nm1192: this is the first week of market analysis for this term and we're going 
into the marketing mix and the marketing mix comprises of pricing place 
promotion and product we're starting off with pricing issues how many of you 
have done accounting for finance courses before have done accounting courses 
yeah good don't worry about it i'm not going to ask you complicated questions 
i'm not going to pick on you er it doesn't the first of the the methods that 
we're going to talk about in terms of pricing is cost oriented pricing and it's 
the most obvious in a sense because it means that when you want to launch 
something into the market when you want to price something you start off by 
working out what it costs two methods both the variable costs so only those 
that are used by the product itself in making it labour materials and so on and 
the 
second choice which is why i asked if anyone had done accounting and finances 
course is the full cost method where you would actually absorb in the overheads 
and allocate the proportion of overheads to the product as well whichever of 
the methods of costing you use the marketers would say that there's a 
disadvantage to this method of pricing that is you start off working out that 
you need to cover your costs and maybe that you want to get a ten to fifteen or 
twenty per cent whatever margin out of the product but you don't take into 
account anything to do with the market itself what people are prepared to pay 
so you're starting off purely from the firm's point of view saying well we've 
got this product and we want to decide how we make a sufficient profit out of 
it and it's the equivalent really of the production oriented or the product 
oriented approach to marketing where we're saying the disadvantage of that is 
maybe you launch a product that's very 
clever er did you hear the example last term of Kevlar DuPont Kevlar was this 
incredibly clever fabric that was going to follow on from from Nylon and it was 
it's light and it's very strong and it's all of these other fine things and 
they invented it but they didn't have any idea what they were going to do with 
it and nobody in the market could actually find an application for Kevlar for 
so it was about several years after it had actually been invented that finally 
it started being used for things it's now used for a whole range of things 
bulletproof vests skateboards crash helmets boats so eventually it did find a a 
a gap in the market and it actually offered a benefit but when it was 
originally invented it was a classic product oriented thing that very clever 
but it may well not have succeeded now the cost oriented pricing method is is 
basically er the equivalent you start off saying i've got this product i have 
to decide what to price it at well if it was Kevlar you'd be saying we need to 
work 
out how much we've spent on developing it we need to know how much it costs to 
make it 
nm1192: so the markets would say the problem with this is that it's a classic 
supply side kind of way of pricing your products and the dangers of it are that 
you may actually sort of think that the market is going to not want to pay more 
for your product but actually you misunderstand the nature of the demand or you 
work out exactly what your costs would be and what margin you want and you put 
it into the market and it's so expensive that nobody actually buys it and you 
don't know whether it's the product or service that isn't valued by the market 
or whether the pricing is just wrong for it so we move towards methods where 
you actually take into account what's going on outside the firm and 
the first of those is com-, competition oriented pricing and what you would do 
there is look at comparable products that your competitors have in the market 
and say well what's their pricing and are we aiming to be at about the same 
rate or are we going to be at a premium above our competitors or are we trying 
to undercut our competitors and there may be a range of reasons why you would 
do that so if cost plus pricing is saying that you've got a cost and you want 
to charge a margin over and above that competition based pricing says that if 
i've got product A if i'm going to launch a new mobile phone into the market 
and it's already a competitive market and there's lots of different people out 
there charging X price per minute charging whatever rental for the phones 
nm1192: then i have to make some basic choices about what my strategy is and 
this is where marketing mix links back to things that you've already talked 
about 
so when you launch a new product when you're looking at your strategy for the 
market you have to decide what kind of objectives you have and that will 
largely determine your pricing strategy if you want for example to penetrate 
the market so you want to offer additional benefits over and above your 
competitors if you charge the same price as them for these additional benefits 
the likelihood is that you will actually gain a fairly high market share you 
will penetrate the market if you're very aggressive about your pricing and you 
really want to penetrate the market for whatever reason maybe you want to tie 
up the best distribution channels maybe you want to get your brand known in the 
market then you have the choice of undercutting the competition what's the 
danger of undercutting the competition 
sm1193: you're starting a price war 
nm1192: yeah and nobody ends up winning not so many years ago about five or six 
years ago i was talking to some of the banks and they were saying that in that 
market 
the only basis on which you could compete was on cost so the only thing you 
could do was to to cut out your bank charges or to lower your rate of interest 
or to improve the er interest that savers were going to get on their savings it 
was all to do with price and they all felt that to gain business from their 
competitors in that mature market they had to undercut the competition the 
danger of that was that people then begin to lo-, perceive that the price 
should be lower and lower and lower for that type of service 
nm1192: the danger if you undercut the competition is that you devalue what 
you're actually offering into the market and this was exactly what happened 
with holidays a few years back we would have looked at the brochure 
and worked out what kind of holiday we wanted what kind of destination we 
wanted what kind of budget we were on were we looking for upmarket tailor-made 
cheap and cheerful holidays but then we all got into the fact that you could 
actually get holidays cheaper and the reason why you were getting holidays 
cheaper is that they were actually selling their late availability holidays so 
the last minute holiday firms had had seats left on planes or hotel rooms 
vacant would reduce the price of those holidays and after a while once 
everybody began to know that you could get cheap holidays at the last minute 
[cough] we stopped paying full price we all started thinking that was about the 
price that you ought to pay for a holiday and we didn't book ahead and the 
firms found themselves getting less and less margin out of those holidays even 
those people who would have booked early started switching their behaviour so 
the 
danger of undercutting is that you set up a price war and nobody in terms of 
the firm the customer way may win because they get some bargains but from the 
firm's side nobody wins the alternative of course is if you really believe in 
the the benefits that your product provides that you should actually be 
charging premium for those benefits and so the third rate of pricing that that 
we talked about there is market oriented pricing and market oriented pricing is 
in a sense the opposite of cost oriented so rather than starting from the firm 
and looking out at the market and saying what price do we want to charge it's 
looking at the customers going right back to your marketing strategy and saying 
well what benefits do we offer and what do we think the price of those benefits 
should be to the market so what's the value of those things that we actually 
have designed into this product or service i'm going to give you an example of 
that the example has anybody 
done the John Deere case study no the example is to do with bulldozers John 
Deere bulldozers they wanted to launch their bulldozers John Deere were 
actually operating in the small bulldozer market that is less than a hundred 
horsepower and in the over a hundred horsepower they were up against some very 
strong competition they were up against people like Caterpillar they were up 
against people like Kamatsu and they wanted to launch into this market because 
basically they felt that they had as higher market share in the small bulldozer 
market as they could gain what they actually did was design a new product 
because they were in the smaller machine market they'd actually got very good 
at getting flexible manoeuvrable machines and when they went into the larger 
market they designed one that had a tighter t-, turning circle the tighter 
turning circle the tighter turning circle meant that you could gain ten to 
fifteen per cent productivity out of this machine suppose you were just better 
at picking things up and and and doing the job so it's ten to fifteen per cent 
increase in productivity when they had to launch into the market they had a 
pricing decision to make they could go in at the same price as Caterpillar 
Caterpillar were well established in the market they had strong distribution 
they had a good ca-, also spares network service and bear in mind if you're 
working on a large construction project you don't want your machine to break 
down so if you're building a a road or if you you're involved in some kind of 
building project you may well have penalty clauses if you don't deliver on time 
it's going to be very important to you that you actually have a reliable 
machine so Caterpillar had all of that established in the big bulldozer market 
John Deere were operating in a market that that was quite different the type of 
people using the machines was different there were jobbing builders there were 
they were one man building firms so quite often the person buying the 
machine for John Deere would be the person who was going to use it with the 
Caterpillar machines quite often there was a large project team involved it'd 
be a larger decision there'd be a whole team of people involved maybe one 
person deciding what ought to be commissioned one person doing the purchasing 
somebody else being the user so there's a whole series of things tied up in 
that not just what price John Deere should charge if you ask what price they 
should charge for the ten to fifteen per cent increase in productivity is there 
anybody who believes that they should charge less than Caterpillar and if so 
why no yes 
sm1194: er i think they should because established than Caterpillar 
nm1192: okay yeah so there is a logic that says if you go in at less than 
Caterpillar it's possible that people in that market will buy your machine now 
otherwise they may say why should i switch from Caterpillar i'm quite happy 
with them can anybody see any issues with charging less 
than Caterpillar yeah 
sm1195: they might just think that they're cheap and might be unreliable 
therefore [laughter] 
nm1192: yeah so there's a price quality relationship in people's minds quite 
often where you say why is it cheap i mean we're all sort of suspicious 
characters and quite often if you see something and it looks too good you think 
there's got to be a catch what's wrong with it now if they're going out saying 
there's a ten to fifteen per cent increase in productivity and they're going to 
charge less then Caterpillar what would you think about the ten to fifteen per 
cent increase in productivity yeah 
sm1196: ten to fifteen per cent decrease in reliability though 
nm1192: yeah you'd say well th-, can they really deliver that if they could 
really deliver that why would they be charging less than Caterpillar so you 
might be doing it for very strategic reasons but there are other issues to take 
into account one of which is price quality how about charging the same price as 
Caterpillar what do you think the market would think to that any 
offers 
sm1197: er they'd think it was better value 
nm1192: they would th-, 
sm1197: just think it's a better value 
nm1192: yes so that could really work because if you've got your ten to fifteen 
per cent increase in productivity and you go in at the same price as 
Caterpillar the market would say could say assuming they believe in this ten to 
fifteen per cent increase in productivity well that's actually very good value 
now you might actually not have quite the same drawbacks as you would have if 
you charge less than Caterpillar because people wouldn't be quite as suspicious 
they'd say well they're not charging less than Caterpillar they're charging the 
same price that would seem like a reasonable thing to do why do you think John 
Deere might decide to do that and it comes back to the point that you've just 
made 
sm1198: it's less of a decision between Caterpillar and John Deere 
nm1192: yeah see otherwise in this particular case John Deere are asking the 
buyers to take a lot on faith aren't they i mean they can take 
their bulldozer to i don't know whatever bulldozer exhibition and maybe they 
can demonstrate this increase in productivity they can come up with technical 
specifications and try to show those to their customers to say look we really 
can deliver this but to a a a set of buyers who are actually happy with 
Caterpillar who are concerned about reliability they've got to persuade them 
somehow to take the risk and buy their machine and if they are not offering a 
benefit over and above Caterpillar maybe the the buyers will not be convinced 
and not switch from their Caterpillar machine to John Deere what's the maximum 
price they could charge 
sm1199: market 
nm1192: yes market oriented pricing would say that the maximum you can charge 
is ten to fifteen per cent more than Caterpillar so ten to fifteen per cent 
you'd have to calculate what that is what a ten to fifteen per cent increase in 
productivity would mean and you could work it out if you had the figures for 
labour and and the basic the the purchase price of the machine the raw 
materials the spares that you've saved the labour costs and all of the other 
things that you would factor in you can work out what you save by a ten to 
fifteen per cent increased productivity ten to fifteen per cent more out of 
that machine over its lifetime and that would be the maximum price that you 
could charge and basically that ten to fifteen per cent more that's basically 
what we mean by market oriented pricing there's a a method of of calculation of 
prices the third method which is called economic value to the customer and 
rather than just say we're we are satisfying a set of needs and wants in the 
market you actually work out what the the price should be if you were offering 
those benefits over and above the price of your competition so you start off by 
benchmarking with the competition you take into account hopefully the strategic 
things about how will the market perceive you if you are cheaper if you're more 
expensive than 
your competition but you can work out what benefits you might be offering over 
and above the competition market oriented pricing therefore there's a whole 
series of things you would need to take into account some of which you've 
already brought out of John Deere first thing you'd have to have your marketing 
strategy now if you look at the car market and start off by saying what price 
can you charge for your product what would happen if you had Skoda quality and 
you charged Lexus prices 
sm1200: no one would buy it 
nm1192: nobody would buy it yeah what would happen if you had er Lexus quality 
and you charged Skoda prices 
sf1201: sell out 
nm1192: you'd sell out on the first day er what would you be doing to your 
company profits selling for far less than you you would need to i mean that's 
an extreme example but basically what we're trying to get to is the fact that 
the price that you can charge the market has to relate to the type of product 
the features that you're offering the quality that you're offering 
what quite of distribution you're selling it to all those other factors so you 
can't just sa-, decide your price in isolation that's what's wrong with cost 
oriented pricing that we saw at the beginning of course you almost always will 
want to cover your costs unless for some particularly strategic reason you want 
to get into a market fast and build a position and then you believe that you 
can put the prices up from there how easy is it to put your prices up once 
you've actually got into a market 
sf1207: very difficult 
nm1192: very difficult so that's what happened in the holiday example that we 
talked about earlier once the market accepts that and basically price quality 
once the market accepts that you would normally pay two to three-hundred pounds 
for a couple of weeks' holiday in Tenerife or wherever it's very difficult to 
go back and say well actually you used to pay four to five-hundred pounds and i 
want to charge you that now because the market's going to think well i'm 
getting the same thing i used to 
pay less for it why would i pay more and they're going to be very unhappy about 
that so you've got to look at your marketing strategy and relate to that but 
just before we we move on there's an interesting one what does a a mobile phone 
cost has anybody got a mobile phone here you're all going to deny it yes 
[laughter] i haven't got mine with me or i'd use it as an [laughter] example 
what does a mobile phone cost the actual handset 
sm1202: the phone itself costs ten pou-, well 
nm1192: ten 
sm1202: costs ten pounds but it costs three-hundred pounds to insure it 
[laughter] 
nm1192: yeah yes so this is the the thing about it i say that you would almost 
always want to cover your costs when you get into a market but mobile phones is 
one of the exceptions sometimes you'd pay ten pounds for the handset sometimes 
you wouldn't pay anything at all but as we're rightly saying there the actual 
cost of it what it costs the firm to make is something like three-hundred 
pounds why then would they charge you ten pounds or nothing at all for it 
sf1203: contract 
nm1192: and what about the contract 
sf1203: it's binding and it has to be 
nm1192: yeah 
sf1203: 
nm1192: and why if you've got to be a customer for a year why is 
that important in terms of price 
sf1203: i think that it keeps up with the consistent 
nm1192: so what they assume is that the the er the problem for them is getting 
people into the market is getting people to have a mobile phone if you either 
are contracted in or you're going to use a certain number of minutes over the 
year what they're assuming is that you're they're actually going to get their 
money back over the lifetime of the phone from the from the airtime and the 
contract and the various other things that they actually have with you does 
anybody maybe you're not old enough i'm certainly old enough when the mobile 
phone market in the U-K started off does anybody know what what handsets were 
were priced at to the customer then 
sm1204: it was in thousands wasn't it 
nm1192: sorry 
sm1204: it was in thousands wasn't it 
nm1192: it was in thousands but that was in the the the very early days my 
father-in-law had a mobile phone that was like you know [laughter] mobile phone 
and we once borrowed this thing it was like a suitcase er and and took it with 
us and the and the only time it was actually useful to us was go to was to go 
to the lakes the was the north-west of England and it's 
actually sort of reasonably mountainous so we took this thing thinking this'll 
be really useful and of course no chance of getting it to work because we just 
couldn't get a signal in fact you couldn't get a signal with it in virtually 
all of the country one of the things used to be actually getting getting the 
signal on analogue phones was not good news when the digital handsets first 
came into the market for consumer use which is relatively recently they were 
actually priced to the customer at around three-hundred pounds and what 
happened nobody bought them because people had had analogue phones and people 
by and large were reasonable happy with analogue digital came along and it's a 
bit like digital T-V now they were trying to get people into the market and 
people were looking at the prices saying well would i use it and the classic 
thing with mobile phones and i am a classical case of a mobile phone user 
'cause i got my mobile phone for emergencies only and 
most of their customers say that to them well i don't i'm not sure i really 
need one but i'll get it for emergencies and i won't dial out on it much but 
i've got this certain number of free minutes you see and er i'll only use the 
free minutes and if the car breaks down or i'm going to be late or what i'll be 
able to ring people and then you start exceeding your free minutes and you 
realize it's not as expensive per minute as you thought it maybe was and then 
you use it more and more and more and it's a life cycle they want to get people 
in at the beginning because once you get into using your phones they actually 
make the money back have you seen the recent Orange advertising in the U-K i 
know there are inter-, international calls and whatever else what was what was 
the advertising before that can anybody remember the Orange community they had 
teams of rowing teams and they had families and whatever else because the 
latest thing that they're saying is in order if if the money comes out of the 
airtime what they want you to do now is is to have more handsets so don't just 
want you to have one they want you to have a whole set of them and then you're 
going to ring each other on your your phones and various other things you're 
going to give them er this is a great one to try on your parents the they 
they're going to give them to your teenage children who go off to university 
because it's cheaper than than getting people to use unreliable callboxes and 
and whatever and you can get a card and you put a certain number of minutes on 
it for a member of your family or or whatever to use their phone so there are 
all kinds of things that they're doing now to to lock people into those 
contracts you know what the most irritating thing is for the mobile phone 
providers given that they're giving you this three-hundred pound phone for ten 
pounds and i think when you said insurance you've probably got it er people 
because they assume it only to be worth ten pounds or nothing at all don't take 
care of their mobile phones 
i'm a classic case i haven't got a case for it yet i've always intended to have 
one it's it's covered in bits of Blu-tak you know bits of pen and things being 
in the bottom of the bag er people return them to their insurance departments 
with all kinds of ridiculous thing you know oh the kid's dropped it in the bath 
er [laughter] i spilt a can of Coke on it and one of the the classic ones that 
they've got someone who'd driven a nail into the top of their mobile phone 
trying to improve the reception on it [laughter] they were surprised that it 
didn't work after that so you have a marketing strategy which dictates what 
kind of price range you're going to be looking at and it c-, of course it 
relates back to your position and your features your quality and all of those 
other things there is a price quality relationship that you've got to take into 
account it's quite possible to pra-, to charge too little for a product as much 
as it's possible to charge too much because sometimes if you go into a market 
with something as we've 
said if you went in with your John Deere bulldozer and you charged less than 
the competition you might be asking people to to sort of not to trust in the 
value of your product in a way that you believe that it must be you know very 
good quality because you're paying a higher price you know that one of the 
classic cases of that to me is er we had a a carpenter come round the other day 
now we wanted a cupboard for our bathroom and we want it to fit a gap about 
this big and there is no pine chest of drawers that fits into that kind of 
space and so you go off to M-F-I or IKEA or whatever else you look at the size 
they're all about the same they're all about sort of twenty-something inches no 
way does it fit into the gap and eventually having looked in all the expensive 
shops for something tailor-made having looked at antiques having looked at all 
kinds we found somebody advertising in the Yellow Pages and he makes furniture 
and he brought us this catalogue of 
of beautiful chests that he'd made of things exactly to your requirements 
tailor-made he'd build it from scratch and then we asked him how much it was 
going to be for this chest of drawers and he was going to charge us something 
like er i don't know what his rate was ten pounds per hour for making this plus 
materials and if you worked out even though it's going to take him a few days 
to make it was going to be less than buying flat-pack furniture from IKEA or M-
F-I or or wherever to get this tailor-made cupboard built much better than you 
would get from any of the the furniture wholesalers so he's taking a cost plus 
pricing method there he's working out what his time is he's working out his 
materials he's one of these incredibly honest characters who's going to charge 
us like thirty-something pence er for a for a a box of nails when you say well 
you know i'm not going to know it's thirty-seven-P if you charge me a pound or 
two pounds or whatever else probably not 
going to notice but he's going to charge you exactly what his labours are and 
that that's you know very honest of him but you feel like saying look ta-, take 
a take a pricing lecture and say [laughter] it's economic value to the customer 
i can't go out and buy this i can't buy it from IKEA or M-F-I at whatever price 
i've even looked in the expensive shops i you know five six seven up to a 
thousand pounds and you're going to charge me a hundred-and-fifty-pounds er 
sometimes the price sensitivity of the customer or the value that they're 
actually getting is much higher than the person is taking into account and 
that's one of the limitations of cost oriented pricing you can end up 
underpricing your services to the marketing or undervaluing what you actually 
have to offer of course you can also overvalue if you're John Deere and you say 
we've got a ten to fifteen per cent er advantage over the competition the 
competition has to be prepared to pay that and the problem that John Deere 
actually faced was they 
went at the higher end of the pricing range because of their ten to fifteen per 
cent increase in productivity and the market didn't really want to switch 
because they didn't fully believe that they could deliver that well what if the 
machine doesn't give us ten to fifteen per cent increase in productivity and 
we've switched away from Caterpillar and we've got to get the spares and will 
it be reliable and it how professional are their small er service units going 
to be and so on there's value to the customer competition as we've said the 
signal to the market in terms of your price quality and your value are very 
much tied in to the competition price if you're charging a premium over the 
competition you've got to be offering superior value if you're undercutting the 
competition well maybe you're doing that because you're offering less value or 
maybe you're doing it for some kind of strategic reason if you can persuade the 
customer that the value is there and the quality is 
there but you're charging less then you can stand a very good chance of 
achieving the objective of penetrating the market in terms of the pricing 
strategy you might be trying to achieve there's a range of different choices 
that you can make those choices relate to the price that you charge and the 
market share that you wish to gain if you charge a low price and you're 
offering value to the market obviously then at a low price you may well gain a 
high penetration of the market this is assuming that you have something that 
the customers want and that's the aims of the mobile phone producers they've 
lowered their price they're having digital technology and mobile wire-free 
phones something that they believe that the market wants but to actually 
penetrate that market to get enough people to take the mobile phones to make it 
viable i mean basically the they're they're putting their profits back if you 
talk about something like Orange they're not making massive profits or indeed 
any profit until recently 
because all the money is going back into building the network building the the 
signals so they can reach enough of the population and in order to get the 
money to do that they need to penetrate the market they need to get enough 
people to use the phones the other choice that you could make is to say well 
okay we charge full price for our mobile handset we charge three-hundred pounds 
for a digital phone or before it came into the consumer market we're charging a 
thousand- plus pounds for a an analogue phone at the time er for the business 
market and we know that only a few people will be able to afford that but if 
they're cha-, er charging if we're charging a high enough price and we're 
making a high enough margin on that then we can afford to skim the market so 
the opposite strategies there are penetration where you're getting a large 
market share and a relatively low margin or skimming where you're going to get 
a high margin from a small amount of the market another example of that would 
market penetration would be one of the mass market cars so it would be a a 
Fiesta or a Metro or a Mini or something like that er whereas with the skimming 
part of the market would be Lexus or one of the upmarket cars at the other end 
so you can you can have different approaches both of which would offer you a 
profit there is the possibility although it is only a possibility of having a 
high priced high market share product can you actually think of any examples of 
that where you charge a high price and gain a high market share there's one at 
the moment which is very dear to my heart having shopped around for Teletubby 
dolls couple of Christmases ago for my kids when they came into the market 
Teletubby dolls you just couldn't get it was a supply demand thing er and they 
were limiting it to one per customer you couldn't have all four 'cause it may 
you may not be the Teletubby market but believe me i've i've i've watched them 
you get very keen to watch them when your children are er are keen on 
Teletubbies you know all their names all the songs [laughter] these things cost 
er people have told me that they actually should retail out at th-, twenty-nine 
pounds because they were in such short supply when they first came into the 
market and they were a real fashion thing people were selling them on the black 
market trading them for hundreds of pounds so that their kids wouldn't be 
disappointed at Christmas the same thing's happened now with Beanie babies and 
Furbies and goodness knows what because they're fashion items they're fads 
they've really come into the market and they're gaining a high market share and 
for a short period of time the a lot of the market will buy them and they will 
buy them at a high price but it won't be sustainable it'll move onto something 
else and actually Teletubbies aren't demanding the price that they were that's 
almost a a sort of chance example you you can have a fad have you done product 
life cycle yet no product life cycle says that a product will be 
introduced into a market will grow gradually will mature and then eventually 
decline there's a product life cycle that goes with a fad and it goes it's it's 
it's not a gentle curve like that it's a triangular thing it goes sharp up and 
then sharp back down again because they grow very quickly but they decline very 
fast as well as something like a fad you can get examples of something which 
sells to a large amount of the market at a high price if it's something that we 
aspire to and a classic example of this does anybody here drink Schweppes Oasis 
no i know it's in the campus shop it was in the campus shop and it also sells 
at the various other bars and so on does anybody know by a chance what it costs 
or what kind of price you'd expect to pay per bottle 
sm1205: is it about seventy pence 
nm1192: it might be now it was marginally more than that it was about a pound a 
bottle at one stage certainly but it's relatively expensive compared to other 
it's a soft drink it's an adult soft drink compared to other adult soft drinks 
it's quite an expensive one when 
they actually entered the market with it when they launched it they believed it 
was going to be a niche product so they believed that what they were trying to 
do was skim the market and they were trying to be in that position there when 
they were charging a high price and they were going to get a small amount of 
the market that small amount of the market was going to be probably male 
probably er mid-twenties to mid-thirties single er gone out for the evening and 
the driver for the evening so driving home not able to drink much alcohol 
doesn't want to to be seen drinking cans of Coke all evening er and aspires 
maybe something a little bit more sophisticated so when they launched it into 
the market the idea was that it was a sophisticated soft drink and there's all 
kinds of background to that we are apparently a soft soft drinks generation 
actually i'm i'm i'm classing myself in the same generation as you i'm i was a 
sort drinks generation you're second generation soft drinks users my 
parents' generation as they got to adulthood they switched towards drinking tea 
and coffee they didn't drink soft drinks we've grown up with cans of Coke and 
cans of Sprite and and Seven-up whatever else and we've got into the habit of 
drinking soft drinks and we continue to drink them when we get to adulthood we 
start drinking more sophisticated things so you go out if you don't drink Oasis 
you might go out and have a glass of mineral water sparkling mineral water what 
kind of price do you pay for mineral water in a bar it's ridiculous you can you 
can pay two three pounds for a glass of mineral water where you pay you know 
one-pound-fifty two pounds for a large bottle of mineral water in a supermarket 
but that kind of market the the drinking in the evening adult sophisticated 
drinks is quite a a premium priced skimming market when Oasis launched that's 
where it thought it was going to be on pricing strategy does anybody know what 
happened to it does anybody know who drinks it [laughter] well 
the answer is you're probably too old er because although they thought they 
were going for twenty-five to thirty-five er reasonably sophisticated males 
what actually happened was they started advertising it in all the types of 
places you would need to to get it to that audience so they were putting it in 
in various of the magazines not that they were just targeting males targeting 
females as well so they were putting it in She and Mizz and and they put it on 
Capital Radio's Hall of Fame and various other types of advertising and the 
people who saw it and the people who aspired to it weren't the twenty-five to 
thirty-five year olds they were the sixteen year olds because the sixteen year 
olds thought it must be a sophisticated drink and they weren't old enough to go 
out to bars and drink so well not officially er [laughter] so they were going 
out and they were buying it from garage forecourts and newsagents and things 
like that because Oasis was was something that was trendy to 
drink for a pound per bottle and what they actually ended up with was a high 
market share high priced product and at one point in the U-K Oasis had seventy 
per cent market share so it was massive and Frutopia and Snapple who were its 
rivals basically Frutopia who's owned by Pepsi pulled out of the market said i 
can't compete with this product even though it's owned by a very big name 
because they've got such market share now what you're telling me seems to be 
that that market is dying out of popularity too but for a time at least it 
achieved the virtually impossible position of high market share and high price 
the ideal for all firms in terms of profit the opposite end of the market you 
get somebody who's got a low price and a low market share and my guy making 
chest of drawers for the the bathroom at very low prices is probably in that 
part of the market it's a niche the niche which is probably serving the 
declining market the end of the product life cycle quite often let me think 
what else would be in there then if it's serving declining markets something 
like black and white television would also be in that part of the pricing 
strategy something where there aren't many people left who want to use it but 
there are some and those people who are the ones who want to use it are 
probably there because they can't afford to trade up to the newer technologies 
that have come in they are in their current life cycle terms the laggards i 
always thought that was a very sort of unflattering term they are the laggards 
[laughter] i just it always sounds great if you're called innovator or a 
whatever else but being called a laggard somehow is bit kind of er it's about 
as as good as being called a dog isn't it in the er purely in in Boston 
Consultancy Group Matrix terms [laughter] so there's a niche at that part of 
the market too market orientated price index it's to do with what price your 
competition are charging apart from some rare examples one of which we've just 
had there 
with the mobile phones you're going to want to cover your costs there may be 
situations where you've got to negotiate the margins because all of this that 
we've talked about so far is implying that you're dealing directly with your 
end customer now the other parts of the the marketing mix that we're going to 
look at next week we're going to talk about place place actually is largely 
about your distribution channels how you actually get your products to the 
market and if you're going via a retail multiple if you're going via a car 
dealership you may not able be able to set your prices as you wish so even if 
you're taking into account your quality even if you're saying what are we 
offering the market what are our competition doing what's our value there's 
somebody else an intermediary between you and the customer in this case if 
you're talking about something like food retailing you're talking in the U-K 
about five chains who have eighty-something per cent of all the distribution of 
food 
and clearly as there's only five firms who control all of that market they've 
got a lot of power i used to work for Unilever before i became an academic and 
er it got to the stage where if those five firms didn't want to list your new 
product when you actually w-, had an idea and you were going through the 
process of launching it in the market thought you may as well not introduce it 
because you were left trying to get it listed by something like ten to to 
fifteen per cent of the market and you knew if your strategy as we've said 
before was to penetrate the market you knew that you weren't going to be able 
to do that you could at best get a niche position so that was okay if it was a 
premium product but it wasn't if it was something that you were aiming at the 
mass market you just wouldn't get the distribution if the channel wants to make 
the maximum margin so Sainsbury's or Tesco's want to make as much money as they 
can out of something like Schweppes Oasis and also 
the firm making it wants to you can't both put on the margin you want to and 
add it up and and then sell it out to the market 'cause what would happen if 
you did that think back to the the competition 
sm1206: maybe it would just undercut it 
nm1192: sorry 
sm1206: maybe it would just undercut it 
nm1192: yeah well i mean basically what what you'd be doing is you'd be 
charging a lot more for no apparent added value because in the channel they'd 
put on the margin you'd put on the margin you'd be double counting that you'd 
be making it more expensive than the competition for no more value people 
wouldn't buy it and rightly as you say if there's competition between retail 
chains if you both hang on to the fact that you want to make say twenty per 
cent margin for your product a competitive chain can sell it cheaper you're not 
going to sell your product people are going to start switching to somewhere 
else so it's in nobody's interest it's not in the producing firm's interest 
it's not in the retail chain chain's interest what they have to do is be 
sensible in 
the negotiation of the margin so to get and and quite often what happens is 
they have a price point that they have in mind for a product what they're going 
to sell it at and they have to work back how much profit each of the the people 
in the the channel are going to make i'll just summarize the price quality 
relationship issues what we're saying is there are different types of 
relationship between price and quality that you can have if your quality is 
high and your price is is high that is a classic premium strategy so remember 
when we're talking about competitive pricing we were saying you couldn't charge 
a premium over and above competition you can do that if your quality is high if 
you have medium quality and you want to charge a high price you you're in one 
of two positions you're either slightly overcharging because if you're charging 
a very high price for something which is a a m-, a moderate quality then you're 
slightly overcharging and the likelihood is that 
if there's something better in the market that the competitors the customers 
are not going to buy it if you're charging a medium price for very high quality 
you get the opposite effect it's very good value if for some bizarre chance 
like the person making furniture for our bathroom and basically because he 
doesn't look at what the market's prepared to pay you're actually offering very 
high quality for a low price then what you're offering is a superb value 
strategy as a matter of interest we actually went back to him and told us he 
ought to be charging us more because we felt that i mean i don't want to pay at 
the top end of the scale but we were prepared to pay more than you know at 
least the equivalent of of buying it flat-pack er and he wouldn't accept it he 
just didn't believe us that you could actually charge more than that to the 
market so there are people who are superb value the opposite extreme is if 
you've got a poor quality and you're charging a high price that's a classic 
rip-off strategy and i suppose you're sitting there thinking well you know when 
would that happen you you wouldn't buy would you but there are instances when 
you would have you ever been stuck in an airport anybody been stuck in an 
airport anybody been stuck outside the station waiting for a taxi you've missed 
the last bus or the last train er it's raining er and there's a taxi there how 
price sensitive are you assuming you've got money sufficient money in your 
pocket you'll pay whatever you need to pay to get home if you've been stuck in 
an airport for long enough and it's hot you're waiting for your flight and you 
want a drink you'll go and you'll pay well over the odds for that that drink 
that kind of pricing strategy only works it's called opportunistic it only 
works if they're not relying on somebody coming back to them again so if they 
think they're never going to see you again they can overcharge you they can rip 
you off once er if you do that to a customer i mean the basis of 
marketing really is on repeat business if you do that to a customer more than a 
certain number of times they're just not going to come back to you and of 
course in the middle of those you can s-, have medium quality and and a high 
price is is sort of poor value rather than a rip-off er that niche position we 
saw where you had a low market share and a low price for something like black 
and white television is is the economy end of the market and there's also a 
niche of the market in quite a lot of sectors so there's a niche cheap car 
market for Lada or or Skoda or whatever there's a niche er cheap food market 
for Kwik Save Aldi Netto and so on so i-, in quite a lot of markets there is an 
economy position you can take as well as a premium position if you go for an 
economy pricing strategy it can only be on the basis really that you want to 
char-, you want to sell a lot of units so you want to penetrate the market and 
make a profit in that way okay we can leave it there for today thank you