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Lecture 13

GEB 4455 Lecture 13: ch 14 learnsmart

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Florida State University
GEB 4455
William A Christiansen

Ch 14 The best way for companies to compete today is to design and promote better products, meaning products that customers perceive to have the best value—good quality at a fair 1 price. When consumers calculate the value of a product, they look at the benefits and then subtract the cost (price) to see whether the benefits exceed the costs, including the cost of driving to the store (or shipping fees if they buy the product online). We’re sure you’ve noticed menu changes at other local fast-food restaurants over time. That’s because marketers have learned that adapting products to new competition and new markets is an ongoing need. An organization can’t do a one-time survey of consumer wants and needs, design a group of products to meet those needs, put them in the stores, and then just relax. It must constantly monitor changing consumer wants and needs, and adapt products, policies, and services accordingly. Developing a total Product Offer From a strategic marketing viewpoint, a product is more than just the physical good or service. A total product offerconsists of everything consumers evaluate when deciding whether to buy something. When people buy a product, they may 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). A successful marketer must begin to think like a consumer and evaluate the total product Page 391offer as a collection of impressions created by all the factors listed in Figure 14.1 Companies usually don’t sell just one product. A product line is a group of items that are physically alike or intended for a similar market. They usually face similar competition. Some organizations produce multiple product lines All of P&G’s product lines make up its product mix, the combination of product lines offered by a manufacturer. Product differentiation is the creation of real or perceived product differences. Actual product differences are sometimes quite small, so marketers must use a creative mix of branding, pricing, advertising, and packaging (value enhancers) to create a unique, attractive image. In order to be considered successful, packages must perform the following functions: 1. Attract the buyer’s attention. 2. Protect the goods inside, stand up under handling and storage, be tamperproof, and deter theft. 3. Be easy to open and use. 4. Describe and give information about the contents. 5. Explain the benefits of the good inside. 6. Provide information on warranties, warnings, and other consumer matters. 7. Give some indication of price, value, and uses. Today, packaging carries more of the promotional burden than in the past. Many products once sold by salespersons are now sold in self-service outlets, and the package has acquired more sales responsibility. The Fair Packaging and Labeling Act was passed to give consumers much more quantity and value information on product packaging. Packaging may make use of a strategy called bundling, which combines goods and/or services for a single price. Virgin Airlines has bundled door-to-door limousine service and in-flight massages in its total product offer. Financial institutions are offering everything from financial advice to help in purchasing insurance, stocks, bonds, mutual funds, and more. A brand is a 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. The word brand includes practically all means of identifying a product. Brand names give products a distinction that tends to make them attractive to consumers. For the buyer, a brand name ensures quality, reduces search time, and adds prestige to purchases. For the seller, brand names facilitate new-product introductions, help promotional efforts, add to repeat purchases, and differentiate products so that prices can be set higher. A trademark is a brand that has exclusive legal protection for both its brand name and its design. Trademarks like McDonald’s golden arches are widely recognized and help represent the company’s reputation and image. McDonald’s might sue to prevent a company from selling, say, “McDonnel” hamburgers. Brand equity is the value of the brand name and associated symbols. Usually, a company cannot know the value of its brand until it is sold to another company. The core of brand equity is brand loyalty, the degree to which customers are satisfied, like the brand, and are committed to further purchases. A loyal group of customers represents substantial value to a firm, and that value can be calculated. One way manufacturers are trying to create more brand loyalty is by lowering the carbon footprint of their products. Brand awareness refers to how quickly or easily a given brand name comes to mind when someone mentions a product category. Advertising helps build strong brand awareness. A brand manager (known as a product manager in some firms) has direct responsibility for one brand or product line, and manages all the elements of its marketing mix: product, price, place, and promotion. Thus, you might think of the brand manager as the president of a one-product firm. Once a product has been developed and tested, it goes to market. There it may pass through a product life cycle of four stages: introduction, growth, maturity, and decline (see Figure 14.2). This cycle is a theoretical model of what happens to sales and profits for a product class over time. However, not all individual products follow the life cycle, and particular brands may act differently. For example, while frozen foods as a generic class may go through the entire cycle, one brand may never get beyond the introduction stage. Some product classes, such as microwave ovens, stay in the introductory stage for years. Others, like ketchup, become classics and never experience decline. Fad products (think Beanie Babies and mood rings) may go through the entire cycle in a few months. Still others may be withdrawn from the market altogether. Nonetheless, the product life cycle may provide some basis for anticipating future market developments and for planning marketing strategies. . It’s extremely important for marketers to recognize what stage a product is in so that they can make intelligent and efficient marketing decisions about it. firm may have several pricing objectives over time, and it must formulate these objectives clearly before developing an overall pricing strategy. Popular objectives include the following: 1. Achieving a target return on investment or profit. Ultimately, the goal of marketing is to make a profit by providing goods and services to others. Naturally, one long-run pricing objective of almost all firms is to optimize profit. Some companies try to increase their profits by reducing the packaged Page 399amount of a product while keeping prices the same. Have you noticed this happening to products you buy like cereal or tissues? 2. Building traffic. Supermarkets often advertise certain products at or below cost to attract people to the store. These products are called loss leaders. The long-run objective is to make profits by following the short-run objective of building a customer base. 3. Achieving greater market share. One way to capture a larger part of the market is to offer lower prices, low finance rates (like 0 percent financing), low lease rates, or rebates. 4. Creating an image. Certain watches, perfumes, and other socially visible products are priced high to give them an image of exclusivity and status. 5. Furthering social objectives. A firm may want to price a product low so people with little money can afford it. The government often subsidizes the price of farm products to keep basic necessities like milk and bread affordable. Intuition tells us the price charged for a product must bear some relationship to the cost of producing it. Prices usually are set somewhere above cost. But as we’ll see, price and cost aren’t always related. In fact, there are three major approaches to pricing strategy: cost-based, demand-based (target costing), and competition-based. Cost-Based Pricing Producers often use cost as a primary basis for setting price. They develop elaborate cost accounting systems to measure production costs (including materials, labor, and overhead), add in a margin of profit, and come up with a price. Demand-Based Pricing Unlike cost-based pricing, target costing is demand based. That means we design a product so it not only satisfies customers but also meets the profit margins we set. Target costing makes the final price an input to the product development process, not an outcome of it. You first estimate the selling price people would be willing to pay for a product and then subtract your desired profit margin. The result is your target cost of production, or what you can spend to profitably produce the item. Competition-Based Pricing Competition-based pricing is a strategy based on what all the other competitors are doing. The price can be at, above, or below Page 400 competitors’ prices. Pricing depends on customer loyalty, perceived differences, and the competitive climate. Price leadership is the strategy by which one or more dominant firms set pricing practices all competitors in an industry follow. You may have noticed that practice among oil companies and some fast-food companies. 8 Break-even analysis is the process used to determine profitability at various levels of sales.The break-even point is the point where revenues from sales equal all costs. The formula for calculating the break-even point is as follows: Break-even point (BEP)=Total fixed costs (FC)/Price of one unit (P)- Variable costs (VC) of one unit Total fixed costs are all the expenses that remain the same no matter how many products are made or sold. Among the expenses that make up fixed costs are the amount paid to own or rent a factory or warehouse and the amount paid for business insurance. Variable costs change according to the level of production. Included are the expenses for the materials used in making products and the direct costs of labor used in making those goods. A skimming price strategy prices a new product high to recover research and development costs and make as much profit as possible while there’s little competition. Of course, those large profits will eventually attract new competitors. A second strategy is to price the new products low. Low prices will attract more buyers and discourage other companies from making similar products because profits are slim. This penetration strategy enables the firm to penetrate or capture a large share of the market quickly. 9 Retailers use several pricing strategies. Everyday low pricing (EDLP) is the choice of Home Depot and Walmart. They set prices lower than competitors and don’t usually have special sales. The idea is to bring consumers to the store whenever they want a bargain rather than having them wait until there is a sale. Department stores and some other retailers most often use a high–low pricing strategy. Regular prices are higher than at stores using EDLP, but during special sales they’re lower. The problem with such pricing is that it encourages consumers to wait for sales, thus cutting into profits. As online shopping continues to grow, you may see fewer stores with a high–low strategy because consumers will be able to find better prices online Psychological pricing means pricing goods and services at price points that make the product appear less expensive than it is. Recognizing that different consumers may be willing to pay different prices, marketers
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