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Lecture 5

AFM 131 Lecture 5: Managing the Marketing Mix – Product, Price, Place, and Promotion Notes

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Accounting & Financial Management
AFM 131
David H A

1 Managing the Marketing Mix – Product, Price, Place, and Promotion Product Development and the Total Product Offer: • Customers buy products that they perceive to have the best value • Value – good quality at a fair price • Customers calculate the value of a product by seeing whether the benefits exceed the cost • Marketers must constantly monitor changing customer wants and needs, and adapt products, services, and policies accordingly Developing a Total Product Offer: • Total Product Offer or a Value Package – consists of everything that customers evaluate when deciding whether to buy something • When people buy a product, they evaluate and compare total product offers on many dimensions • Some are tangible (the product itself and its package), others are intangible (the producer’s reputation and the image created by advertising) • It is wise for marketers to talk with customers to learn with features and benefits are most important to them and what value enhancers that they want or removed in the final offering • Organizations might use low prices for an attractive total product offer Product Lines and the Product Mix: • Product Line – Group of products that are physically similar or intended for a similar market • Product Mix – the combination of product lines offered by an organization Product Differentiation: • Product Differentiation – creation of real or perceived product differences • Actual product differences are quite small, marketers use a creative mix of branding, pricing, advertising, and packaging (value enhancers) to create a unique, attractive image. • Ex. Companies had success by using the term “organic” in their promotions Packaging Changes the Product: • Companies have used packaging to change and improve their basic products. • Packaging must perform the following functions: o Attract the buyer’s attention o Protect the goods inside, stand up to handling and storage, be tamperproof, and deter theft o Be easy to open and use o Describe and give information about the contents o Explain the benefits of the core product inside 2 o Provide information on warranties, warnings, and other customer matters o Give some indication of price, values, and use • Universal Product Codes (UPCs) on packages help stores control inventory • UPCs combine a bar code and a preset number that gives retailer information about the product’s price, size, colour, and other attributes • New packaging technology for tracking products is the radio frequency identification (RFID) chip, especially the ones made with nanoparticle powder. • When attached to a product, the chip sends out signals telling a company where the product is at all times • RFID chips carry more information than bar codes, do not have to be read one at a time and can be read at a distance • Bundling – combination of goods and services in a package for a single price • Marketers must be sure when combining services or goods into one package that they don’t include too much that their price gets too high Branding: • Brand – Name, Symbol, or Design (or combination thereof) that identifies the goods or services of one seller or group of sellers, and distinguishes them from the goods and services of competitors • For the buyer, brand name assures quality, reduces search time, and adds prestige to purchases • For the seller, brand names facilitate new-product introductions, support promotional efforts, add to repeat purchases, and differentiates products so that prices can be set higher Generating Brand Equity and Loyalty: • Brand Equity – value of brand name and associated symbols • Companies used to boost short-term performance by offering coupons and price discounts to move goods quickly • However, this eroded customers’ commitment to brand names and now companies are trying harder to measure the earning power of strong brand names • Brand Loyalty – the degree to which customers are satisfied, enjoy the brand, and are committed to further purchases • Manufacturers trying to create more brand loyalty by lowering the carbon footprints of their products Brand Management: • Brand Manager or Product Manager – has direct responsibility for one brand or product line and manages all the elements of the marketing mix (product, price, place, promotion) through the life cycle of each product or service • Position created to have greater control over new-product developed and product promotion 3 • Some companies have brand management teams to bolster the overall effort The Product Life Cycle: • Four stages: Introduction, Growth, Maturity, and Decline • Product Life Cycle is a theoretical model of what happens to sales and profits for a product class over time • Provides some basis for anticipating future market developments and for planning marketing strategies Example of Product Life Cycle: • Product Life Cycle give marketers valuable clues to successfully promoting a product over time • Import for marketers to recognize what stage a product is in so that they can make intelligent and efficient marketing decisions about it. Using the Product Life Cycle: • Pricing Objectives: • Achieving a target return on investment or profit • Building traffic o Loss Leaders – Advertising certain products at or below cost to attract people to the store o Long-run objective of profit with a short-run objective of a customer base • Achieving greater market share o One way to capture larger part of the market to offer lower prices, low finance rates (like 0 percent financing), low leases rates, or rebates • Creating an image o Certain watches, perfumes, and other socially visible products are priced high to give them an image of exclusivity and status • Furthering social objectives o Firm might may want to price a product low so that people with little money can afford it. The government often subsidizes the price of farm products to keep basic necessities affordable Cost-Based Pricing: • Producers use cost as a primary basis for setting a price • Cost elaborates production costs (including materials, labour, and overhead) and add in a margin of profit • Question is whether price is satisfactory to the market as well • Pricing should also include expected costs of product updates, the marketing objectives for each product, and competitors’ prices. 4 • In the long-run the market determines the price will be not the producer Demand-Based Pricing: • Target Costing – design a product so it not only satisfies customers but also meets profit margins we have set. • Target costing makes the final price an input to the product development process not an outcome • You estimate the selling price people would be willing to pay for a product and then subtract your desired profit margin. This is your target cost, or what you spend to profitably produce the item Competition-Based Pricing: • Competition-Based Pricing – strategy based on what all the other competitors are doing. Price can be at, above, or below competitors’ prices • Pricing depends on customer loyalty, perceived differences, and the competitive climate • Price Leadership – strategy by which one or more dominant firms set pricing practices that all competitors in an industry then follow Break-Even Analysis: • Break-Even Analysis – process used to determine profitability at various levels of sales • Break-Even Point – point where revenue from sales equals all costs Total Fixed Cost (FC) • Break-Even Point (BEP) = Priceof one unit (P)-Variable Cost (VC) of one unit • Total Fixed Costs – all expenses that remain the same no matter how many products are made or sold. Expenses include amount paid to own or rent a factory or warehouse and the amount paid for business insurance • Variable Costs – Change according to level of production and includes the expenses for the materials used in making products and the direct costs of labour used to make these products Pricing Strategies for New Products: • Skimming Price – Pricing a new product high to
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