Marketing Final Exam TExtbook Notes

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Western University
Management and Organizational Studies
Management and Organizational Studies 2320A/B
Gail Leizerovich

Chapter 8: Developing New Products Product: anything of value to a consumer and can be offered through a marketing exchange. They could be places, ideas, organizations, people, or communities that create value for consumers in their respective competitive marketing arenas LO1 New markets provide value to both firms and customers Completely new-to-the-market products represent fewer than 10% of all new product introductions each year Innovation: the process by which ideas are transformed into new products and services that will help them grow Without innovation and its resulting new products and services, firms would only have two choices: continue to market current products to current customers or take the same product to another market with similar customers Changing Customer 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 Companies can identify problems and develop products that customers never knew they needed Firms take a well-known offering and innovate it 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 products/services, the value of the firm will ultimately decline Consumers tend to get tired of products before they wear out or break and seek variety Example: Reebok introducing several lines a year, they sustain their growth Managing Risk Through Diversity Through innovation, firms often create a broader portfolio of products, which helps them to diversify risk and enhance firm value better than a single product can If some products in a portfolio are doing poorly, other may be doing well Firms with multiple products are better able to withstand external shocks, including changes in consumer preferences or intensive competitive activity Example: Kellogg’s offering many variations of Special K including cereal bars and protein shakes Fashion Cycles In industries that rely on fashion trends and experience short product life cycles—apparel, books, software—most sales come from new products Example: a motion picture generates most of its sales in theatre, DVD and cable TV revenues within a year of release Innovation and Value New product introductions, especially new-to-the-world products that create new markets, can add tremendous value to firms These new products, services, or processes are called pioneers, breakthroughs or “disruptive” because they establish a completely new market or radically change both the rules of competition and consumer preferences in a market Generally they require a higher level of learning from consumers and offer much more benefits than predecessor products Example: eBay, Blackberry, or Canon’s desktop photocopiers Pioneers have advantage of being first movers; as the first to create the market or product category, they become recognizable to consumers and thus establish a commanding and early market share lead Not all pioneers succeed In many cases, imitators capitalize on weaknesses of pioneers and subsequently gain advantage in the market Pioneers often have a less sophisticated design and may be priced relatively higher, leaving room for better and lower priced competitive products As many as 95% of all consumer goods fail, and products across all market and industries suffer failure rates of 50- 80% WHY? They offer consumers too few benefits compared with existing products They are too complex or require substantial learning and effort before consumers can use them Bad timing (consumers aren’t ready for such p/s) New-to-the-world products are not adopted by everyone at the same time LO2 Diffusion of innovation: the process by which the use of an innovation, whether a product or 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 It also gives them a means to identify potential markets for their products or services and predict their potential sales, even before they introduce the innovations Innovators: 2.5% of the total market Those buyers who want to be first on the block to have the new product or service Enjoy taking risks, are regarded as highly knowledgeable, and are NOT price sensitive Typically they keep themselves very well informed about the product category by subscribing to magazines, talking to other “experts”, searching the internet, attending product-related forums, seminars and special events They are crucial to the success of any new product or service because they help the product gain market acceptance EarlyAdopters: 13.5% of the total market Second subgroup that begins to use a product or service innovation Generally don’t like to take as much risk as innovators but instead wait and purchase a product after careful review Tend to enjoy novelty and are often regarded as the opinion leaders for specific product categories Crucial for bringing the other three buyer categories to the market Early Majority: 34% of total market 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 typically fails Differ in many ways—don’t like to take as much risk and therefore tend to wait until “the bugs” are worked out When they are in the market, the number of competitors in the marketplace usually also has reached its peak, so they have many different price and quality choices Late Majority: 34% of the total market Last group of buyers to enter a new product market; when they do, the product has achieved its full market potential By this time, sales tend to level off or may be in decline Laggards: 16% of the total market These consumers like to avoid change and rely on traditional products until they are no longer available They may never adopt a product or service Very few companies actively pursue these customers 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, as well as later as the product or service gets more and more accepted by the market With this knowledge, the firm can develop effective promotion, pricing, and other marketing strategies to push acceptance among each customer group The speed with which products are adopted depends on several product characteristics Relative advantage: if a product is perceived to be better than substitutes, then the diffusion will be relatively quick 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 information to do this. I.e. compatible with people’s current behaviour Observability: when products are easily observed, their benefits or uses are easily communicated to others, thus enhancing the diffusion process Complexity and Trialability: products that are relatively less complex are also relatively easy to try. These products will diffuse more quickly than those that are not LO3 The new product development process begins with the generation of new product ideas and culminates in the launch of the new product and the evaluation of its success The stages of the product development process Depicts linear and sequential stages when in reality it is iterative, consisting of a number of feedback loops at various stages Substantially new products will likely follow the process fairly closely, while products imitating a successful product from a competitor, having a low development cost, or involving incremental changes (such as line extensions) may skip one or more steps 1) Idea Generation 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 Sometimes new product ideas come from employees, customers, suppliers, and partners or are generated by attending trade shows and conferences Companies also generate ideas by using reverse engineering or, in more extreme cases, even by digging through a competitor's garbage Internal research and development Many firms have their own R&D departments, in which scientists work to solve complex problems and develop new ideas Product development costs are quite high, and the resulting new product or service has a good chance of being a technological market breakthrough Firms expect such products to generate enough revenue and profits to make the costs of R&D worthwhile Licensing For many new scientific and technological products, firms buy the rights to use technology or ideas from other research intensive firms through a licensing agreement Brainstorming Firms often engage in brainstorming sessions during which a group works together to generate new ideas One of the key characteristics of a session can be that no idea can be immediately accepted or rejected Can use voting Competitor’s Products Anew product entry by a competitor may trigger a market opportunity for a firm, which can use reverse engineering to understand the competitor’s product and then bring an improved version to the market Reverse engineering: involves taking apart a competitor’s product, analyzing it, and creating an improved product that does not infringe on the competitor’s patents, if any exist Customer Input Listening to the customer is essential for successful idea generation Prior studies have shown that as much as 85% of all new B2B product ideas come from customers Input came come from a variety of sources Particularly successful customer input approack is to analyze lead users, those innovative product users who modify existing products according to their own ideas to suit their specific needs 2) Concept Testing Ideas with potential are developed further into concepts, which in this context refer to brief written descriptions of the product; its technology, working principles, and forms; and what customer needs it would satisfy May also include visuals Concept testing: the process in which a concept statement is presented to potential buyers representative of the target market or users to obtain their reactions These reactions enable the developer to estimate the sales value of the product or service concept, possibly make changes to enhance its sales value, and determine whether the idea is worth further development Firm likely starts with exploratory research, after which it can undertake conclusive research The most important question pertains to the respondent’s purchase intentions were the product or service be made available 3) Product Development Entails a process of balancing various engineering, manufacturing, marketing, and economic considerations to develop a products form and features or a service’s features Prototype: the first physical form or service description of a new product, still in rough or tentative form Alpha testing: an attempt by a firm to determine whether or not the product will perform according to its design and whether it satisfies the need for which it was intended Tests occur in the firm’s R&D department Beta testing: uses potential consumers, who examine the product prototype in a “real use” setting to determine its functionality performance, potential problems, and other specific issues to its use and then surveys those users to determine if the product worked as intended and to identify any issues 4) Market Testing The firm must test the market for the new product with a trial batch of products, but sometimes this step is skipped because of competition, timing or cost pressures Premarket Tests Firms conduct these before they actually bring a product or service to market to determine how many customers will try and then continue to use the product or service according to a small group of potential consumers Test marketing Amethod of determining the success of potential new product by introducing the offering to a limited geographical area (usually a few cities) prior to a national launch Uses all elements of the marketing mix Test marketing costs more and takes longer than premarket tests, which may provide an advantage to competitors that could get a similar or better product to market first It offers a key advantage: the firm can study actual consumer behaviour, which is more reliable than a simulated test 5) Product Launch if the market testing returns with positive results, the firm is ready to introduce its product to the entire market a product launch is the most critical step in the new product introduction and requires tremendous financial resources and extensive coordination of all aspects of the marketing mix First, on the basis of the research it has gathered on consumer perceptions and the tests it has conducted, as well as any competitive considerations, the firm confirms its target market(s) and decides how the product will be positioned Then the firm finalizes the remaining marketing mix variables for the new product, including the marketing budget for the first year 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 Price: the firm needs to ensure that it gets the price right Timing: the timing of the launch may be important, depending on the product 6) 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 failure an what additional resources or changes to the marketing mix are needed, if any Firms measure the success of a new product by 3 interrelated factors Its satisfaction of technical requirements, such as performance Customer acceptance Its satisfaction of the firm’s financial requirements, such as sales and profits LO4 The product life cycle (PLC) 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 Not every product follows the same life cycle shape, many products stay in the maturity period for a very long time Introduction Stage Usually starts off with a single firm, and innovators are the ones who try the new offering Sensing the viability and commercialization possibilities of this market-creating new product, other firms soon enter the market with similar or improved products at lower prices Characterized by initial losses to the firm because of high start-up costs and low levels of sales revenue as the product begins to take off Growth Stage 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 and producing different product variations which enables them to segment the market more precisely Profits in the growth stage also rise because the economies of scale associated with manufacturing and marketing costs Firms have not yet established a stronghold in the market, even in narrow segments, 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 they defend their market share Intense competition price Lower prices and increased marketing costs begin to erode the profit margins for many firms In the later stages of the maturity stage, the market has become quite saturated, and practically all potential customers for the product have already adopted it Firms may pursuer several strategies during this stage to increase their customer base and defend their market share Entry into new market of market segments Because the market is saturated at this point, firms may attempt to enter new geographical markets, including international markets that may be less saturated Development of new products 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 Decline Stage Firms with products in the decline stage either position themselves for a niche segment of diehard consumers or those with special needs, or they completely exit the market The few laggards who have not yet tried the product or service enter the market at this stage The shape of the product life cycle curve Assumed to be bell-shaped with regard to sales and profits Each product or service has its own individual shape The most challenging part of applying the product life cycle concept is that managers do not know exactly what shape each product's life cycle will take, so there is no way to know precisely what stage a product is in New research, based on the history of dozens of consumer 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 LO1: List the components of a product Complexity of Products Marketers involved with the development, design, and sale of products think of them in an interrelated fashion At the centre is the core customer value which are the basic problem-solving benefits that consumers are seeking Marketers convert core customer value into an actual product Attributes such as brand name, features, design, quality level, and packaging are considered, though the importance of these attributes varies depending on the product The associated services/augmented product include the nonphysical aspects of the product, such as product warranties, financing, product support, and after-sale service When developing or changing a product, marketers start with the core customer value to determine what their potential customers are seeking. Then they make the actual physical product and add associated services to round out the offering Types of products Two primary categories of products or services based on who is buying them: consumers and businesses Consumer products: products and services used by people for their personal use LO2: Identify the types of consumer products Specialty products/services Customers show such a strong preference that they will expend considerable effort to search for the best suppliers Ex. Luxury cars, legal or medical professionals, or designer apparel Shopping products/services Consumers will spend a fair amount of time comparing alternatives Ex. Buying shoes, furniture, apparel, fragrances etc. Convenience products/services Consumer is not willing to spend any effort to evaluate prior to purchase Frequently purchased commodity items, usually purchased with very little thought Ex. Common beverages, bread or soap Unsought products/services Consumers do not normally think of buying or do not know about These products require lots of marketing effort and various forms of promotion Ex. When GPS’s first came out, or HeatMax HotHands Hand Warmers Product Mix and Product Line Decisions Product mix: complete set of all products offered by a firm Product line: groups of associated items, such as those that consumers use together or think of as part of a group of similar products Product Category: assortment of items that the customer sees as a reasonable substitute for one another Product mix breadth (variety): the number of product lines offered by the firm Ex. Oral care, personal care, household care, fabric care, pet nutrition Product line depth: the number of products within a product line Ex. Colgate’s oral care line: Toothpaste, toothbrush, kids’products, etc. LO3: Explain the difference between a product mix’s breadth and a product line’s depth Stock keeping units (SKUs): individual items within each product category; the smallest unit available for inventory control The decision to expand or contract product lines and categories depends on several industry-, consumer-, and firm- level factors Among the industry factors, 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 substantial market opportunity When firms add new lines to their product mix, they often earn significant sales and profits However, adding unlimited numbers of products can have adverse consequences Too much variety in the product mix is often too costly to maintain, and too many brands may weaken the firm’s brand reputation Changing Product Mix Breadth Firms may change their product mix breadth by either adding to or deleting entire product lines Increase breadth Firms often add new product lines to capture new or evolving markets, increase sales, and compete in new venues Example: addition of product line D above Decrease breadth Sometimes it is necessary to delete entire product lines to address changing market conditions or meet internal strategic priorities Example: deletion of product line C above Changing Product Line Depth Firms occasionally either add or delete from their 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 Example: addition ofA4 above Decrease depth From time to time, it is necessary to delete product categories to realign resources Example: deletion of B5 and B6 above The decision to delete products is never taken lightly Change number of SKUs Avery 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 Example: when jeans manufacturers lowered the waistline and flared legs for their products Product Line Decisions for Services Many of the strategies used to make product line decisions for physical products can also be applied to services Example: a service provider such as a bank typically offers different product lines for its business and retail accounts; those product lines are further divided into categories based on the needs of different target markets i.e. savings and chequing accounts for individual retail customers (equivalent to SKUs) Offer a variety of chequing accounts LO4: Identify the advantages that brands provide firms and consumers Branding Acompany lives or dies based on brand awareness 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 (General Motors), one product line (Chevrolet), or a single item (Corvette) Various brand elements that firms use Logos, symbols, characters, slogans, jingles, and distinctive packages Brands add value to merchandise and services beyond physical and functional characteristics or the pure act of performing the service 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 Enable customers to differentiate one firm or product from another Brands establish loyalty Customers learn to trust certain brands Many customers become loyal to certain brands in much the same way that people become loyal to their university As a result, companies can maintain great depth in their product lines since their customers will buy other brands within their product mix Brands protect from competition Strong brands are somewhat protected from competition and price competition Such brands are more established in the market and have a more loyal customer base, neither competitive pressures on price nor retail-level competition is 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 Can be legally protected through trademarks and copyrights and thus constitute a unique ownership for the firm Firms sometimes have to fight to keep their brand “pure” Brands impact market value Having well-known brands can have a direct impact on the company’s bottom line The value of a brand can be calculated by assessing the earning potential of the brand over the next 12 months LO5: Summarize the components of brand equity There are three areas of branding Brand equity The set of assets and liabilities linked to a brand that add or subtract from the value provided by the product or service Brands are assets the firm can build, manage and harness over time to increase its revenue, profitability, and overall value Experts look at four aspects of a brand to determine its equity Brand awareness Measures how many consumers in a market are familiar with the brand and what it stands for, and have an opinion about that brand If the customer recognizes the brand, it probably has attributes that make it valuable Marketers create brand awareness through repeated exposures of the various brand elements in the firm’s communications to consumers (ex. advertising and promos) Firms are willing to spend tons of money creating a strong brand 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 Good marketing raises customers’quality perceptions relative to price Brand associations Reflect the mental links that consumers make between a brand and its key product attributes, such as logo, slogan, or famous personality 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, good feelings, family gathering, and parties Firms sometimes even develop a personality for heir brands, as if the brand were human 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 Brand loyal customers are an important source of value for firms Such consumers are often less sensitive to price and the marketing costs of reaching loyal customers are much lower and a high level of brand loyalty insulates the firm from competition Firms can manage brand loyalty through a variety of CRM programs The better CRM programs attempt to maintain some continuous contact with loyal customers by sending them birthday cards or having a personal sales associate contact them to inform them of special events and sales Brand ownership Brand names LO6: Describe the types of branding strategies used by firms Firms institute a variety of brand-related strategies to create and manage key brand assets, such as the decision to own the brands, establishing a branding policy, extending the brand name to other products and markets, cooperatively using the brand name with that of another firm, and licensing the brand to other firms Brand Ownership Brands can be owned by any firm in the supply chain, whether manufacturers, wholesalers, or retailers There are three basic brand ownership strategies Manufacturer or national brands Owned and managed by the manufacturer Nike, Mountain Dew, KitchenAid & Marriott Majority of brands in Canada are manufacturer brands 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 create their own brand equity Private-label or store brands Owned and managed by retailers Some manufacturers prefer to make only private-label merchandise because the costs of national branding and marketing are prohibitive, whereas other firms manufacture both their own brand and merchandise for other brands or retailers Private-label brands are particularly common in supermarkets, discount stores, and drugstores President’s Choice Generic brands Those sold without brand names, typically in commodities markets The popularity and acceptance of generic products has declined Consumers question the quality and origin of the products, and retailers have found better profit potential and the ability to build brand equity with manufacturer and store brands Unbranded salt, grains, product, meat, or nuts in grocery stores Brand Names Firms use several very different strategies to name their brands and product lines Naming Brands and Product Lines Corporate or Family Brand The use of a firm’s own corporate name to brand all of its product lines and products Corporate and Product Line Brands The use of a combination of family brand name and individual brand name to distinguish a firm’s products Individual Brands The use of individual brand names for each of a firm’s products Choosing a Name When it comes to naming new products, companies should consider the following desirable qualities: (1) The brand name should be descriptive and suggestive of benefits and qualities associated with the product. For example, the name Sunkist evokes images of oranges ripening on the trees kissed by the sun. (2) The brand name should be easy to pronounce, recognize, and remember, such as Tide, Crest, or Kodak. (3) The company should be able to register the brand name as a trademark and legally protect it. (4) 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 Several advantages to using the same brand name for new products 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 If the brand is known for its high quality, that perception will carry over to the new product The marketing costs for a new product by an established brand are lower because consumers already know and understand the brand When brand extensions are used for complementary products, a synergy exists between the two products that can increase overall sales Successful brand extensions can result in cross category trial and boost sales because adopters of the new extended brand may try other products in the brand family they are not already using Not all brand extensions are successful; some can dilute brand equity Brand dilution: occurs when brand extension adversely affects consumer perceptions about the attributes the core brand is believed to hold Cobranding The practice of marketing two or more brands together, on the same package or promotion It 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 Can be a prelude to an acquisition strategy There are some risks to cobranding Financial disputes Customer profiles too different Firms that own the brands may change their priorities Customer relationships and loyalty created could be lost Brand Licensing Acontractual arrangement between firms, whereby one firm allows another to use its brand name, logo, symbols, and/or characters in exchange for a negotiated fee Common for toys, apparel, accessories, and entertainment products Licensing is an effective form of attracting visibility for the brand and thereby building brand equity while also generating additional revenue There are some risks associated with it 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 In entertainment licensing, both licensors and licensees run the risk that characters based on books and movies will be only a fad LO7: State how a product’s packaging and label contribute to a firm’s overall strategy Packaging Packaging is an important brand element with more tangible or physical benefits than the other brand elements because packages come in different types and offer a variety of benefits to consumers, manufacturers, and retailers Consumers typically seek convenience in terms of storage, use, and consumption 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 Labelling Labels on products and packages provide information the consumer needs for his or her purchase decision and consumption of the product. In that they identify the product and brand, labels are also an important element of branding and can be used for promotion 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 Many of the elements on the label are required by laws and regulations (i.e., ingredients, fat content, sodium content, serving size, calories), but other elements of the label remain within the control of the manufacturer How manufacturers use labels to communicate the benefits of their products to consumers varies by the product Chapter 10: Services: The Intangible Product LO1: identify how marketing a service differs from marketing a product by applying the principles of intangibility, inseparability, inconsistency, and inventory Customer service: refers to human or mechanical activities that firms undertake to help satisfy their customers’needs and wants By providing good customer service, firms add value to their products or services The marketing of services differs from product marketing because of four fundamental differences unique to services: they are intangible, inseparable, variable, and perishable Think of them as the four Is of services in that they are intangible, inseparable from their providers, inconsistent (variable), and cannot be held in inventory (perishable) Intangible: they cannot be touched, tasted, or seen like a pure product can Aservice is also difficult to promote because it can't be shown directly to potential customers. Marketers must therefore creatively employ symbols and images to promote and sell services Example: Starbucks atmosphere & wifi adds tangibility to their service Because of the intangibility of services, the images marketers use reinforce the benefit or value that a service provides Inseparable Product and Consumption: Acharacteristic of a service: it is produced and consumed at the same time —that is, service and consumption are inseparable Customers rarely have the opportunity to try the service before they purchase it and can’t be returned Example: dentist Purchase risk in these situations can be relativel;y high, services sometimes provide extended warranties and 100% satisfaction guarantees (such as First Choice Haircutters) Inconsistency: a characteristic of a service, its quality may vary because it is provided by humans If a consumer has a problem with a product, it can be replaced, remade, destroyed, or, if it is already in the supply chain, recalled. In many cases, the problem can even be fixed before the product gets into consumers' hands. But an inferior service can't 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 Marketers also can use the inconsistent nature of services to their advantage.Amicromarketing segmentation strategy can customize a service to meet customers' needs exactly Some service providers tackle the inconsistency issue by replacing people with machines i.e. self checkouts The internet has reduced service inconsistency in several areas Inventory: a characteristic of a service, it is perishable and cannot be stored for future use The perishability of services provides both challenges and opportunities to marketers in terms of the critical task of matching demand and supply Services cant be stockpiled in inventory For services companies, excess demand results in having to turn customers away in peak periods, while excess capacity may mean less desirable expense to revenue ratios LO2: Explain why it is important that service marketers understand and manage customer expectations Service gap: results when a service fails to meet the expectations that customers have about how it should be delivered There are 4 service gaps: Knowledge gap Reflects the difference between customers’expectations and the firm’s perception of those customer expectations Firms can close this gap by matching customer expectations with actual service through research Standards gap Pertains to the difference between the firm’s 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 firm’s service standards and the actual service it provides to its customers This gap can be closed by getting employees to meet or exceed service standards Communication gap Refers to the difference between the actual service provided to customers and the service that the firm’s promotion program promises Generally firms can close this gap if they are more realistic about the services they can provide and manage customer expectations effectively Evaluating Service Quality by Using Well-Established Marketing Metrics Customers generally use five distinct service dimensions to determine overall service quality: reliability, responsiveness, assurance, empathy, and tangibles Voice-of-customer (VOC) program: collects customer insights and intelligence to influence and drive business decisions An important marketing metric to evaluate how well firms perform on the five service quality dimensions, the concept of the zone of tolerance: the area between customers’expectations regarding their desired service and the minimum level of acceptable service—that is, the difference between what the customer really wants and what he or she 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: The desired and expected level of service for each dimension, from low to high Customers' perceptions of how well the focal service performs and how well a competitive service performs, from low to high The importance of each service quality dimension LO3: Describe strategies that firms can use to help employees provide better service The Knowledge Gap: Knowing what customers want Understanding customer expectations Customers' expectations are based on their knowledge and experiences Evaluating Service Quality by Using Well-Established Marketing Metrics To meet or exceed customers' expectations, marketers must determine what those expectations are. Yet because of their intangibility, the service quality, or customers' perceptions of how well a service meets or exceeds their expectations, often is difficult for customers to evaluate The Standards Gap: Setting Service Standards Achieving Service Goals Through Training To deliver consistenly high-quality service, firms must set specific, measurable goals based on customers’ wxpectations; to help ensure that quality, the employees should be involved in the goal setting Aquality goal should be specific: “Greet every customer you encounter with ‘Good morning/afternoon/evening, Sir or Miss.’” Try to greet customers by name Commitment to Service Quality Service providers take their cues from management. If managers strive for excellent service, treat their customers well, and demand the same attitudes from everyone in the organization, it is likely employees will do the same Employees who understand that operating on time is a critical component to service quality and guest experience work hard to improve on-time performance The Delivery Gap: Delivering Service Quality Where “the rubber meets the road”, where the customer directly interacts with the service provider Even if there are no other gaps, a delivery gap always results in a service failure Delivery gaps can be reduced when employees are empowered to act in the customers' and the firm's best interests and are supported in their efforts so they can do their jobs effectively Technology can also reduce delivery gaps Empowering Service Providers In this context, empowerment means allowing employees to make decisions about how service is provided to customers. When front-line employees are authorized to make decisions to help their customers, service quality generally improves However, empowering service providers can be difficult and costly Empowerment becomes more important when price points edge higher and services are more individualized Providing Support and Incentives Aservice provider's job can often be difficult, especially when customers are unpleasant or less than reasonable The old cliché “Service with a smile” remains the best approach. To ensure that service is delivered properly, management needs to support the service provider First, 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 Second, the support that managers provide must be consistent and coherent throughout the organization Third, a key part of any customer service program is providing rewards to employees for excellent service Using Technology 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, and the ability to obtain information Management also benefits from the increased efficiency in service processes through reduced servicing costs and, in some cases, can develop a competitive advantage over less service-oriented competitors The Communication Gap: Communicating the Service Promise The communication 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 won't be met The communication gap can be reduced by managing customer expectations Promising only what you can deliver, or possibly even a little less, is an important way to control the communication gap Arelatively 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 promotions, whether in advertising or personal selling LO4: Summarize three service recovery strategies Despite a firm's best efforts, sometimes service providers fail to meet customer expectations. When this happens, the best course of action is to attempt to make amends with the customer and learn from the experience 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 i. Listening to the Customer Whether the firm has a formal complaint department or the complaint is offered directly to the service provider, the customer must have the opportunity to air the complaint completely, and the firm must listen carefully to what he or she is saying 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 ii. Finding a Fair Solution Customers want to be treated fairly, whether that means distributive or procedural fairness Their perception of what fair means is based on their previous experience with other firms, how they have seen other customers treated, material they have read, and stories recounted by their friends Distributive fairness: pertains to a customer's perception of the benefits he or she received compared with the costs (inconvenience or loss) Customers want to be compensated a fair amount for a perceived loss that resulted from a service failure The key is listening carefully to the customer Procedural fairness: refers to the perceived fairness of the process used to resolve them Customers want efficient complaint procedures over whose outcomes they have some influence iii. Resolving the Problem 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 service failures quickly, firms need clear policies, adequate training for their employees, and empowered employees Chapter 11: Pricing Concepts and Strategies: Establishing Value LO1: Explain what price is and its importance in establishing value in marketing Price is the most challenging of the four Ps to manage, partly because it is often the least understood Managers have held an overly simplistic view of the role of price, considering it simply the amount of money a consumer must part with to acquire a product or service. We now know that price is not just a sacrifice but an information cue as well 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 Aprice set too low may signal low quality, poor performance, or other negative attributes about the product or service Price is the only element of the marketing mix that generates revenue Marketers should view pricing decisions as a strategic opportunity to create value rather than as an afterthought to the rest of the marketing mix LO2: Illustrate how the five Cs influence pricing Successful pricing strategies are built through the five critical components: company objectives, customers, costs, competition, and channel members 1. Company Objectives Each firm embraces an objective that seems to fit with where management thinks the firm needs to go to be successful, in whatever way they define success These specific objectives usually reflect how the firm intends to grow Company objectives are not as simple as they might first appear; they often can be expressed in slightly different forms that mean very different things Also, objectives are not always mutually exclusive, because a firm may embrace two or more noncompeting objectives Product 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 Target profit pricing: a pricing strategy implemented by firms when they have a particular goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit Maximizing profits: 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 sales Sales Orientation Firms use sales orientation to set prices believing 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 Adopting a market share objective does not always imply setting low prices Rarely is the lowest-price offering the dominant brand in a given market 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 Oriented Strategize according to the premise that they should measure themselves primarily against their competition Competitive parity: some firms focus on this; setting prices that are similar to those of major competitors Value is only implicitly considered in competitor-oriented strategies Customer Oriented Explicitly involves the concept of value Sometimes a firm may attempt to increase value by focusing on customer satisfaction and setting prices to match consumer expectations Firms also may offer very high-priced, “state-of-the-art” products or services in full anticipation of limited sales These offerings are designed to enhance the company's reputation and image and thereby increase the company's value in the minds of consumers Setting prices with a close eye to how consumers develop their perceptions of value can often be the most effective pricing strategy, especially if it is supported by consistent advertising and distribution strategies 2. Customers Most important because it is about understanding consumers’reactions to different prices Economic theory that helps explain how prices are related to demand and how managers can incorporate this knowledge into their pricing strategies Demand curves and pricing Demand curve shows how many units of a product or service consumers will demand during a specific period of times at different prices Can be straight or curved Common downward-sloping demand curve; as price increases, demand for the product or service decreases Knowing the demand curve for a product or service enables a firm to examine different prices in terms of the resulting demand and relative to its overall objective Interestingly enough, not all products or services follow the downward-sloping demand curve for all levels of price Prestige products which consumers purchase for their status rather than their functionality Price Elasticity of demand 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 measures how changes in a price affect the quantity of a product demanded Formula: PEOD= % change in quantity demanded / % change in price In general, the market for a product or service is price sensitive (or elastic) when the price elasticity is less than –1: that is, when a 1-percent decrease in price produces more than a 1-percent increase in the quantity sold 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 Consumers are generally more sensitive to price increases than to price decreases 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. 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 in the quantity of ProductAdemanded compared with the percentage change in price in Product B. Complementary products: products whose demands are positively related, such that they rise or fall together Substitute products: products for which changes in demand are negatively related—a percentage increase in the quantity demanded for ProductAresults in a percentage decrease in the quantity demanded for Product B 3. Costs Firms must understand their costs structures so they can determine the degree to which their products or services will be profitable at different prices In general, prices should not be based on costs because consumers make purchase decisions based on their perceived value; they care little about the firm's costs to produce and sell a product or deliver a service Variable costs Those costs, primarily labour and materials, which vary with production volume Fixed Costs The costs that remain essentially at the same level, regardless of any changes in the volume of production Total Cost Simply the sum of the variable and fixed costs Break-Even Analysis and Decision Making The point at which the number of units sold generates just enough revenue to equal the total costs.At this point, profits are zero 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 Break-even points (units) = Fixed Costs / Contribution per unit Limitations Likely that there may be different charges for different products/services Prices often get reduced as quantity increases because the costs decrease, so firms must perform several break-even analyses at different quantities Abreak-even analysis cannot indicate for sure how many units will sell at a given price 4. Competition Profound impact on pricing strategies Four levels of competition Price war: occurs when two or more firms compete primarily by lowering their prices Monopolistic competition: occurs when there are many firms competing for customers in a given market but their products are differentiated When a commodity can be differentiated somehow, even if simply by a sticker or logo, there is an opportunity for consumers to identify it as distinct from the rest, and in this case, firms can at least partially extricate their product from a pure competitive market 5. Channel Members Channel members—manufacturers, wholesalers, and retailers—can have different perspectives when it comes to pricing strategies Unless channel members carefully communicate their pricing goals and select channel partners that agree with them, conflict will surely arise Channels can be very difficult to manage, and distribution outside normal channels does occur.A grey market, for example, employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer Other Influences on Pricing Internet Information online has made consumers more price sensitive Allows consumers to purchase goods like electronics at highly discounted prices Amore recent trend affecting pricing has been the rapid growth of online daily coupon promotions from companies such as Groupon or WagJag 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 convey status in some way Such prestige products are still aimed at the elite, but more and more consumers are making the financial leap to attain them Acountervailing trend finds customers attempting to shop cheap Retailers such as H&M and Loblaws, with its Joe Fresh line of clothing, have introduced disposable chic and cross- shopping into Canadians' shopping habits Cross-shopping: the pattern of buying both premium and low-priced merchandise or patronizing both expensive, status-oriented retailers and price-oriented retailers Finally, the economic environment at local, regional, national, and global levels influences pricing By thinking globally, firms can seek out the most cost-efficient methods of providing goods and services to their customers On a more local level, the economy still can influence pricing. Competition, disposable income, and unemployment all may signal the need for different pricing strategies Retailers often charge higher prices in areas populated by people who have more disposable income and enjoy low unemployment rate LO3: Describe various pricing strategies and tactics and their use in marketing (e.g., cost-based pricing, competitor-based pricing, value-based pricing, new product pricing, psychological pricing, and pricing tactics targeted to channel members and consumers) Cost-Based Methods Determine the final prices to charge by starting with the cost This method does not recognize 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 The process assumes that these costs will not vary much for different levels of production Prices are usually set on the basis of estimates of average costs Competitor-Based Methods May set their prices to reflect the way they want consumers to interpret their own prices relative to the competitors’ offerings Premium pricing: the firm deliberately prices a product above the prices set for competing products to capture those customers who always shop for the best or for whom price does not matter Value-Based Methods Include approaches to setting prices that focus on the overall value of the product by offering as perceived by the consumer Sometimes this method can be a bit unconventional Improvement value method The manager must estimate the improvement value of a new product or service This improvement value represents an estimate of how much or less consumers are willing to pay for a product relative to comparable products Cost of Ownership method Avalue-based method for setting prices that determines the total cost of owning the product over its useful life Consumers may be willing to pay more for a particular product because, over its entire lifetime, it will eventually cost less to own than a cheaper alternative Sellers must know how consumers in different market segments will attach value to the benefits delivered by their products They also must account for changes in consumer attitudes because the way customers perceive value today may not be the way they perceive it tomorrow New Product Pricing One of the most challenging tasks a manager can undertake When the product is truly innovative, determining customers’perceptions of its value and pricing it accordingly becomes far more difficult Price Skimming Astrategy 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 Firms use skimming strategies for a variety of reasons Limit demand Try to earn back some of the high R&D investments they made Test consumers’price sensitivity Drawbacks Relatively high unit costs often associated with producing small volumes of products Customers can feel cheated when the price goes up Market Penetration Pricing Apricing 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 Profits flow through volume Many firms expect the unit cost to drop significantly as the accumulated volume sold increases, an effect known as the experience curve effect With this effect, as sales continue to grow, the costs continue to drop, allowing further reductions in the price Pros of penetration pricing Discourages competitors from entering the market because the profit margin is relatively low If the costs to produce the product drop because of the accumulated volume, competitors that enter the market later will face higher unit costs, at least until their volume catches up with the early entrant Drawbacks The firms must have a capacity to satisfy a rapid rise in demand—or be able to add it quickly Low price does not signal high quality “leaving money on the table” as some consumers would be willing to pay more Psychological FactorsAffecting Value-Based Pricing Strategies Understanding the psychology underlying the way consumers arrive at their perceptions, make judgments, and finally invoke a choice is critical to effective pricing strategies When consumers are exposed to a price, they assign meaning to it by placing it into a category, such as “expensive,” “a deal,” “cheap,” “overpriced,” or even “fair.” Consumers’Use of Reference Pricing Reference price: the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process External reference price: a higher price to which the consumer can compare the selling price to evaluate the deal Typically, the seller labels the external reference price as the “regular price” or an “original price.” When consumers view the “sale price” and compare it with the provided external reference price, their perceptions of the value of the deal will likely increase Internal reference price: Price information stored in the consumer's memory that the person uses to assess a 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 Everyday Low Pricing (EDLP) Versus High/Low Pricing Everyday low pricing (EDLP): companies stress the continuity of their retail prices at a level somewhere between the regular, nonsale price and the deep-discount sale prices their competitors may offer Adds value High/Low Pricing: relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases Odd Prices Those prices that end in odd numbers, usually 9, are very common Most marketers believe that odd pricing got its start as a way to prevent sales clerks from just pocketing money The Price-Quality Relationship 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 Given the various psychological pricing factors that come into play for consumers, marketers must consider how they function when they set prices Pricing Tactics It is important to distinguish clearly between pricing strategies and pricing tactics Pricing strategy: a long-term approach to setting prices broadl
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