Marketing Textbook Notes—Final Exam.docx

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Management and Organizational Studies
Management and Organizational Studies 2320A/B
Kevin Thompson

Marketing Textbook Notes—Final Exam Chapter Eight: Developing New Products Why Do Firms Create New Products?  New market offerings provide value to both firms and customers, the degree to which they do this depends on how new they really are  Completely new-to-the market products represent fewer than 10% of all new product introductions  Innovation: the process by which ideas are transformed into new products and services that will help firms grow  Some estimates indicate that only 3 percent of new products actually succeed—overriding long-term reasons compel firms to introduce new products and services Changing customers needs  When they add new products to their offerings, firms can create and deliver value more effectively by satisfying the changing needs of their current and new customers or simply by keeping customers from getting bored with the current product/service offering  Sometimes companies can identify problems and develop products that customers never knew they needed (ex: basic car wash, a wash and polish, undercarriage wash)  The firms take a well-known offering and innovate to make it more interesting Market saturation  The longer a product exists in the marketplace, the more likely it is that the market will become saturated  Without new products or services, the value of the firm will ultimately decline Managing risk through diversity  Firms often create a broader portfolio of products, which helps them diversify their risk and enhance firm value better than a single product can  Firms with multiple products are better able to withstand external shocks, including changes in consumer preferences or intensive competitive activity Fashion cycles  In industries that rely on fashion and experience short product life cycles, most sales come from new products  These include apparel, arts, books and software Innovation and value  New product introductions especially new to the world products that create new markets, can add a lot of value to firms  Pioneers: aka breakthrough or disruptive because they establish a completely new market or radically change both the rules of competition and consumer preferences in a market o Generally require a higher level of learning from consumers and offer much more benefits than predecessor products  Pioneers have the advantage of being first movers: as the first to create the market or product category, they become readily recognizable to consumers and this establish a commanding and early market share lead  Studies have found that market pioneers can command a greater market share over a longer period of time that later entrants can  In many cases, imitators capitalize on the weaknesses of pioneers and gain advantage in the market  They pave the way for followers, which can spend less marketing effort creating demand for the product category and instead focus directly on creating demand for the specific brand often has a less sophisticated design and may be priced higher leaving room for better and lower prices competition  The majority of new products are fails, as many as 95% of all consumer goods fail, most common reasons; o (1)They offer consumers too few benefits compared to existing products (2) they are too complex or require substantial learning and effort before consumer can use them (3) bad timing, introduced at a time when consumers are not ready for such new products or services Adoption of Innovation  Diffusion of innovation: the process by which the use of an innovation, whether a product or a service, spreads throughout a market group over time and over various categories of adopters  Helps marketers understand the rate at which consumers are likely to adopt a new product or service  A means to identify potential markets for their new products or services and predict their potential sales, even before they introduce the innovators  The number of users of an innovative product/service spreads through the population over time and generally follows a bell-shaped curve, a few people buy at first, then increasingly more, and finally fewer buy as the degree of the diffusion slows  Purchasers can be divided into 5 groups according to how soon they buy the product after its has been introduced Innovators:  Those buyers who want to be the first on the block to have the new product/service  They enjoy taking risks and are highly knowledgeable and are not price sensitive  Firms that invest in the latest technology, either to use in their products or services or to make the firm more efficient, also are considered innovators  Keep themselves very well informed about the product category, represent only 2.5% of total market  Crucial to the success of any new product or service, help the product gain market acceptance Early adopters:  Generally don’t like to take as much risk as innovators but instead wait and purchase the product after careful review  Enjoy novelty and often are regarded as the opinion leaders for particular product categories, waits for the review first  Represent about 13.5%, spread the word to the next big groups, crucial for bringing the other three categories to the market, if the early adopters is relatively small, the number of people who ultimately adopt the innovation likely will also be small Early majority:  About 34% of the population, crucial because few new products and services can be profitable until this large group buys them  If the group never becomes large enough, the product/service typically fails  Don’t like to take as much risk, tend to wait until the bugs are worked out  Experience little risk, when they enter the market, the number of competitors in the marketplace usually also has reached its peak, so these buyers have many different price and quality choices Late majority:  At 34%, they are the last group of buyers to enter a new market  The product has achieved its full market potential  By the time they enter, sales tend to level off or may be in decline Laggards:  Make up roughly 16% of the market, avoid change and rely on traditional products until they are no longer available, may never adopt a certain product/service, very few companies market to them Using the Adoption Cycle  Using the diffusion of innovation theory or adoption cycle, firms can predict which types of customers will buy their new product or service immediately after its introduction  The firm can develop effective promotion, pricing and other strats to push acceptance  Marketers must understand what the diffusion curve for the new product looks like  The speed with which products are adopted depends on several product characteristics; o Relative advantage: if a product is perceived to be better than substitutes, then the diffusion will be relatively quick o Compatibility: most business professionals and executives have to make decisions in a timely fashion and be able to communicate their decisions in a timely manner also; they need real-time info to do this o Observability: when products are easily observed, their benefits or uses are easily communicated to others, thus enhancing the diffusion process o Complexity and trailability: products that are relatively less complex are also relatively easy to try, generally diffuse more quickly than those that are not  The diffusion of innovation theory thus comes into play in the immediate and long-term aftermath of a new product or service introduction  But before the intro, firms must actually develop those new offerings How Firms Develop New Products  The process is iterative, consisting of a number of feedback loops at various stages  Generally the process is a team effort with the new product team composed of members from various functions  Marketing plays a crucial role in the new product development process by communicating customers needs and wants and marketplace preferences and attitudes to the R&D and engineering group Idea generation  To generate ideas for new products, a firm can use its own internal R&D efforts, collaborate with other firms and institutions, license technology from research intensive firms, brainstorm, research competitors products and services and/or conduct consumer research  Companies also generate ideas by using reverse engineering or in more extreme cases, even by digging through a competitors garbage Internal research and development:  More than a year may be spent in extensive internal R&D playing around with a recipe before unveiling a new product  The product development costs for firms are quite high, and the resulting new product or service has a good chance of being a technological or market break through  R&D investments generally are considered continuous investments, so firms may lose money on a few new products  Few extremely successful new products, often known as blockbusters, can generate enough revenues and profits to cover the losses from other introductions that might not fare so well Licensing:  For many new scientific and technological products, firms buy the rights to use the technology or ideas from other research- intensive firms through a licensing agreement  Saves the high cost of in house R&D but means banking on a solution that already exists but has not been marketed Brainstorming:  Firms often engage in brainstorming sessions during which a group works together to generate ideas  No idea can be immediately accepted or rejected  The moderator of the session may channel participants attention to specific product features and attributes, performance expectations or packaging, but only at the end of the session do the members vote on the best ideas or combo of ideas Competitors’ products:  A new product entry by a competitor may trigger a market opportunity for a firm, which can use reverse engineering to understand the competitors product then bring an improved version to the market  Reverse engineering: taking apart a competitors product, analyzing it, and creating an improved product that does not infringe on the competitors patents if any exist Customer input:  Listening to the customer is essential for the successful idea generation  As much as 85% of all new B2B product ideas come from customers  Customer input comes from a variety of sources  In the food and beverage industry, new product failure rates are as high as 78%  A successful customer input approach is to analyze lead users: those innovative product users who modify existing products according to their own ideas to suit their specific needs  Studying lead users helps the firm understand general market trends that might be just on the horizon Concept testing  Ideas with potential are developed further into concepts: brief written descriptions of the product; its technology, working principles and forms; and what customers needs it would satisfy  Concept testing: process in which a concept statement is presented to potential buyers representive of the target market or users to obtain their reactions  If the concept fails to meet customers expectations, it is doubtful it would succeed if it were to be produced and marketed  Firms likely start with exploratory research, such as in-depth interviews or focus groups, to test the concept, after which it can undertake conclusive research through internet or surveys  The most important question pertains to the respondents purchase intentions were the product or service be made available  Marketers usually collect some demographic information so they can analyze which consumer segments are likely to be most interested in the product  Some concepts never make it past this stage Product development  Product development or design: process of balancing various engineering, manufacturing, marketing and economic considerations to develop a products form and features or a services 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, sometimes even crafted individually o Usually tested through alpha or beta testing  Alpha testing: firm attempts to determine whether the product will perform according to design, and whether it satisfies the need for which is was intended, occur in the firms R&D  Beta testing: uses potential customers, who examine the product prototype in a real use setting to determine its functionality, performance, potential problems and other issues specific to its use Market Testing  Companies sometimes skip this step because of the competitive, timing, or cost pressures, these tests can take two forms;  Premarket tests: conduct before they actually bring a product or service to the market to determine how many customers will try and then continue to use the product according to a small group of potential consumers o Sometimes firms simulate a product/service introduction, in which case potential customers view the advertising of various currently available products or services along with advertising for the new product/service  Test marketing: introduces the offering to a limited geographical areas prior to a national launch o Uses all the elements of the marketing mix, just as if it were bring introduced nationally o The firm can estimate demand for the entire market  Test marketing costs more and takes longer, and could provide an advantage to competitors that could get a similar or better product to market first  Key advantage of test markets is the firm can study actual consumer behaviour which is more reliable that simulated tests Product Launch  If the market testing returns with positive results, the fir is ready to introduce the product to the entire market  A product launch is the most critical step in the new product introduction and requires a lot of financial resources and extensive coordination of all aspects of the marketing mix, if the new product launch is a failure, it may be difficult to recover  Promotion: the test results help the firm determine an appropriate integrated marketing communications strategy  Place: the firm must have an adequate quantity of products available for shipment and to keep in stock at relevant stores, the product offering should also be as complete as possible  Price: the firm needs to ensure that it gets the price right, it is sometimes easier to start with a higher price and offer promos and then over time lower the price than it is to introduce at a low price and then try to raise it  Timing: the timing of launch may be important, depending on the product Evaluation of results  After the product has been launched, marketers must undertake a critical post launch review to determine whether the product and its launch were a success or a failure and what additional resources or changes to the marketing mix are needed if any  Success depends on three factors; (1) satisfaction of technological requirements (2) customer acceptance (3) satisfaction of the firms financial requirements  The new product development process when followed rationally and sequentially helps failures The Product Life Cycle  The 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  In their life cycles, products pass through 4 stages Introduction stage:  Usually starts will a single firm, and innovators are the ones to try the new offerings, some new to the world products and services that defined their own product category and industry include the telephone, the transistor semiconductor, the walkman, the internet browser, itunes and blackberry  If the product is successful, firms may start seeing profits toward the end of this stage Growth Stage:  The growth stage is marked by a growing number of product adopters, rapid growth in industry sales and increases in both the number of competitors and the number of available product versions  The market becomes more segmented and consumer preferences more varied which increase the potential for new market or new uses of the product or service  Innovators start rebuying the product, and early majority consumers enter  Firms attempt to reach new customers by studying their preferences and producing different product variations, which enables them to segment the market more precisely  The goal of this segmentation is to ride the rising sales trend and firmly establish the firms brand  As firms rise the crest of increasing industry sales, profits in the growth stage also rise because of the economies of scale associated with manufacturing and marketing costs, especially promotion and advertising  At the same time, firms that have not yet established a stronghold in the market, may decide to exit in what is referred to as an industry shakeout Maturity stage:  Characterized by the adoption of the product by the late majority and intense competition for market share among firms  Marketing costs increase as these firms vigorously defend their market share against competitors  Lower prices and increased marketing costs begin to erode the profit margins for many firms  In the later phases of the maturity stage, the market has becomes quite saturated and practically all potential customers for the product have already adopted the product  Firms may pursuer several strategies during this stage to increase their customer base and or defend their market share such as entering into new markets and market segments and developing new products or promos  Entry into new markets or market segments: because the market is saturated at this point, firms may attempt to enter new geographical markets, including markets that may be less saturated o Even in mature markets, firms may be able to find new market segments, emerging new trends or changes in consumer tastes may fragment mature markets, which would open new market opps o New market opps may also emerge through simple product design changes  Development of new products: despite the market saturation, firms continually introduce new products with improved features or find new uses for existing products because they need constant innovation and product proliferation to defend market share during intense competition o Sometimes new products are introduced by less-than-famous companies Decline stage:  Firms with products in the decline stage either position themselves for a niche segments of diehard consumers or those with special needs or they completely exit the market  The few laggards who have not yet tried the product/service enter the market at this stage The shape of the product life cycle curve  In theory the product life cycle curve is assumed to be bell-shaped with regard to sales and profits  In reality, each product or service has its own individual shape, some move more rapidly through their product life cycle than others, depending on how different the product/service is from products currently in the market and how valuable it is to the consumer  New products/services that consumers accept quickly have higher consumer adoption rates very early in their product life cycle and move faster across the various stages  The type of product affects the variations in the shape of the product life cycle curve  Fads move through the stages quickly while fashion products tend to by cyclical in natural Strategies based on product life cycle: some caveats  The most challenging part of applying the product life cycle concept is that managers don’t know exactly what shape each products life cycle will take  Fortunately new research bases on the history of dozens of consumers products suggests that the product life cycle concept is indeed a valid idea, and new analytical tools now provide rules for detecting the key turning points in the cycle Chapter 9: Product, Branding, and Packaging Decisions Complexity of Products and Types of Products Complexity of Products  Core customer value: The basic problem-solving benefits that consumers are seeking  Marketers convert core customer value into an actual product  Associated services (or augmented product): The nonphysical attributes of the product, including product warranties, financing, product support, and after-sale service Types of Products  There are two primary categories of products and services based on who is buying them: consumers or businesses  Consumer products are products and services used by people for their personal use  Specialty Products/Services: products or services toward which customers show such a strong preference that they will expend considerable effort to search for the best suppliers (e.g. luxury cars)  Shopping Products/Services: products or services, such as furniture, apparel, fragrances, appliances, and travel alternatives, for which consumers will spend a fair amount of time comparing alternatives  Convenience Products/Services: e products or services for which the consumer is not willing to spend any effort to evaluate prior to purchase  Unsought Products/Services: products consumers either do not normally think of buying or do not know about o These products require lots of marketing effort and various forms of promotion Product Mix and Product Line Decisions  Product mix: The complete set of all products offered by a firm  The product mix 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  Within each product line, there are often multiple product categories  Product category: An assortment of items that the customer sees as reasonable substitutes for one another  Brand: The name, term, design, symbol, or any other features that identify one seller’s good or service as distinct from those of other sellers  Product mix breadth: The number of product lines, or variety, offered by the firm  Product line depth: The number of products within a product line  Within each product category are a number of individual items called stock keeping units (SKUs), which are the smallest unit available for inventory control  Firms expand their product lines (breadth) when it is relatively easy to enter a specific market (entry barriers are low) and/or when there is a substantial market opportunity  Too much variety in the product mix is often too costly to maintain, and too many brands may weaken the firm’s brand reputation Change Product Mix Breadth  Increase Breadth: Firms often add new product lines to capture new or evolving markets, increase sales, and compete in new venues  Decrease Breadth: Sometimes it is necessary to delete entire product lines to address changing market conditions or meet internal strategic priorities Change Product Line Depth  Increase Depth: Firms may add new products within a line to address changing consumer preferences or pre-empt competitors while boosting sales  Decrease Depth: it is necessary to delete product categories to realign resources Change Number of SKUs  A very common and ongoing activity for many firms is the addition or deletion of SKUs in existing categories to stimulate sales or react to consumer demand Product Line Decisions for Services  Many of the strategies used to make product line decisions for physical products can also be applied to services 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 mix, one product line, or a
single item  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 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 o Brands enable customers to differentiate one firm or product from another  Brands Establish Loyalty: As a result of this loyalty, these companies can maintain great depth in their product lines since their customers will buy other brands within their product mix  Brands Protect from Competition and Price Competition: because strong brands are more established in the market and have a more loyal customer base, neither competitive pressures on price nor retail level competition is as threatening to the firm  Brands Reduce Marketing Costs: Firms with well known brands can spend relatively less on marketing costs than firms with little-known brands because the brand sells itself  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  Brands Impact Market Value: Having well-known brands can have a direct impact on the company’s bottom line o The value of a brand can be calculated by assessing the earning potential of the brand over the next 12 months Brand Equity  Three areas: brand equity, brand ownership and brand names  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  Four aspects of a brand to determine its equity: brand awareness, perceived value, brand associations, and brand loyalty 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  Familiarity matters most for products that are bought without much thought  If the consumer recognizes the brand, it probably has attributes that make it valuable  Certain brands gain such predominance in a particular product market over time that they become synonymous with the product itself; that is, the brand name that they become synonymous with the product itself (Kleenex)  Create brand awareness through repeated exposures of the various brand elements (brand name, logo, symbol, character, packaging, or slogan) in the firm’s communications to consumers Perceived Value  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 (2 brands with same perceived value = choose cheapest one)  Good marketing raises customers’ quality perceptions relative to price  Many people believe higher prices = better quality 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 o These brand associations often result from a firm’s advertising and promotion efforts  Firms also attempt to create specific associations for their brands with positive consumer emotions, such as fun& friendship  Brand personality refers to a set of human characteristics associated with a brand, which has symbolic or self-expressive meanings for consumers Brand Loyalty  Occurs when a consumer buys the same brand’s product or service repeatedly over time rather than buying from multiple suppliers within the same category  Such consumers are often less sensitive to price  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  A high level of brand loyalty insulates the firm from competition because brand loyal customers do not switch to competitors’ brands, even when provided with a variety of incentives Branding Strategies  Firms institute a variety of brand-related strategies to create and manage key brand assets Brand Ownership  There are three basic brand ownership strategies: manufacturer or national brands, private-label or store brands, and generic brands  Manufacturer brands are owned and managed by the manufacturer (a.k.a. national brands e.g. Nike) o By owning their brands, manufacturers retain more control over their marketing strategy, are able to choose the appropriate market segments and positioning for the brand, and can build the brand and thereby can create their own brand equity  Private-label brands (store brands): Brands developed and marketed by a retailer and available only from that retailer  Generic: A product sold without a brand name, typically in commodities markets Naming Brands and Product Lines  Corporate or Family Brand: The use of a firm’s own corporate name to brandy all of its product lines and products (e.g. Gap)  Corporate and Product Line Brands: The use of a combination of family brand name and individual brand name to distinguish a firm’s products (e.g. Corn Flakes, Froot Loops, Rice Krispies= Kellogs)  Individual Brands: individual brands brand names for each of a firm’s products (e.g. P&G market various detergents, paper products, household cleaners, and beauty products) Choosing a Name  When it comes to naming new products, companies should consider the following desirable qualities: o The brand name should be descriptive and suggestive of benefits and qualities associated with product o The brand name should be easy to pronounce, recognize, and remember, such as Tide, Crest, or Kodak o The company should be able to register the brand name as a trademark and legally protect it o For companies looking to global markets, the brand name should be easy to translate into other languages Brand Extension  Refers to the use of the same brand name for new products being introduced to the same or new markets  Advantages to using the same brand name for new products: o 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 o Second, if the brand is known for its high quality, that perception will carry over to the new product o Third, the marketing costs for a new product by an established brand are lower because consumers already know and understand the brand  Consumers who have adopted the core brand are more likely to try the extension o Fourth, when brand extensions are used for complementary products, a synergy exists between the two products that can increase overall sales o Fifth, successful brand extensions can result in cross category trial and boost sales s because adopters of the new extended brand may try other products in the brand family they are not already using  Brand dilution: Occurs when a brand extension adversely affects consumer perceptions about the attributes the core brand is believed to hold o If the brand extension is very similar to the core brand, it even could cause cannibalization of sales from the core brand  To prevent the potentially negative consequences of brand extensions, firms must consider the following caveats: o Marketers should carefully evaluate the fit between the product class of the 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 for the extension. o Firms should carefully evaluate consumer perceptions of the attributes of the core brand and seek out similar attributes for the extension because brand specific associations are very important for extensions. o Firms should refrain from extending the brand name to too many products and product categories to avoid diluting the brand and damaging brand equity o 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  The practice of marketing two or more brands together, on the same package or promotion  Cobranding enhances consumers’ perceptions of product quality by signaling otherwise unobservable product quality through links between the firm’s brand and a well-known quality brand  Cobranding can also be a prelude to an acquisition strategy  Cobranding will fail if the customers for each of the brands is vastly differently and if the brands’ owners cannot resolve financial disputes about revenue and royalty sharing Brand Licensing  A contractual arrangement between firms, whereby one firm allows another to use its brand name, logo, symbols, and/or characters in exchange for a negotiated fee  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)  Licensing is an effective form of attracting visibility for the brand and thereby building brand equity while also generating additional revenue  For the licensor, the major risk is the dilution of its brand equity through overexposure of the 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 Packaging  Packaging is an important brand element with more tangible or physical benefits  Consumers typically seek convenience in terms of storage, use, and consumption  Packaging also serves to protect products  Packaging provides the UPC label used by retail scanners as well as contents, directions, and other additional product information  The package can also be an important marketing tool for the manufacturer if it is used to convey the brand’s positioning  Packaging is considered by many marketers to be the last frontier in advertising because of its role in promoting products to consumers on the floor of the store at the point of purchase  Packaging may also affect consumers’ emotions and drive impulse buying  Packaging acts as a point of differentiation and makes consumers feel proud to own the brand  Some packaging changes are designed to make the product more ecological  Many consumers experience “wrap rage”—a great frustration with packaging that makes it seemingly impossible to get at the actual products  Because packaging is critical to the firm’s brand positioning and shelf appeal, many innovations in design and materials have occurred in the past few decades o Stand-up, reclosable zipper pouches o Aluminum beverage cans o Green and biodegradable packaging o Child-resistant/senior-friendly packages o Aseptic packaging Labeling  Labels on products and packages provide information the consumer needs for his or her purchase decision and consumption of the product  The information required on them must comply with general and industry-specific laws and regulations, including the constituents or ingredients contained in the product, where the product was made, directions for use, and/or safety precautions  The Food and Drugs Act regulates the information on food, drugs, and cosmetics package labels Chapter Ten: Services, The Intangible Product  Customer service: specially refers to human or mechanical activities firms undertake to help satisfy their customers needs and wants  Economies of developed countries such as Canada have become increasingly dependent of services  The service sector makes up more than 70% of Canada’s economy  The growth and dependence of service-oriented industries in developed countries have emerged for several reasons; o It is generally less expensive for firms to manufacturer their products in less-developed countries, the proportion of service production to goods production in Canada, and other similar economies, has steadily increased over time o Household maintenance activities which many people performed by themselves in the past, have become quite specialized, often performed by specialists in the modern economy o People place a high value on convenience and leisure, have little time for the household maintenance tasks, many are willing to pay others to do their chores  As the Canadian population ages, the need for health care professionals also increases Services Marketing Differs from Product Marketing  Marketing of services differs from product marketing because of four fundamental differences unique to services, the four I’s, intangible, inseparable, inconsistent (variable), and cannot be held in inventory (perishable)  These differences make marketing services considerably more challenging Intangible  The most fundamental difference between a product and a service is that services are intangible: they cannot be touched, tastes or seen like a pure product can  It makes it difficult to convey the benefits of services  A service is also difficult to promote because it cant be shown directly to potential customers  Marketers must therefore creatively employ symbols and images to promote and sell services  Because of the intangibility of services, the images marketers use reinforce the benefit or value that a service provides  Professional service providers depend heavily on consumers perceptions of their integrity and trustworthiness Inseparable  Another difference between services and products is that services are produced and consumed at the same time—that is service and consumption are inseparable  Because service production cant be separated from consumption, astute service marketers provide opportunities for their customers to get directly involved in the service  Customers rarely have the opportunity try the service before they purchase it, and after the service has been performed, it cant be returned  Because the purchase risk can be relatively high, services sometimes provide extended warranties and 100-percent satisfaction guarantees Inconsistent  The more humans that are needed to provide a service, the more likely that the services quality will be inconsistent or variable  In many cases, the problem can be fixed before the product gets into customers hands, but an inferior service cant be recalled by the time the firm recognizes a problem, the damage has been done  Some marketers of services strive to reduce service inconsistency through training and standardization  The smooth and pleasant service transaction is the result of the company’s very specific service standards and excellent training program  Marketers also can use the inconsistent nature of services to their advantage, a micro marketing segmentation strategy can customize a service to meet customers needs exactly  Micromarketing can be expensive to deliver, especially for a firm that offers multiple services  Consumers also may get confused or even irritated if they must pay for each little service  Service providers usually bundle their services into one package and change a single fee  Some service providers tackle the inconsistent issue by replacing people with machines (atms, self-checkouts) o 56% of Canadians are more likely to use self-checkout  The technological delivery of services sometimes causes additional problems, customers may not embrace the idea of replacing a human with a machine, it may not perform adequately  The internet has reduced service inconsistency in several areas, customers can purchase travel items, concert and movie tickets, insurance, mortgages and merch directly via internet or cellphone Inventory  Services are perishable because they cannot be held in inventory or stored for use in the future  The perishability of services provides both challenges and opps to marketers in terms of the critical task of matching demand and supply  As long as the demand for the supply of the services match closely there is no problem but this perfect matching rarely occurs  Balancing the ups and downs of demand and capacity is challenging, unlike products, services cant be stockpiled in inventory, excess demand results in having to turn customers away in peak periods, while excess capacity may mean less desirable expense to revenue ratios Providing Great Service: The Gaps Model  The Gaps Model is designed to highlight those areas where customers believe they are getting less or poorer services than they expect (the gaps) and how these gaps can be closed  Designed to encourage the systematic examination of all aspects of the service delivery process and prescribe the steps needed to develop an optimal service strategy  There are four service gaps:  Knowledge gap: reflects the difference between customers expectations and the firms perception of those customers expectations, firms can close this gap by matching customers expectations with actual service through research  Standards gap: pertains to the difference between the firms perceptions of customers expectations and the service standards it sets, firms can narrow this gap by setting appropriate service standards and measuring service performance  Delivery gap: the difference between the firms service standards and the actual service it provides to customers, this gap can be closed by getting employees to meet or exceed service standards  Community gap: difference between the actual service provided to customers and the service that the firms promo program promises, generally firms can close this gap if they are more realistic about the services they can provide and manage customer expectations effectively The Knowledge Gap: Knowing What Customers Want  An important early step in providing good service is knowing what the customer wants  To reduce this gap, firms must understand the customers expectations, which can be accomplished through customer research and by increasing the interaction and communication between managers and employees  Understanding customer expectations: customers expectations are based on their knowledge and experiences, expectations vary according to the type of service, peoples expectations also vary depending on the situation, the service provider needs to know and understand the expectations of the customers in its target market  Evaluating service quality by using well-established marketing metrics: to meet or exceed customers expectations, marketers must determine what those expectations are o Service quality: customers perceptions of how well a service meets or exceeds their expectations, often is difficult for customers to evaluate o Customers generally use five distinct service dimensions to determine overall service quality: o Reliability: ability to perform the service dependably and accurately o Responsiveness: the willingness to help customers and provide prompt service o Assurance: the knowledge of and courtesy by employees and their ability to convey trust and confidence o Empathy: the caring, individualized attention provided to customers o Tangibles: the appearance of physical facilities, equipment, personnel and communication materials  Marketing research provides a means to better understand consumers service expectations and their perceptions of service quality, can be extensive and expensive, integrated into a firms everyday interactions with customers  Most service firms have developed voice-of-customer programs and employ ongoing marketing research to assess how well they are meeting their customers expectations  Voice-of-customers (VOC) program: collects customer insights and intelligence to influence and drive business decisions  Zone of tolerance: the area between customers expectations regarding their desired service and the min level of acceptable service—the difference between what the customer really wants and what they will accept before going elsewhere  To define the zone of tolerance, firms ask a series of questions about each service quality dimension that relate to; o The desired and expected level of service for each dimension, from low to high o Customers perceptions of how well the focal service performs and how well a competitive service performs from low to high o The importance of each service quality dimension  A very straightforward and inexpensive method of collecting consumers perceptions of service quality is to gather them at the time of the sale o Ask customers how they liked the service or distribute a simple questionnaire  Another method is making effective use of customer complaint behaviour, even if complaints are handled effectively to solve customer problems, the essence of the complaint is too often lost on managers  Even firms with the best formal research mechanisms in place must put managers on the front lines occasionally to interact directly with the customers The Standards Gap: Setting Service Standards  The firm needs to set high service standards, enforce these standards and train employees on how to perform their tasks to these standards, managers must lead by example and demonstrate high service standards, which will permeate through the organization  Achieving service goals through training: to deliver consistently high-quality service firms must set specific, measurable goals based on customers expectations; to help ensure that quality, the employees should be involved in the goal setting o Service providers generally want to do a good job, as long as they know what is expected of them  Commitment to service quality: service providers take their cues from management, if managers strive to excellent service, treat their customers well, and demand the same attitudes from everyone in the organization, it is likely employees will do the same o Employees who understand that operating on time is a critical component to service quality and guest experience work hard to improve on-time performance o Sales agents also strive to provide the highest standards of customer service The delivery gap: Delivering Service Quality  The delivery gap is where the rubber meets the road, where customers directly interact with the service providers, even if there are no other gaps, a delivery gap always results in a service failure  Can be reduced when employees are empowered to act in the customers and the firms best interests and are supported in their efforts so they can do their jobs effectively  Technology can also be employed to reduce delivery gaps  Empowering service providers: empowerment: allowing employees to make decisions about how service provided to customers, when front line employees are authorized to make decisions to help their customers, service quality generally improves o Empowering them can be difficult and costly, in cases in which the service e is very repetitive and routine, such as at fast-food, it might be more efficient and easier for service providers to follow a few simple rules o If an exceptional circumstance that does not fit the rules arises, then a manager should handle it o Empowerment becomes more important when price points edge higher and services are more individualized  Providing support and incentives: a service providers job can often be difficult, especially when customers are unpleasant or less than reasonable, service with a smile still remains the best approach o To ensure that service is delivered properly, management needs to support the service provider o Managers and co-workers should provide emotional support to service providers by demonstrating a concern for their well-being and by standing behind their decisions o The support that managers provide must be consistent and coherent throughout the org o A key part of any customer service program is providing rewards to employees for excellent service o Numerous firms have developed a service rep by ensuring that their employees recognize the value the firms places on customer service, offering VIP clubs, employee of the month awards  Using technology: technology has become an increasingly important method for facilitating the delivery of services o Since the mid 90s with the widespread usage of internet, firms have invested heavily in technologies that have enables customers to buy more quickly more easily and with more information than in the past o Using technology to facilitate service delivery can provide many benefits, such as access to a wider variety of services a greater degree of control by the customer over the services an the ability to obtain information The Communication Gap: Communicating The Service Promise  The communications gap pertains to the difference between the service promised and the service actually delivered  Although firms have difficulty controlling service quality because it can vary from day to day, and provider to provider, they do have control over how they communicate their service package to their customers  If a firm promises more than it can deliver, customers expectations wont be met  Dissatisfied customers also are likely to tell others about the underperforming service, using word of mouth, or increasingly the internet, which has become an important channel for dissatisfied customers to vent their frustrations  The communication gap can be reduced by managing customers expectations  Promising only what you can deliver or possibly even a little less, is an important way to control the communication gap  A relatively easy way to manage customer expectations considers both the time the expectation is created and the time the service is provided, expectations typically are created through promos  Customer expectations can also be managed when the service is delivered Service Recovery  Sometimes service providers fail to meet customers expectations, when this happens, the best course of actions is to attempt to make amends with the customer and learn from experience  The firm has a unique opportunity to demonstrate its customer commitment, effective service recovery efforts can significantly increase customer satisfaction, purchase intentions and positive word of mouth, though customers post- recovery satisfaction levels usually fall lower than their satisfaction level prior to the service failure  Effective service recovery entails (1) listening to the customer (2) providing a fair solution (3) resolving the problem quickly Listening to the customer  Firms often don’t find out about service failures until a customer complains  The customer must have the opportunity to air the complaint completely and the firm must listen carefully to what he or she is saying  Customers can become very emotional about a service failure, in many cases the customer may just want to be heard and provider should give the customer all the time he or she needs to get it out  Service providers therefore should welcome the opportunity to be that sympathetic ear, listen carefully and appear anxious to rectify the situation to ensure it doesn’t happen again Finding a fair solution  Customer’s perception of what fair means is based on their previous experience with other firms, how hey have seen other customers treated, material they have read, and stories recounted by their friends  Distributive fairness: pertains to a customers perceptions of the benefits he or she received compared with the costs o The key to this is listening carefully to the customer, regardless of how the problem is solved customers typically want tangible restitution, not just an apology, the next best thing is to assure the customer that steps are being taken to prevent the failure from recurring  Procedural fairness: refers to the perceived fairness of the process used to resolve them o Customers want efficient complaint procedures over whose outcomes they have some influence, they tend to believe they have been treated fairly if the service provider follow specific company guidelines, though rigid adherence to rules can have damaging effects Resolving problems quickly  The longer it takes to resolve a service failure, the more irritated the customer will become and the more people he or she is likely to tell about the problem  To resolve quickly, firms need clear policies, adequate training for their employees and empowered employees  Companies should welcome complaints and make it easy for customers to provide feedback, listening carefully to what customers have to say  Although customers are complaining they are showing a degree of loyalty and a desire to get a problem fixed  Of customers who do complain, 56-70% will do business with the company again if the complaint is resolved o That goes up to 96% if it is done quickly Chapter 11: Pricing Concepts and Strategies: Establishing Value  Price: the overall sacrifice a consumer is willing to make to acquire a specific product or service  Consumers judge the benefits a product delivers against the sacrifice necessary to obtain it, and then make a purchase decision based on this overall judgment of value  The key to successful pricing is to match the product or service with the consumer’s value perceptions  A price set too low may signal low quality, poor performance, or other negative attributes about the product or service  Customers rank price as one of the most important factors in their purchase decision  Price is not just a sacrifice but an information cue as well o Consumers use the price of a product or service to judge its quality, particularly when they are less knowledgeable about the product category The Five Cs of Pricing  Successful pricing strategies are built through the five critical components: company objectives, customers, costs, competition, and channel members Company Objectives Profit Orientation  Even though all company objectives may ultimately be oriented toward making a profit, firms implement a profit orientation by focusing on target profit pricing, maximizing profits, or target return pricing  Firms usually implement target profit pricing when they have a particular profit goal as their overriding concern o To meet this targeted profit objective, firms use price to stimulate a certain level of sales at a certain profit per unit  The maximizing profits strategy relies primarily on economic theory o A mathematical model that captures all the factors required to explain and predict
sales and profits, which should be able to identify the price at which its profits are maximized  Target return pricing: A pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return
on investment, usually expressed as a percentage of sale Sales Orientation  Firms using a sales orientation to set prices believe that increasing sales will help the firm more than increasing profits  Some firms may be more concerned about their overall market share than about dollar sales per se 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  Companies can gain market share simply by offering a high-quality product at a fair price, as long as they generate high- value perceptions among consumers Competitor Orientation  A company objective based on the premise that the firm should measure itself primarily against
it’s competition  Some firms focus on competitive parity, which means they set prices that are similar to those of their major competitors  Value is only implicitly considered in competitor-oriented strategies, in the sense that competitors may be using value as part of their pricing strategies, so copying their strategy might provide value Customer Orientation  Pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectations  Sometimes a firm may attempt to increase value by focusing on customer satisfaction and setting prices to match consumer expectations  Lower prices and increasing value  Some companies offer high priced state of the art products to increase the company’s value in the minds of consumers Customers  Marketers must understand consumers’ reactions to different prices 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  Any static demand curve assumes that everything else remains unchanged (e.g. marketers creating a demand curve must assume the firm will not increase its expenditures on advertising)  The horizontal axis measures the quantity demanded, the vertical axis is the price  Prestige products or services: consumers purchase for their status rather than their functionality o In these products or services, the higher the price, the greater the status associated with it and the greater the exclusivity, because fewer people can afford to purchase it o A higher price also leads to a greater quantity sold—up to a certain point o When customers value the increase in prestige more than the price differential between the prestige product and other products, the prestige product attains the greater value overall Price Elasticity of Demand  Measures how changes in a price affect the quantity of the product demanded; specifically the ration of the percentage in change in quantity demanded to the percentage change in price  Necessary products that people need (milk) are not sensitive to price changes; as price goes up people still buy the milk  Marketers need to know how consumers will respond to a price increase (or decrease) for a specific product or brand so they can determine whether it makes sense for them to raise or lower prices  Price elasticity of demand= % change in quantity demanded/ % change in price  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  Elastic: Refers to a market for a product or service
that is price sensitive; that is, relatively small changes price will generate fairly large changes in the quantity demanded  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  Inelastic: Refers to a market for a product or service
that is price insensitive; that is, relatively small changes price will not generate large changes in the quantity demanded  The price elasticity of demand usually changes at different points in the demand curve unless the curve is actually a straight line Factors Influencing Price Elasticity of Demand  Income effect: Refers to the change in the quantity of a product demanded by consumers because of a change in their
income  Substitution effect: Refers to consumers ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand o The greater the availability of substitute products, the higher the price elasticity of demand for any given product will be  Cross-price elasticity: The percentage change I demand for Product A that occurs in response to a percentage change in price of Product B o For example, when the price of Blu-ray players dropped rapidly, the demand for Blu-ray discs also increased rapidly o Complementary products: Products whose demand curves are positively related, such that they rise or fall together, a percentage increase in demand for one results in a percentage increase in demand for the other o 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 Costs  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  Consumers use just the price they must pay and the benefits they may receive to judge value; they will not pay a higher price for an inferior product simply because the firm cannot be as cost-efficient as its competitors  There are two primary cost categories: variable and fixed  Variable Costs: Those costs, primarily labour and materials, which vary with production volume o Generally expressed on a per-unit basis, because each unit of the product produced incurs the same cost  Fixed Costs: Those costs that remain essentially at the same level, regardless of any changes in the volume of production o Items such as rent, utilities, insurance, administrative salaries, and the depreciation of the physical plant and equipment  Total Cost: The sum of the variable and fixed costs Break-Even Analysis and Decision Making  A useful technique that enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales is called the break-even analysis  Break-even point: The point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero  How do we determine the break-even point? o Although profit, which represents the difference between the total cost and the total revenue (total revenue or sales= selling price of each unit sold X number of units sold) can indicate how much money the firm is making or losing at a single period of time, it cannot tell managers how many units a firm must produce and sell before it stops losing money and at least breaks even o To determine the break-even point in units mathematically, we must consider fixed costs and the contribution per unit, which is the price less the variable cost per unit o Break-even points (units) = fixed costs / contribution per unit  Although a break-even analysis cannot actually help managers set prices, it does help them assess their pricing strategies because it clarifies the conditions in which different prices may make a product or service profitable  Limitations: o It is unlikely that a hotel has one specific price that it charges for each and every room, so the price it would use in its break-even analysis probably represents an average price that attempts to account for these variances o Prices often get reduced as quantity increases because the costs decrease, so firms must perform several break- even analyses at different quantities o A break-even analysis cannot indicate for sure how many rooms will be rented or, in the case of products, how many units will sell at a given price o It tells the firm only what its costs, revenues, and profitability will be given a set price and an assumed quantity Competition  There are four levels of competition—monopoly, oligopolistic, monopolistic, and pure—and each has its own set of pricing challenges and opportunities  Monopoly: monopoly firm provides the product or service in a particular industry o A monopoly that restricts competition by controlling an industry can be deemed illegal and broken apart by the government  Oligopolistic competition: Occurs when only a few firms dominate a market o 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 many firms sell closely related but not homogeneous products; these products may be viewed as substitutes but are not perfect substitutes o When so many firms compete, product differentiation rather than a strict pricing competition tends to appeal to consumers  Pure competition: Occurs when different companies sell commodity products that consumers Perceive as substitutable; price usually is set according to the laws of supply and demand  The secret to pricing success in a pure competition market is not necessarily to offer the lowest price because doing so might create a price war and erode profits o Instead, some firms have brilliantly decommoditized their products Channel Members  Channel members—manufacturers, wholesalers, and retailers—can have different perspectives when it comes to pricing strategies  Channels can be very difficult to manage, and distribution outside normal channels does occur  Grey market: Employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to channels of distribution to than those intended by the manufacturer  To discourage this type of grey market distribution, some manufacturers, have resorted to large disclaimers on their websites, packaging, and other communications to warn consumers that the manufacturer’s product warranty becomes null and void unless the item has been purchased from an authorized dealer Other 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 provides search engines and online auction sites, such as eBay and Kijiji, that enable consumers to find the best prices for any product, new or used, quickly, which again increases their price sensitivity and reduces the costs associated with finding lower-price 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 Economic Factors  Two interrelated trends that have merged to impact pricing decisions are the increase in consumers’ disposable income and status consciousness  Some consumers appear willing to spend money for products that can convey status in some way  Cross-shopping: The pattern of buying both premium and low-priced merchandise or patronizing both expensive, status oriented retailers and price-oriented retailers  The economic environment at local, regional, national, and global levels influences pricing  Many firms maintain a presence in multiple countries: products get designed in one country, the arts are manufactured in another, the final product assembled in a third, and after-sales service is handled by a call center in a fourth  . Competition, disposable income, and unemployment all may signal the need for different pricing strategies Pricing Strategies Cost-Based Methods  Determines the final price to charge by starting with the cost, without recognizing the role that consumers or competitors’ prices play in the marketplace  Requires that all costs can be identified and calculated on a per-unit basis  Prices are usually set on the basis of estimates of average costs Competitor-Based Methods  An approach that attempts to reflect how the firm wants consumers to interpret its products relative to the competitors’ offerings  Premium pricing: A competitor-based pricing method by which the firm deliberately prices a product above the prices set for competing products to capture those consumers who always shop for the best or for whom price does not matter Value-Based Methods  Focuses on the overall value of the product offering as perceived by consumers, who determine value by comparing the benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product  Improvement Value Method: Represents an estimate of how much more (or less) consumers are
willing to pay for a product relative to other comparable products  Cost of ownership method: A value-based method for A value-based method for the total cost of owning the product over its useful life New Product Pricing Price Skimming  A strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay to obtain it; after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the next most price-sensitive segment  For price skimming to work, the product or service must be perceived as breaking new ground in some way, offering consumers new benefits currently unavailable in alternative products  Reasons to price skim: o To signal high quality to the market o Price high at first to limit demand, which gives them time to build their production capacities o Some firms employ a skimming strategy to try to quickly earn back some of the high R&D investments they made for the new product o Employ skimming strategies to test consumers’ price sensitivity  For a skimming pricing strategy to be successful, competitors cannot be able to enter the market easily; otherwise, price competition will likely force lower prices and undermine the whole strategy Market Penetration Pricing  A pricing strategy of setting the initial price
low for the introduction
of the new product or service, with the objective of building sales, market share, and profits quickly  With price skimming profits are generated through margin, whereas with penetration pricing, profits flow through volume  Experience curve effect: Refers to the drop in unit cost as the accumulated volume sold increases; as sales continue to grow, the costs continue to drop, allowing even further reductions in the price  Penetration pricing discourages competitors from entering the market because the profit margin is relatively low  Drawbacks: o The firm must have the capacity to satisfy a rapid rise in demand—or at least be able to add that capacity quickly o Low price does not signal high quality o Firms should avoid a penetration pricing strategy if some segments of the market are willing to pay more for the product; otherwise, the firm is just “leaving money on the table Psychological Factors Affecting Value-Based Pricing Strategies Consumers’ Use of Reference Prices  A reference price is the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process  In some cases, the seller itself provides an external reference price, a higher price to which the consumer can compare the selling price to evaluate the deal  Consumers may also rely on an internal reference price to judge a price offering by accessing price information stored in their memory—perhaps the last price they paid or what they expect to pay  Internal reference price: Price information stored in the consumer’s memory that the person uses to assess current price offering—perhaps the last price he or she paid or what he or she expects to pay  External reference prices influence internal reference prices  When consumers are repeatedly exposed to higher reference prices, their internal reference prices shift toward the higher external reference prices, assuming their initial internal reference price was not too far away from it  The net effect is that consumers will perceive the product or service in question to have a relatively lower selling price, and it therefore becomes a better deal in their perceptions Everyday Low Pricing (EDLP) Versus High/Low Pricing  A strategy companies
use to emphasize the continuity of their retail prices at a level somewhere between the regular, non- sale price and the deep-discount sale prices their competitors may offer.  By reducing consumers’ search costs, EDLP adds value; consumers can spend less of their valuable time comparing prices, including sale prices, at different stores  High/low pricing: A pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases Odd Prices  Prices that end in odd numbers, usually 9, such as $3.99  First started to prevent sales clerks from stealing money because they have to open the till to give change to the customer, requiring the sale to be rung up on the register  Customers see $21.99 as $21, when really its closer to $22  Odd prices signal to consumers that the price is low The Price-Quality Relationship  Higher the price usually signals to the customer higher quality  When consumers know the brands, have had experience with the products, or have considerable knowledge about how to judge the quality of products objectively, price becomes less important  The store, brand name, product warranties/guarantees, and where the product was produced also represent information consumers use to judge quality Pricing Tactics  A pricing strategy is a long-term approach to setting prices broadly in an intergrative effort (across all the firm’s products) based on the five Cs (company objectives, customers, costs, competition, and channel members) of pricing  Pricing tactics: Short-term methods, in contrast to long-term pricing strategies, used to focus on company objectives, customers, costs, competition, or channel members; can be responses to competitive threats (e.g., lowering price temporarily to meet a competitor’s price reduction) or broadly accepted methods of calculating a final price for the customer that is short term in nature Business-to-Business Pricing Tactics and Discounts  Seasonal discount: Pricing tactic of offering an additional reduction as an incentive to retailers to order merchandise in advance of the normal buying season  Cash Discounts: tactic of offering a reduction in the invoice cost if the buyer pays the invoice prior to the end of the discount period o Businesses offer cash discounts to encourage early payment benefiting them because of the time value of money o The firm can invest that money to earn a return to avoid borrowing money and paying interest  Allowances o Advertising allowance: Tactic of offering a price reduction to channel members if they agree to feature the manufacturers product in their advertising and promotional efforts o Listing allowances: Fees paid to retailers simply to get new products into stores or to gain
more or better shelf space
for their products  Quantity Discounts: Pricing tactic of offering a reduced price according to the amount purchased; the more the buyer purchases, the higher the discount and, of course, the greater the value o Cumulative quantity discount: Pricing tactic that offers a discount based on the amount purchased over a specified period and usually involves several transactions  This type of discount encourages sellers to maintain their current supplier because the cost to switch must include the loss of the discount o Noncumulative quantity discount: Pricing tactic that offers a discount based on only the amount purchased in a single order  Incentive for buyer to purchase more merchandise immediately  Uniform Delivery Versus Geographic Pricing o Uniform delivered pricing: The shipper charges one rate, no matter where the buyer is located o Geographic pricing: The setting of different prices depending on a geographical division of the delivery areas Pricing Tactics Aimed at Consumers  Price Lining: Consumer market pricing tactic of establishing a price floor and a price ceiling for an entire line of similar products and then setting a few other price points in between to represent distinct differences quality  Price Bundling: Consumer pricing tactic of selling more than one product for a single, lower price than what the items would cost sold separately; can be used to sell slow moving items, to encourage customers to stock up so they won’t purchase competing brands, to encourage trial of a new product, or to provide an incentive to purchase a less desirable product or service to obtain a more desirable one in the same bundle  Leader Pricing: Consumer pricing tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store’s cost o The rationale behind this tactic is that, while in the store to get the great deal on, say, milk, the consumer will also probably pick up other items he or she needs Consumer Price Reductions  The final price a customer pays for a product or service often has been adjusted from the original price because marketers have used various techniques designed to enhance value  Markdowns: reductions retailers take on the initial selling price of the product or service o Enable retailers to get rid of slow-moving or obsolete merchandise, sell seasonal items after the appropriate season, and match competitors’ prices on specific merchandise o Retailers must get rid of merchandise that isn’t selling because holding on to such items hurts the retailer’s image and ties
up money in inventory that could be used more productively elsewhere o Retailers also use markdowns to promote merchandise and increase sales (increases traffic in the store)  Quantity Discounts for Consumers o Size discount: The most common implementation of a quantity discounts at the consumer level; the larger the quantity bought, less the cost per unit (e.g. per gram) o E.g. Grocery stores put prices per 100 grams to encourage consumers to purchase larger quantities each time they buy  Seasonal Discounts: e price reductions offered on products and services to stimulate demand during off-peak seasons  Coupons and Rebates: provide discounts to consumers on the final selling price o Coupon: Provides a stated discount to consumers on the final selling price of a specific item; the retailer handles the discount o The goal of coupons is to prompt consumers to try a product, reward loyal customers, or encourage repurchases o Rebate: A consumer discount in which a portion of the purchase price is returned to the buyer in cash; the manufacturer, not the retailer, issues the refund o Whereas a coupon provides instant savings when presented, a rebate promises savings, usually mailed to the consumer at some later date Legal and Ethical Aspects of Pricing Deceptive or Illegal Price Advertising  Deceptive Reference Prices: if the reference price has been inflated or is just false this is deceptive and may cause harm to consumers o Bona fide = if the reference point is bona fide the advertisement is informative  Loss Leader Pricing: takes the tactic of leader pricing one step further by lowering the price below the store’s cost  Bait and Switch: A deceptive practice of luring customers into the store with a very low advertised price on an item (the bait), only to aggressively pressure them into purchasing a higher-priced item (the switch) by disparaging the low-priced item, comparing it unfavorably with the higher-priced model, or professing an inadequate supply of the lower-priced item Predatory Pricing  A firm’s practice of setting a very low price for one or more of its products with the intent of driving its competition out of business; illegal under the Competition Act  Difficult to prove: First, one must demonstrate intent that is, that the firm intended to drive out its competition or prevent competitors from entering the market. Second, the complainant must prove that the firm charged prices lower than its average cost, an equally difficult task Price Discrimination  The practice of selling the same product to different resellers (wholesalers, distributors, or retailers) or to the ultimate consumer at different prices; some, but not all, forms of price discrimination are illegal  A barter agreement, in which buyers and sellers negotiate a mutually agreed upon price, is commonplace and absolutely legal in retail settings such as car sales and collectibles markets Price Fixing  The practice of colluding with other firms to control prices  Horizontal price fixing: Occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers  Vertical price fixing: Occurs when parties at different levels of the same marketing channel (e.g., manufacturers and retailers) collude to control the prices passed on to consumers Chapter Twelve: Marketing Channels—Distribution Strategy The Importance of Distribution  Convincing intermediaries, such as wholesalers and retailers, to carry new products can prove to be more difficult than thought  With dozens of new products being introduced each day, the fight for shelf space is fierce  All goods and services organizations need a well-thought out distribution strategy, even organizations that physically make money  A good distribution strategy is key to the successful launch of a new product, its not always easy and it well integrated with other elements of the marketing mix which results in increased revenues Distribution channels, supply chain and logistics are related  Distribution channel: set of institutions that transfer ownership of and move goods from the point of production to the point of consumption, it consists of all the institutions and marketing activities in the marketing process  The terms distribution channel and supply chain are the same and used interchangeably  Sometimes companies use direct market channels to deliver their goods  Other times, distribution is accomplished indirectly through the use of intermediaries  Supply chain management: a set of approaches and techniques firms employ to efficiently and effectively integrate their suppliers, manufacturers, warehouses, stores and transport intermediaries into a seamless value chain in which merch is produced and distributed in the right quantities, to the right locations and at the right time  Wholesalers: are firms that buy products from manufacturers and resell them to retailers  Retailers: sell products directly to customers  The more intermediaries involved in the supply chain, the greater the complexity and number of transactions involved for a company to reach customers  Some retail chains such as home depot and Costco function as both retailer and wholesalers  When manufactures such as dell and avon sell directly to customers, they are performing both production and retailing activities  Supply chain management focuses on the relationships among members of the supply chain and distribution channel and the need to coordinate efforts to provide customers with the best value  Logistics management: the integration of two or more activities to plan, implement and control the efficient flow of raw material, in process inventory, and finished goods from the point of origin to the point of consumption  These activities may include customer service, demand forecasting, distribution communication, inventory control, etc  Supply chain management takes a system wide approach to coordinated the flow of merch and includes both distribution management and logistics management  Distribution channel management traditionally has been the responsibility of marketing departments, under the direction of a marketing vice president, logistics was traditionally the responsibility of operations under a vice president of operations Distribution channels add value  Distribution channels are composed of various entities that are buying, such as retailers and wholesalers; selling, such as manufacturers or wholesalers; or helping facilitate the exchange such as transportation companies  Relationships can range from close working partnerships to one time arrangements, they occur because the parties want something from one another  Each channel member performs a specialized role, if one member believes that another isn’t doing its job correctly/efficiently, it usually can replace that member  Distribution channels perform a variety of transactions, logistical, and facilitating functions  One important role played is to reduce the number of market place contacts, resulting in more efficient systems  Intermediaries also match the requirements of individual consumers to the goods that manufacturers produce; handle physical distribution and storage of goods, making them available for customers to purchase, and etc. Designing Distribution Channels Channel structure  When a firm is just starting out or entering a new marketing, it doesn’t typically have the option of designing the best distribution channel structure—that is choosing from whom it buys and whom it sells  Some manufactures wont want to sell to this new retailer initially because its credit isn’t established or the manufactures already have enough of their products represented by other retailers in the area  The problem can be equally daunting for manufactures entering a new market, whose primary concern will be to find retailers that want to take a chance on their line Direct distribution  Allows manufacturers to deal directly with consumers  Play a significant role in B2B dealings with companies that sell directly to their largest customers in the public and private sectors  Some companies may be forced to distribute their goods directly because they are unable to secure shelf space in retail outlets or are unable to pay the high listing fees demanded by retailers for the shelf space Indirect distribution  One or more intermediaries work with manufactures to provide goods and services to consumers  In some cases, there may only be one intermediary involved  Typically only one intermediary is used in the case of large retailers such as the bay  Wholesalers are often used when a company does not buy in sufficient quantity to make it cost-effective for a manufacturer to deal directly with a retailers o Quite common for low-cost or low unit value items such as candy and chips  When developing its distribution strategy a company may choose to use a push strategy or a pull  With a push, a manufacturer focuses its promotional efforts on channel members to convince them to carry its product  If channel members are reluctant to stock new products, they may use a pull o Promo efforts are directed at customers to build demand for products which may convince retailers to carry them Multichannel distribution  Many companies are embracing a multichannel or hybrid approach to distribution  Some companies engage a sale force to deliver products to customers while others pursue a direct marketing approach through the use of catalogues  When choosing which channels and retailers though which to sell, the manufacturer should consider where the end customer expects to find the product, as well as some important retailer characteristics Customer expectations  Distribution channel management is an integral part of any marketing strategy, a key party of any strategy is to determine customer expectations  From a retailers perspective, it is important to know from which manufactures its customers want to buy  Manufactures need to know where their target market customers expect to find their products and those of their competitors  Companies need to stay abreast of changes in where customers buy products and what products they request and then change their distribution strategies accordingly Channel member characteristics  Several factors pertaining to the channel members themselves will help determine the distribution structure  Generally the larger and more sophisticated the channel member, the less likely that it will use intermediaries  Larger firms often find that performing the distribution functions themselves, they can gain more control, be more efficient and save money Distribution Intensity  When setting up distribution for the first time or introducing new products, firms decide the appropriate level of distribution intensity: the number of channel members to use at each level of the supply chain  Commonly divided into three levels; Intensive distribution  Designed to get products into as many outlets as possible  Most consumer packaged goods companies and most other nationally branded products found in grocery and discount stores, strive for and often achieve intensive distribution  The more exposure these products gets, the more they sell Exclusive distribution  Strategy of granting (exclusive geographic territories) exclusive rights to sell to one or very few retail customers so no other customers can sell a particular brand  Benefit manufacturers by assuring them that the most appropriate customers represent their products  In cases of limited supply or when a firm is just starting out, providing an exclusive territory to one customer helps ensure enough inventory to offer the customer an adequate selection  Dealers know there will be no competing retailers to cut prices, so their profit margins are protected, which also gives them an incentive to carry more inventory and use extra advertising, personal selling and sales promos Sale
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