BUS-M370 Mid-Term & Final Notes & Study Guide
BUS-M370 Mid-Term & Final Notes & Study Guide BUS-M 370
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M370 Marketing Mid T erm Study Guide 06/09/2015 ▯ CHAPTER 1: MARKETING: Creating and Capturing Customer Value ▯ KEY TERMS Marketing: creating value for customers and managing profitable customer relationships to capture value from them in return Marketing myopia: the mistake of focusing on products offered rather than the benefits and experiences produced by them for the consumer Needs: states of felt deprivation: marketer’s assess consumer needs, wants and demands Market: set of all actual and potential buyers of a product or service Marketing concept: success depends on knowing needs and wants of target markets and delivering desired satisfaction to customers better than your competitors Customer relationship management (CRM): process of building and maintaining profitable customer relationships by giving superior customer value/satisfaction of consumer needs Customer perceived value (CPV): benefits weighed against costs of a marketing offer relative to a competing offer from point of view of customer Customer satisfaction: how much a product’s perceived performance matches buyer’s expectations Customermanaged relationships: initiated by the customer; consumer shapes her relationship with a brand CLV: customer life time value; value of all purchases customer makes over lifetime Share of customer: how much of a customer’s purchasing that a company gets in its product categories Customer equity: total combined CLV of all a company’s customers ▯ ▯ ▯ THE MARKETING PROCESS Understand marketplace and customer needs Design customerdriven marketing strategy Create integrated marketing program that delivers superior value Build profitable relationships Capture value from customer’s to get profits and customer equity ▯ ▯ Consumergenerated marketing: consumers post about a business without invitation of the brand/business; like yelp, google reviews, trip advisor, contests for a new flavor, like with lays ▯ ▯ Marketing management: art and science of choosing target markets and building profitable relationships with them ▯ ▯ MARKETING METRICS: market share and penetration Unit market share: #brand units sold/total market units sold o Firm must define market and competitors in it o Brand unit sales = market unit sales x brand unit market share Revenue market share: brand sales revenue $ / total market sales revenue $ o Brand sales revenue = total market sales x brand revenue market share Relative market share (either # or $): brand’s market share/largest competitor’s market share Market penetration: # of brand users/total population o Must define population’s geographical area o Expressed as percentage CUSTOMER RELATIONSHIP GROUPS Butterflies: high profitability over the short term True friends: high profitability over the long term Strangers: low profitability over the short term Barnacles: low profitability over the long term ▯ ▯ VALUE BUILDING THROUGH MARKETING 4 ways to help firms build customer value o no such thing as a commodity all products can be differentiated Products = problem solving tools consumers are more focused on thirst and holes, not drills and cola There is a bias towards the measurable but firms also need to measure things like satisfaction, fun, and friendliness Make the intangible (reputation, brand equity, brand power) more tangible to consumers ▯ ▯ Consumer buyer behavior: buying behavior of final consumers These final consumers combined make up the consumer market ▯ ▯ CHARACTERISTICS AFFECTING CONSUMER BEHAVIOR ▯ CULTURAL FACTORS Culture: most basic cause of a person’s wants and behavior Subculture: groups of people with shared value systems based on common life experiences and situations; nationalities, religions, racial groups, geographic regions Culture shifts create opportunities for new products or can otherwise influence consumer behavior Culture is like your nose; you don’t see it on yourself but others do **SOCIAL CLASS is considered cultural, not social factor ▯ SOCIAL FACTORS Those we interact with: family, reference groups, opinion leaders, social networks, social roles you play, social status Opinion leader: someone who influences the behaviors or attitudes of others; NOT a spokesperson Reference group: people that have a significant effect on an individual’s evaluations, aspirations, or behavior o Can cause conformity where a person changes as a reaction to real of imagined group pressure o Some of the strongest pressures to conform come from our gender roles o Examples: frats, clubs, church groups, school classes ▯ PERSONAL FACTORS Age and lifecycle stage: people change the goods they buy over their lifetime Occupation: influences the purchase of clothing and other goods Economic situation: some goods are very income sensitive Selfconcept, life style, personality ▯ PSYCHOLOGICAL FACTORS Maslow’s Heirarchy of Needs o Upper level needs: selfactualization, selffulfillment o Middle 3 levels: (most marketing is effective when appealing to these) Ego needs, prestige, status Belongingness, friendship, love, acceptance by others Safety, security, shelter, protection o Lower Level needs: physiological, water, sleep, food o Beliefs in attitudes, self concept, ▯ ▯ THE BUYER DECISION PROCESS Starts with need recognition If a consumer has a need and the satisfying product is not near at hand, consumer stores the need and undertakes information search; finds products, prices, etc., what fits their budget Consumer arrives at brand choice through evaluation of alternatives; what best fits them Consumer makes purchase decision to buy the most preferred brand Postpurchase behavior; almost always results in cognitive dissonance; buyer discomfort caused by postpurchase conflict ▯ BUYER DECISION PROCESS FOR NEW PRODUCTS New product = good or service or idea perceived by some potential customers as new o Adoption process = mental process through which an individual goes from first learning about a product to final adoption Stages in adoption process Awareness Interest Evaluation Trial Adoption Categories of adopters: shown on bell curve Innovators (2.5%) Early adopters Early majority Late majority Laggards ▯ ▯ READING #1: The Mismanagement of Customer Loyalty Is loyalty profitable? must test 2 claims o 3 claims It costs less to serve loyal customers Sometimes experienced, loyal customers are actually more expensive Loyal customers pay higher prices for the same bundled goods On the contrary, longterm customers consistently pay lower prices than the newer customers A loyal customer is actually more pricesensitive than an occasional one Loyal customers market the company Slightly true, but those who are more loyal vocally are more likely to market for company than those who are loyal behaviorally Knowing when to lose a customer o Link between loyalty and profits is weaker than expected o Sort customers according to how often they make purchases and how much they spend (RFM) Why this is a poor way to measure loyalty; RFM can’t distinguish between frequently and infrequently bought goods; also, monetary value component is almost always based on revenue rather than profitability Segmentation is a more valuable method put into categories of barnacle, butterfly, strangers, and true friends Butterfly: profitable but disloyal True friends: profitable and loyal Strangers: not profitable and not loyal Barnacles: low profitability and loyal Turning true friends into true believers; don’t do overkill Instead, give them more perks; preferred access, exclusive benefits etc. Enjoying butterflies Next most valuable after true friends; know when to stop investing in them Smoothing barnacles Most problematic customers; determine whether problem is a small wallet or just aren’t spending as much as they can ▯ ▯ READING #2: Avoid the Four Perils of CRM #1: Implementing CRM before creating a customer strategy o Segmentation analysis must be done before using fancy CRM software o New York Time’s example #2: Rolling out CRM before changing your organization to match o installing CRM technology before creating a customerfocused organization is most dangerous pitfall o Company first has to revamp the key business processes that relate to customers, from service to order fulfillment o CRM requires companies to adopt customercentric philosophies #3: Assuming that more CRM technology is better o CRM doesn’t necessarily have to be technologically intensive o Relying only on technology can be a costly pitfall o Good CRM approach is a hybrid one #4: Stalking Customers rather than Wooing Them o Even if you may want to make more relationships with affluent customers, it doesn’t always mean they will want it from you o Only work to build relationships with customers who value them ▯ ▯ READING #3: Customer Profitability and Lifetime Value To see benefits from having detailed customer knowledge, firms have to systematically estimate the profitability associated with its use o Must track initial acquisition costs and compare them to profits to be generated over the customer’s expected relationship with the company o First must determine the relevant characteristics of customer activity and distinguish between segments of customers that exhibit similar characteristics Acquisition cost = #action needed to get one customer * cost of action o With acquisition cost, can determine customer breakeven point then get CLV and use strategic implications CLV = [(profit margin – cost of marketing)/(1retention rateinterest rate)] – AC Strategic implications of CLV Analysis o Firing Customers: can lose a percentage of the leastperforming customers o Rewarding Customers: rewarding best customers can lead to higher loyalty o Identifying Crossselling opportunities: firms can identify opportunities to offer additional or related products CLV and relationship marketing relationship between the customer and the firm typically evolves over time and is not static o Stage 1: Prospects: critical stage, determines long term satisfaction and retention of a customer o Stage 2: First Time Buyers: satisfaction in this phase is critical for industries with short purchase cycles to establish repeat buyers o Stage 3: Early Repeat Buyers: repeat purchasers are more likely to buy again than first time buyers; rate of defection is reduced o Stage 4: Core Customers: rate of defection in this stage is typically low o Stage 5: Core Defectors: reasons eventually cause some customers to switch suppliers ▯ ▯ CHAPTER 3: Company and Marketing Strategy ▯ ▯ Strategic planning: process of developing and maintaining a strategic fit between the organization’s goals and capabilities and its changing marketing opportunities 1. Define company mission 2. Set company objectives and goals 3. Designing the business portfolio 4. Planning marketing and other functional strategies Mission statement: statement of the organization’s purpose; what it wants to accomplish in the larger environment Clean mission statements act as an “invisible hand” that guides people in the organization Need a marketoriented mission; meaningful and specific yet motivating o Shouldn’t just be “making more sales or profits” ▯ ▯ Firm’s with more than one brand (more than one SBU strategic business unit) Businesses can classify their SBUs according to growthshare matrix o Stars: high growth, high share products o Cash cows: low growth, high share product o Question marks: low share in high growth market o Dogs: low growth low share products Boston consulting group developed this as a way to evaluate portfolio ▯ ▯ Measurement: What is Product Growth Measurement? Is the product category growing in sales volume? What percent growth? The firm must determine what % growth constitutes high vs. low for a product Productmarket expansion grid: portfolioplanning tool for identifying company growth opportunities through market penetration, market development, product development, or diversification called the Ansoff model o Increasing market penetration: making more sales of current products to current market segments without changing product o Market development: company growth my identifying and developing new market segments for current company products o Product development: growth by offering modified or new products to current markets o Diversification: starting up or buying up businesses beyond company’s current products and markets to achieve growth ▯ Managing marketing strategies and the marketing mix Marketing strategy: marketing logic company uses to hopefully create customer value and profitable customer relationships 4 Ps OF MARKETING o PRODUCT o PLACE o PROMOTION o PRICE Key terms o Market segment: consists of consumers who respond in a similar way to a given set of marketing efforts o Market segmentation: dividing a market into distinct groups of buyers who have different needs, characteristics, or behaviors, and who might require separate products or marketing programs o Market targeting: evaluating each market segment’s attractiveness and selecting one or more segments to enter o Positioning: arranging for a product to occupy a clear, distinctive, and desirable place relative to competing products in the minds of consumers Ex: bmw is the “ultimate driving machine” and audi promises “truth in engineering” These types of statements form backbone of a product’s marketing strategy Differentiation: actually differentiating the market offering so that it gives consumers more value Example: Allegiant; “going where they ain’t” looks for uncontested routes neglected by larger airlines and targets customers who might not otherwise fly; offers charter flights ▯ Marketing analysis: begins with SWOT Analysis Internal: strengths and weaknesses External: opportunities and threats ▯ Marketing implementation: turning marketing strategies and plans into marketing actions to accomplish strategic marketing objectives “Doing things right” implementation “Doing the right things” strategy; need to focus on this ▯ ROI return on marketing investment Marketing ROI is the net return from a marketing investment/costs of investment Can be measured in many ways; can be measured in brand awareness, sales, or market share ▯ ▯ STDP: Segment, Target, Differentiate, Position ▯ ▯ READING #4: Market Segmentation, Target Market Selection, and Positioning ▯ Market segmentation: dividing market into groups of potential customers (segments) Goal is to put customers in groups that differ from one another but that have a lot of homogeneity within them 2 types of segmentation: o based on benefits sought by customers benefit segments are based on differences in consumer preferences or needs o based on observable characteristics of customers In an ideal scenario, marketers will try to group customers based on their needs Requirements for segmentation o Understand benefits consumers seek o Segment market and develop customer profiles based on benefits o Find observable variables most likely to discriminate among benefit segments ▯ Target Market Selection: evaluating each market segment’s attractiveness and selecting one or more of the market segments to enter Key is understanding differentiation; must collect data for the firm in 5 areas: o Ability to… Conceive and design Produce (quantity and quality) Market Finance Manage/execute Once data is collected it can be synthesized “competitor capability matrices” ▯ Positioning: marketer’s effort to identify a unique selling proposition for the product arranging for a product to occupy a clear, distinctive, and attractive position relative to competing products in target consumer’s minds A good positioning statement answers 3 questions: o Who are the customers? o What is the set of needs that product fulfills? o Why is the product the best option to satisfy those needs? The Positioning Statement: specifies place the firm wishes to occupy in its target customer’s minds Differentiation: good positioning reflects competitive differentiation o 2 extreme types: Vertical differentiation: offering better quality product for higher price Example: Toyota offers Yaris, Camry, and Toyota Horizontal differentiation: same price/quality but different in ways independent of quality Camry vs. other Toyota models in same price range; different styles Role of Brands: brands make product differentiation concrete ▯ ▯ CHAPTER 4: CUSTOMERDRIVEN MARKET STRATEGY ▯ ▯ Bases of Market Segmentation: geographic, demographic, psychographic, occasion (product usage behavior) Geographic segmentation: divides market based on location Demographic: dividing consumers into groups based on sex, income, age, occupation, race, religion, education, etc. o Age and life cycle stage o Gender o Income Psychographic: divides buyers by social class, lifestyle, or personality o ZipCar; all about Urban living Product usage behavior: segments based on when and why product is used Benefit segmentation: dividing a population into groups based on the benefits they seek in the product or service o Car buyers that seek safety vs. car buyers that seek performance ▯ What makes a good segment? Measurable Accessible Substantial Differentiable Actionable ▯ Selecting Target Market Segments Undifferentiated – mass marketing; rarely used, markets to everyone Differentiated – targeting certain segments; used by most businesses Concentrated – choose one segment; like bridal store Micromarketing – market to individual customer; high customization, local marketing ▯ Positioning Map/Perceptual Map A product’s space on the map represents consumer’s perceptions for different brands of a product ▯ Selecting an Overall Positional Strategy: Choose Right Competitive Advantage for Your Brand Be competitive in a way that matters How many differences and which ones to promote example of pizza hut failing at this by trying to offer everything to everyone so no one ends up going there Value proposition: full mix of benefits on which a brand is differentiated and positioned o More benefits for more $ o More benefits for same $ o More benefits for less $ o Same benefits for less $ o Less benefits for much less $ ▯ Product line stretching: vertical differentiation; offering lower and higher priced brands ▯ Product line filling: horizontal; offering more variants of same thing; same price different benefits ▯ ▯ CHAPTER 5: PRODUCTS, SERVICES, AND BRANDS: Building Customer Value ▯ ▯ Product: anything that can be offered to a market for attention, acquisition, use, or consumption that might satisfy a want or need ▯ ▯ Services: a form of product that consists of activities, benefits, or satisfactions offered for sale that are essentially intangible and do not result in the ownership of anything ▯ ▯ Product layers Core product, i.e. energy drink o Core customer value Actual product, i.e. red bull and its can o Brand name o Quality level o Design o Packaging o features Augmented product i.e. red bull sponsored events o Product support o Delivery and credit o Aftersales service o Warranties ▯ Consumer products: product bought by final consumer for personal consumption 4 types of consumer products o Convenience product: frequent purchase, little planning, low price, wide distribution, mass marketing Toothpaste, magazines, detergent o Shopping product: less frequently purchased, requires planning and shopping effort, comparison of brands on price, quality, and style; higher priced than convenience, fewer outlets and selective distribution Major appliances, televisions, furniture, clothing o Specialty product: strong brand preference and loyalty, special purchase effort, little comparison of brands, high price, exclusive distribution in only a few market outlets, carefully targeted promotion Luxury goods, such as Rolex watches or find crystal o Unsought products: little product awareness or knowledge, little or even negative interest, price and distribution vary, promotion is aggressive and personal Life insurance, Red Cross blood donations ▯ Industrial products: products purchased for further processing or for use in conducting a business Includes materials and parts and capital items, like installations and accessory equipment, also supplies and services ▯ ▯ What a product/brand can be… Organization; often carry out activities to “sell” the organization itself organization marketing People; person marketing = activities undertaken to create, maintain, or change attitudes or behavior toward particular people Places; place marketing = activities to do (above) towards particular places, like I heart NY t shirts Ideas; social marketing = using commercial marketing concepts and tools to influence individuals’ behavior ▯ ▯ Product/brand – what is it? Quality Features/attributes Style and design Brand image Packaging Labeling Product support ▯ Brand: that which identifies the product of one marketer to be distinguished from another; name, term, sign, symbol, design, or combination that identifies the product or service A brand is how people recognize the seller of a product ▯ How brands are arranged: product/brand line Product line: group of products that are closely related because they function in a similar manner, sold to same customer groups, marked through same types of outlets, or fall within given price ranges o Product line length: number of items in the product line o Can expand product line in two ways… Line filling: adding more items within present rand of line (many flavors of diet coke) Line stretching: company lengthens product line beyond its current range; companies at upper end of market can stretch their brand downward and some companies also stretch product lines upward Product mix/portfolio: all product lines and items a particular seller offers for sale o Example: Campbell soup’s product mix has 3 major product lines and each one has several sub lines ▯ ▯ Service characteristics (how they differ from goods) Intangibility o Can’t be seen, tasted, felt, heard, or smelled before they are bought; provider has to make it tangible in some way Inseparability o Services cannot be separated from their providers, whether the provider be people or machines; customers produce part of the experience o Can’t separate server and customer or there is no service experience Variability o Quality of service depends on who provides it, when, where, and and how it is provided Perishability o Services can’t be stored for later use; if you buy a concert ticket and miss the concert, it already happened and you can’t use the service of going to the concert; they are time sensitive ▯ ▯ BRANDING TERMS ▯ ▯ Brand equity: measure of brand’s ability to get consumer preference and loyalty The differential effect that knowing the brand name has on customer response to the product and its marketing Brands vary in amount of power they hold in the marketplace Fundamental asset underlying brand equity is customer equity ▯ ▯ Brand name selection: should suggest something about product’s benefits and qualities, should be easy to pronounce, recognize, and remember; should be distinctive, extendable, and translate easily into foreign languages; capable of registration and legal protection ▯ ▯ Brand origination/sponsorship: 4 sponsorship options: national brand, private brand, licensed brand, or cobrand Store brands (private brands): brand created and owned by a reseller of a product or service; store brands are growing much faster than national brands o Kroger has 14000 store brands o Retailers price store brands lower than national brands o Yield higher profit margins than national brands because they create greater store traffic and loyalty National brand: manufacturer’s brand; like PepsiCoLays having sierra mist Licensing: use names or symbols previously created by other manufacturers, names of wellknown celebrities, or characters from popular movies and books; apparel sellers pay large royalties to adorn products with brand names Cobranding: two established brands of different companies are used on the same product ▯ ▯ Brand development: line extension, brand extension, multibrands, new brands Line extensions: occurs when a company extends its existing brand names to new forms, colors, sizes, ingredients, or flavors of an existing product category o Example: cheerios has a line of cereal including honey nut, frosted, etc. o Low cost, low risk way to introduce new products or to meet consumer desires for variety, way to use up excess capacity or take up more shelf space than other retailers Brand extension: extending existing brand name to new product categories o Kellog’s has expanded Special K from just cereal to crackers, nutrition bars, protein shakes, etc. Multibrands: when a company markets many different brands in a given product category o Multibranding offers way to establish different features that appeal to different customer segments get more reseller shelf space and capture a large market share New brands: if a company believes power of its existing brand is waning or when it enters a new product category new brand o Offering too many new brands can result in a company spreading its resources too thin Brand management: brands are not maintained by advertising but by customers’ brand experiences; customers come to know a brand through a wide range of contacts and touch points Must manage touch points as well as ads Brand’s positioning will not take hold fully unless everyone in the company lies the brand Company has to train people to be customercentered ▯ ▯ Developing new Products: brand/product, new product development, product life cycle New product development: original products of improvements or modifications to existing product through a firm’s own efforts o 8 (7) stages of product development Idea generation: systematic search for new product ideas Crowdsourcing: inviting broad communities of people into the new product innovation process Idea screening: screening new product ideas to spot good ideas and drop poor ones as soon as possible Reduce number of ideas and drop poor ones before incurring significant expense Consider potential, cost, degree of difficulty, competitive fit, barriers to entry, and longevity Concept development and testing: product concept = detailed version of the new product idea stated in meaningful consumer terms, product image = how consumers perceive an actual or potential product Concept testing: testing new product concepts with a group of target consumers to find out if the concepts have strong consumer appeal Explain, show, inquire Marketing strategy development: designing an initial marketing strategy for a new product based on the product concept Marketing strategy statement: 3 parts: describe the target market, state planned value proposition, lay out sales, market share, and profit goals for the first few years Business Analysis (should be done along with marketing plan): involves a review of the sales, costs, and profit projections for a new product to find out whether they satisfy the company’s objectives Product development: developing the product concept into a physical product to ensure that the product idea can be turned into a workable market offering Test marketing: stage in which product and its proposed marketing program are tested in realistic market settings This is really when development actually starts Commercialization (not really a development stage): introducing the new product into the market o Managing NPD: Is there a real customer for the product? Only make things consumers actually want Does the organization have the scientific and technological ability to develop the product? Is the potential for such a product large enough to offer the promise of profitability? ▯ ▯ Product LifeCycle Strategies Products have a limited life o Pass through distinct stages o Profits vary by stage o Products require different management at different stages o (this is referring to life cycle of a product type, not a specific brand) 4 Stages of the Product Life Cycle: o Innovation/introduction: trial lowest sales and highest costs profit loss at first customers in this stage are innovators product has few or no competitors o Growth: share Sales are rapidly growing Costs are average Profits increasing Customers in this stage are early adopters Competition is growing o Maturity: diversify Sales reach their peak Costs are low Profits reach their peak Customers are the midmajority Competition for product reaches its peak o Decline: harvest Sales are declining Costs are very low Profits are eroding Customers in this stage are the laggards Competition for product is declining **More on mature stage o here, company “modifies the market” to try to increase consumption by finding new users and new market segments for its brand (market development) o Increase use among current customers = penetration o May also try modifying the product by changing characteristics such as quality, features, style, or packaging to attract new users (product development) o Modifying the marketing mix: change way product is served, priced, distributed, or promoted Examples of 4 stages: o Smart watches = innovation/introduction o Bigger and thinner flat screen TVs = growth o Nonsmart cell phone = maturity o “walkman” type music player = decline Other factors affecting life cycle stages o Style: basic and distinctive mode of expression o Fashion: currently accepted or popular style in a given field o Fad: temporary period of unusually high sales driven by consumer enthusiasm and immediate product or brand popularity ▯ ▯ ▯ ▯ ▯ ▯ ▯ CHAPTER 7: PRICING: UNDERSTANDING AND CAPTURING CUSTOMER VALUE ▯ ▯ What is price? Price = amount of money charged for a product or service ▯ Major Pricing Strategies: customer value, cost, competition Customer valuebased pricing o Price ceiling: above a certain price, there will be no demand for the product o 2 types: good value pricing: offering right combo of quality and good service at a fair price valueadded pricing: attaching valueadded features and services to product to differentiate the offer and thus allowing to charge higher prices Costbased pricing o Price floor: no profits below a certain price o Set prices based on costs + fair rate of return for effort/risk Take into account both fixed and variable costs o 2 types costplus/markup pricing: adding standard markup to the cost of a product breakeven pricing: setting price to break even on the costs of making/marketing a product OR setting price to make a target return Competitionbased pricing o External factors affect pricing; set prices based on competitors’ strategies, prices, costs, and market offerings ▯ Factors that Affect Pricing Industry Economy Demand Influences (government, social) Elasticity of demand ** ▯ Price elasticity Price elasticity = how responsive demand will be to a change in price = % change in quantity demanded / % change in price o if >1 lowering price to make more revenue makes sense as long as extra costs don’t exceed extra revenue o if demand is elastic, sellers will consider lowering prices (>1) Inelastic demand: when elasticity <1 o Gasoline, tobacco are examples o Changes in price do not greatly effect changes in demand Elasticity of demand captures the percentage change in unit demand resulting from a 1% change in price o Negative elasticity of demand means that a 1% drop in price leads to some % increase in sales OR that a 1% increase in price leads to some % decrease in unit sales REVENUE RULES FOR ELASTICITY o Elastic demand: price increase sales and revenue decrease o Elastic demand: price decrease sales and revenue increase o Inelastic: (and E negative) price decrease slight sales increase but decrease revenues o Inelastic: (and E negative) price increase sales decrease slightly and revenues increase ▯ Pricing Fundamentals Retail selling price – margin dollars = cost dollars Pricing formulas o SP = MU + C o MU = SP – C o C = SP – MU o MP% = MU/SP o MC% = MU/C If given markup as % of cost SP = C + (C x MC%) If given markup as % of SP SP = C / (1 – MP%) ▯ NewProduct Pricing Strategies Price skimming o Charge highest price first to hit wealth consumers with new product then hit the next segment by lowering price and continue to next segment once you have exhausted those buyers o Like what apple does by charging a ton for the new iPhone at first but now you can get older models for less than $100 o Doesn’t work for every product; couldn’t do this with a candy bar Can’t be a market easily entered by competitors or pricing would have to get competitive Product quality must also support the higher price Changes in product volume can’t be too costly Marketpenetration pricing o Setting low price for a new product to attract a large number of buyers and gain large market share High sales volume results in falling costs, so companies can cut prices even further Example: IKEA in the Chinese market o Also discourages competition from entering the market, becomes a pioneering brand ▯ Product Mix Pricing Strategies Product line pricing o Setting price steps between various products in a line based on cost differences, customer evaluations, and competitors’ prices Optional product pricing o Start with one model and add options to it Options = more pricey Example: basic car, but can add leather seats, better sound system, custom wheels, etc. Captive Product Pricing o Sell 2+ products that will only work when used together If you buy the 1 , you need the second Give a low entry price and earn your margin on the repeat purchase Example: blades for a razor, games for a video console Price Bundling o Combining several products and offering the bundle at a price lower than what it would cost to buy them individually o Example: fast food places offer a “meal” (burger, fries, drink) for less than the combination of each item’s individual prices Bundling TV services, phone service and internet connection from one provider ▯ What Price is Right? Psychological pricing: quality is associated with price o High price = quality signal o When the price says something about the product Internal reference price: you likely know current price of gasoline, but you may not know the price of an oven o Prices buyers carry in their minds and refer to when they look at a given product ▯ Price Adjustments: discounts, allowances, segment pricing, promo pricing, dynamic pricing Discount o Straight reduction in price on purchases made during a stated period of time or in larger quantities Allowance o Reduction from list price if a buyer does certain actions, like a tradein or promotional/sales support Segmented pricing o Selling a product or service at 2+ prices, where difference in prices is based on location, versions, or time period rather than the cost of the product Promotional pricing o Temporarily pricing products below the list price, and then sometimes even below the cost, in order to increase sales in the short run Dynamic pricing o Adjusting prices continually to meet the characteristics and needs of individual customers and situations Especially prevalent online ▯ ▯ READING: IF BRANDS ARE BUILT OVER YEARS, WHY ARE THEY MANAGED OVER QUARTERS? ▯ ▯ Overall idea: longterm strategies are more successful for brands than shortterm ones Companies are paying too much attention to shortterm data and not enough to the long term health of their brands ▯ Genesis of the shortterm view 3 factors that made manufacturers so myopic about their brands o abundance of realtime sales data that shows benefits of short term promos, causing brands to overdiscount promos yield a boost in sales called lift over baseline but this effect is only short lived This trains shoppers to expect a sale and just wait for the next sale to buy something, causing gaps in sales Focusing on price rather than quality in minds of consumers dilutes brand equity o lack of information to assess long term effect of investing in brand equity, new products, and distribution advertisements successful in the short term have a positive effect in the long term but it’s hard to measure increase in length and variety of a product line play a major role in boosting a brand’s baseline sales increased product variety and distribution in leading retailers reduce consumer price sensitivity o short tenure of brand managers long term perspectives like investing in advertising and new product development won’t help a shortterm manager as they only have long term effects helping subsequent managers ▯ ▯ READING: HOW TO STOP CUSTOMERS FROM FIXATING ON PRICE ▯ ▯ The problem Customers behave based on one thing when it comes to “commodities”; price Constant price cutting to get customers can create efficiency gains, but usually it just damages brand equity and decreases profit margins ▯ Strategy 1: Use Price Structure to Clarify Your Advantage Make the price call attention to the value your product or service delivers; ideally, call attention to the one dimension that most meaningfully differentiates it from those of competitors o Example: Goodyear prices their tires on how many miles they were expected to last Pricing based on units sold does little to set them apart from the competition o Instead, it promotes price comparison by establishing a simple common denominator that customers seize on Key to success with this strategy is to vary price according to what’s most distinctive about your offering rather than the makeup of the product or service itself ▯ Strategy 2: Willfully Overprice to Stimulate Curiosity There is a thoughtprovoking effect of overpricing; setting higher prices than what customers normally intend to pay piques their interest Customers don’t automatically dismiss the higher price; instead, it motivates them to take a closer look Overpricing also evokes a more passionate response to products, leading to a willingness to pay much more than originally intended For every purchase decision, there is a price range above what potential customers say they are willing to pay that will provoke them to ask “do I need this or not?” rather than “what is the cheapest?” ▯ Strategy 3: Partition Prices to Highlight Overlooked Benefits Price partitioning: break a price into its component charges o This highlights dimensions of differentiation that might otherwise go unnoticed o Presenting a cost as a smaller set of mandatory smaller charges invites closer analysis and increases likelihood that a customer will revise a routine consumption behavior People are unlikely to factor a benefit into their choice unless an explicit charge is made for it Partitioning succeeds only hen it primes customers to see a real benefit they would have otherwise overlooked ▯ St Equalize Price Points to Crystallize Personal Relevance Variants that appeal to different tastes should be priced the same o This way, customers will be compelled to discover which option best suits their needs rather than choosing by which is cheapest ▯ APPENDIX 1: MARKETING BY THE NUMBERS ▯ ▯ Pricing, breakeven, and margin analysis Pricing considerations o Determining costs: variable and fixed Setting price based on costs o Costplus pricing (markup pricing) adds a standard markup to the cost of the product o Relevant costs are those that will occur in the future and will vary across the alternatives being considered o Breakeven price is the price at which unit revenue (price) = unit cost and profit = 0 o If you don’t want to just break even, you can add in a target profit: Markup price = unit cost / (1 – target profit) o ROI Pricing: cost based pricing method that determines price based on a specified rate of return on investment ROI Price = unit cost + [ (ROI x inv) / unit sales ] Setting price based on external factors o Markup = the difference between a company’s selling price for a product and its cost to manufacture or purchase it o Valuebased pricing: using buyer’s perception of value rather than seller’s cost; offering just the right combo of quality and good service at a fair price o Markup chain: sequence of markups used by firms at each level in the channel Breakeven and margin analysis o Breakeven analysis: analysis to determine the unit volume and dollar sales needed to be profitable given a particular price and cost structure Determining breakeven unit volume and dollar sales BE Volume (units) = FC / (P – UVC) Unit contribution margin = p – UVC o UCM = how much each unit contributes to covering FC BE sales ($) = BE vol x price = FC / CM% Contribution margin (%) = UCM / P Determining “BE” for Profit Goals o Target profit unit volume = ( FC + TP ) / UCM o Target profit dollar sales = ( FC + TP ) / CM% READING: WHAT IS A FREE CUSTOMER WORTH? Overall idea: customers who pay little or nothing and are subsidized by another set of customers are essential to a vast array of businesses This business model of “free” customers (customers who don’t themselves pay for the service) accounts for the business models of 60 of the top 100 largest companies in the world Knowing lifetime value of free customer is crucial to determine the following: The optimal way to grow o How much should a company spend at various points in tie to acquire and retain free or heavily subsidized customers? The real value of the enterprise o How much should investors or acquirers pay for all or part of a business with such customers? The best organizational design o How should the business and its incentive systems be structured to encourage the units responsible for the free and the paying customers to work together? If you answer these questions wrong, your company could go out of business!! ▯ Deciphering Network Effects This model takes into account how the number of free customers influences number of paying customers and vice versa o Also how both are affected by firm’s marketing efforts Lifetime value (CLV) of a free customer is his or her incremental effect on the NPV of cash flows from the population of fee (not free) customers o Depends on the degree to which a free customer attracts other both fee and free customers and the ripple effect this creates When this “network” effect is large, payments flow to the firm and the CLV increases Indirect network effects between buyers and sellers can be positive or negative o Free customers in early stages of business are crucial and the firm should be willing to invest a lot of resources to get them on board ▯ CHAPTER 8: COMMUNICATING CUSTOMER VALUE PROMOTION = COMMUNICATION Within the 4 Ps, what role does promotion play? o Product = what do we offer? o Price = what is our product’s value? o Promotion = how will consumer know about our product? o Place = how will consumer get our product? The Promotion Mix Advertising: paid use of media to promote offering o nonpersonal presentation/promotion Sales promotion: shortterm incentives to encourage the purchase or sale of a
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