted this strategy independently

3) What is Brand Equity? How can you Build Brand Equity? . How can you measure Brand Equity?
Brand equity:
Brand equity is which describes the value of having a well-known brand name, based on the
idea that the owner of a well-known brand name can generate more money from products with
that brand name than from products with a less well-known name, as consumers believe that a
product with a well-known name is better than products with less well-known names.

How to build brand equity?

Brand equity is built by choosing right set of brand equity drivers.

1. Initial choices of brand elements or identities that make up the brand. Like brand
names, URL’s , logos, symbols, characters, spokes people, slogans, jingles packages
and signage.
2. The products or service and all accompanying marketing activities and supporting
marketing programs-
For e.g. Vodafone came up with zoo-zoo campaign which was edgy and humorous.
Coming up with those kind of advertisements which depict mischievous acts by zoo-zoo
added fan following to Vodafone.
3. Other associates which are indirectly transferred to the brand by indirectly linking it
to some other entity:
For e.g. Airtel mobile operator uses A.R.Rehman as brand endorser. A.R.Rehman has
won Oscar awards for music composing. Also the signature tune of the brand is
composed by A.R.Rehman which is very famous. These things like person, music links
people to brand and helps in building brand equity.

How to measure brand equity?

There are many ways to measure a brand. Some measurements approaches are at the firm
level, some at the product level , and still others are at the consumer level.
Firm Level: Firm level approaches measure the brand as a financial asset. In short, a calculation
is made regarding how much the brand is worth as an intangible asset. For example, if you were
to take the value of the firm, as derived by its market capitalization—and then subtract tangible
assets and "measurable" intangible assets—the residual would be the brand equity. One high-
profile firm level approach is by the consulting firm Inter brand. To do its calculation, Inter
brand estimates brand value on the basis of projected profits discounted to a present value.
The discount rate is a subjective rate determined by Inter brand and Wall Street equity
 specialists and reflects the risk profile, market leadership, stability and global reach of the
brand. Brand valuation modeling is closely related to brand equity, and a number of models and
approaches have been developed by different consultancies. Brand valuation models typically
combine a brand equity measure (e.g.: the proportion of sales contributed by "brand") with
commercial metrics such as margin or economic profit.
Product Level: The classic product level brand measurement example is to compare the price of
a no-name or private label product to an "equivalent" branded product. The difference in price,
assuming all things equal, is due to the brand. More recently a revenue premium approach has
been advocated. Marketing mix modeling can isolate "base" and "incremental" sales, and it is
sometimes argued that base sales approximate to a measure of brand equity. More
sophisticated marketing mix models have a floating base that can capture changes in underlying
brand equity for a product over time.
Consumer Level: This approach seeks to map the mind of the consumer to find out what
associations with the brand the consumer has. This approach seeks to measure the awareness
(recall and recognition) and brand image (the overall associations that the brand has). Free
association tests and projective techniques are commonly used to uncover the tangible and
intangible attributes, attitudes, and intentions about a brand. Brands with high levels of
awareness and strong, favorable and unique associations are high equity brands.
All of these calculations are, at best, approximations. A more complete understanding of the
brand can occur if multiple measures are used.
4) What is Marketing ROI or Return On Marketing Investment (ROMI)?
Return on marketing investment (ROMI) is the contribution attributable to marketing (net of
marketing spending), divided by the marketing 'invested' or risked. It is not like the other
'return-on-investment' metrics because marketing is not the same kind of investment. Instead
of moneys that are 'tied' up in plants and inventories (often considered Capital Expenditure or
CAPEX), marketing funds are typically 'risked.' Marketing spending is typically expensed in the
current period (Operational Expenditure or OPEX). The idea of measuring the market’s
response in terms of sales and profits is not new, but terms such as marketing ROI and ROMI
are used more frequently now than in past periods. Usually, marketing spending will be
deemed as justified if the ROMI is positive. In a survey of nearly 200 senior marketing
managers, nearly half responded that they found the ROMI metric very useful.
The ROMI concept first came to prominence in the 1990s. The phrase "return on marketing
investment" became more widespread in the next decade following the publication of two
books Return on Marketing Investment by Guy Powell (2002) and Marketing ROI by James
Lenskold (2003).In the book "What Sticks: Why Advertising Fails And How To Guarantee Yours
Succeeds," Rex Briggs suggested the term "ROMO" for Return-On-Marketing-Objective, to
reflect the idea that marketing campaigns may have a range of objectives, where the return is
not immediate sales or profits. For example, a marketing campaign may aim to change the
perception of a brand.
Short term vs. Long term
Short term - The first, short-term ROMI, is also used as a simple index measuring the dollars of
revenue (or market share, contribution margin or other desired outputs) for every dollar of
marketing spend.
For example, if a company spends $100,000 on a direct mail piece and it delivers $500,000 in
incremental revenue, then the ROMI factor is 5.0. If the incremental contribution margin for
that $500,000 in revenue is 60%, then the margin ROMI (the incremental margin for $100,000
of marketing spent is $300,000 (= $500,000 x 60%). Of which, the $100,000 spent on direct mail
advertising will be subtracted and the difference will be divided by the same $100,000 . Every
dollar expended in direct mail advertising translates an additional $2 on the company's
bottomline.
The value of the first ROMI is in its simplicity. In most cases a simple determination of revenue
per dollar spent for each marketing activity can be sufficient enough to help make important
decisions to improve the entire marketing mix.
The most common Short Term approach to measuring ROMI is by applying Marketing Mix
Modeling techniques to separate out the incremental sales effects of marketing investment.
Long term - In a similar way the second ROMI concept, long-term ROMI can be used to
determine other less tangible aspects of marketing effectiveness. For example, ROMI could be
used to determine the incremental value of marketing as it pertains to increased brand
awareness, consideration or purchase intent. In this way both the longer-term value of
marketing activities (incremental brand awareness, etc.) and the shorter-term revenue and
profit can be determined. This is a sophisticated metric that balances marketing and business
analytics and is used increasingly by many of the world's leading organizations (Hewlett-
Packard and Procter & Gamble to name two) to measure the economic (that is, cash-
flow derived) benefits created by marketing investments. For many other organizations, this
method offers a way to prioritize investments and allocate marketing and other resources on a
formalized basis.
Long term ROMI models will often draw on Customer lifetime value models to demonstrate the
long term value of incremental customer acquisition or reduced churn rate. Some more
sophisticated Marketing Mix Modeling approaches include multi-year long term ROMI by
including CLV type analysis.
Long term ROMI models have sometimes used Brand valuation techniques to measure how
building a brand with marketing spend can create balance sheet value for brands (or at least for
brands that have been transacted, and therefore under accounting rules can have a balance
sheet value). The ISO 10668 standard sets out the appropriate process of valuing brands and
sets out six key requirements, transparency, validity, reliability, sufficiency, objectivity and
financial, behavioral and legal parameters. Brand valuation is distinguished from brand
equity by placing a money value on a brand, and in this way a ROMI can be calculated.