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wwwmhhecomgrewal2e LE 3quotkSA N MAR 3023 Chapter 13 PRICING CONCEPTS FOR ESTABLISHING VALUE ARNING OBJECTIVES Why should firms pay more attention to setting prices What is the relationship between price and quantity sold Why is it important to know a product s breakeven point Who wins in a price war How has the lntemet changed the way some people use price to make purchasing decisions INTRODUCTION Price the overall sacrifice a consumer is willing to make to acquire a specific product or service This sacrifice necessarily includes the money that must be paid to the seller to acquire the item but it also may involve other sacrifices whether nonmonetary like the value of the time necessary to acquire the product or service or monetary like travel costs taxes shipping costs and so forth all of which the buyer must give up to take possession ofthe product Previously we have defined value as the relationship between the product s benefits and the consumer s costs which is another way of looking at the same thing Consumers judge the benefits the product delivers against the sacrifice necessary to obtain it l make a purchase decision based on this overall judgment of value Thus a great but overpriced product can be judged as low in value and may not sell as well as an inferior but wellpriced item In turn we cannot define price without referring specifically to the product or service associated with it The key to successful pricing is to match the product or service with the consumers value perceptions Price also provides information about the quality of products and services Firms can price their products or services too high andor they can price them too low Price is the only element ofthe marketing mix that does not generate costs but instead generates revenue Research has consistently shown that consumers usually rank price as one ofthe most important factors in their purchase decisions Price is the most challenging of the four Ps to manage partly because it is often the least understood THE FIVE C S OF PRICING Company Objectives The pricing of a company s products and services should support and allow the firm to reach its overall goals These specific objectives usually reflect how the firm intends to row 3 Firms may embrace two or more objective simultaneously Profit Orientation Even though all company methods and objectives may ultimately be oriented toward making a profit firms implement a pro t orientation specifically by focusing on target profit pricing maximizing profits ortarget return pricing Firms usually implement target profit pricing when they have a particular profit goal as their overriding concern To meet this targeted profit objective firms use price to stimulate a certain level of sales at a certain profit per unit 0 The maximizing profits strategy relies primarily on economic theory If a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits it should be able to identify the price at which its profits are maximized Of course the problem with this wwwmhhecomgrewa2e Sales Orientation MAR 3023 approach is that actually gathering the data on all these relevant factors and somehow coming up with an accurate mathematical model is an extremely difficult undertaking Other firms are less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments These firms typically turn to target return pricing and employ pricing strategies designed to produce a specific return on their investment usually expressed as a percentage of sales Firms using a sales orientation to set prices believe that increasing sales will help the firm more than will increasing profits 0 Some firms may be more concerned about their overall market share than about dollar sales per se though these often go hand in hand because they believe that market share better reflects their success relative to the market conditions than do sales alone A firm may set low prices to discourage new firms from entering the market encourage current firms to leave the market take market share away from competitors all to gain overall market share Adopting a market share objective does not always imply setting low prices Rarely is the lowestprice offering the dominant brand in a given market Premium pricing means the firm deliberately prices a product above the prices set for competing products to capture those customers who always shop for the best or for whom price does not matter Thus companies can gain market share simply by offering a highquality product at a fair price as long as they use effective communication and distribution methods to generate high value perceptions among consumers Although the concept of value is not overtly expressed in salesoriented strategies it is at least implicit because for sales to increase consumers must see greater value Competitor Orientation When firms take a competitor orientation they strategize according to the premise that they should measure themselves primarily against their competition 0 Some firms focus on competitive parity which means they set prices that are similar to those of their major competitors 0 Status quo pricing changes prices only to meet those ofthe competition 0 Value is only implicitly considered in competitororiented strategies but in the sense that competitors may be using value as part of their pricing strategies copying their strategy might provide value Customer Orientation A customer orientation explicitly invokes the concept of value 0 O Customers Sometimes a firm may attempt to increase value by focusing on customer satisfaction and setting prices to match consumer expectations Or a firm can use a nohagglequot price structure to make the purchase process simpler and easier for consumers thereby lowering the overall price and ultimately increasing value After firms have developed their company objectives they then turn to understanding consumers reactions to different prices To determine how firms account for consumers preferences when they develop pricing strategies we must first lay a foundation of traditional economic theory that helps explain how prices are related to demand consumers desire for products and how managers can incorporate this knowledge into their pricing strategies Demand Curves and Pricing A demand curve shows how many units of a product or service consumers will demand during a specific period of time at different prices For the sake of experiment marketers creating a demand curve assume that the firm will not increase its expenditures on advertising and that the economy will not change in any significant way wwwmhhecomgrewal2e Costs MAR 3023 0 Not all products or services follow the downwardsloping demand curve for all levels of price Consider prestige products or services which consumers purchase for their status rather than their functionality The higherthe price the greater the status associated with it and the greater the exclusivity because fewer people can afford to purchase it Price Elasticity of Demand measures how changes in a price affect the quantity of the product demanded Specifically it is the ratio ofthe percentage change in quantity demanded to the percentage change in price We can calculate it with the following formula thnngt in quantity rlvmnmlud l r39iw vlaaticilju ul39 dvmnm l 39 39 rlmngt in prim o In general the market for a product or service is price sensitive or elastic when the price elasticity is less than 1 that is when a 1 percent decrease in price produces more than a 1 percent increase in the quantity sold In an elastic scenario relatively small changes in price will generate fairly large changes in the quantity demanded so if a firm is trying to increase its sales it can do so by lowering prices 0 The market for a product is generally viewed as price insensitive or inelastic when its price elasticity is greater than 1 that is when a 1 percent decrease in price results in less than a 1 percent increase in quantity sold Generally if a firm must raise prices it is helpful to do so with inelastic products or services because in such a market fewer customers will stop buying or reduce their purchases However ifthe products are inelastic lowering prices will not appreciably increase demand customers just don t notice or care about the lower price 0 Consumers are generally more sensitive to price increases than to price decreases Factors Influencing Price Elasticity of Demand 0 Income Effect refers to the change in the quantity of a product demanded by consumers due to a change in their income 0 Substitution Effect Refers to consumers ability to substitute other products for the focal brand The greater the availability of substitute products the higher the price elasticity of demand for any given product will be For example there are many close substitutes for the various brands of peanut butter lf Skippy raises its prices many consumers will turn to Jif Peter Pan or another brand because they are more sensitive to price increases when they can easily find lowerpriced substitutes Extremely brandloyal consumers however are willing to pay a higher price up to a point because in their minds Skippy still offers a better value than the competing brands and they believe the other brands are not adequate substitutes o CrossPrice Elasticity The percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B Complementary Products Products whose demands are positively related such that they rise or fall together A percentage increase in the quantity demanded for Product A results in a percentage increase in the quantity demanded for Product B Substitute Products Products for which changes in demand are negatively related that is a percentage increase in the quantity demanded for product A results in a percentage decrease in the quantity demanded for product B The way a product or service is marketed to customers can have a profound effect on its price elasticity wwwmhhecomgrewal2e MAR 3023 To make effective pricing decisions firms must understand their cost structures so they can determine the degree to which their products or services will be profitable at different prices In general prices should not be based on costs because consumers make purchase decisions based on their perceived value they care little about the firm s costs to produce and sell a product or deliver a service Variable Costs are those costs primarily labor and materials that vary with production e As a firm produces more or less of a good or service the total variable costs increase or decrease at the same time Because each unit ofthe product produced incurs the same cost marketers generally express variable costs on a perunit basis Costs are those costs that remain essentially at the same level regardless of any changes in the volume of production Typically these costs include items such as rent utilities insurance administrative salaries for executives and higherlevel managers and the depreciation ofthe physical plant and equipment Across reasonable fluctuations in production volume these costs remain stable Cost is simply the sum ofthe variable and fixed costs Break Even Analysis a technique used to examine the relationships among cost price revenue and profit over different levels of production and sales to determine the breakeven point 0 volum o Fixed 0 Total 0 Competition e Central to this analysis is the determination ofthe breakeven point or the point at which the number of units sold generatesjust enough revenue to equal the total costs At this point profits are zero Because the fourth C competition has a profound impact on pricing strategies we use this section to focus on its effect as well as on how competitors react to certain pricing strategies 0 each h C There are three levels of competition oligopolistic monopolistic and pure and as its own set of pricing challenges and opportunities Oligopolistic Competition occurs when only a few firms dominate Firms typically change their prices in reaction to competition to avoid upsetting an otherwise stable competitive environment Sometimes reactions to prices in oligopolistic markets can result in a price war which occurs when two or more firms compete primarily by lowering their prices Monopolistic Competition occurs when there are many firms competing for customers in a given market but their products are differentiated When so many firms compete product differentiation rather than a strict pricing competition tends to appeal to consumers Pure Competition different companies that consumers perceive as substitutable sell commodity products In such markets price usually is set according to the laws of supply and demand Fair Trade socially responsible movement that ensures that producers receive fair prices for their products Retail price maintenance is an attempt by a vendor to dictate or control the retail price a l 0 Channel Members Channel members manufacturers wholesalers and retailers can have different perspectives when it comes to pricing strategies Consider a manufacturer that is focused on increasing the image and reputation of its brand but working with a retailer that is primarily concerned with increasing its sales The manufacturer may desire to keep prices higher to convey a better image whereas the retailer wants lower prices and will accept lower profits to move the product regardless of consumers impressions of the brand Unless channel members carefully communicate their pricing goals and select channel partners that agree with them conflict will surely arise wwwmhhecomgrewa2e MAR 3023 Channels can be very difficult to manage and distribution outside normal channels does occur A gray marketfor example employs irregular but not necessarily illegal methods generally it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer Check Yourself 1 What are the ve C s of Pricing 2 Identify the four types of company objectives 3 What is the difference between elastic versus inelastic demand 4 How does one calculate the breakeven point in units MACRO INFLUENCES ON PRICING The Internet The shift among consumers to acquiring more and more products services and information online has made them more price sensitive and opened new categories of products to those who could not access them previously The Internet also has introduced search engines that enable consumers to find the best prices for any product quickly which again increases their price sensitivity and reduces the costs associated with finding lowerprice alternatives Not only do consumers know more about prices they know more about the firms their products their competitors and the markets in which they compete Another implication of the Internet for prices has been the growth of online auction sites such as eBay Economic Factors Two interrelated trends that have merged to impact pricing decisions are the increase in consumers disposable income and status consciousness At the same time however a countervailing trend finds customers attempting to shop cheap Crossshopping is the pattern of buying both premium and lowpriced merchandise or patronizing both expensive statusoriented retailers and priceoriented retailers Chapter 11 Developing New Products Monday March 15 2010 1058 PM Our lives are defined by many new products and services 1 Innovation and Value Innovation is the process by which ideas are transformed into new products and services that will help firms grow Without innovation firms would have two choices continue to market current products to current customers or take the same product to another market with similar customers Firms can create and deliver value more effectively by satisfying the changing needs oftheir current and new customers or simply by keeping customers from getting bored with the current product or service offering The longer a product exists in the marketplace the more likely it is that the market will become saturated The portfolio of precuts that innovation can create helps the firm diversify its risk and therefore enhances firm value better than a single product can Sales come from new products in some industries Completely new to the market products represent fewer than 10 percent of all new product introductions each year slightly repositioned Pioneers or breakthroughs establish a completely new market or radically change both the rules of competition and consumer preferences in a market First movers I Become readily recognizable I Establish a commanding and early market share Can command a greater market share over a longer time period First product in the market I Less sophisticated design Priced slightly higher I 95 of all new consumer goods fail lmitators capitalize on the weaknesses of pioneers and subsequently gain advantage in the market 2 Diffusion oflnnovation Process by which innovation spreads throughout a market group Helps marketers understand the rate that consumers will adopt the productservice Also can identify potential markets for their new products or services and predict their potential sales Bell shaped curve Purchasers can be divided into five groups according to how soon they buy the product after it has been introduced Innovators buyers who want to be the first to have new servicesproducts I Enjoy taking risks Well informed I 25 of total market I Crucial to the success of any new product of service Help the product gain market acceptance I Early Adopters wait and purchase the product after careful review I Enjoy novelty opinion leaders I 135 I Crucial for bringing the other three buyer categories to the market I Early Majority wait until the bugs are worked out of a particular product or service I 34 of total market I Crucial bc few new products and services can be profitable until this large group buys them I Competitors usually has reached its peak so many different prices and quality choices I Late Majority last group of buyers to enter a new product market I Full market potential I Sales tend to level off or may be in decline 34 of total market Laggards like to avoid changes and rely on traditional products 16 of total market I Using the diffusion of innovation theory Firms can predict which types of customers will buy their new products or service immediately after its intro I Different products diffuse at different rates Relative advantages product is perceived to be better than substitutes then will be relatively quick Compatibility ritual in many cultures Observability easily seen and benefits or uses are easily communicated to others Complexity and Trialability products that are relatively less complex are also relatively easy to try I Comes in play in the immediate and long term aftermath of a new product or service intro 3 How Firms Develop New Products The new product development process begins with the generation of new product ideas and culminates in the launch of a new product and the evaluation of its success I Idea Generation To generate ideas for new products a firm uses Internal Research and Development I Are considered continuous investments RampD Consortia groups of other firms and institutions Explore new ideas or obtain solutions for developing new products I Participating firms and institutions share the results Clinical trial medical study that tests the safety and effectiveness of a drug or treatment in people Licensing I Firms buy the rights to use the technology or ideas from other researchintensive firms through a licensing agreement I Saves the highs costs and the firm is banking on a solution that already exists but has not been marketed Brainstorming Groups works together to generate ideas I No idea can be immediately accepted or rejected CompetitorsI Product Reverse engineering taking apart a product analyzing it and creating an improved product that does not infringe on the competitor39s patents Customer Input Listening to the customer is essential for successful idea generation I 85 of all new 323 product ideas come from customers I Lead Users innovative product users who modify existing products according to their own ideas to suit their specific needs Concept Testing I Concept brief written descriptions ofthe product Concept testing refers to the process in which a concept statement is presented to potential buyers or users to obtain their reactions Helps the firm avoid unnecessary product development by occurring before real product has been made Product Development Product development or product design process of balancing various engineering manufacturing marketing and economic considerations to develop a product39s form and features or a service39s features Prototype first physical form or service description of a new product still in rough or tentative form that has the same properties as a new product but is produced through different manufacturing processes Alpha Testing firm attempts to determine whether the product will perform according to its design and whether it satisfies the need for which it was intended I Occurs in the firm39s RampD department Beta Testing uses potential consumers who examine the product in a real use setting to determine its functionality performance potential problems and other issues specific to its use I Market Testing Premarket Tests conducted before a product or service is brought to market to determine how many customers will try and then continue to use it Test Marketing introduces the product to a limited geographical area prior to a national launch I Uses all elements of the marketing mix I Is a strong predictor of product success I BehaviorScan utilizes consumer panel data collected passively at the point of sale in stores and through home scanning to measure individual household first time trial and repeat purchases used to improve probability of success Product Launch If market testing returns with positive results the firm is ready to introduce the product to the entire market Most critical step Firms confirm target market and decides how the product will be positioned Promotion I Test results help the firm 39 39 an W F 39 39 g strategy I Introductory Price limited duration lower than normal prices designed to provide retailers with an incentive to try the products Place I Manufacturer coordinates the delivery and storage of the new products with its retailers to assure that it is available for sale when consumers want it need it and can obtain it Price I Setting prices is a supply chain wide decision I When setting MSRP manufacturers also consider the price at which the new products are sold to the retailers I Slotting allowance fee paid simply to get new products into stores or to gain more or better shelf space fro their products Timing 39 g communications Evaluation of Results Must undertake a postlaunch review to determine whether the product and its launch were a success or failure and what additional resources or changes to the marketing mix are needed Three interrelated factors that measure success I Satisfaction of technical requirements I Customer acceptance I Satisfaction of the firm39s financial requirements Product life cycle defines the stages that new products move through as they enter get established in and ultimately leave the marketplace and thereby offers marketers a starting point for their strategy planning Products pass thru four stages I Introduction stage innovative products or services usually starts with a single firm and innovators are the ones to try the new offering I Characterized by initial losses to the firm due to its high start up costs and low levels of sales revenue as the product begins to take off Firms may start seeing profits toward the end of this stage I Sales low Profits Low or Negative Typical consumers innovators Competitors one or few Growth Stage marked by a growing it of product adopters rapid growth in industry sales and increase in both the if of competitors and the if of available product versions I Innovators start rebuying the product and early majority consumers enter I First attempts to reach new customers by studying their preferences and producing different product variations I Firms may decide to exit referred to as IIindustry shakeoutII which usually occurs with firms that have not yet established a stronghold in the market I Sales Rising Profits Rapidly rising Typical Consumers early adopters and early majority Competitors few but increasing I Maturity Stage industry sales reach their peak so firms try to rejuvenate their products by adding new features or repositioning them I adoption of the product by the late majority and intense competition for market share I Marketing costs increase I Face intense competition on price I Lower profits margins I Many products stay in this stage for a very long time I Firms pursue strategies Entry into new markets or market segments Development of New products I Decline Stage firms with products in the decline stage either position themselves for a niche segment of diehard consumers or those with special needs or they completely exit the market I Few laggards that have not yet tired the product or service enter the market at this stage The shape of the product life cycle curve I Product life cycle curve is assumed to be bell shaped with regard to sales and profits Each product or service has its own individual shape Strategies based on product life cycle some caveats I There is no way to know precisely what stage a product is in bc managers don39t know exactly what shape each product39s life cycle will take New analytical tools now provide IIrulesII for dete3cting the key turning points in the cycle A Marke ng Environme 1 Consumers ar Chapter A Analyzingthe Marketing Environment ntAnaiysis Fram ework e at the center ot aii marke ng z MarketingEnvirom a culture Demngraphiu ine immediate Environment 1 Successtuiiy Leveraging Company Capaoiiities a Fi39rstfactor tnatattects tne Consumer is tne tirm c Use SWOT naiysis to categorize opportunities 2 Competitors and Competitive inteiiigence a po i39u39ori witn respect to tneir 39 c iaiiows anies to anti 3 Corporate Partn a Parties tna oiticai tnatmarketers know competitors strengths and weaknesses nvais C pate changes ers tworkwitn tne tocai tirm their Macroenvironmentai Factorsr CDSiEP 1 Cuimre rrirn ni39rv nii rm 4 i39 i m rm rii39 preterences are easy Q a t t h h n r i r to spot ref 2 Demograpnics rrit N n nrir r i39 r Ar NH er to a particuiar productcategory LE soda pop coke identity Consumer markets A Ag e race and income w o Generadonai Conormra group or peopie or the sarne generau39on A i D h D spend a ioton ieisure tirne and vaiue taki39rg care or tnernseives Aiso are Very n concerned wi39dw yout 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Aiso savirg accounm 6 PoiiticaiReguiatoryEnvironment a Year 1890 up er rggx ma Law Sherman Anuunsx An cr aymn Au renevarrwue Rohrlrsou PJHHaHAd ummrssrmw Wheoier Len Ad Norm Arum T v Inde Agree NAFTA Corporate Sotr39ar Responsrbr39h39ty 1 Inputs wnrrd r t 1 theywork erry wr39H ea r I Outputs a a an we em dto better resurtsfor stakehorders nzsurpxron man nanopo es am my advmes that wauu xesmm rude or armaturan Maka on was wrtmu u use mer 1 muumrgml Suppurts the Sherman Ad by prohlbrtmg Um winmnar m or 1 mmemmreungmmumumsmm pumth omyelsh p ofslunkaml Iasmmng rumer mumps mam umdystrvmrnauonruxdmrvrdmhng an tymg Mum u ummm uuym Esmhhshm he FederatTrade omrwssrou no to regu 1m mm ampelrtrw pmmm and pmum um Mew m ue unfarr tomnsumers Outlaws we rszrmwmron ward whoresmm readers or cum pmduLev neuuuemneu u wrch amer rscr vries m momma mum to an buyers on propumnn nzeryeqrm mm Makes umuw m rmpxwe advarmmg pmqu mm and gues FTC runsaxmun ovm room and m ug pmmutron lntewatmml mu agreerrrrm mo mam Mexm and the muted Stale removmg mr 5 and trade amers to menu a trad ymong um mm mm brand equr39ty and sares r39n the ng run b CompanyrBy giving customers optr39ons bqus a brand royarty L r n x r r run and more resources r39n the ng run wwwmhhecomgrewa2e MAR 3023 Chapter 10 PRODUCT BRANDING AND PACKAGING DECISIONS LEARNING OBJECTIVES 1 How do rms adjust their product lines to changing market conditions 2 Why are brands valuable to rms 3 How do rms implement different branding strategies 4 How do a product s packaging and label contribute to a rm s overall strategy INTRODUCTION Product is anything that is of value to a consumer and can be offered through a voluntary marketing exchange 0 In addition to goods such as soft drinks or services products might also be places ideas organizations people or communities that create value for consumers in their respective competitive marketing arenas PRODUCT ASSORTMENT AND PRODUCT LINE DECISIONS Product Assortment Product Mix The complete set of all products offered by a firm Product Lines The product assortment typically consists of various product lines which are groups of associated items such as items that consumers use together or think of as part of a group of similar products Product Category VI thin each product line there are often multiple product categories A product category is an assortment of items that the customer sees as reasonable substitutes for one another or are used under similar circumstances Brands Each category within a product line may use the same or different brands which are the names terms designs symbols or any other features that identify one seller s good or service as distinct from those of other sellers Breadth Product assortments can also be described in terms of their breadth and depth A firm s product line breadth sometimes also referred to as variety represents the number of product lines offered by the firm Depth Is the number of categories within a product line Stock Keeping Units SKU s VI thin each product category are a number of individual items called SKUs which are the smallest unit available for inventory control Category Depth Is the number of SKUs within a category ExpandingContracting Product Lines The decision to expand or contract product lines and categories depends on several factors Industry Level factors Consumer Level factors Firm Level factors 0 Among the industry factors firms expand their product lines when it is relatively easy to enter a specific market entry barriers are low andor when there is a substantial market opportunity 0 When firms add new product categories and brands to their product assortments they often earn significant sales and profits often earn significant sales and profits 0 However unchecked and unlimited product line extensions may have adverse consequences 0 Too much variety in the product assortment is often too costly to maintain and too many brands may weaken the firm s brand reputation Change Product Mix Breadth Firms may change their product mix breadth by either adding to or deleting categories 0 Increase Breadth Firms often add new product categories to capture new or evolving markets increase sales and compete in new venues wwwmhhecomgrewa2e MAR 3023 o Decrease Breadth Sometimes it is necessary to delete entire product lines to address changing market conditions or meet internal strategic priorities Change Product Assortment Depth As with product line breadth firms occasionally either add to or delete from their product line depth 0 Increase Depth Firms may add items or SKUS to address changing consumer preferences or preempt competitors while boosting sales 0 Decrease Depth From time to time it is also necessary to delete SKUs to realign resources The decision to delete SKUs is nevertaken lightly Generally substantial investments have been made to develop and manufacture the products Consumer goods firms make pruning decisions regularly to eliminate unprofitable items and refocus their marketing efforts on more profitable items Product Line Decisions for Services Many of the strategies used to make product line decisions for physical products can also be applied to services For instance a service provider like a bank typically offers different product lines for its business and retail consumer accounts those product lines are further divided into categories based on the needs of different target markets Check Yourself 1 What is the difference between product line breadth versus depth 2 Why change product line breadth 3 Why change product line depth BRANDING Branding provides a way for a firm to differentiate its product offerings from those of its competitors and can be used to represent the name of a firm and its entire product assortment General Motors one product line Chevrolet or a single item Corvette Brand names logos symbols characters slogans jingles and even distinctive packages constitute the various brand elements firms use which they usually choose to be easy for consumers to recognize and remember Value of Branding for the Customer and the Marketer Brands add value to merchandise and services beyond physical and functional characteristics orthe pure act of performing the service 0 Brands Facilitate Purchasing Brands are often easily recognized by consumers and because they signify a certain quality level and contain familiar attributes brands help consumers make quick decisions Brands Establish Loyalty Over time and with continued use consumers learn to trust certain brands They know for instance that BandAid bandages always perform in the exact same way Many customers become loyal to certain brands in much the same way that you or your friends likely have become loyal to your college They wouldn t consider switching brands and in some cases feel a strong affinity to certain brands Brands Protect from Competition and Price Competition Strong brands are somewhat protected from competition and price competition Because such brands are more established in the market and have a more loyal customer base neither competitive pressures on price nor retaillevel competition is as threatening to the firm 0 O wwwmhhecomgrewa2e Brand I MAR 3023 0 Brands Reduce Marketing Costs Firms with wellknown brands can spend relatively less on marketing costs than firms with littleknown brands because the brand sells itself 0 Brands Are Assets Brands are also assets that can be legally protected through trademarks and copyrights and thus constitute a unique ownership for the firm 0 Brands Impact Market Value Having wellknown brands can have a direct impact on the company s bottom line The value of a brand can be calculated by assessing the earning potential ofthe brand over the next 12 months Equity The value of a brand translates into brand equity or the set of assets and liabilities linked to a brand that add to or subtract from the value provided by the product or service Like the physical possessions of a firm brands are assets the firm can build manage and harness over time to increase its revenue profitability and overall value Firms spend millions of dollars on promotion advertising and other marketing efforts throughout a brand s life cycle These marketing expenditures if done carefully result in greater brand recognition awareness and consumer loyalty for the brand A licensed brand is one in which there is a contractual arrangement between firms whereby one firm allows another to use its brand name logo symbols andor characters in exchange for a negotiated fee The main components of brand equity Brand Awareness measures how many consumers in a market are familiar with the brand and what it stands for and have an opinion about that brand The more aware or familiar customers are with a brand the easier their decisionmaking process will be Familiarity matters most for products that are bought without much thought such as soap or chewing gum However brand awareness is also important for infrequently purchased items or items the consumer has never purchased before If the consumer recognizes the brand it probably has attributes that make it valuable Perceived Value of a brand is the relationship between a product or service s benefits and its cost Customers usually determine the offering s value in relationship to that of its close competitors lfthey feel a less expensive brand is about the same quality as a premium brand the perceived value ofthe cheaper choice is high Brand Associations reflect the mental links that consumers make between a brand and its key product attributes such as a logo slogan or famous personality These brand associations often result from a firm s advertising and promotional efforts Brand Personality refers to such a set of human characteristics associated with a brand which has symbolic or selfexpressive meanings for consumers Firms sometimes even develop a personality for their brands as ifthe brand were human Brand Loyalty occurs when a consumer buys the same brand s product or service repeatedly over time ratherthan buy from multiple suppliers within the same category Therefore brandloyal customers are an important source of value for firms Why First such consumers are often less sensitive to price In return firms sometimes reward loyal consumers with loyalty or customer relationship management CRM programs such as points customers can redeem for extra discounts or free services advance notice of sale items and invitations to special events sponsored by the company Second the marketing costs of reaching loyal consumers are much lower because the firm does not have to spend money on advertising and promotion campaigns to attract these customers Loyal consumers simply do not need persuasion or an extra push to buy the firm s brands O O O O O wwwmhhecomgrewal2e MAR 3023 Third loyal customers tend to praise the virtues oftheir favorite products retailers or services to others This positive wordofmouth reaches potential customers and reinforces the perceived value of current customers all at no cost to the firm Finally a high level of brand loyalty insulates the firm from competition because brandloyal customers do not switch to competitors brands even when provided with a variety of 39 39 Check Yourself 1 How do brands create value for the customer and the rm 2 What are the components of brand equity BRANDING STRATEGIES Firms institute a variety of brandrelated strategies to create and manage key brand assets Brand Ownership Brands can be owned by any firm in the supply chain whether manufacturers wholesalers or retailers There are two basic brand ownership strategies 0 Manufacturer Brands also known as national brands are owned and managed by the manufacturer 0 PrivateLabel Brands also called store brands house brands or own brands are products developed by retailers me manufacturers prefer to make only privatelabel merchandise because the costs of developing and marketing a manufacturer s brand are prohibitive Other firms manufacture both their own brand and merchandise for other brands or retailers In many cases retailers develop the design and specifications for their privatelabel products and then contract with manufacturers to produce those products In other cases national brand vendors work with a retailer to develop a special version of its standard merchandise offering to be sold exclusively by the retailer In these cases the national brand manufacturer is responsible for the design and specification as well as the production of the merchandise 0 There are four categories of private brands Premium brands offer the consumer a private label that is comparable to or even superior to a manufacturer s brand quality sometimes with modest price savings Generic brands target a pricesensitive segment by offering a nofrills product at a discount price Copycat brands imitate the manufacturer s brand in appearance and packaging generally are perceived as lower quality and are offered at lower prices Exclusive cobrands is a brand that is developed by a national brand vendor often in conjunction with a retailer and is sold exclusively by the retailer The simplest form of an exclusive cobrand is when a national brand manufacturer assigns different model numbers and has different exterior features for the same basic product sold by different retailers A more sophisticated form of exclusive cobranding is when a manufacturer develops an exclusive product or group of related products for a retailer Naming Brands and Product Lines Firms use several very different strategies to name their brands and product lines 0 Corporate or Family Brands A firm can use its own corporate name to brand all its product lines and products When all products are sold under one corporate or wwwmhhecomgrewal2e MAR 3023 family brand the individual brands benefit from the overall brand awareness associated with the family name Corporate and Product Line Brands A firm also could use combinations ofthe corporate and product line brands to distinguish its products Individual Brands A firm can use individual names for each of its products Choosing a Name Although there is no simple way to decide how to name a brand or a product line the more the products vary in their usage or performance the more likely it is that the firm should use individual brands Choosing a name also can be an exercise in creativity They can also be used to distinguish themselves from more traditionally named products especially in a market as diverse and full of offerings The name can also indicate a strong brand image 0 OO Brand Extensions refers to the use ofthe same brand name for new products being introduced to the same or new markets 0 There are several advantages to using the same brand name for new products I First because the brand name is already well established the firm can spend less in developing consumer brand awareness and brand associations for the new product Second if either the original brand or the brand extension has strong consumer acceptance that perception will carry over to the other product Finally when brand extensions are used for complementary products a synergy exists between the two products that can increase overall sales 0 Brand Dilution Not all brand extensions are successful however Some can dilute brand equity Brand dilution occurs when the brand extension adversely affects consumer perceptions about the attributes the core brand is believed to hold I To prevent the potentially negative consequences of brand extensions firms consider the following Marketers should evaluate the fit between the product class ofthe core brand and that of the extension If the fit between the product categories is high consumers will consider the extension credible and the brand association will be stronger forthe extension Firms should evaluate consumer perceptions of the attributes ofthe core brand and seek out similar attributes for the extension because brandspecific associations are very important for extensions Firms should refrain from extending the brand name to too many products and product categories to avoid diluting the brand and damaging Firms should consider whether the brand extension will be distanced from the core brand especially if the firm wants to use some but not all of the existing brand associations Cobranding is the practice of marketing two or more brands together on the same package or promotion 0 Cobranding can enhance consumers perceptions of product quality by signaling unobservable product quality through links between the firm s brand and a well known quality brand 0 Cobranding can also be a prelude to an acquisition strategy Brand Licensing is a contractual arrangement between firms whereby one firm allows another to use its brand name logo symbols andor characters in exchange for a negotiated fee 0 The firm that provides the right to use its brand licensor obtains revenues through royalty payments from the firm that has obtained the right to use the brand licensee wwwmhhecomgrewa2e MAR 3023 These royalty payments sometimes take the form of an upfront lumpsum licensing fee or may be based on the dollar value of sales ofthe licensed merchandise 0 One very popular form of licensing is the use of characters created in books and other media 0 Licensing is an effective form of attracting visibility for the brand and thereby building brand equity while also generating additional revenue 0 There are however some risks associated with it For the licensor the major risk is the dilution of its brand equity through overexposure ofthe brand especially if the brand name and characters are used inappropriately Licensors also run the risk of improperly valuing their brand for licensing purposes or entering into the wrong type of licensing arrangement Brand Repositioning refers to a strategy in which marketers change a brand s focus to target new markets or realign the brand s core emphasis with changing market preferences 0 Although repositioning can improve the brand s fit with its target segment or boost the vitality of old brands it is not without costs and risks Firms often need to spend tremendous amounts of money to make tangible changes to the product and packages as well as intangible changes to the brand s image through advertising These costs may not be recovered ifthe repositioned brand and messages are not credible to the consumer or ifthe firm has mistaken a fad for a longterm market trend Check Yourself 1 What is the difference between manufacturer privatelabel and generic brands 2 What is Cobranding 3 What are some 39 and quot 39 a ofbrand a PACKAGING Packaging is an important brand element with more tangible or physical benefits than the other brand elements Packages come in different types and offer a variety of benefits to consumers man ufacturers and retai ers 0 Primary package is the one the consumer uses such as the toothpaste tube From the primary package consumers typically seek convenience in terms of storage use and consumption 0 packag Secondary package is the wrapper or exterior carton that contains the primary e and provides the UPC label used by retail scanners Consumers can use the secondary package to find additional product information that may not be available on the primary package Like primary packages secondary packages add consumer value by facilitating the convenience of carrying using and storing the product The secondary package can also be an important marketing tool for the manufacturer if it is used to convey the brand s positioning Product Labeling Labels on products and packages provide information the consumer needs for his or her purchase decision and consumption ofthe product In that they identify the product and brand labels are also an important element of branding and can be used for promotion A product label is much more than just a sticker on the package it is a communication tool fat content ingredients Many of the elements on the label are required by laws and regulations ie ingredients sodium content serving size calories Other elements ofthe label remain within the control of the manufacturer specific vitamin content or nutrient content Chapter 1 1 Marketing An organizational function and a set of processes for creating communicating and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders First it is a philosophy an attitude a perspective or a management orientation that stresses customer satisfaction Second marketing is an organization function and a set of processes used to implement this philosophy 2 Orientations toward marketing a Production orientation A philosophy that focuses on the internal capabilities of the firm rather than on the desires and needs of the marketplace quotWhat can we do bestquot quotWhat can our engineers designquot quotWhat is easy to produce given our equipmentquot In the case of a service organization managers ask quotWhat services are most convenient for the firm to offerquot and quotWhere do our talents liequot quotIf we build it they will comequot Production orientation falls short because it does not consider whether the goods and services that the firm produces most efficiently also meet the needs of the marketplace but sometimes what a firm can best produce is exactly what the market wants b Sales orientation The idea that people will buy more goods and services if aggressive sales techniques are used and that high sales result in high profits Intermediaries are also encouraged to push manufacturers39 products more aggressively As with a production orientation there is a lack of understanding of the needs and wants of the marketplace Sales oriented companies often find that despite the quality of their sales force they cannot convince people to buy goods or services that are neither wanted nor needed Some sales oriented firms simply fail to understand what is important to their customers c Marketing conceptorientation The idea that the social and economic justification for an organization39s existence is the satisfaction of customer wants and needs while meeting organizational objectives It is based on an understanding that a sale does not depend on an aggressive sales force but rather on a customer39s decision to purchase a product the perceived value Examine the information from a total business perspective determining how to deliver superior customer value and implementing actions to provide value to customers Understanding your competitive arena and competitors39 strengths and weaknesses is a critical component of a market orientation This includes assessing what existing or potential competitors might be intending to do tomorrow as well as what they are doing today i Focusing on customer wants and needs so that the organization can distinguish its products from competitors39 offerings ii Integrating all the organization39s activities including production to satisfy these wants iii Achieving long term goals for the organization by satisfying customer wants and needs legally and responsibly d Societal marketing orientation The idea that an organization exists not only to satisfy customer wants and needs and to meet organizational objectives but also to preserve or enhance individuals39 and society39s long term best interests Marketing products and containers that are less toxic than normal are more durable contain reusable materials or are made of recyclable materials is consistent with a societal marketing orientation 3 Relationship marketing A strategy that focuses on keeping and improving relationships with current customers Companies can expand market share in three ways attracting new customers increasing business with existing customers and retaining current customers Most successful relationship marketing strategies depend on customer oriented personnel a potential customer who is greeted discourteously may well assume that the employee39s attitude represents the whole firm effective training programs When employees make their customers happy the employees are more likely to derive satisfaction from their jobs employees with authority to make decisions and solve problems empowered employees manage themselves are more likely to work hard account for their own performance and the company39s and take prudent risks to build a stronger business and sustain the company39s success and teamwork job performance company performance product value and customer satisfaction all improve when people in the same department or work group begin supporting and assisting each other and emphasize cooperation instead of competition 4 Customer satisfaction Customers39 evaluation of a good or service in terms of whether it has met their needs and expectations Keeping current customers satisfied is just as important as attracting new ones and a lot less expensive One study showed that reducing customer attrition by just 5 to 10 percent could increase annual profits by as much as 75 percent Employees throughout the organization understand the link between their job and satisfied customers The culture of the organization is to focus on delighting customers rather than on selling products Chapter 2 1 Strategic planning The managerial process of creating and maintaining a fit between the organization39s objectives and resources and evolving market opportunities How do companies go about strategic marketing planning How do employees know how to implement the long term goals of the firm The answer is a marketing plan The goal of strategic planning is long run profitability and growth Strategic marketing management addresses two questions What is the organization39s main activity at a particular time How will it reach its goals a Planning The process of anticipating future events and determining strategies to achieve organizational objectives in the future b Marketing planning Designing activities relating to marketing objectives and the changing marketing environment Marketing planning is the basis for all marketing strategies and decisions c Marketing plan A written document that acts as a guidebook of marketing activities for the marketing manager A marketing plan provides the basis by which actual and expected performance can be compared The marketing plan allows the marketing manager to enter the marketplace with an awareness of possibilities and problems d Mission statement A statement of the firm39s business based on a careful analysis of benefits sought by present and potential customers and an analysis of existing and anticipated environmental conditions What business are we in and where are we headed A mission statement should focus on the market or markets the organization is attempting to serve rather than on the good or service offered 2 Marketing myopia Defining a business in terms of goods and services rather than in terms of the benefits that customers seek Myopia means narrow short term thinking 3 SWOTsituation analysis Identifying internal strengths S and weaknesses W and also examining external opportunities 0 and threats T When examining internal strengths and weaknesses the marketing manager should focus on organizational resources such as production costs marketing skills financial resources company or brand image employee capabilities and available technology When examining external opportunities and threats marketing managers must analyze aspects of the marketing environment through scanning a Environmental scanning Collection and interpretation of information about forces events and relationships in the external environment that may affect the future of the organization or the implementation of the marketing plan It helps identify market opportunities and threats and provides guidelines for the design of marketing strategy The six most often studied macroenvironmental forces are social demographic economic technological political and legal and competitive 4 Competitive advantage The set of unique features of a company and its products that are perceived by the target market as significant and superior to the competition There are three types of competitive advantages cost productservice differentiation and niche strategies a Cost leadership can result from obtaining inexpensive raw materials creating an efficient scale of plant operations designing products for ease of manufacture controlling overhead costs and avoiding marginal customers i Experience curves Curves that show costs declining at a predictable rate as experience with a product increases ii Efficient labor Labor costs can be an important component of total costs in low skill labor intensive industries such as product assembly and apparel manufacturing iii No frills goods and services Marketers can lower costs by removing frills and options from a product or service iv Government subsidies Governments may provide grants and interest free loans to target industries v Product design Cutting edge design technology can help offset high labor costs vi Reengineering Reengineering entails fundamental rethinking and redesign of business processes to achieve dramatic improvements in critical measures of performance vii Production innovations Production innovations such as new technology and simplified production techniques help lower the average cost of production viii New methods of service delivery Medical expenses have been substantially lowered by the use of outpatient surgery and walk in clinics b Productservice differentiation competitive advantage The provision of something that is unique and valuable to buyers beyond simply offering a lower price than the competition39s c Niche competitive advantage The advantage achieved when a firm seeks to target and effectively serve a small segment of the market D Sustainable competitive advantage An advantage that cannot be copied by the competition 5 Strategic alternatives that match products and markets a Market penetration A marketing strategy that tries to increase market share among existing customers b Market development A marketing strategy that entails attracting new customers to existing products New uses for old products stimulate additional sales among existing customers while also bringing in new buyers c Product development A marketing strategy that entails the creation of new products for current customers the process of converting applications for new technologies into marketable products d Diversification A strategy of increasing sales by introducing new products into new markets Example McDonald39s introduces line of children39s clothing 6 Marketing mix A unique blend of product place distribution promotion and pricing strategies designed to produce mutually satisfying exchanges with a target market a Product The heart of the marketing mix the starting point is the product offering and product strategy The product includes not only the physical unit but also its package warranty after sale service brand name company image value and many other factors b Place Place or distribution strategies are concerned with making products available when and where customers want them It involves all the business activities concerned with storing and transporting raw materials or finished products c Promotion Promotion includes advertising public relations sales promotion and personal selling Promotion39s role in the marketing mix is to bring about mutually satisfying exchanges with target markets by informing educating persuading and reminding them of the benefits of an organization or a product d Price Price is what a buyer must give up to obtain a product It is often the most flexible of the four marketing mix elements the quickest element to change Chapter 3 1 Corporate social responsibility A business39s concern for society39s welfare This concern is demonstrated by managers who consider both the long range best interests of the company and the company39s relationship to the society within which it operates a Sustainability The idea that socially responsible companies will outperform their peers by focusing on the world39s social problems and viewing them as opportunities to build profits and help the world at the same time b Pyramid of corporate social responsibility A model that suggests corporate social responsibility is composed of economic pursues profits legal obey the law ethical right just and fair and philanthropic good corporate citizen responsibilities and that the firm39s economic performance supports the entire structure 2 Target market A defined group most likely to buy a firm39s product a group of people or organizations for which an organization designs implements and maintains a marketing mix intended to meet the needs of that group resulting in mutually satisfying exchanges As markets mature some new consumers who may have different tastes needs incomes lifestyles and buying habits become part of the target market others drop out Although managers can control the marketing mix they cannot control elements in the external environment that continually mold and reshape the target market Unless marketing managers understand the external environment the firm cannot intelligently plan for the future Environmental Scanning Ch2 3 External Know thoroughly The factors within the external environment thatltgtenvironment are important to marketing managers can be classified as social demographic economic technological political and legal and competitive a Social change is perhaps the most difficult external variable for marketing managers to forecast influence or integrate into marketing plans Social factors include our attitudes values and lifestyles US consumers rank the characteristics of product quality as 1 reliability 2 durability 3 easy maintenance 4 ease of use 5 a trusted brand name and 6 a low price 1 Self sufficiency Every person should stand on his or her own two feet 2 Upward mobility Success would come to anyone who got an education worked hard and played by the rules 3 Work ethic Hard work dedication to family and frugality were moral and right 4 Conformity No one should expect to be treated differently from everybody else ii Component lifestyles The practice of choosing goods and services that meet one39s diverse needs and interests rather than conforming to a single traditional lifestyle iii Environmental management When a company implements strategies that attempt to shape the external environment within which it operates b Demography The study of people39s vital statistics such as their age race and ethnicity and location Demographic characteristics are strongly related to consumer buyer behavior in the marketplace America39s tweens today39s pre and early adolescents ages 8 to 14 a population 29 million strong Just because tweens get the business motive behind ads however doesn39t mean they are averse to them Generation X people born between 1965 and 1978 consists of 40 million consumers They are savvy and cynical consumers Gen X spending is quite diffuse food housing transportation Time is at a premium for harried Gen Xers so they39re outsourcing the tasks of daily life which include everything from domestic help to babysitting i Generation Y 1979 1994 60million Word of mouth 1 Impatient Gen Y has grown up in a world that39s always been automated and they39ve had access to computers CD ROMs the Internet DVD players chat rooms instant messaging and the like for as long as they can remember so it39s no surprise that they expect things to be done now 2 Family oriented Unlike Gen X before them overall Gen Yers had relatively stable childhoods They also grew up in a very family focused time when even big companies strived to become more family and kid friendly 3 Inquisitive Knowing more than their parents about computers and technology has always been a source of pride for the echo boomers They want to know why things happen how things work and what they can do next 4 Opinionated From the time they were children Gen Yers have been encouraged to share their opinions by their parents teachers and other authority figures 5 Diverse This is the most ethnically diverse generation the nation has ever seen and many don39t identify themselves as being only one race 6 Time managers Their entire lives have been scheduled from playgroups to soccer camp to Little League 7 quotStreet Smartquot The term isn39t used in the literal sense but simply means that these young people have seen a lot ii Baby boomers People born between 1946 and 1964 1 quotLooking for balancequot boomers About one quarter of boomers 27 percent fall into this very active and busy segment They represent an excellent market for companies that can offer them time saving products and services 2 quotConfident and living wellquot boomers Confident and living well boomers represent 23 percent of all boomers They have the highest incomes of all the segments and relish the chance to be the first to purchase a new product or service Technology Trendy Travel 3 At easequot boomers At ease boomers represent 31 percent of all boomers They are at peace with themselves and do not worry about the future job security or financial security Home oriented 4 quotOverwhelmedquot boomers As the smallest segment of the boomer population overwhelmed boomers represent less than 20 percent of boomers This group has the lowest income of all the segments Worriers iii Multiculturalism occurs when all major ethnic groups in an area such as a city county or census tract are roughly equally represented c Economic areas of greatest concern to most marketers are consumers39 incomes inflation and recession Education is the primary determinant of a person39s earning potential Another trend in consumers39 income is the growing financial power of women in the United States Women bring in half or more of the income in the majority of US households and women control 513 percent of the private wealth in the United States Women also control most of the spending in US households about 80 percent i Purchasing power A comparison of income versus the relative cost of a set standard of goods and services in different geographic areas ii Inflation A measure of the decrease in the value of money expressed as the percentage reduction in value since the previous year In times of low inflation businesses seeking to increase their profit margins can do so only by increasing their efficiency In creating marketing strategies to cope with inflation managers must realize that regardless of what happens to the seller39s cost the buyer is not going to pay more for a product than the subjective value he or she places on it iii Recession A period of economic activity characterized by negative growth which reduces demand for goods and services d Technology is an effective weapon against inflation and recession New machines that reduce production costs can be one of a firm39s most valuable assets i Basic research Pure research that aims to confirm an existing theory or to learn more about a concept or phenomenon ii Applied research An attempt to develop new or improved products e Political and Legal Factors There are laws and regulations that control what businesses and organizations can and can not due These are put in place to protect the consumer public f Competition Management has little control over the competitive environment confronting a firm As US population growth slows costs rise and available resources tighten firms find that they must work harder to maintain their profits and market share regardless of the form of the competitive market i Highly competitive can only increase market share by taking it from a competitor ii Mature industries slow no growth Chapter 4 1 Global marketing Marketing that targets markets throughout the world US managers must develop a global vision not only to recognize and react to international marketing opportunities but also to remain competitive at home Global marketing is defined as individuals and organizations using a global vision to effectively market goods and services across national boundaries Product development costs are rising the life of products is getting shorter and new technology is spreading around the world faster than ever Adopting a global vision can be very lucrative for a company Globalization expands economic freedom spurs competition and raises the productivity and living standards of people in countries that open themselves to the global marketplace You must consider their culture economic and technological development political structure and actions demographic makeup and natural resources Language is another important aspect of culture Making successful sales presentations abroad requires a thorough understanding of the country39s culture a Global vision Recognizing and reacting to international marketing opportunities using effective global marketing strategies and being aware of threats from foreign competitors in all markets 2 Multinational corporation A company that is heavily engaged in international trade beyond exporting and importing Multinational corporations move resources goods services and skills across national boundaries without regard to the country in which the headquarters is located Multinationals often develop their global business in stages In the first stage companies operate in one country and sell into others Second stage multinationals set up foreign subsidiaries to handle sales in one country In the third stage they operate an entire line of business in another country The fourth stage has evolved primarily due to the Internet and involves mostly high tech companies Multinationals39 ability to tap financial physical and human resources from all over the world and combine them economically and profitably can be of benefit to any country a Capital intensive Using more capital than labor in the production process 3 Global marketing standardization Production of uniform products that can be sold the same way all over the world They use a strategy of providing different product features packaging advertising and so on Communication and technology have made the world smaller so that almost all consumers everywhere want all the things they have heard about seen or experienced 4 Global marketplace entry strategies A company should consider entering the global marketplace only after its management has a solid grasp of the global environment Some relevant questions are quotWhat are our options in selling abroadquot quotHow difficult is global marketingquot and quotWhat are the potential risks and returnsquot Managers may feel that international sales will result in higher profit margins or more added on profits A second stimulus is that a firm may have a unique product or technological advantage not available to other international competitors Many firms form multinational partnerships called strategic alliances to assist them in penetrating global markets Five other methods of entering the global marketplace are in order of least to most risky are exporting licensing and franchising contract manufacturing the joint venture and direct investment Economies of scale mean that average per unit production costs fall as output is increased One strategy is to use one product and one promotion message worldwide A second strategy is to create new products for global markets A third strategy is to keep the product basically the same but alter the promotional message A fourth strategy is to slightly alter the product to meet local conditions Chapter 5 1 Consumer behavior Processes a consumer uses to make purchase decisions as well as to use and dispose of purchased goods or services also includes factors that influence purchase decisions and product use If the firm cannot change the design in the short run it can use promotion in an effort to change consumers39 decision making criteria 2 Consumer decision making process A five step process used by consumers when buying goods or services 1 Need recognition 2 information search 3 evaluation of alternatives 4 purchase and 5 postpurchase behavior Consumers39 decisions do not always proceed in order through all of these steps In fact the consumer may end the process at any time or may not even make a purchase a Need recognition Result of an imbalance between actual and desired states It is caused by an internal or external stimulus i Want Recognition of an unfulfilled need and a product that will satisfy it Ie you need furniture you want new furniture ii Stimulus Any unit of input affecting one or more of the five senses sight smell taste touch hearing External stimuli are influences from an outside source ie suggestions Internal stimuli are occurrences you experience such as hunger or thirst b Information search internally externally or both The extent to which an individual conducts an external search depends on his or her perceived risk knowledge prior experience and level of interest in the good or service i Internal information search The process of recalling past information stored in the memory Stored information stems largely from previous experience with a product ii External information search The process of seeking information in the outside environment 1 Nonmarketing controlled information source A product information source that is not associated with advertising or promotion Personal experiences trying or observing a new product personal sources family friends acquaintances and coworkers who may recommend a product or service and public sources such as Underwriters Laboratories Consumer Reports and other rating organizations 2 Marketing controlled information source A product information source that originates with marketers promoting the product Mass media advertising radio newspaper television and magazine advertising sales promotion contests displays premiums and so forth salespeople product labels and packaging and the Internet iii Evaluation of alternatives 1 Evoked set consideration set A group of brands resulting from an information search from which a buyer can choose One way to begin narrowing the number of choices in the evoked set is to pick a product attribute and then exclude all products in the set that don39t have that attribute Another way to narrow the number of choices is to use cutoffs Cutoffs are either minimum or maximum levels of an attribute that an alternative must pass to be considered A final way to narrow the choices is to rank the attributes under consideration in order of importance and evaluate the products based on how well each performs on the most important attributes The goal of the marketing manager is to determine which attributes have the most influence on a consumer39s choice A brand name can also have a significant impact on a consumer39s ultimate choice iv Post purchase behavior Consumers expect certain outcomes from the purchase How well these expectations are met determines whether the consumer is satisfied or dissatisfied with the purchase Price often influences the level of expectations for a product or service 1 Cognitive dissonance Inner tension that a consumer experiences after recognizing an inconsistency between behavior and values or opinions Consumers try to reduce dissonance by justifying their decision They may seek new information that reinforces positive ideas about the purchase avoid information that contradicts their decision or revoke the original decision by returning the product In some instances people deliberately seek contrary information in order to refute it and reduce dissonance Dissatisfied customers sometimes rely on word of mouth to reduce cognitive dissonance by letting friends and family know they are displeased Postpurchase letters sent by manufacturers and dissonance reducing statements in instruction booklets may help customers feel at ease with their purchase Advertising that displays the product39s superiority over competing brands or guarantees can also help relieve the possible dissonance of someone who has already bought the product 3 Social influences on consumer buying decisions a Reference group A group in society that influences an individual39s purchasing behavior For marketers reference groups have three important implications 1 they serve as information sources and influence perceptions 2 they affect an individual39s aspiration levels and 3 their norms either constrain or stimulate consumer behavior Direct reference groups are face to face membership groups that touch people39s lives directly i Primary membership group A reference group with which people interact regularly in an informal face to face manner such as family friends or fellow employees ii Secondary membership group A reference group with which people associate less consistently and more formally than a primary membership group such as a club professional group or religious group Consumers also are influenced by many indirect nonmembership reference groups they do not belong to iii Aspirational reference group A group that someone would like to join A person must at least conform to the norms of that group iv Nonaspirational reference group A group with which an individual does not want to associate Dissociative groups influence our behavior when we try to maintain distance from them A consumer may avoid buying some types of clothing or car going to certain restaurants or stores or even buying a home in a certain neighborhood in order to avoid being associated with a particular group b Opiniongroup leader An individual who influences the opinions of others They are typically self indulgent making them more likely to explore unproven but intriguing products and services Technology companies have found that teenagers because of their willingness to experiment are key opinion leaders for the success of new technologies c Family is the most important social institution for many consumers strongly influencing values attitudes self concept and buying behavior Initiators kids suggest initiate or plant the seed for the purchase process Influencers parents are those members of the family whose opinions are valued Decision maker is the family member who actually makes the decision to buy or not to buy Purchaser probably Dad or Mom is the one who actually exchanges money for the product Consumer is the actual user Children can have great influence over the purchase decisions of their parents In many families with both parents working and short on time children are encouraged to participate i Socialization process How cultural values and norms are passed down to children 4 Individual influences on consumer buying decisions Influence from personal characteristics that are unique to each individual such as gender age and life cycle stage and personality self concept and lifestyle a Gender Physiological differences between men and women result in different needs such as health and beauty products Just as important are the distinct cultural social and economic roles played by men and women and the effects that these have on their decision making processes Men desire simple shopping experiences stores with less variety and convenience Men are more interested than women in stores that are easy to shop in are near home or office or have knowledgeable personnel As women around the world are working and earning more many industries are attracting new customers by marketing to women Women s decision making tends to be multi minded and integrative meaning that they consider and move back and forth among many criteria as opposed to being single minded and focused They tend to view shopping as a learning process educating themselves on the available options and typically adding criteria as they learn more b Age and life cycle stage How old a consumer is generally indicates what products he or she may be interested in purchasing Consumer tastes in food clothing cars furniture and recreation are often age related Family life cycle is an orderly series of stages through which consumers39 attitudes and behavioral tendencies evolve through maturity experience and changing income and status Marketers often define their target markets in terms of family life cycle such as quotyoung singles young married with childrenquot and quotmiddle aged married without childrenquot c Personality A way of organizing and grouping the consistencies of an individual39s reactions to situations Personality combines psychological makeup and environmental forces It includes people39s underlying dispositions especially their most dominant characteristics Although personality is one of the least useful concepts in the study of consumer behavior some marketers believe that personality influences the types and brands of products purchased d Self conceptperception How consumers perceive themselves in terms of attitudes perceptions beliefs and self evaluations Through self concept people define their identity which in turn provides for consistent and coherent behavior Self concept combines the ideal self image the way an individual would like to be and the real self image how an individual actually perceives himself or herself Generally we try to raise our real self image toward our ideal or at least narrow the gap By influencing the degree to which consumers perceive a good or service to be self relevant marketers can affect consumers39 motivation to learn about shop for and buy a certain brand i Psychographics is the analytical technique used to examine consumer lifestyles and to categorize consumers Unlike personality characteristics which are hard to describe and measure lifestyle characteristics are useful in segmenting and targeting consumers Lifestyle and psychographic analysis explicitly addresses the way consumers outwardly express their inner selves in their social and cultural environment 5 Psychological influences on CB decisions An individual39s buying decisions are further influenced by psychological factors perception motivation learning and beliefs and attitudes These factors are what consumers use to interact with their world They are the tools consumers use to recognize their feelings gather and analyze information formulate thoughts and opinions and take action Unlike the other three influences on consumer behavior psychological influences can be affected by a person39s environment because they are applied on specific occasions Which stimuli will be perceived often depends on the individual People can be exposed to the same stimuli under identical conditions but perceive them very differently Marketing managers are also interested in the threshold level of perception the minimum difference in a stimulus that the consumer will notice This concept is sometimes referred to as the quotjust noticeable differencequot a Perception The processes by which people select organize and interpret stimuli into a meaningful and coherent picture The familiarity of an object contrast movement intensity such as increased volume and smell are cues that influence perception Consumers use these cues to identify and define products and brands b Selective exposure The process whereby a consumer notices certain stimuli and ignores others c Selective distortion A process whereby a consumer changes or distorts information that conflicts with his or her feelings or beliefs d Selective retention A process whereby a consumer remembers only that information that supports his or her personal beliefs e Motive A driving force that causes a person to take action to satisfy specific needs f Maslow39s hierarchy of needs A method of classifying human needs and motivations into five categories in ascending order of importance physiological safety social esteem and self actualization g Learning A process that creates changes in behavior immediate or expected through experience and practice i Experiential learning occurs when an experience changes your behavior ii Conceptual learning which is not acquired through direct experience is the second type of learning If you know you do not like carrots and see a new carrot drink then you know you won t like it without ever trying it iii Stimulus generalization A form of learning that occurs when one response is extended to a second stimulus similar to the first iv Stimulus discrimination A learned ability to differentiate among similar products product differentiation h Belief An organized pattern of knowledge that an individual holds as true about his or her world Consumers tend to develop a set of beliefs about a product39s attributes and then through these beliefs form a brand image a set of beliefs about a particular brand In turn the brand image shapes consumers39 attitudes toward the product The first technique is to turn neutral or negative beliefs about product attributes into positive ones The second approach to modifying attitudes is to change the relative importance of beliefs about an attribute The third approach to transforming attitudes is to add new beliefs i Attitude A learned tendency to respond consistently toward a given object Attitudes rest on an individual39s value system which represents personal standards of good and bad right and wrong and so forth therefore attitudes tend to be more enduring and complex than beliefs Chapter 6 1 Strategic alliance strategic partnership A cooperative agreement between business firms Strategic alliances can take the form of licensing or distribution agreements joint ventures research and development consortia and partnerships They may be between different manufacturers manufacturers and customers manufacturers and suppliers and manufacturers and channel intermediaries Business marketers form strategic alliances to leverage what they have technology financial resources access to markets by combining these assets with those of other firms Some alliances are formed with competitors to achieve increased productivity and lower costs for all participants Other alliances are formed between companies that operate in completely different industries When one company experiences increased demand for its products and services it can call on its partner39s employees rather than add staff or use a temporary agency a Relationship commitment A firm39s belief that an ongoing relationship with another firm is so important that the relationship warrants maximum efforts at maintaining it indefinitely b Trust The condition that exists when one party has confidence in an exchange partner39s reliability and integrity Exchange between firms is based on personal relationships that are developed through what is called amae or indulgent dependency Amae is the feeling of nurturing concern for and dependence on another Reciprocity and personal relationships contribute to amae 2 Segments of the business market The business market consists of four major categories of customers producers resellers governments and institutions a Producer segment of the business market includes profit oriented individuals and organizations that use purchased goods and services to produce other products to incorporate into other products or to facilitate the daily operations of the organization i Original equipment manufacturers OEMs Individuals and organizations that buy business goods and incorporate them into the products that they produce for eventual sale to other producers or to consumers b Resellers reseller market includes retail and wholesale businesses that buy finished goods and resell them for a profit A retailer sells mainly to final consumers wholesalers sell mostly to retailers and other organizational customers Business product distributors are wholesalers that buy business products and resell them to business customers They often carry thousands of items in stock and employ sales forces to call on business customers c Governments Government organizations include thousands of federal state and local buying units They make up what may be the largest single market for goods and services in the world Interested vendors submit bids usually sealed to provide specified products during a particular time Sometimes the lowest bidder is awarded the contract When the lowest bidder is not awarded the contract strong evidence must be presented to justify the decision Grounds for rejecting the lowest bid include lack of experience inadequate financing or poor past performance Bidding allows all potential suppliers a fair chance at winning government contracts and helps ensure that public funds are spent wisely The federal government is a combination of several large companies with overlapping responsibilities and thousands of small independent units Selling to states counties and cities can be less frustrating for both small and large vendors than selling to the federal government Paperwork is typically simpler and more manageable than it is at the federal level d Institutions Institutions seek to achieve goals other than the standard business goals of profit market share and return on investment This segment includes schools hospitals colleges and universities churches labor unions fraternal organizations civic clubs foundations and other so called nonbusiness organizations 3 Derived demand The demand for business products Unlike consumer demand business demand is derived inelastic joint and fluctuating a Because demand is derived business marketers must carefully monitor demand patterns and changing preferences in final consumer markets even though their customers are not in those markets Moreover business marketers must carefully monitor their customers39 forecasts because derived demand is based on expectations of future demand for those customers39 products b Inelastic demand means that an increase or decrease in the price of the product will not significantly affect demand for the product The price of a product used in the production of or as part of a final product is often a minor portion of the final product39s total price Therefore demand for the final consumer product is not affected c Joint demand The demand for two or more items used together in a final product Sales of the two products are directly linked d Fluctuating demand i Multiplier effect accelerator principle Phenomenon in which a small increase or decrease in consumer demand can produce a much larger change in demand for the facilities and equipment needed to make the consumer product 4 Productsservices Business products generally fall into one of the following seven categories depending on their use major equipment accessory equipment raw materials component parts processed materials supplies and business services a Major equipment installationsCapital goods such as large or expensive machines mainframe computers blast furnaces generators airplanes and buildings Major equipment is depreciated over time rather than charged as an expense in the year it is purchased Personal selling is an important part of the marketing strategy for major equipment because distribution channels are almost always direct from the producer to the business user b Accessory equipment Goods such as portable tools and office equipment that are less expensive and shorter lived than major equipment Accessory equipment is often charged as an expense in the year it is bought rather than depreciated over its useful life In contrast to major equipment accessories are more often standardized and are usually bought by more customers c Raw materials Unprocessed extractive or agricultural products such as mineral ore lumber wheat corn fruits vegetables and fish Because there is often a large number of relatively small sellers of raw materials none can greatly influence price or supply Thus the market tends to set the price of raw materials and individual producers have little pricing flexibility Promotion is almost always via personal selling and distribution channels are usually direct from producer to business user d Component parts Either finished items ready for assembly or products that need very little processing before becoming part of some other product A special feature of component parts is that they can retain their identity after becoming part of the final product Moreover because component parts often wear out they may need to be replaced several times during the life of the final product Thus there are two important markets for many component parts the original equipment manufacturer OEM market and the replacement market The difference between unit costs and selling prices in the OEM market is often small but profits can be substantial because of volume buying e Processed materials Products used directly in manufacturing other products Unlike raw materials they have had some processing Examples include sheet metal chemicals specialty steel lumber corn syrup and plastics Unlike component parts processed materials do not retain their identity in final products Most processed materials are marketed to OEMs or to distributors servicing the OEM market f Supplies Consumable items that do not become part of the final product Supplies are normally standardized items that purchasing agents routinely buy lubricants paper towels Supplies typically have relatively short lives and are inexpensive compared to other business goods g Business services Expense items that do not become part of a final product Businesses often retain outside providers to perform janitorial advertising legal management consulting marketing research maintenance and other services
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