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BUAD 307 Final Study Guide

by: Chandler Grade

BUAD 307 Final Study Guide BUAD 307

Chandler Grade

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These notes cover all of the tops that should be on the final for Lars Perner's Fundamental Marketing Course
Marketing Fundamentals
Lars Perner
Study Guide
Marketing, business
50 ?




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This 30 page Study Guide was uploaded by Chandler Grade on Friday August 5, 2016. The Study Guide belongs to BUAD 307 at University of Southern California taught by Lars Perner in Spring 2016. Since its upload, it has received 14 views. For similar materials see Marketing Fundamentals in Marketing, Business at University of Southern California.


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Date Created: 08/05/16
CONSUMER BEHAVIOR Consumer Problems ● Problem is discrepancy between current and ideal states Consumer Decision Stages - Theory and Reality ● Problem recognition - realize something is not as it should be ● Information search - what are some alternative ways for solving the problem ● Evaluation of alternatives ● Purchase stage ● Post-purchase ** in reality, people may go back and forth between the stages - a person may resume alternative identification while evaluating already known alternatives Search and Alternatives Identification ● INTERNAL search ○ Identifying alternatives from memory ○ For certain low involvement products, it is very important that marketing programs achieve "top of mind" awareness ● EXTERNAL search ○ For high involvement products, consumers more likely to use this ○ Before buying product, consumers may ask friends' opinions, read reviews, consult websites ,etc ○ Firms that make products that are selected predominantly through external search must invest in having information available to consumer in need (brochures, websites, news coverage) Level of Involvement ● Amount of effort consumer puts into searching depends on number of factors such as ○ Market (how many competitors there are, how great differences between brands expected to be) ○ Product Characteristics (how important is this product, how complex, how obvious indications of quality) ○ Consumer Characteristics (how interested is consumer in analyzing product characteristics and making best possible deal) ○ Situational Characteristics Two interesting issues in decision are: ● Variety seeking (where consumers seek to try new brands not because these brands are expected to be "better" in any way, but rather because consumer wants a "change of pace" ● "impulse" purchases - unplanned buys A number of factors involve consumer choices: ● Motivated ○ May be more careful in choosing a gift for someone else than when buying same thing for self ● Comparison shop for best prices ● Convenience oriented ● Personality impacts decisions ○ Some like variety more than others ○ Some more receptive to stimulation/excitement ● Perception ○ Some can taste difference between generic and name brand ● Selective perception ○ Occurs when person is paying attention only to information of interest ○ When looking for new car, may pay more attention to car ads ● Some customers put off by Perceived risk ○ Thus marketers often offer money back guarantee ● Consumers tend to change behavior through learning ○ Avoid restaurants they have found to be crowded and will settle on brands that best meet tastes ● Values ○ Some people more committed to recycling, etc Compensatory vs. Non-Compensatory Decision Strategies ● Compensatory: involves consumer "trading off" good and bad attributes of product ○ Car may have low price and good gas mileage, but slow acceleration ○ If price is sufficiently inexpensive and gas efficient, consumer may select it over car with better acceleration that costs more and uses more gas ● Non-compensatory: parent may reject all soft drinks that contain artificial sweeteners ○ Here, other good features such as taste and low calories cannot overcome this "non-negotiable" attribute Heuristics ● Simplified and time saving decision rules that may be used by consumers under conditions of low involvement or lack of information ○ Consumer may automatically select most expensive product in category ,figuring higher price means higher quality ○ Consumer may also decide to automatically buy either Coke or Pepsi if that brand is not on sale but to buy Coke (the most preferred brand) if neither is on sale, not considering any other brands or the actual depth of discount Consumer Information Processing ● Stimuli such as advertising may fail to receive desired level of attention and impact due to "attrition" at various stages of information processing (consumer may fail to advance to next step necessary to reach desired behavior) ● Perception: (conscious, pre-conscious) ○ Whether stimulus even perceived (consumer does not look in direction of large print advertisement or is too far away to read, etc) ● Attention: (limited - subject to priority, divided) ○ Even if stimulus is perceived, does not mean attention will be given ○ Many other things may be going on to call for consumer's attention and interfere ○ May register brand name that comes out in advertisement, but may do no further processing after that ● Comprehension: (correct or incorrect, elaborate or shallow) ○ If sufficient attention given to stimulus, process of elaboration more likely ● Links to other items in memory (association) ● Storage (in memory) ● Triggers (May or may not happen, no guarantee) ○ For really important products, may be sufficient priority given so you remember to buy it at store ○ For less important products, some "trigger" may need to occur before product is remembered ○ Information from advertising could be retrieved when consumer sees section of store or specific logo ○ No guarantee that sufficient trigger will occur; thus, many messages may fail to advance beyond this stage ● Retrieval (activation) ○ Important for information you take in to be stored in memory for future retrieval ○ Not likely an advertisement will have an effect by itself, usually needs to be repeated many times ○ Cumulative process of bringing information into memory each time the advertisement is seen ○ "activated" causing consumer to think more about product or related information ● Elaboration (thinking brings about new links and thoughts) Associative Network of Knowledge ● Brain uses association between different "nodes" (ideas or other pieces of information) to activate related others ● Each node potentially triggers others ● From a brand management perspective, it is useful to have one's product tied to as many positive nodes as possible ○ Allows for more opportunities and for the product memory to be triggered, potentially resulting in purchase behavior and/or further elaboration Attitudes ● Attitudes are composite of consumer's ○ Beliefs about ○ Feelings about ○ Behavior intentions toward some "object" ● These components viewed together since they are highly interdependent and together represent forces that influence how consumer will react to the object ● Beliefs ○ May hold both positive and negative beliefs towards an object ■ Coffee tastes good, but easily stains and spills ○ Some beliefs may be neutral ■ Coffee is black (simple observations) ○ May differ in valance depending on person or situation ■ Coffee is hot and stimulates - good on cold morning, not good on hot summer evening when one wants to sleep ○ Beliefs that consumers hold need not be accurate and some beliefs may be contradictory ○ Since consumer holds many beliefs, often difficult to get down to "bottom line" overall belief about whether object such as McDonald's is overall good or bad ○ Multiattribute (Fishbein Model) attempts to summarize overall attitudes into one score using an equation ● Affect ○ Hold certain feelings toward brands or other objects ○ Sometimes these feelings are based on beliefs but there may also be feelings which are relatively independent of beliefs ■ Extreme environmentalist may believe that cutting down trees is morally wrong, but may have positive affect toward Christmas trees because he or she unconsciously associates them with past Christmas experiences as a child ● Behavioral Intention ○ What consumer plans to do with respect to the object (buy or not buy the brand) ○ As with affect, this is sometimes a logical consequence of beliefs (or affect), but may sometimes reflect other circumstances ■ Although consumer does not really like a restaurant, he or she will go there because it is a hangout for his or her friends Attitude Change Strategies ● Changing attitudes is generally very difficult, particularly when consumers suspect that marketer has self-serving agenda in bringing about this change (to get consumer to buy more or to switch brands) ● Changing affect ○ May or may not involve getting consumers to change their beliefs ○ One strategy uses approach of classical conditioning to "pair" product with liked stimulus ■ "pair" a car with a beautiful woman ○ Pavlov's experiment with classical conditioning ■ When dogs fed meat powder (Unconditioned Stimulus; US), they salivate (Unconditioned Response; UR) ■ If bell rung before dogs fed, dogs would begin salivating in anticipation of being fed (CS, "pairing") ■ After bell had been "paired" with meat powder enough times, Pavlov could ring bell without feeding them and they would still salivate (CR) ○ Liking ■ Pillsbury Doughboy - creates warm fuzzy image rather than emphasize conveyance of information to consumer ■ Energizer Bunny - get people to believe batteries last longer, but main emphasis is on likeable bunny ○ Mere exposure effect - tend to be better liked - more a product is advertised and seen in stores, the more it will generally be liked, even if consumers do not develop any specific beliefs about product ● Changing behavior ○ People like to believe that their behavior is rational; once they sue our products, chances are they will continue unless someone is able to get them to switch ○ One way to get people to switch is to use temporary price discounts and coupons; ■ however, when consumers buy product on deal, they may justify purchase based on deal and may then switch to other brands on deal later on ○ Obtain better shelf space so product is more convenient ■ Consumers less likely to use this availability as rationale for purchase and may continue to buy product even when product is less conveniently located ● Changing beliefs ○ Particularly when consumers hold unfavorable or inaccurate beliefs, it's difficult to change because consumers tend to resist ■ Change currently held beliefs: hard to change current even if they are inaccurate ■ Petroleum industry advertised for long time that profits were lower than commonly believed, provided extensive factual evidence in advertising to support - consumers were suspicious and rejected this information ■ Change importance of beliefs: may be possible to strengthen beliefs that favor certain company ■ Vitamin supplement manufacturer may advertise extremely important for women to replace iron lost through menstruation - most consumers already agree with this, but belief can be made stronger ■ Add beliefs: consumers less likely to resist addition of beliefs so long as they do not conflict with existing beliefs ■ Beef industry has added beliefs that beef is convenient and can be used to make number of creative dishes ■ Vitamin manufacturers attempt to add belief that stress causes vitamin depletion, which sounds quite plausible to most people ■ Change ideal: difficult and risky, only few firms succeed ■ Hard Candy may have attempted to change ideal away from traditional beauty toward more unique self expression One Sided vs. Two Sided Appeals ● Consumers tend to react more favorably to advertisements which either ○ Admit something negative about sponsoring brand (Volvo is clumsy car, but very safe) ○ Admit something positive about competing brand (competing supermarket has slightly lower prices, but offers less service and selection) ● Two-sided appeals must contain overriding arguments why the sponsoring brand is ultimately superior (the "but" part must be emphasized) Means-End Chain ● Consumers often buy products not because of their attributes but rather because of ultimate benefits these attributes provide - in turn, leading to satisfaction of ultimate values ● Ex: consumer may not be interested in chemistry of plastic roses, but may reason as follows: ○ Highly reliable synthetic content of roses--> ○ Roses will stay in original condition for long time--> ○ Significant other will appreciate roses longer--> ○ Significant other will continue to love one --> self esteem ● Start with attribute, a concrete characteristic of product) ● Progress to series of consequences (which tend to become progressively more abstract) ● That end with value being satisfied ● Usually most effective in advertising to focus on higher level items ○ In flower example, individual giving flowers might better be portrayed than the flowers alone Subliminal Messages ● 1960s, reported in movie theaters isolated frames with words "Drink Coca Cola" and "Eat Popcorn" imbedded in movie ○ Frames went by so fast that people did not consciously notice them ○ Reported that coke and popcorn sales were significantly higher than on days the subliminal messages were used ● Congress banned subliminal messaging ○ Question as to whether experiment ever took place or whether information was made up ○ No one has been able to replicate these findings ● Research to show people will start to giggle with embarrassment when they are briefly exposed to "dirty" words in an experimental machine ○ Exposure is so brief that subjects are not aware of actual words they saw, but evident that something has been recognized by embarrassment displayed Organizational Buyers ● Organizational buyers - make buying decisions for their companies for a living - tend to be somewhat more sophisticated than ordinary buyers ● More risk averse ○ Risk in going with new, possibly better (lower price/higher quality) supplier whose product is unproven and may turn out to be problematic ○ Fear of running this risk greater than potential reward ● Come in several forms ○ Resellers: either wholesalers or retailers that buy from one organization and resell to some other entity ■ Large grocery chains sometimes buy products directly from manufacturer and resell to end- consumers ■ Wholesalers may sell to retailers who in turn sell to consumers ○ Producers: buy products from sub-manufacturers to create finished product ■ Rather than manufacturing parts themselves, computer manufacturers often buy hard drives and other components from manufacturers and put them together to create finished product ○ Governments: buy great deal of things ■ Military needs incredible amount of supplies to feed/equip troops ○ Institutions: buy products in huge quantities ■ UCR probably buys thousands of reams of paper every month ● Usually involves more people than individual buying ● Often many people are involved in making decisions as to ○ Whether to buy ○ What to buy ○ What quantity ○ From whom ● Engineer may make specifications as to what is needed, which may be approved by manager with final purchasing being made by purchase specialist who spends all time finding best deal on goods organization needs ● Long purchase processes can cause delays MARKET RESEARCH A. Primary Research a. Primary vs. secondary research methods. i. Secondary research 1.  involves using information that others have already put together. 2. For example, if you are thinking  about starting a business making clothes for tall people, you don’t  need to question people about how tall they are to find out how  many tall people exist—that information has already been  published by the U.S. Government.   ii. Primary research 1. Is research that you design and conduct yourself. a. For example, you  may need to find out whether consumers would prefer that  your soft drinks be sweater or tarter. 2. Research will often help us reduce risks associated with a new product, but itcannot take the risk away entirely. 3. It is also important to ascertain whether the research has been complete. 4. Please see the chart provided in class for advantages and disadvantages of each. As a guide to selecting the most appropriate research method for a particular issue, please see this chart and the listing of preferred methods by issue. B. Methods – Characteristics, Advantages, Disadvantages a. Surveys i. Open vs. closed­ended 1. Open a.  Provides a free  response to a question 2.   Closed a. Provides a specific  list of answers to a question ii. Continuum vs. binary answer scales 1.  Binary a. Provides usually two  answers to a question (yes or no) 2. Continuum a. Provides more than  one answer to a question b. Helps better answer  questions like brand loyalty, price sensitivity, decision  making,  experience, knowledge, product interest c. Generally more  helpful to provide continuum answer scales iii. Forms 1. Mail in surveys a. Cost effective but  have a low response rate 2. Phone response surveys a. Better response rate  but can only ask a few number of questions because  people don’t want to be on their  for very long 3. Mall intercepts a. Convenient way to  reach customers but most customer’s are reluctant to  discuss personal or sensitive manner in a face­to­face  interview iv. Problem questions 1. Difficult to answer a.  Some respondants  may not have the necessary information to answer  questions honestly b. Ex: how much money do you spend on soft drinks a day? 2.  Sensitive a. If sensitive or  personal questions are asked, respondents are less  inclined to answer honestly 3. Two­in­one a. One question could  be asked about two or more things, each having a unique  response b. Ex: on a scale of 1­10 how yummy and filling are in­n­out burgers? 4. Leading questions a.  Questions can be  phrased to imply a desired result 5. Non­exhaustive questions a. Answers do not  provide all possible answers to the question asked 6. Non­mutually exclusive answers a.  Answers can overlap, making it difficult for the respondant to answer b. Ex: how old are you  10­25 or 25­40? Which one should a person who’s 25  choose? b. Experimentation i. Experimentation involves an attempt to determine  causality.  ii. Generally, the idea is to systematically vary either  (1) the way that different groups of people are treated or (2) the way that  the same person is treated at different times.  1.  In the first case, for example, we  may show different groups of research participants (each selected randomly) different versions of the same advertisement, varying  only the color of the product displayed.  If respondents who saw  the version where the product was red rate the product more  favorably than those who saw the product in blue, then, subject to  sampling error, it appears that product color drives the difference.  iii. Experiments are usually cumbersome to do, but  can be used to test how people actually respond to a particular treatment  rather than how theythink they will respond. c. Taste tests and the “triangle test” i. Taste test is when a group of people tries a new  product. No comparisons are being made between groups so it is not an  experiment ii. Triangle test is when there are two different  versions of a product, product A and product B.  A group of people will  taste a sample of product A and B and an additional sample of A or B that is randomly selected. The participants will then be asked to see which  product “is odd” or doesn’t not work or taste as well. d. Observation i. Looking at how consumers select products may  yield insights into how they make decisions and what they look for.   Observation may help us determine how much time consumers spend  comparing prices, or whether nutritional labels are being consulted.  ii. A question arises as to whether this type of “spying” inappropriately invades the privacy of consumers.  The question is what  consumers—either as an entire group or as segments—do.  Consumers  benefit, for example, from stores that are designed effectively to promote  efficient shopping.  If it is found that women are more uncomfortable than  men about others standing too close, the areas of the store heavily  trafficked by women can be designed accordingly.  What is being  reported here, then, are averages and tendencies in response.  e. Focus groups i. In general, focus groups are good for finding out  breadth – what issues are important for consumers in a given product  category ii.  It is good to keep focus groups open ended 1. Allows the proctor to have  respondents elaborate on or specify important issues iii. Small sample size because they are expensive to  conduct. 1. Does not provide answers to if a  portion of the population will buy the product or the price they  would be willing to pay. iv. These groups are inherently social 1. Respondants can respond in a way  that makes them look better 2.  Customers may be reluctant to  speak about embarrassing or personal matter f. In­depth interviews i. In­depth personal questioning of a respondent  about their thoughts, interests, experiences and feelings about a product. ii. Can get valuable specific information but is  extremely expensive and prone to bias iii. A good way to get the respondent to elaborate  without showing bias is to repeat what they say 1. The respondent will feel awkward  with the silence and feel inclined to answer more in­depth iv. Highly prone to signaling 1. Interviewers might desire a positive  customer response so they might ask questions or show off  emotions the signals that they hope the customer will give a good  product review g. Projective techniques i. Allows interviewers to ask more personal  embarrassing questions by asking people to express how a “friend” might  respond to a situation or to describe a photo ii.  Inherently inefficient iii. there are drastically different answers and are  extremely effective h. Physiological measures i. Used to examine consumer response 1. Ex: tracking a customer’s eye  pattern or attention.  Measuring brain waves during an  advertisement 2. Can track consumer performance  over time 3. Which points of the advertisement  provide more arousal for example i. Online research i. Increased availability and increased use ii. Online surveys employ conventional branching,  which allows surveys to directly skip questions based on previous  answers. This saves the respondents time and makes them more likely to use their time answering truthfully and fully. iii. Drawbacks 1.   Not everyone has access to the  internet 2. People rarely take the time to read  instructions carefully 3. Some people are less comfortable  answering questions online iv. online search data and page visit logs provides valuable ground for analysis. It is possible to see how frequently various terms are used by those who use a firm’s web site search feature or to see the route taken by most consumers to get to the page with the information they ultimately want. j. Scanner data i. Uses a family’s purchase history, exposure to  advertisements, and demographic to assess and analyze the  effectiveness of advertisements, pricing, and shelf space ii. This tool is only useful to regularly purchased items – specifically groceries 1. In general this does not have use  beyond groceries k. Conjoint analysis i. Used to determine the importance of particular  attributes of a product ii. Will usually have a respondent rank the importance of attributes C. Confounds a.  When one of two or more variable seem to cause a reaction b.  Ex: more toys causes higher IQ in babies.  This might seem to be  a causal relationship but outside factors might effect IQ like family income D. Online research issues a. Conditional branching i. Online surveys employ conventional branching,  which allows surveys to directly skip questions based on previous  answers. This saves the respondents time and makes them more likely to use their time answering truthfully and fully. b.  Click­stream analysis i. see the route taken by most consumers to get to the page with the information they ultimately want.   c. Shopping cart analysis i. Seeing how different variable effect if a shopping  cart gets “abandoned” or purchased. MARKETING MIX: PUTTING IT ALL TOGETHER PRODUCT Types of Innovation ● Continuous innovation: includes slight improvements over time ○ Very little usually changes from year to year in automobiles ● Dynamically continuous innovation: some change in technology, although product used much the same way that predecessors were used ○ Jet vs. propeller aircraft ● Discontinuous innovation: product that fundamentally changes way things are done ○ Fax and photocopiers ○ More difficult to market since greater changes required in way things are done, but rewards are also often significant Diffusion of Innovation ● Tendency of new products, practices, or ideas to spread among people ○ Usually when introduced, initially only adopted by small group of people ○ Later many innovations spread to other people ○ Bell shaped curve frequently illustrates rate of adoption of new product ○ Cumulative adoptions reflected by S-shaped curve ● Saturation point: maximum proportion of consumers likely to adopt product ○ Refrigerators in US, saturation level nearly 100% of households ○ Figure is certainly well below that for video games ● Ex. Physicians ○ Until 1800s, few physicians bothered to scrub prior to surgery even though new theories predicted small microbes could cause infection ○ Younger more progressive physicians began scrubbing early on, but lacked stature to make older colleagues follow ● Ex. ATM cards ○ Spread relatively quickly ○ Cards used in public - others who did not have cards could see how convenient they were ○ Although some concerned about security, convenience factors seemed the decisive factor in battle for and against adoption ● Ex. Credit Cards ○ Chicken and egg paradox ○ Accepting credit cards was not particularly attractive option to retailers until they were carried by a large enough number of consumers ○ Consumers were not interested in cards that were not accepted by large number of retailers ○ Needed to "jump start" the process, signing up large corporate accounts, under favorable terms, earl in the cycle, after which the cards became worthwhile for retailers to accept ● Ex. Rap music ○ Initially spread quickly among urban youths ○ Low costs of recording ○ Later, became popular among suburban youths because of apparently authentic depiction of exotic urban lifestyle ● Ex. Hybrid Corn ○ Adopted slowly among farmers ○ Provided yields of about 20% more than traditional, many farmers had difficulty believing it could do this ■ Reluctant because failed harvest could have serious economic consequences ○ Agricultural extension agents then sought out most progressive farmers to try hybrid corn, aiming for farmers who were most respected and likely to be imitated ○ Few farmers switched from year to year but many started with fraction of their land and gradually switched to 100% Several forces work against innovation ● Risk - either social or financial ○ Ex. CD Player ■ Risked that few CDs would be recorded before CD player went way of 8 track player ○ Another risk is being perceived by others as being weird for trying a "fringe" product or idea ■ Barbara Mandrel sings son "I Was Country When Country Wasn't Cool" ● initial effort needed to learn to use new products ○ Takes time to learn how to use computer, etc ● Concerns about compatibility with existing culture/technology ○ Birth control incompatible with religious beliefs that predominate in some areas ○ Computer database incompatible with large established card file Several factors influence speed with which innovation spreads ● Relative advantage (ratio of risk or cost to benefits) ○ Some products (cell phones, fax machines, ATM cards) have strong relative advantage ○ Others such as automobile satellite navigation systems, entail some advantages but cost ratio is high ● Lower priced products often spread more quickly and extend to which product is trialable ○ Farmers did not have to plant all their land with hybrid, while one usually ahs to buy a cellular phone to try it out ● Extent of switching difficulties ○ Many offices slow to adopt computers due to time needed to learn how to operate Some cultures tend to adopt new products more quickly than others based on: ● Modernity: extent to which culture is receptive to new things ○ In some countries, tradition is greatly valued and new products don't fare well ○ US tends to value progress ● Homophily: more similar to each other that members of culture are, the more likely an innovation is to spread - people more likely to imitate similar than different models ● Physical distance: greater distance between people, less likely innovation is to spread ● Opinion leadership: more opinion leaders are valued and respected, the more likely an innovation is to spread ○ Style of opinion leaders moderates this influence ○ In less innovative countries, opinion leaders tend to be more conservative and reflect local norms of resistance **innovation is not always an unqualifiedly good thing ● Some innovations, such as infant formula adopted in developing countries may do more harm than good ● Individuals may also become dependent on the innovations ● Sometimes innovations are disadopted ○ May disadopt cell phones if they aren't using them much DISTRIBUTION Distribution Intensity and Selectivity ● Most manufacturers would prefer to have products distributed widely - for products to be available in an many stores as possible ○ Especially the case for convenience products where consumer has little motivation to go to less convenient retail outlet to get preferred brand ○ Ex Soda = vast majority would settle for less preferred brand if it meant getting it in a more convenient way ● For most manufacturers, wide distribution not realistically obtainable ○ In food product categories, larger supermarkets can carry large number of brands ○ Smaller convenience stores and warehouse stores are likely to carefully pick a few brands ● In very small number of cases, some manufacturers prefer to have products selectively or even exclusively distributed ○ Case for high prestige brands or premium quality image brands that require considerable before and after sales service Parallel Distribution Structures ● Refer to fact that products may reach consumers in different ways ● Most flow through traditional (manufacturer --> retailer --> consumer) channel ● Certain large chains may demand to buy directly from manufacturer if they believe they can provide distribution services at lower cost themselves ○ In turn, they want lower prices ,which may anger traditional retailers who feel that represents unfair competition ● Firms may also choose to utilize factory outlet stores ○ Usually located in areas not easily accessible Diversion ● Occurs when merchandise intended for one market is bought up by distributor that ships it to different market ○ Sometimes, manufacturer will run promotion in one region but not in another and speculators will then buy extra quantity in promoted area and ship it another area ○ Speculator will then sell to local retailers or distributors for price slightly lower than what is being charged through regular channel but at price that still allows nice profit ● Certain products sell for different prices in different countries ● Gray market occurs when product is bought in one country and exported to another where price is generally higher Retail Trends ● During difficult economic times, discount stores like Wal-Mart actually tended to increase sales as consumers seemed to switch their purchases of same products from higher priced to lower priced stores rather than reducing quantity and quality bought in product categories ● During last two decades, there has been strong growth in "category killer" chains which specialize in moderate assortment of goods (CompUSA, Best Buy, Staples, Office Depot, etc) ○ Expanded rapidly and captured very large share of market in respective areas of emphasis ● Chains operate from two sources of strength ○ Although total purchase volumes usually smaller than those of giants such as Wal-Mart and Target, these purchases are focused in more limited areas ■ Purchases of each "giant" account for large proportion of sales of many firms ■ Best Buy accounts for large percentage of sales of firms that make DVD players, etc ○ Mega store chains often negotiate large contracts early in purchasing cycle ■ Manufacturers often willing to offer especially low prices to buyer who will commit to taking large quantities well ahead of time that products are actually need ■ Guarantees manufacturers a certain volume, freeing the firm to commit to production and produce large quantities without having to worry about selling large portion of product ■ Such deals often account for very low sales prices that can be offered on select models in various product categories PRICE Introductory Price Effects ● Changing price of product can be difficult ○ Ex. Experimenters tried to introduce laundry detergent both at "high" and "low" price in stores ■ After 8 weeks, price of laundry under "low" intro price was changed to match that of "high" intro condition ■ Although sales higher in low introductory price while price was low, sales dropped dramatically after price had been raised ■ After 16 weeks, cumulative sales were higher in those stores where the price had been high all along ○ Consumers started thinking about the product as a "low price" one and had difficulty adjusting when price was later changed ● Ex. In 1970s, consumers reluctant to pay above $2 ceiling for cereal ● Coca Cola also found difficult to raise price above highly salient 5 cent level Consumer Price Awareness ● Research suggests large segment of consumers does not give much attention to prices of individual products ○ Consumers found on average to spend only about 12 seconds between arriving at site in store where frequently purchased product was located and departing ○ On average consumers only inspected 1.2 products ○ Only 55.6% seconds after having selected product, could specify price within 5% accuracy ● Study does not indicate total lack of consumer price sensitivity since consumers are undoubtedly making some inferences about overall price levels of store ○ Store has some incentive to maintain reasonable overall prices Reference Prices ● Typically based on prices they have seen or paid in past or perceived fairness of prices ● Two types: ○ Internal reference prices: price expectations based on consumer's experience ■ Typically lower than actual retail prices; thus, consumers frequently experience "sticker shock" when shopping for certain products ■ Frequently updated, but somewhat difficult to change dramatically ■ Confined to narrower range for some products than others ○ External reference prices: prices supplied by marketer as means of influencing consumer's price expectations ■ "regularly $3.99 but now $2.99" ■ Although one might think that an implausible (unbelievable) external reference price would suggest to the consumer that retailer is lying, research has shown that clearly implausibly high external reference prices actually increase internal reference prices ● Research shows that both experience (prices previously paid) and sale context (prices of competing brands) influence consumer's internal reference price ● Consumers tend to experience two sources of value for a product: ○ Acquisition utility: utility of obtaining a product ○ Transaction utility: difference between subject's reference price and featured price ● Traditionally managers have believed you need to approach certain threshold of some 15-20% discount before consumers will respond significantly to sales ● More recent research shows that a large segment of population will apparently respond to "negligible" discounts ○ If product reduced from $3.98 to $3.96, a large number of consumers will "bite" ○ Store manager also found that placing sign saying "EVERYDAY LOW PRICE" randomly among store products increased sales of affected products by some 20% ● "odd prices" ○ Question whether it actually increases sales ○ Those ending in "9" or "95" or "99" ○ Some effect has been found in US, but none in Germany ○ "odd" prices may communicate idea that you are receiving a bargain, which may or may not be consistent with desired positioning of product ● "framing" ○ Tends to dramatically influence consumer response ■ Automobile Club of Southern California indicates that upgrading to "AAA Plus" service costs "only pennies a day" rather than emphasizing the yearly cost ○ Framing effect may also have implications for practice of sales - when sale is retracted, consumers may see this is as a loss rather than termination of a gain Promotion Signal ● Refers to phenomenon whereby some customers will tend to look only at whether something is on sale or not - not by how much the sale was ● Consumers tend not to adjust their behavior much based on whether this is a "legitimate" sale where one saves at least say 15% as opposed to 2% ● Example of use of heuristic (simplified decision rule) to favor products on sale with assumption that at least on the average, these are good deals ● Other customers have been found to scrutinize magnitude of sale more carefully CUMULATIVE INFORMATION Customer Value ● Central idea behind marketing is idea that firm or entity will create something of value to one or more customers who, in turn, are willing to pay enough (or contribute other forms of value) to make the venture worthwhile considering opportunity costs ● VALUE = BENEFITS RECEIVED/COSTS ○ Value must be examined from point of view of customer ○ Some segments value certain product attributes more than others Some forms of customer value ● Form utility: idea that product is made available to consumer in some form that is more useful than any commodities that are used to create it ○ Customer buys chair rather than wood and other components used to create it ○ Benefits form specialization that allows manufacturer to create chair than customer could do himself ● Place Utility: idea that product made available to customer at preferred location worth ore than at place of manufacture ○ More convenient to get groceries from supermarket than from farmer ● Time utility: idea of having product made available when needed by customer ○ May buy turkey a few days before thanksgiving without having to plan for it to be available ● Possession utility - idea that consumer can go to one store to obtain large assortment ○ Supermarkets/superstores ○ Hypermarkets 4 P's Product Place (distribution) Promotion Price ** variable that are within control of firm - firm is faced with uncertainty from environment though E-Commerce Considerations involving suitability for products and services for sale online ● In most cases, selling online probably more costly than selling in traditional stores due to high costs of processing orders and direct shipping to customer ○ Some products may be economically marketed online Some factors relevant in assessing potential for e-commerce ● "value-to-bulk" ratio: products that have lot of value squeezed into small volume (high end jewelry, electronic products) - often more cost-effective to ship to end-customers than bulkier products with less value (low end furniture) ● Absolute margins: some may have high percentage margin, however absolute margin may be lower. Allows merchant to spend money on processing, packaging and shipping order ○ Scarf $10 wholesale, marked up to $20, only $10 absolute margin ○ Computer $1,000 wholesale, marked up to $150, $150 absolute margin ● Extent of Customization Needed: Some products need to be customized ○ Airline tickets (specific departure site, destination time, travel time) - online processing may be useful because customer can do much of work ● Willingness of customers to pay for convenience: some may be willing to pay to have product shipped to door ● Geographic dispersal of customers: electronic commerce, when value-to-bulk ratios and absolute margins not favorable, is often not viable when customers are located conveniently close to retail outlet ○ For some products like bee keeping equipment, customers are widely geographically dispersed and thus a centralized distribution center may be more economically viable ○ Specialty books may not be worthwhile for bookstores to stock so may be economically sold online ● Vulnerability of inventory to loss of value: Some products (especially high tech products) have high effective carrying costs ○ Has been estimated that because of rapid technological progress made, computer parts may lose as much as 1.5% of value per week ○ If shipping directly to consumer can reduce the channel time by 5 weeks, this potentially "rescues" as much as 7.5% of product value ○ May make sense even if direct costs of distribution are higher because of inventory value issue At firm level, some will be better able to efficiently and effectively sell online ● Firm reputation/credibility: customer buying without opportunity to inspect it, customer will need to have certain confidence that merchandise ordered will actually arrive (firms with stronger reputation will more likely receive orders) ● Volumes sold: One way to limit labor costs of online sales is to automate process as much as possible (up front investment in automation is heavy, however, investment needs to be spread over large number of units) ○ As with conventional retail chains, those that buy large quantities have greater bargaining power to get prices down ○ Allows for greater margins and/or greater quantities sold at prices lower than what certain competitors can match ○ Firms shipping more packages can also negotiate lower shipping costs per unit ● Ability to sell multiple items together: useful to be able to spread cost of packaging and shipping across number of different items. The more different but complementary items that an online vendor carries, the more likely its customer will include a number of different items ● Synergy with traditional retail store operations (Bricks- and-clicks): well known retail chains (staples, Costco, Nordstrom) more likely to be trusted - having retail locations makes it easier to accept returns and combine sales of online and brick and mortar to make for greater bargaining power ● Location for minimization of sales taxes: some states either do not collect sales tax or have small populations so that sales within state are modest ○ Rule of taxation of items sold out of state through internet orders are complex ○ Internationally, there may also be opportunities to avoid sales and duties - sometimes legally and sometimes not ● Location and low labor and land costs: with ready access to shippers (UPS), there is no significant advantage of being located in a major city ○ Small towns often have much lower real estate costs ○ Firms can also locate in areas where wage levels tend to be lower ● Potential for repeat sales to same customer: often more cost effective to sell to existing customers than constantly trying to reach new ones ○ Based on knowing that customer has bought in past, it is possible to identify other customers who have bought these same items and identify additional common purchases among these relatively similar individuals ○ Collaborative filtering Number of economic realities of online competition: ● Costs of handing online orders often higher than distributing through traditional stores ● Even if online selling more cost effective in some situations, firm selling online will, in the long run, be competing with other online merchants - not just against brick and mortar ○ By forces of supply and demand, online prices will then be driven down so profit form selling online will be no greater than from traditional retailing ○ Any reduced costs would then be expected to go to customers ● Competition greater for products that have large markets than for those where markets are smaller and more specialized ○ Amazon for example - can ell specialty books at high price, but for large part of market, competition intense ● New online merchant will face competition from established traditional merchants ○ These often have cash reserves to stay in business for long time even with temporary competition ○ Online merchant, if it has no cash reserves other than stockholders' investment, may run out of cash before it can become profitable Cost Component Brick-and Online sales Combined Mortar (“Bricks and Store Clicks”) Ordering cost Cost present Cost present Average cost per (from wholesaler unit will be lower or manufacturer) (and the firm will have better bargaining power with suppliers due to volumes bought) Inventory holding Cost present Possibly lower May benefit from due to faster economies of turnover and scale lesser safety stock Inventory space Cost present Probably lower Combination of due to use of less the two (some expensive real expensive and estate some cheaper) with possible savings from joint use Retail store space Cost present For physical store outlets Stocking Cost present Cost present Cost present Assembling order Cost present For online (May be reduced component (May by automation) be reduced by automation) Packaging order Cost present For online (May be reduced component (May by automation) be reduced by automation) Cost of shipping Cost present For online to customer component Store sales staff Cost present Possibly for For physical store (non-checkout) online support component and (“chatters”) possibly for online support (“chatters”) Credit card Cost present Cost present Cost present charges or allowance for bad checks, if accepted (assuming no cash payments) Loss of inventory Greater Smaller In proportion to value over time the relative sales by each method Handling of Smaller Greater Smaller returns ● One of key issues from table is cost of non-checkout sales personnel ○ Analysis suggested that Best Buy ahs relatively high costs in part because of high rents they must pay for may of retail locations and part because of high cost of "blue shirt" sales people ● Selling online is a way to reduce labor cost ● However, traditional brick and mortar have lower cost here ○ Customers usually select own items, put in their carts, take to cash register and bring them home ○ If retailer needs to have sales people bring out items for back storage facility, that may be inefficient ○ However, if sales people help answer questions, it's useful to have this staff Because of random variations in demand for different retail stores largely cancel out each other when orders are handled from much larger facility handling online orders for particular region, there is less need


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