Rajagopal. Marketing Dynamics: Theory and Practice

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Marketing Dynamics: Theory and Practice

the years since, 1950 in different states. The chronological evolution of the customer value chain

process may be seen as below:

• Company built the brands through extensive mass advertising campaign (1950-2000)

• Customer database marketing has been implemented independent of the mass advertising

campaign (1985-2000)

• Internet customer services on the interactive virtual platform in isolation without integrating

with the existing customer database has been implemented (1996-2000)

• Company integrates the mass advertising campaign, customer database and virtual customer

services through internet (2001)

The company has strong commitment to hold its brand promise on performance, value for money

(VFM), safety, convergence technology and innovation in order to keep the customer satisfaction

high and maintain the value chain impact on the brand. The customers make the decision to buy

BMW automobiles on the following parameters:

• Usefulness of the products

• Perceived brand value ( Which is created through the value chain process by the company

to a large extent, besides the referrals and word of mouth impact)

• Value for money, and

• Pre and post sales services delivered by the company

Virtual call to the customers has really paid good returns to the brand globally. The Mini model of

the company had bagged the credit of the car of the year in 2003. “It has gone very, very well,

especially in Internet sales. We share the revenue with our dealers on direct sales from the Web.

This category has helped build our branding efforts and has added to Mini’s brand awareness”

says Jack Pitney, general manager for the Mini division of BMW of North America LLC.

Company has secured its niche by intensive customer relationship and persuasion. The building

of a robust existing and prospecting customer database in 2000 has given the company an added

advantage to strengthen its brand in the market. BDR Consulting

was selected in September 2000

as system integrator and deployment project managers for the integrated business and IT solution for

BMW direct because of their experience of multinational integrated web and call centre deployments.

BDR were responsible for the initial scoping, requirements and design work, followed by the

development and deployment of the completed system. BDR, though strictly vendor independent,

worked with the BMW team to select ‘best in class’ tools –Vignette for content management,

Clarify for the CRM and order management system. Through a password controlled, fully personalized

web based front-end, users are able to view details on all eligible cars online and then go on to

configure them against a full menu of allowable accessories. Additionally, they can build up a virtual

‘garage’ of configured cars, book test drives and request brochures before finally submitting their

requested car for authorization by the Company Fleet and Contract Hire Company.

19 www.bdr-consulting.com

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BMW Direct is truly ‘CRM’ compliant, providing two-way communication via automated alerts

and e-mails and incorporating a contact centre to ensure immediate access to trained product advisors.

Users can track online the status of their individual dealings whether by web, phone, fax or e-mail.

Also available are web tools to enhance customer satisfaction, including a tax calculator, car comparator

and residual value calculator. The contact centre functionality includes telephone account management,

phone and e-campaign generation, customer enquiry handling, profiling to customize promotions, and

post-sales support which is delivered using a thin client solution (using Citrix) to BMW’s contact

centre in Croydon and order management centre in Bracknell. In keeping with BMW’s excellent

brand image and customer expectations, the resultant solution delivered an excellent customer

voyage when launched in April 2001 after a total project length of only 9 months, on time and to

budget. Customers’ expectations from BMW, a brand long-associated with quality, innovation and

performance are of a high-level of accurate information and support. BMW Direct continues to

exceed customer expectations and is setting standards for the rest of the industry to follow.

Top-Drive System Project of BMW

Traditional and Internet-based outbound communication channels can be used for the provision

and management of CRM content for delivery to the customer. Increased efficiencies have been

achieved through more efficient use of BMW customer service and relationship management personnel

and the creation of new CRM standards in key areas of the organization, process costs were reduced

significantly, while customer care quality has been raised by having access to a central integrated

customer database. Increased frequency of direct contact between customers and BMW have been

planned by way of personalizing the relations. Customers now have more contact options, dealer

contacts are facilitated, and BMW has gained the ability to offer more complex products and

services to its customers. CRM has been conceived by the company as a critical element behind an

organization’s ability to drive profitable and sustainable revenue growth, increase customer loyalty,

and meet its overall corporate objectives. This program has been implemented in Germany and other

European countries. BMW realized following key benefits of their CRM program:

• Ability to manage the customer through the application of different customer-centric

processes while giving the customer the feeling of dealing with a single, interested, and

intelligent entity.

• Multi-channel integration enables a closed communication cycle with the customer.

• Customers can pick the media of their choice and can expect the same quality in responses

across all traditional and Internet-based channels.

CUSTOMER RELATIONSHIP TRACKING

Service is a technical skill while hospitality is an emotional skill and the combination of both the skills

would bring the customer relationship memorable for ever. BMW believes in the retaining the customer

for ever for a healthy customer-company relationship. Hence, the company banks on the technical

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and personal aspects of the services rendered to the customers. The company has built the robust

data base for storing the information updates of the existing and potential customers with the following

objectives:

• To provide a comprehensive view of the automobile and financial services to the BMW

customers

• Deliver short term and money value packs information to the customers

• Augment customer loyalty through knowing the customer preferences and delivering the

relevant and timely communications, and

• Online tracking of prospecting customers

Design of BMW customer database was aimed at providing information to the customers on

comparative advantage of various automobile brands in the market. The tracking of the prospective

customers is attended by the central system of measurement of the company. The report center

monitors the communications and analyses the responses from the customers. The company is now

able to view full shopper-owner path from the first point of contact, sales and till the automobile

remains with the customer and also the variable required to frame his purchase decisions. The new

marketing database contains a broad range of information pertaining to the BMW customer, that

includes campaigns, short communications, corporate and product updates and financial services

data. The tools of communication the company uses include welcome kit, loyalty program details,

prost prioritization, BMW magazine, BMW owners circle, financial services programs and opportunities

like “quick-win” program. The control group exercise of the company measures the effectiveness of

programs in reference to mailed and non-mailed customer segments to assess the quick net returns.

All customer relationship programs are built to the state-of the-art through effective interactive data

base management focusing on the following issues:

• Providing reliable and additional information on owners and prospects than BMW has ever

assembled before

• Render the communication program as a powerful tool to support BMW loyalty and

prospect conversion programs

• Analyze the automated communication that supports the Owner Experience

• More information on owners and prospects than BMW has ever assembled before

• As an effective tool to support BMW loyalty and prospect conversion programs

• Generate automated communication that supports the Owner Experience to honor the

customer.

Welcome kit reaches the customers within 30 days of the registration. It is a dialogue opener

and an invitation to mark the BMW experience for one full year. The customer center makes periodic

calls to restore the brand image of the company and this inherently fosters the personal information

of the prospective customers. The kit provides the weekly update on the owner information, retrieve

the solicited information by the customer and identifies the customer models, convergence to the

loyalty program and build the buying activity log for the convenience of decision making to the

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prospecting customer. The company has strong determination on the loyalty of the customers to the

BMW brand as it is reflected in their repeat purchase behaviour. The effectiveness of the customer

relations program of the company is measured by the control and test group results. The company

sends the newsletters to the prospecting and existing customer to facilitate their views on the brand

performance, now the new BMW owners and acquaint with the accessories for different models.

Prospective customer relations are managed by a tailor-made strategy of the company to increase

the prospect conversion to sell more BMW automobiles. The communications will be based on

interactive opinion exchanges for better understanding the company, its products and services. The

prospect conversion rate is measured on the basis of region, income and lifestyle of the customer.

The new customers are prospected through tele-marketing, e-messaging, exhibitions and events

managed by the company. The prospects are assessed by the sales personnel for rapid qualification

and scores. The centers receive qualified leads for the prospects within 48 hours of the process. The

leads are subjected to a tracking log and the lead prospects are contacted accordingly by the marketing

staff of the company. The prospecting customers are tested through the scoring models that determine

the priority of sales and customization. The test scores and anticipated response are adjusted and

further client specific sales/ promotion program is chalked out. The cost of the prospecting program

is audited by the company and an unsuccessful prospect is also retained for all relationship marketing

communication on the database.

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Chapter

PRICING STRATEGY

CHAPTER FOCUS

• To acquaint with the pricing concepts and its relevance in the strategic

marketing

• To know different pricing strategies and price-market relationships,

• To understand the issues associated with price leadership and non-

price factors that influence the pricing decisions.

ricing goods and services is a critical job to maximize the profit of business organizations. Price

is the one element of the marketing mix that generates revenue; the rest are costs. Many marketing

executives exercise their best to increase prices to boost short-term profits. Stock markets in the

United States, for example, are sensitive to quarterly earnings reports, and managers often raise the

prices of cash cows to maintain earnings growth. Low prices can be used as a weapon to build

market share. Prices that undercut competitors attract new customers and allow for greater utilization

of facilities. However, low prices squeeze margins and often reduce net profits. Thus an ideal pricing

strategy should be the one that balances the need for sales growth against market demand for

profits. The selection of pricing objectives is determined by the decisions of business positioning.

Many organizations need profit to satisfy the stakeholders and allocate resources for product

development. The other objectives of the pricing strategy for a growing company may be maximizing

the revenue, maximizing the market share and achieving the quality leadership. Several factors

influence management’s decisions about how price will be used in marketing strategy. An important

concern is estimating how buyers will respond to alternative prices for a product or service. The cost

of producing and distributing a product sets lower boundaries on the pricing decision. Costs affect an

organization’s ability to compete. The existing and potential competition in the market segments

targeted by a company constrains the flexibility in selecting prices. Finally, legal and ethical constraints

also create pressures on decision makers. Pricing plays a key role in the marketing strategy. Strategic

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choices about market targets, products, and distribution set guidelines for both price and promotion

strategies. Product quality and features, type of distribution channel, end-users served, and the functions

of intermediaries all help to establish a feasible price range. When an organization forms a new

distribution network, selection of the channel and intermediaries may be driven by price strategy.

Pricing in markets is a controversial issue involving legal, economic, political factors both in the

practice of differentiated pricing and uniform pricing. Some international marketers argue for uniform

pricing while others, however, observe that the obvious differences in the markets of various countries

favor the use of an internationally differentiated pricing policy. Conceptually, it is desirable on economic

grounds to set different prices in different markets, because demand and supply differ from country

to country. Such strategy of differentiated pricing may fit to any form of imperfect competition

such as pure monopoly, oligopoly, and monopolistic competition. Thus, the multinational firms practice

the varying prices in different markets. However, such pricing strategy may be risk averse as the

firm may be charged with dumping allegations in the host country for selling at lower prices than the

other countries. On the contrary, a firm essentially in a monopolistic or oligopolistic situation may

price its products uniformly on global scale. For example, Airbus Industries Inc. sells a range of

aircrafts and the company retains the same basic price for its planes everywhere excluding the

taxes. At the introductory product stage the product is not highly diffused. Hence, a new product

may be priced uniformly throughout the world. Further, if the diffusion process of an innovation has

a similar pattern worldwide, standardized pricing would make sense for a foreign firm. However, the

perspectives of local laws largely affect the decision on uniform versus differentiated pricing of

multinational firms.

VALUE AND SKIMMING PRICING

Embryonic stage refers to such products that are newly introduced in the market and their recognition

with the consumers is yet to be established. The value pricing may be an appropriate strategy to

practice with the new products. It is also known as skimming the market. In this process, a high price

is set for the product to ‘cream off’’ all available demand. The price is maintained for some time, to

allow the customers who regard the product as important to ‘upgrade’ them into the high price

bracket. In a broad sense, it is the product segmentation. However, the value pricing approach would

prove advantageous only when enough product awareness is created among the consumers through

advertisements, demonstrations and effective consumer services. In the long run such an approach

would create a specific group of customers or consumer segment for the product. For instance, the

electronic products of some companies like BPL-Sanyo and Philips among the capital goods and

some of the household consumable goods such as packed food and condiments coming form capital-

intensive units constitute such consumers segments for their products.

Advantage of a high profit under the value pricing approach is anticipated in the long run when

there is consumer segmentation for the product with a high recognition. However in this approach,

the selling cost may shoot up reducing the profit margin low in the initial stages. In value pricing,

another important factor to be considered is the territorial characteristics - low purchasing power or

high purchasing power consumer segments or rural and urban. In the former, where the marginal

propensity of consumption and income level of consumers are low, the value pricing, with a high

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product price and selling cost would not be a

profitable approach. In such areas, where

there are low-income group consumers, the

product segmentation can be done

formulating the ‘dumping policy’ at a low

price. The price of the product can be raised

to the maximum in coherence with the

consumers’ purchasing and paying capacity

in the long run, after the product gets proper

consumer recognition and makes headway in

the market. Under such circumstances, the

selling cost will however be lower as

compared to the overhead costs.

It is possible to estimate the benefit of pur-

chasing the product or service, if customer’s

economics is understood properly. Company

management should be asking itself, “What is

the highest price that can be charged such that

the customer is better off after buying from

us?” The value added pricing can be explained

as a company provides transportation and dis-

posal services for infectious medical waste

from small generators, such as doctors and

blood banks. As the regulatory and enforce-

ment climates have stiffened, customers have

become increasingly sensitive to the problems

associated with proper disposal of this mate-

rial. Unlike the competitors, who primarily price

by the pound of material removed, the com-

pany may charge a fixed fee per container.

Skimming pricing is the strategy of

establishing a high initial price for a product

with a view to “skimming the cream off the

market” at the upper end of the demand

curve. It is accompanied by heavy

expenditure on promotion. A skimming

strategy may be recommended under the

following business conditions:

• When the nature of demand is

uncertain

Strategy Focus 4.1: Skimming Pricing

Strategy- A Tool for Short-run Profit

A Company may implement the price-skimming

strategy to take advantage of high short-term profits in

view of the newness of the product and with reference

to the effective market segmentation.

There are several advantages of price skimming

• A company may employ price-skimming strategy

for an innovative or high technology-high value

product which involves high research and

development costs. This pricing strategy would

also be suitable to the company where the costs

of introducing the product to the market through

sales, promotion, and advertising are relatively

higher.

• A company can build a quality sensitive image

for its product by charging high prices initially.

This will initial allow the firm the scope of

reducing price when the product becomes

competitive. On the contrary, it would be difficult

for a company to increase the price that has been

set initially lower without taking risk of the loss

of sales volume.

• Skimming can be an effective strategy in

segmenting the market as a company may divide

the market into a number of segments and reduce

the price at different stages in each, thus acquiring

maximum profit from each segment

• The practice of price-skimming is a right strategy

tool, when a product is distributed through

dealers. Since high prices are set by the company

considering the margin-spread among suppliers,

the skimming price is translated into high mark-

ups for the dealer

• Practice of price skimming can be particularly

successful for ‘conspicuous’ or ‘prestige goods’,

as the buyer tends to be more egocentric in

spending to buy such products. 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.

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• When a company has expended large sums of money on research and development for

a new product

• When the competition is expected to develop and market a similar product in the near

future, or

• When the product is very innovative and market is expected to mature very slowly.

Under these circumstances, a skimming strategy has several advantages. At the top of the

demand curve, price elasticity is low. Besides, in the absence of any close substitute, cross-elasticity

is also low. These factors, along with heavy emphasis on promotion, tend to help the product make

significant inroads into the market. The high price also helps the segment market.

One may also turn to a penetration strategy with a view to achieving economies of scale. Savings

in production costs alone may not be an important factor in setting low prices because, in the absence

of price elasticity, it is difficult to generate sufficient sales. Finally, before adopting penetration pricing,

one must make sure that the product fits into the lifestyles of the mass market. How low the

penetration price should be differs from case to case. There are different types of prices used in

penetration strategies: restrained elimination prices, promotional prices, and keep-out prices.

Dow Chemical Company stresses penetration pricing. It concentrates on lower-margin commodity

products and low prices, builds dominant market share, and holds on for the long haul. Texas

Instruments also practices penetration pricing. Texas Instruments starts by building a large plant

capacity. By setting the price as low as possible, it hopes to penetrate fast and gain a large market

share. Penetration pricing reflects a long-term perspective in which short-term profits are sacrificed

in order to establish sustainable competitive advantage. Penetration policy usually leads to above-

average long-run returns that fall in to a relatively narrow range. Price skimming, on the other hand,

yields a wider range of lower average returns.

PRICING WITH DEMAND CURVE

This approach may be followed for pricing the products that already exist in the market and are mature

with regard to sales realization in the open market condition. In this process, unlike getting customers to

upgrade themselves and form segments, the pricing approach calls for widening the market and matching

the product price with product demand. In this process, a high price may be set initially, but there is a

sealing down of the price and mopping up of all available demand at each price level.

Likely demand at various price levels is difficult to estimate but, the implications pertaining to the

results of sample survey can be used in pricing. The sales estimates may represent the demand

schedule and in a firm, even with these points the curve can be drawn. Some preconditions may be

reviewed to estimate the demand of the product such as (i) number of potential buyers (ii) propensity

to purchase and of sales, and (iii) product attributes to attitude building. The demand curve has

implications of these preconditions. If the price is changed there is a movement along with the

demand curve and, if any of the preconditions of demand is changed, there is a scope of shift in the

demand curve to the higher or lower side. In case the demand for the product is elastic, the price

should not be kept high for any product. Pricing strategies are subject to the very nature of the

product. If it is a core product made tangible without enough scorching expenditure, it can be priced

at higher margins, as any close competitor does not encounter it. Marketing of such products depends

on the pricing strategies suitable at every level of the distribution network.

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147

PENETRATION PRICING

This policy may be adopted to penetrate the market as quickly as possible to secure cost advantages

through pushing products in high volume. In case, new products of qualities similar to those already

existing in the market, have to be introduced for crash sales in the market, the price may be derived

in relation to its competitive products. The important issue to be kept in view is the anticipated selling

cost and the volume of sales to determine the prices. The penetration price always needs to be little

lower than the price of the existing products similar to it. The penetration price is conceptually an

artificial pricing approach to push the product in the market. The real price may be fixed later in the

process to assess the demand elasticity of the product in the primary and subsequent markets.

Penetration pricing is the strategy of entering the market with a low initial price so that a greater

share of the market can be captured. The penetration strategy is used when an elite market does not

exist and demand seems to be elastic over the entire demand curve, even during early stages of

product introduction. High price elasticity of demand is probably the most important reason for

adopting a penetration strategy. The penetration strategy is also used to discourage competitors from

entering the market. When competitors seem to be encroaching on a market, an attempt is made to

lure them away by means of penetration pricing, which yields lower margins. A competitor’s costs

play a decisive role in this pricing strategy because a cost advantage over the existing manufacturer

might persuade another firm to enter the market, regardless of how low the margin former may be.

GEOGRAPHICAL PRICING

It is the strategy to exercise a discriminatory pricing policy across the various territorial market

segments. The marketer who serves a number of distinct regions can adopt this policy without

creating psychological barriers either to the customers or distributors in purchasing and selling the

products.

Dual Standards

This strategy is largely backed by the concept of ‘skimming in’ and ‘skimming off’ price setting.

A marketer can choose relatively a lower price for the product in the segments where the customer

density is high but the purchasing power is low. On the contrary, a higher price may be fixed in the

segments of high purchasing power where skimming off’ strategy can be implemented. In setting up

both the price standards, the marketing objective should remain intact and the overall orientation of

the marketing managers has to remain the same.

CONSPICUOUS PRICING

Skimming approach implies in this pricing policy where the price of the product is kept higher than its

substitutes in order to make it conspicuous, so the product may be recognised as a symbol of social

status. An example of jewellery watches may be cited in this context that serve as a status product

for the customers.